Accountancy XI

Contents
FOREWORD iii
Chapter 1 Introduction to Accounting 1
1.1 Meaning of Accounting 2
1.2 Accounting as a Source of Information 6
1.3 Objectives of Accounting 10
1.4 Role of Accounting 13
1.5 Basic Terms in Accounting 14
Chapter 2 Theory Base of Accounting 22
2.1 Generally Accepted Accounting Principles (GAAP) 23
2.2 Basic Accounting Concepts 24
2.3 Systems of Accounting 33
2.4 Basis of Accounting 34
2.5 Accounting Standards 35
Chapter 3 Recording of Transactions - I 41
3.1 Business Transactions and Source Document 41
3.2 Accounting Equation 45
3.3 Using Debit and Credit 47
3.4 Books of Original Entry 56
3.5 The Ledger 64
3.6 Posting from Journal 67
Chapter 4 Recording of Transactions - II 91
4.1 Cash Book 92
4.2 Purchases (Journal) Book 117
4.3 Purchases Return (Journal) Book 119
4.4 Sales (Journal) Book 121
4.5 Sales Return (Journal) Book 123
4.6 Journal Proper 129
4.7 Balancing the Accounts 131
Chapter 5 Bank Reconciliation Statement 150
5.1 Need for Reconciliation 151
5.2 Preparation of Bank Reconciliation Statement 156
Chapter 6 Trial Balance and Rectification of Errors 181
6.1 Meaning of Trial Balance 181
6.2 Objectives of Preparing the Trial Balance 182
6.3 Preparation of Trial Balance 185
6.4 Significance of Agreement of Trial Balance 190
6.5 Searching of Errors 192
6.6 Rectification of Errors 193
Chapter 7 Depreciation, Provisions and Reserves 227
7.1 Depreciation 227
7.2 Depreciation and other Similar Terms 231
7.3 Causes of Depreciation 231
7.4 Need for Depreciation 232
7.5 Factors Affecting the Amount of Depreciation 234
7.6 Methods of calculating Depreciation Amount 235
7.7 Straight Line Method and Written Down Method 240
A Comparative Analysis
7.8 Methods of Recording Depreciation 242
7.9 Disposal of Asset 251
7.10 Effect of any Addition or Extension to the 261
Existing Asset
7.11 Provisions 264
7.12 Reserves 266
7.13 Secret Reserve 270
Chapter 8 Bill of Exchange 279
8.1 Meaning of Bill of Exchange 280
8.2 Promissory Note 282
8.3 Advantages of Bill of Exchange 284
8.4 Maturity of Bill 285
8.5 Discounting of Bill 285
8.6 Endorsement of Bill 286
8.7 Accounting Treatment 286
8.8 Dishonour of a Bill 293
8.9 Renewal of the Bill 298
8.10 Retiring of the Bill 301
8.11 Bills Receivable and Bills Payable Books 303
8.12 Accommodation of Bills 317
Accountancy
Financial Accounting
Volume I
Textbook for Class XI
Introduction to Accounting 1
O ver the centuries, accounting has remained

confined to the financial record-keeping
functions of the accountant. But, today’s rapidly
changing business environment has forced the
accountants to reassess their roles and functions
both within the organisation and the society. The
role of an accountant has now shifted from that of
a mere recorder of transactions to that of the
member providing relevant information to the
decision-making team. Broadly speaking,
accounting today is much more than just book-
keeping and the preparation of financial reports.
Accountants are now capable of working in exciting
new growth areas such as: forensic accounting
LEARNING OBJECTIVES
(solving crimes such as computer hacking and the
After studying this chapter theft of large amounts of money on the internet); e-
you will be able to: commerce (designing web-based payment system);
• state the meaning and financial planning, environmental accounting, etc.
need of accounting; This realisation came due to the fact that accounting
• discuss accounting as is capable of providing the kind of information that
a source of information ; managers and other interested persons need in
• identify the internal order to make better decisions. This aspect of
and external users of accounting gradually assumed so much importance
accounting information;
that it has now been raised to the level of an
• explain the objectives information system. As an information system, it
of accounting;
collects data and communicates economic
• describe the role of information about the organisation to a wide variety
accounting;
of users whose decisions and actions are related to
• explain the basic terms its per for mance. This introductory chapter
used in accounting.
therefore, deals with the nature, need and scope of
accounting in this context.
2 Accountancy
1.1 Meaning of Accounting

In 1941, The American Institute of Certified Public Accountants (AICPA) had
defined accounting as the art of recording, classifying, and summarising in a
significant manner and in terms of money, transactions and events which
are, in part at least, of financial character, and interpreting the results thereof’.
With greater economic development resulting in changing role of accounting,
its scope, became broader. In 1966, the American Accounting Association
(AAA) defined accounting as ‘the process of identifying, measuring and
communicating economic information to permit informed judgments and
decisions by users of information’.
Fig. 1.1 : Showing the process of accounting
In 1970, the Accounting Principles Board of AICPA also emphasised that

the function of accounting is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in
making economic decisions.
Accounting can therefore be defined as the process of identifying,
measuring, recording and communicating the required information relating
to the economic events of an organisation to the interested users of such
information. In order to appreciate the exact nature of accounting, we must

understand the following relevant aspects of the definition:
• Economic Events
• Identification, Measurement, Recording and Communication
• Organisation
• Interested Users of Information
Box 1
History and Development of Accounting
Accounting enjoys a remarkable heritage. The history of accounting is as old as

civilisation. The seeds of accounting were most likely first sown in Babylonia and
Egypt around 4000 B.C. who recorded transactions of payment of wages and taxes
on clay tablets. Historical evidences reveal that Egyptians used some form of
accounting for their treasuries where gold and other valuables were kept. The incharge
of treasuries had to send day wise reports to their superiors known as Wazirs (the
prime minister) and from there month wise reports were sent to kings. Babylonia,
known as the city of commerce, used accounting for business to uncover losses
taken place due to frauds and lack of efficiency. In Greece, accounting was used for
apportioning the revenues received among treasuries, maintaining total receipts,
total payments and balance of government financial transactions. Romans used
memorandum or daybook where in receipts and payments were recorded and
wherefrom they were posted to ledgers on monthly basis. (700 B.C to 400 A.D).
China used sophisticated form of government accounting as early as 2000 B.C.
Accounting practices in India could be traced back to a period when twenty three
centuries ago, Kautilya, a minister in Chandragupta’s kingdom wrote a book named
Arthashasthra, which also described how accounting records had to be maintained.
Luca Pacioli’s, a Franciscan friar (merchant class), book Summa de
Arithmetica, Geometria, Proportion at Proportionality (Review of Arithmetic and Geometric
proportions) in Venice (1494) is considered as the first book on double entry book-
keeping. A portion of this book contains knowledge of business and book-keeping.
However, Pacioli did not claim that he was the inventor of double entry book-keeping
but spread the knowledge of it. It shows that he probably relied on then–current
book-keeping manuals as the basis for his masterpiece. In his book, he used the
present day popular terms of accounting Debit (Dr.) and Credit (Cr.). These were the
concepts used in Italian terminology. Debit comes from the Italian debito which comes
from the Latin debita and debeo which means owed to the proprietor. Credit comes
from the Italian credito which comes from the Latin ‘credo’ which means trust or belief
(in the proprietor or owed by the proprietor. In explaining double entry system, Pacioli
wrote that ‘All entries… have to be double entries, that is if you make one creditor, you
must make some debtor’. He also stated that a merchants responsibility include to
give glory to God in their enterprises, to be ethical in all business activities and to
earn a profit. He discussed the details of memorandum, journal, ledger and specialised
accounting procedures.
4 Accountancy
1.1.1 Economic Events

Business organisations involves economic events. An economic event is known
as a happening of consequence to a business organisation which consists of
transactions and which are measurable in monetary terms. For example,
purchase of machinery, installing and keeping it ready for manufacturing is
an event which comprises number of financial transactions such as buying a
machine, transportation of machine, site preparation for installation of a
machine, expenditure incurred on its installation and trial runs. Thus,
accounting identifies bunch of transactions relating to an economic event. If
an event involves transactions between an outsider and an organisation, these
are known as external events. The following are the examples of such
transactions:
• Sale of Reebok shoes to the customers.
• Rendering services to the customers by Videocon Limited.
• Purchase of materials from suppliers.
• Payment of monthly rent to the landlord.
An internal event is an economic event that occurs entirely between the
internal wings of an enterprise, e.g., supply of raw material or components by
the stores department to the manufacturing department, payment of wages
to the employees, etc.
1.1.2 Identification, Measurement, Recording and Communication

Identification : It means determining what transactions to record, i.e., to identity
events which are to be recorded. It involves observing activities and selecting
those events that are of considered financial character and relate to the
organisation. The business transactions and other economic events therefore
are evaluated for deciding whether it has to be recorded in books of account.
For example, the value of human resources, changes in managerial policies
or appointment of personnel are important but none of these are recorded in
books of account. However, when a company makes a sale or purchase, whether
on cash or credit, or pays salary it is recorded in the books of account.
Measurement : It means quantification (including estimates) of business
transactions into financial terms by using monetary unit, viz. rupees and
paise as a measuring unit. If an event cannot be quantified in monetary
terms, it is not considered for recording in financial accounts. That is why
important items like the appointment of a new managing director, signing of
contracts or changes in personnel are not shown in the books of accounts.
Recording : Once the economic events are identified and measured in financial
terms, these are recorded in books of account in monetary terms and in a
chronological order. Recording is done in a manner that the necessary financial
information is summarised as per well-established practice and is made

available as and when required.
Communication : The economic events are identified, measured and recorded
in order that the pertinent information is generated and communicated in a
certain form to management and other internal and external users. The
information is regularly communicated through accounting reports. These
reports provide information that are useful to a variety of users who have an
interest in assessing the financial performance and the position of an
enterprise, planning and controlling business activities and making necessary
decisions from time to time. The accounting information system should be
designed in such a way that the right information is communicated to the
right person at the right time. Reports can be daily, weekly, monthly, or
quarterly, depending upon the needs of the users. An important element in
the communication process is the accountant’s ability and efficiency in
presenting the relevant information.
1.1.3 Organisation
Organisation refers to a business enterprise, whether for profit or not-for-
profit motive. Depending upon the size of activities and level of business
operation, it can be a sole-proprietory concern, partnership firm, cooperative
society, company, local authority, municipal corporation or any other
association of persons.
1.1.4 Interested Users of Information

Accounting is a means by which necessary financial information about
business enterprise is communicated and is also called the language of
business. Many users need financial information in order to make important
decisions. These users can be divided into two broad categories: internal users
and external users. Internal users include: Chief Executive, Financial Officer,
Vice President, Business Unit Managers, Plant Managers, Store Managers,
Line Supervisors, etc. External users include: present and potential Investors
(shareholders), Creditors (Banks and other Financial Institutions, Debenture-
holders and other Lenders), Tax Authorities, Regulatory Agencies (Department
of Company Affairs, Registrar of Companies, Securities Exchange Board of
India, Labour Unions, Trade Associations, Stock Exchange and Customers,
etc. Since the primary function of accounting is to provide useful information
for decision-making, it is a means to an end, with the end being the decision
that is helped by the availability of accounting information. You will study
about the types of accounting information and its users later in this chapter.
6 Accountancy
Box 2
Why do the Users Want Accounting Information?
• The owners/shareholders use them to see if they are getting a satisfactory return
on their investment, and to assess the financial health of their company/business.
• The directors/managers use them for making both internal and external
comparisons in their attempts to evaluate the performance. They may compare
the financial analysis of their company with the industry figures in order to
ascertain the company’s strengths and weaknesses. Management is also
concerned with ensuring that the money invested in the company/organisation
is generating an adequate return and that the company/organisation is able to
pay its debts and remain solvent.
• The creditors (lenders) want to know if they are likely to get paid and look
particularly at liquidity, which is the ability of the company/organisation to pay
its debts as they become due.
• The prospective investors use them to assess whether or not to invest their
money in the company/organisation.
• The government and regulatory agencies such as Registrar of companies, Custom
departments IRDA, RBI, etc. require information for the payment of various taxes
such as Value Added Tax (VAT), Income Tax (IT), Customs and Excise duties for
protecting the interests of investors, creditors(lenders), and also to satisfy the
legal obligations imposed by the Companies Act 1956 and SEBI from time-to-
time.
1.2 Accounting as a Source of Information

As discussed earlier, accounting is a definite processes of interlinked activities,
(refer figure 1.1) that begins with the identification of transactions and ends
with the preparation of financial statements. Every step in the process of
accounting generates information. Generation of information is not an end
in itself. It is a means to facilitate the dissemination of information among
different user groups. Such information enables the interested parties to
take appropriate decisions. Therefore, dissemination of information is an
essential
function of accounting. To be useful, the accounting information should
ensure to:
• provide information for making economic decisions;
• serve the users who rely on financial statements as their principal source
of information;
• provide information useful for predicting and evaluating the amount,
timing and uncertainty of potential cash-flows;
• provide information for judging management’s ability to utilise resources
effectively in meeting goals;
• provide factual and interpretative information by disclosing underlying

assumptions on matters subject to interpretation, evaluation, prediction,
or estimation; and
• provide information on activities affecting the society.
Test Your Understanding - I

Complete the following sentences with appropriate words:
(a) Information in financial reports is based on ..................... transactions.
(b) Internal users are the ..................... of the business entity.
(c) A ..................... would most likely use an entities financial report to determine
whether or not the business entity is eligible for a loan.
(d) The Internet has assisted in decreasing the ..................... in issuing financial
reports to users.
(e) ..................... users are groups outside the business entity, who uses the
information to make decisions about the business entity.
(f) Information is said to be relevent if it is ......................
(g) The process of accounting starts with ............ and ends with ............
(h) Accounting measures the business transactions in terms of ............ units.
(i) Identified and measured economic events should be recording in ............ order.
The role of an accountant in generating accounting information is to observe,

screen and recognise events and transactions to measure and process them,
and thereby compile reports comprising accounting information that are
communicated to the users. These are then interpreted, decoded and used
by management and other user groups. It must be ensured that the information
provided is relevant, adequate and reliable for decision-making. The apparently
divergent needs of internal and external users of accounting information have
resulted in the development of sub-disciplines within the accounting discipline
namely, financial accounting, cost accounting and management accounting (refer
box 3).
Financial accounting assists keeping a systematic record of financial
transactions the preparation and presentation of financial reports in order to
arrive at a measure of organisational success and financial soundness. It
relates to the past period, serves the stewardship function and is monetary in
nature. It is primarily concerned with the provision of financial information to
all stakeholders.
Cost accounting assists in analysing the expenditure for ascertaining the
cost of various products manufactured or services provided by the firm and
8 Accountancy
fixation of prices thereof. It also helps in controlling the costs and providing
necessary costing information to management for decision-making.
Management accounting deals with the provision of necessary accounting
information to people within the organisation to enable them in decision-making,
planning and controlling business operations. Management accounting draws
the relevant information mainly from financial accounting and cost accounting
which helps the management in budgeting, assessing profitability, taking pricing
decisions, capital expenditure decisions and so on. Besides, it generates other
information (quantitative and qualitative, financial and non-financial) which
relates to the future and is relevant for decision-making in the organisation.
Such information includes: sales forecast, cash flows, purchase requirement,
manpower needs, environmental data about effects on air, water, land, natural
resources, flora, fauna, human health, social responsibilities, etc.
As a result, the scope of accounting has become so vast, that new areas
like human resource accounting, social accounting, responsibility accounting
have also gained prominance.
Let’s Do It
Many People in today’s society think of an accountant as simply a glorified book-
keeper. But the role of an accountant is continually changing. Discuss in the
classroom what really the role of accounting is?
1.2.1 Qualitative Characteristics of Accounting Information

Qualitative characteristics are the attributes of accounting information which
tend to enhance its understandability and usefulness. In order to assess
whether accounting information is decision useful, it must possess the
characteristics of reliability, relevance, understandability and comparability.
Reliability
Reliability means the users must be able to depend on the information. The
reliability of accounting information is determined by the degree of
correspondence between what the information conveys about the transactions
or events that have occurred, measured and displayed. A reliable information
should be free from error and bias and faithfully represents what it is meant
to represent. To ensure reliability, the information disclosed must be credible,
verifiable by independent parties use the same method of measuring, and be
neutral and faithful (refer figure 1.3).
Box 3
Branches of Accounting
The economic development and technological improvements have resulted in an

increase in the scale of operations and the advent of the company form of business
organisation. This has made the management function more and more complex and
increased the importance of accounting information. This gave rise to special branches
of accounting. These are briefly explained below :
Financial accounting : The purpose of this branch of accounting is to keep a record
of all financial transactions so that:
(a) the profit earned or loss sustained by the business during an accounting period
can be worked out,
(b) the financial position of the business as at the end of the accounting period
can be ascertained, and
(c) the financial information required by the management and other interested
parties can be provided.
Cost Accounting : The purpose of cost accounting is to analyse the expenditure so
as to ascertain the cost of various products manufactured by the firm and fix the
prices. It also helps in controlling the costs and providing necessary costing
information to management for decision-making.
Management Accounting : The purpose of management accounting is to assist the
management in taking rational policy decisions and to evaluate the impact of its
decisons and actions.
Relevance
To be relevant, information must be available in time, must help in prediction
and feedback, and must influence the decisions of users by :
(a) helping them form prediction about the outcomes of past, present or
future events; and/or
(b) confirming or correcting their past evaluations.
Understandability
Understandability means decision-makers must interpret accounting
information in the same sense as it is prepared and conveyed to them. The
qualities that distinguish between good and bad communication in a message
are fundamental to the understandability of the message. A message is said
to be effectively communicated when it is interpreted by the receiver of the
message in the same sense in which the sender has sent. Accountants should
present the comparable information in the most intenlligible manner without
sacrificing relevance and reliability.
10 Accountancy
Comparability
It is not sufficient that the financial information is relevant and reliable at a
particular time, in a particular circumstance or for a particular reporting entity.
But it is equally important that the users of the general purpose financial reports
are able to compare various aspects of an entity over different time period and
with other entities. To be comparable, accounting reports must belong to a
common period and use common unit of measurement and format of reporting.
Test Your Understanding - II
You are a senior accountant of Ramona Enterprises Limited. What three steps would
you take to make your company’s financial statements understandable and decision
useful?
1. ——————————————————————————————
2. ——————————————————————————————
3. ——————————————————————————————
[Hint : Refer to qualitative characteristics of accounting information]
1.3 Objectives of Accounting

As an information system, the basic objective of accounting is to provide useful
information to the interested group of users, both external and internal. The
necessary information, particularly in case of external users, is provided in
the form of financial statements, viz., profit and loss account and balance
sheet. Besides these, the management is provided with additional information
from time to time from the accounting records of business. Thus, the primary
objectives of accounting include the following:
1.3.1 Maintenance of Records of Business Transactions

Accounting is used for the maintenance of a systematic record of all financial
transactions in book of accounts. Even the most brilliant executive or manager
cannot accurately remember the numerous amount of varied transactions
such as purchases, sales, receipts, payments, etc. that takes place in business
everyday. Hence, a proper and complete records of all business transactions
are kept regularly. Moreover, the recorded information enables verifiability
and acts as an evidence.
1.3.2 Calculation of Profit and Loss

The owners of business are keen to have an idea about the net results of their
business operations periodically, i.e. whether the business has earned profits
Qualitative Characteristic of Accounting Information
Decision Makers
(Users of Accounting Information)
Understandability
Decision Usefulness
Relevance Relability
Timliness
Dedicative Feedback Verifiability Faithfulness

Value Value
Nutrality
Comparability
Fig. 1.3 : The qualitative characteristics of accounting information
or incurred losses. Thus, another objective of accounting is to ascertain the

profit earned or loss sustained by a business during an accounting period
which can be easily workout with help of record of incomes and expenses
relating to the business by preparing a profit or loss account for the period.
Profit represents excess of revenue (income), over expenses. If the total revenue
of a given period is Rs 6,00,000 and total expenses are Rs. 5,40,000 the profit
will be equal to Rs. 60,000(Rs. 6,00,000 – Rs. 5,40,000). If however, the total
expenses exceed the total revenue, the difference reflects the loss.
1.3.3 Depiction of Financial Position

Accounting also aims at ascertaining the financial position of the business
concern in the form of its assets and liabilities at the end of every accounting
period. A proper record of resources owned by business organisation (Assets)
12 Accountancy
and claims against such resources (Liabilities) facilitates the preparation of a

statement known as balance sheet position statement.
1.3.4 Providing Accounting Information to its Users
The accounting information generated by the accounting process is
communicated in the form of reports, statements, graphs and charts to the
users who need it in different decision situations. As already stated, there are
two main user groups, viz. internal users, mainly management, who needs
timely information on cost of sales, profitability, etc. for planning, controlling
and decision-making and external users who have limited authority, ability
and resources to obtain the necessary information and have to rely on financial
statements (Balance Sheet, Profit and Loss account). Primarily, the external
users are interested in the following:
• Investors and potential investors-information on the risks and returns
on investments;
• Unions and employee groups-information on the stability, profitability
and distribution of wealth within the business;
• Lenders and financial institutions-information on the creditworthiness of
the company and its ability to repay loans and pay interest;
• Suppliers and creditors-information on whether amounts owed will be
repaid when due, and on the continued existence of the business;
• Customers-information on the continued existence of the business and
thus the probability of a continued supply of products, parts and after
sales service;
• Government and other regulators- information on the allocation of
resources and the compliance to regulations;
• Social responsibility groups, such as environmental groups-information
on the impact on environment and its protection;
• Competitors-information on the relative strengths and weaknesses of their
competition and for comparative and benchmarking purposes. Whereas
the above categories of users share in the wealth of the company,
competitors require the information mainly for strategic purposes.
Test Your Understanding - III

Which stakeholder g roup… Would be most interested in
_____________________________ (a) the VAT and other tax liabilities of the firm
_____________________________ (b) the potential for pay awards and bouns deals
_____________________________ (c) the ethical or environmental activities of the firm
_____________________________ (d) whether the firm has a long-term future
_____________________________ (e) profitability and share performance
_____________________________ (f) the ability of the firm to carry on providing a
service or producing a product.
1.4 Role of Accounting

For centuries, the role of accounting has been changing with the changes in
economic development and increasing societal demands. It describes and
analyses a mass of data of an enterprise through measurement, classification
and summarisation, and reduces those date into reports and statements,
which show the financial condition and results of operations of that enterprise.
Hence, it is regarded as a language of business. It also performs the service
activity by providing quantitative financial information that helps the users in
various ways. Accounting as an information system collects and communicates
economic information about an enterprise to a wide variety of interested parties.
However, accounting information relates to the past transactions and is
quantitative and financial in nature, it does not provide qualitative and non-
financial information. These limitations of accounting must be kept in view
while making use of the accounting information.
Test Your Understanding - IV
Tick the Correct Answer

1. Which of the following is not a business transaction?
a. Bought furniture of Rs.10,000 for business
b. Paid for salaries of employees Rs.5,000
c. Paid sons fees from his personal bank account Rs.20,000
d. Paid sons fees from the business Rs.2,000
2. Deepti wants to buy a building for his business today. Which of the following is the
relevant data for his decision?
a. Similar business acquired the required building in 2000 for Rs. 10,00,000
b. Building cost details of 2003
c. Building cost details of 1998
d. Similar building cost in August, 2005 Rs. 25,00,000
3. Which is the last step of accounting as a process of information?
a. Recording of data in the books of accounts
b. Preparation of summaries in the form of financial statements
c. Communication of information
d. Analysis and interpretation of information
4. Which qualitative characteristics of accounting information is reflected when
accounting information is clearly presented?
a. Understandability
b. Relevance
c. Comparability
d. Reliability
5. Use of common unit of measurement and common format of reporting promotes;
a. Comparability
b. Understandability
c. Relevance
d. Reliability
14 Accountancy
Box 4
Different Roles of Accounting
9 As a language – it is perceived as the language of business which is used to

communicate information on enterprises;
9 As a historical record- it is viewed as chronological record of financial transactions
of an organisation at actual amounts involved;
9 As current economic reality- it is viewed as the means of determining the true
income of an entity namely the change of wealth over time;
9 As an information system – it is viewed as a process that links an information
source (the accountant) to a set of receivers (external users) by means of a channel
of communication;
9 As a commodity- specialised information is viewed as a service which is in demand
in society, with accountants being willing to and capable of providing it.
1.5 Basic Terms in Accounting

1.5.1 Entity
Entity means a thing that has a definite individual existence. Business entity
means a specifically identifiable business enterprise like Super Bazaar, Hire
Jewellers, ITC Limited, etc. An accounting system is always devised for a
specific business entity (also called accounting entity).
1.5.2 Transaction
A event involving some value between two or more entities. It can be a purchase
of goods, receipt of money, payment to a creditor, incurring expenses, etc. It
can be a cash transaction or a credit transaction.
1.5.3 Assets
Assets are economic resources of an enterprise that can be usefully expressed
in monetary terms. Assets are items of value used by the business in its
operations. For example, Super Bazar owns a fleet of trucks, which is used by
it for delivering foodstuffs; the trucks, thus, provide economic benefit to the
enterprise. This item will be shown on the asset side of the balance sheet of
Super Bazaar. Assets can be broadly classified into two types: Fixed Assets
and Current Assets.
Fixed Assets are assets held on a long-term basis, such as land, buildings,
machinery, plant, furniture and fixtures. These assets are used for the normal
operations of the business.
Current Assets are assets held on a short-ter m basis such as

debtors(accounts receivable), bills receivable (notes receivable), stock
(inventory), temporary marketable securities, cash and bank balances.
1.5.4 Liabilities
Liabilities are obligations or debts that an enterprise has to pay at some time
in the future. They represent creditors’ claims on the firm’s assets. Both small
and big businesses find it necessary to borrow money at one time or the other,
and to purchase goods on credit. Super Bazar, for example, purchases goods
for Rs. 10,000 on credit for a month from Fast Food Products on March 25,
2005. If the balance sheet of Super Bazaar is prepared as at March 31, 2005,
Fast Food Products will be shown as creditors on the liabilities side of the
balance sheet. If Super Bazaar takes a loan for a period of three years from
Delhi State Co-operative Bank, this will also be shown as a liability in the
balance sheet of Super Bazaar. Liabilities are classified as long-term liabilities
and short-term liabilities (also known as short-term liabilities).
Long-term liabilities are those that are usually payable after a period of
one year, for example, a term loan from a financial institution or debentures
(bonds) issued by a company.
Short-term liabilities are obligations that are payable within a period of one
year, for example, creditors, bills payable, bank overdraft.
1.5.5 Capital
Amount invested by the owner in the firm is known as capital. It may be
brought in the form of cash or assets by the owner for the business entity
capital is an obligation and a claim on the assets of business. It is, therefore,
shown as capital on the liabilities side of the balance sheet.
1.5.6 Sales
Sales are total revenues from goods or services sold or provided to customers.
Sales may be cash sales or credit sales.
1.5.7 Revenues
These are the amounts of the business earned by selling its products or
providing services to customers, called sales revenue. Other items of revenue
common to many businesses are: commission, interest, dividends, royalities,
rent received, etc. Revenue is also called income.
16 Accountancy
1.5.8 Expenses
Costs incurred by a business in the process of earning revenue are known as
expenses. Generally, expenses are measured by the cost of assets consumed
or services used during an accounting period. The usual items of expenses
are: depreciation, rent, wages, salaries, interest, cost of heater, light and water,
telephone, etc.
1.5.9 Expenditure
Spending money or incurring a liability for some benefit, service or property
received is called expenditure. Payment of rent, salary, purchase of goods,
purchase of machinery, purchase of furniture, etc. are examples of expenditure.
If the benefit of expenditure is exhausted within a year, it is treated as an
expense (also called revenue expenditure). On the other hand, the benefit of
an expenditure lasts for more than a year, it is treated as an asset (also called
capital expenditure) such as purchase of machinery, furniture, etc.
1.5.10 Profit
The excess of revenues of a period over its related expenses during an
accounting year profit. Profit increases the investment of the owners.
1.5.11 Gain
A profit that arises from events or transactions which are incidental to business
such as sale of fixed assets, winning a court case, appreciation in the value of
an asset.
1.5.12 Loss
The excess of expenses of a period over its related revenues its termed as loss.
It decreases in owner’s equity. It also refers to money or money’s worth lost
(or cost incurred) without receiving any benefit in return, e.g., cash or goods
lost by theft or a fire accident, etc. It also includes loss on sale of fixed assets.
1.5.13 Discount
Discount is the deduction in the price of the goods sold. It is offered in two
ways. Offering deduction of agreed percentage of list price at the time selling
goods is one way of giving discount. Such discount is called ‘trade discount’.
It is generally offered by manufactures to wholesellers and by wholesellers to
retailers. After selling the goods on credit basis the debtors may be given
certain deduction in amount due in case if they pay the amount within the
stipulated period or earlier. This deduction is given at the time of payment on
the amount payable. Hence, it is called as cash discount. Cash discount acts
as an incentive that encourages prompt payment by the debtors.
1.5.14 Voucher
The documentary evidence in support of a transaction is known as voucher.
For example, if we buy goods for cash, we get cash memo, if we buy on credit,
we get an invoice; when we make a payment we get a receipt and so on.
1.5.15 Goods
It refers to the products in which the business units is dealing, i.e. in terms of
which it is buying and selling or producting and selling. The items that are
purchased for use in the business are not called goods. For example, for a
furniture dealer purchase of chairs and tables is termed as goods, while for
other it is furniture and is treated as an asset. Similarly, for a stationery merchant,
stationery is goods, whereas for others it is an item of expense (not purchases)
1.5.16 Drawings
Withdrawal of money and/or goods by the owner from the business for personal
use is known as drawings. Drawings reduces the investment of the owners.
1.5.17 Purchases
Purchases are total amount of goods procured by a business on credit and on
cash, for use or sale. In a trading concern, purchases are made of merchandise
for resale with or without processing. In a manufacturing concern, raw
materials are purchased, processed further into finished goods and then sold.
Purchases may be cash purchases or credit purchases.
1.5.18 Stock
Stock (inventory) is a measure of something on hand-goods, spares and other
items in a business. It is called Stock in hand. In a trading concern, the stock
on hand is the amount of goods which are lying unsold as at the end of an
accounting period is called closing stock (ending inventory). In a manufacturing
company, closing stock comprises raw materials, semi-finished goods and
finished goods on hand on the closing date. Similarly, opening stock (beginning
inventory) is the amount of stock at the beginning of the accounting period.
1.5.19 Debtors
Debtors are persons and/or other entities who owe to an enterprise an amount
for buying goods and services on credit. The total amount standing against
18 Accountancy
such persons and/or entities on the closing date, is shown in the balance
sheet as sundry debtors on the asset side.
1.5.20 Creditors
Creditors are persons and/or other entities who have to be paid by an enterprise
an amount for providing the enterprise goods and services on credit. The total
amount standing to the favour of such persons and/or entities on the closing
date, is shown in the Balance Sheet as sundry creditors on the liabilities side.
Test Your Understanding - V
Mr. Sunrise started a business for buying and selling of stationery with Rs. 5,00,000
as an initial investment. Of which he paid Rs.1,00,000 for furniture, Rs. 2,00,000
for buying stationery items. He employed a sales person and clerk. At the end of the
month he paid Rs.5,000 as their salaries. Out of the stationery bought he sold some
stationery for Rs.1,50,000 for cash and some other stationery for Rs.1,00,000 on
credit basis to Mr.Ravi. Subsequently, he bought stationery items of Rs.1,50,000
from Mr. Peace. In the first week of next month there was a fire accident and he lost
Rs. 30,000 worth of stationery. A part of the machinery, which cost Rs. 40,000, was
sold for Rs. 45,000.
From the above, answer the following :
1. What is the amount of capital with which Mr. Sunrise started business.
2. What are the fixed assets he bought?
3. What is the value of the goods purchased?
4. Who is the creditor and state the amount payable to him?
5. What are the expenses?
6. What is the gain he earned?
7. What is the loss he incurred?
8. Who is the debtor? What is the amount receivable from him?
9. What is the total amount of expenses and losses incurred?
10. Determine if the following are assets, liabilities, revenues, expenses or none of
the these: sales, debtors, creditors, salary to manager, discount to debtors,
drawings by the owner.
Summary with Reference to Learning Objectives
1. Meaning of Accounting : Accounting is a process of identifying, measuring,

recording the business transactions and communicating thereof the required
information to the interested users.
2. Accounting as a source of information : Accounting as a source of information
system is the process of identifying, measuring, recording and communicating
the economic events of an organisation to interested users of the information.
3. Users of accounting information : Accounting plays a significant role in society

by providing information to management at all levels and to those having a
direct financial interest in the enterprise, such as present and potential
investors and creditors. Accounting information is also important to those
having indirect financial interest, such as regulatory agencies, tax authorities,
customers, labour unions, trade associations, stock exchanges and others.
4. Qualitative characteristics of Accounting : To make accounting information
decision useful, it should possess the following qualitative characteristics.
• Reliability • Understandability
• Relevance • Comparability
5. Objective of accounting : The primary objectives of accounting are to :
• maintain records of business;
• calculate profit or loss;
• depict the financial position; and
• make information available to various groups and users.
6. Role of accounting : Accounting is not an end in itself. It is a means to an end.
It plays the role of a :
• Language of a business
• Historical record
• Current economic reality
• Information system
• Service to users
Questions for Practice

Short Answers
1. Define accounting.
2. State what is end product of financial accounting.
3. Enumerate main objectives of accounting.
4. List any five users who have indirect interest in accounting.
5. State the nature of accounting information required by long-term lenders.
6. Who are the external users of information?
7. Enumerate informational needs of management.
8. Give any three examples of revenues.
9. Distinguish between debtors and creditors.
10. ‘Accounting information should be comparable’. Do you agree with this
statement. Give two reasons.
11. If the accounting information is not clearly presented, which of the qualitative
characteristic of the accounting information is violated?
12. “The role of accounting has changed over the period of time”- Do you agree?
Explain.
13. Giving examples, explain each of the following accounting terms :
• Fixed assets • Gain • Profit
• Revenue • Expenses • Short-term liability
• Capital
14. How will you define revenues and expenses?
20 Accountancy
15. What is the primiary reason for the business students and others to
familiarise themselves with the accounting discipline?
Long Answers
1. Explain the factors, which necessitated systematic accounting.
2. Describe the brief history of accounting.
3. Explain the development of and role of accounting.
4. Define accounting and state its objectives.
5. Describe the informational needs of external users.
6. What do you mean by an asset and what are different types of assets?
7. Explain the meaning of gain and profit. Distinguish between these two terms.
8. Explain the qualitative characteristics of accounting information.
9. Describe the role of accounting in the modern world.
Checklist to Test Your Understanding

Test Your Understanding – I
(a) Economic (b) Management/Employees (c) Creditor
(d) Time-gap (e) External (f) Free from bias
(g) Identifying the transactions and communicating information
(h) Monetory (i) Chronological
1. Reliability, i.e. Verifiability, Faithfulness, Nutrality
2. Relevance, i.e. Timeliness
3. Understandability and Comparibility
(a) Government and other regulators
(b) Management
(c) Social responsibility groups
(d) Lenders
(e) Suppliers and Creditors
(f) Customers
1. (c) 2. (c) 3. (a) 4. (a) 5. (b) 6. (c) 7. (a) 8. (a) 9. (d)
1. Rs. 5,00,000 2. Rs. 1,00,000, 3. Rs. 2,00,000
4. Mr. Reace, Rs. 1,50,000 5. Rs. 5,000 6. Rs. 5,000
7. Rs. 30,000 8. Mr. Ravi, Rs. 1,00,000 9. Rs. 35,000
10. Assets : debtors; Liabilities : creditors; drawings; Revenues : sales expenses,
discount, salary.
Let’s Do It
Accountants today can work in exciting new growth areas such as forensic
accounting, budget accounting, cost accounting, environmental accounting,
e-commerce and the various agencies within the public sector.The advent of
information technology have resulted inthe development of necessary skills
for today’s accountant include the ability to:
• Develop competence in systems analysis and computer technology;
• Develop facilitation skills, such as persuasion and communication
skills;
• Acquire a broad business knowledge in strategy, operations, human
resources, marketing, finance and economics;
• Develop analytical skills;
• Develop a willingness to embrace change and assume risk;
• Complete an internship in business and/or public accounting;
• Develop proficiency in accounting and tax issues.
Theory Base of Accounting 2
A s discussed in the previous chapter, accounting

is concerned with the recording, classifying and
summarising of financial transactions and events
and interpreting the results thereof. It aims at
providing information about the financial
performance of a firm to its various users such as
owners, managers employees, investors, creditors,
suppliers of goods and services and tax authorities
and help them in taking important decisions. The
LEARNING OBJECTIVES investors, for example, may be interested in
After studying this chapter,
knowing the extent of profit or loss earned by the
you will be able to: firm during a given period and compare it with the
• identify the need for performance of other similar enterprises. The
theory base of acco- suppliers of credit, say a banker, may, in addition,
unting; be interested in liquidity position of the enterprise.
• explain the nature of All these people look forward to accounting for
Generally Accepted appropriate, useful and reliable information.
Accounting Principles For making the accounting information
(GAAP); meaningful to its internal and external users, it is
• describe the meaning important that such information is reliable as well
and purpose of the basic
as comparable. The comparability of information is
accounting concepts;
required both to make inter-firm comparisons, i.e.
• enumerate the accounting
to see how a firm has performed as compared to
standards issued by
Institute of Chartered the other firms, as well as to make inter-period
Accountants of India; comparison, i.e. how it has performed as compared
• describe the systems to the previous years. This becomes possible only
of accounting; and if the information provided by the financial
• describe various basis statements is based on consistent accounting
of accounting. policies, principles and practices. Such consistency
is required throughout the process of identifying
Theory base of Accounting 2 3
the events and transactions to be accounted for, measuring them,

communicating them in the book of accounts, summarising the results thereof
and reporting them to the interested parties. This calls for developing a proper
theory base of accounting.
The importance of accounting theory need not be over-emphasised as no
discipline can develop without a sound theoretical base. The theory base of
accounting consists of principles, concepts, rules and guidelines developed
over a period of time to bring uniformity and consistency to the process of
accounting and enhance its utility to different users of accounting information.
Apart from these, the Institute of Chartered Accountants of India, (ICAI), which
is the regulatory body for standardisation of accounting policies in the country
has issued Accounting Standards which are expected to be uniformly adhered
to, in order to bring consistency in the accounting practices. These are
discussed in the sections to follow.
2.1 Generally Accepted Accounting Principles (GAAP)

In order to maintain uniformity and consistency in accounting records, certain
rules or principles have been developed which are generally accepted by the
accounting profession. These rules are called by different names such as
principles, concepts, conventions, postulates, assumptions and modifying
principles.
The term ‘principle’ has been defined by AICPA as ‘A general law or rule
adopted or professed as a guide to action, a settled ground or basis of conduct
or practice’. The word ‘generally’ means ‘in a general manner’, i.e. pertaining
to many persons or cases or occasions. Thus, Generally Accepted Accounting
Principles (GAAP) refers to the rules or guidelines adopted for recording and
reporting of business transactions, in order to bring uniformity in the
preparation and the presentation of financial statements. For example, one of
the important rule is to record all transactions on the basis of historical cost,
which is verifiable from the documents such as cash receipt for the money
paid. This brings in objectivity in the process of recording and makes the
accounting statements more acceptable to various users.
The Generally Accepted Accounting Principles have evolved over a long
period of time on the basis of past experiences, usages or customs, statements
by individuals and professional bodies and regulations by government agencies
and have general acceptability among most accounting professionals. However,
the principles of accounting are not static in nature. These are constantly
influenced by changes in the legal, social and economic environment as well
as the needs of the users.
2 4 Accountancy
These principles are also referred as concepts and conventions. The term
concept refers to the necessary assumptions and ideas which are fundamental
to accounting practice, and the term convention connotes customs or traditions
as a guide to the preparation of accounting statements. In practice, the same
rules or guidelines have been described by one author as a concept, by another
as a postulate and still by another as convention. This at times becomes
confusing to the learners. Instead of going into the semantics of these terms,
it is important to concentrate on the practicability of their usage. From the
practicability view point, it is observed that the various terms such as
principles, postulates, conventions, modifying principles, assumptions, etc.
have been used inter-changeably and are referred to as Basic Accounting
Concepts in the present chapter.
2.2 Basic Accounting Concepts

The basic accounting concepts are referred to as the fundamental ideas or
basic assumptions underlying the theory and practice of financial accounting
and are broad working rules for all accounting activities and developed by the
accounting profession. The important concepts have been listed as below:
• Business entity; • Revenue recognition (Realisation);
• Money measurement; • Matching;
• Going concern; • Full disclosure;
• Accounting period; • Consistency;
• Cost • Conservatism (Prudence);
• Dual aspect (or Duality); • Materiality;
• Objectivity.
2.2.1 Business Entity Concept
The concept of business entity assumes that business has a distinct and
separate entity from its owners. It means that for the purposes of accounting,
the business and its owners are to be treated as two separate entities. Keeping
this in view, when a person brings in some money as capital into his business,
in accounting records, it is treated as liability of the business to the owner.
Here, one separate entity (owner) is assumed to be giving money to another
distinct entity (business unit). Similarly, when the owner withdraws any money
from the business for his personal expenses(drawings), it is treated as reduction
of the owner’s capital and consequently a reduction in the liabilities of the
business.
The accounting records are made in the book of accounts from the point of
view of the business unit and not that of the owner. The personal assets and
liabilities of the owner are, therefore, not considered while recording and
reporting the assets and liabilities of the business. Similarly, personal
transactions of the owner are not recorded in the books of the business, unless
it involves inflow or outflow of business funds.
2.2.2 Money Measurement Concept
The concept of money measurement states that only those transactions and
happenings in an organisation which can be expressed in terms of money
such as sale of goods or payment of expenses or receipt of income, etc. are to
be recorded in the book of accounts. All such transactions or happenings
which can not be expressed in monetary terms, for example, the appointment
of a manager, capabilities of its human resources or creativity of its research
department or image of the organisation among people in general do not find
a place in the accounting records of a firm.
Another important aspect of the concept of money measurement is that
the records of the transactions are to be kept not in the physical units but in
the monetary unit. For example, an organisation may, on a particular day,
have a factory on a piece of land measuring 2 acres, office building containing
10 rooms, 30 personal computers, 30 office chairs and tables, a bank balance
of Rs.5 lakh, raw material weighing 20-tons, and 100 cartons of finished goods.
These assets are expressed in different units, so can not be added to give any
meaningful information about the total worth of business. For accounting
purposes, therefore, these are shown in money terms and recorded in rupees
and paise. In this case, the cost of factory land may be say Rs. 2 crore; office
building Rs. 1 crore; computers Rs.15 lakh; office chairs and tables Rs. 2
lakh; raw material Rs. 33 lakh and finished goods Rs. 4 lakh. Thus, the total
assets of the enterprise are valued at Rs. 3 crore and 59 lakh. Similarly, all
transactions are recorded in rupees and paise as and when they take place.
The money measurement assumption is not free from limitations. Due to
the changes in prices, the value of money does not remain the same over a
period of time. The value of rupee today on account of rise in prices is much
less than what it was, say ten years back. Therefore, in the balance sheet,
when we add different assets bought at different points of time, say building
purchased in 1995 for Rs. 2 crore, and plant purchased in 2005 for Rs. 1
crore, we are in fact adding heterogeneous values, which can not be clubbed
together. As the change in the value of money is not reflected in the book of
accounts, the accounting data does not reflect the true and fair view of the
affairs of an enterprise.
2 6 Accountancy
2.2.3 Going Concern Concept

The concept of going concern assumes that a business firm would continue to
carry out its operations indefinitely, i.e. for a fairly long period of time and
would not be liquidated in the foreseeable future. This is an important
assumption of accounting as it provides the very basis for showing the value
of assets in the balance sheet.
An asset may be defined as a bundle of services. When we purchase an
asset, for example, a personal computer, for a sum of Rs. 50,000, what we are
buying really is the services of the computer that we shall be getting over its
estimated life span, say 5 years. It will not be fair to charge the whole amount
of Rs. 50,000, from the revenue of the year in which the asset is purchased.
Instead, that part of the asset which has been consumed or used during a
period should be charged from the revenue of that period. The assumption
regarding continuity of business allows us to charge from the revenues of a
period only that part of the asset which has been consumed or used to earn
that revenue in that period and carry forward the remaining amount to the
next years, over the estimated life of the asset. Thus, we may charge
Rs. 10,000 every year for 5 years from the profit and loss account. In case the
continuity assumption is not there, the whole cost (Rs. 50,000 in the present
example) will need to be charged from the revenue of the year in which the
asset was purchased.
2.2.4 Accounting Period Concept
Accounting period refers to the span of time at the end of which the financial
statements of an enterprise are prepared, to know whether it has earned profits or
incurred losses during that period and what exactly is the position of its assets and
liabilities at the end of that period. Such information is required by different users
at regular interval for various purposes, as no firm can wait for long to know its
financial results as various decisions are to be taken at regular intervals on the
basis of such information. The financial statements are, therefore, prepared at
regular interval, normally after a period of one year, so that timely information is
made available to the users. This interval of time is called accounting period.
The Companies Act 1956 and the Income Tax Act require that the income
statements should be prepared annually. However, in case of certain
situations, preparation of interim financial statements become necessary.
For example, at the time of retirement of a partner, the accounting period
can be different from twelve months period. Apart from these companies
whose shares are listed on the stock exchange, are required to publish
quarterly results to ascertain the profitability and financial position at the
end of every three months period.
Choose the Correct Answer

1. During the life-time of an entity accounting produce financial statements in
accordance with which basic accounting concept:
(a) Conservation
(b) Matching
(c) Accounting period
(d) None of the above
2. When information about two different enterprises have been prepared presented
in a similar manner the information exhibits the characteristic of:
(a) Verifiability
(b) Relevance
(c) Reliability
3. A concept that a business enterprise will not be sold or liquidated in the near
future is known as :
(a) Going concern
(b) Economic entity
(c) Monetary unit
4. The primary qualities that make accounting information useful for decision-making
are :
(a) Relevance and freedom from bias
(b) Reliability and comparability
(c) Comparability and consistency
2.2.5 Cost Concept

The cost concept requires that all assets are recorded in the book of accounts
at their purchase price, which includes cost of acquisition, transportation,
installation and making the asset ready to use. To illustrate, on June 2005,
an old plant was purchased for Rs. 50 lakh by Shiva Enterprise, which is into
the business of manufacturing detergent powder. An amount of
Rs. 10,000 was spent on transporting the plant to the factory site. In addition,
Rs. 15,000 was spent on repairs for bringing the plant into running position
and Rs. 25,000 on its installation. The total amount at which the plant will be
recorded in the books of account would be the sum of all these, i.e.
Rs. 50,50,000.
The concept of cost is historical in nature as it is something, which has
been paid on the date of acquisition and does not change year after year. For
example, if a building has been purchased by a firm for Rs. 2.5 crore, the
2 8 Accountancy
purchase price will remain the same for all years to come, though its market
value may change. Adoption of historical cost brings in objectivity in recording
as the cost of acquisition is easily verifiable from the purchase documents.
The market value basis, on the other hand, is not reliable as the value of an
asset may change from time to time, making the comparisons between one
period to another rather difficult.
However, an important limitation of the historical cost basis is that it does
not show the true worth of the business and may lead to hidden profits. During
the period of rising prices, the market value or the cost at (which the assets
can be replaced are higher than the value at which these are shown in the
book of accounts) leading to hidden profits.
2.2.6 Dual Aspect Concept

Dual aspect is the foundation or basic principle of accounting. It provides the
very basis for recording business transactions into the book of accounts. This
concept states that every transaction has a dual or two-fold effect and should
therefore be recorded at two places. In other words, at least two accounts will
be involved in recording a transaction. This can be explained with the help of
an example. Ram started business by investing in a sum of Rs. 50,00,000 The
amount of money brought in by Ram will result in an increase in the assets
(cash) of business by Rs. 50,00,000. At the same time, the owner’s equity or
capital will also increase by an equal amount. It may be seen that the two
items that got affected by this transaction are cash and capital account.
Let us take another example to understand this point further. Suppose
the firm purchase goods worth Rs. 10,00,000 on cash. This will increase an
asset (stock of goods) on the one hand and reduce another asset (cash) on the
other. Similarly, if the firm purchases a machine worth Rs. 30,00,000 on
credit from Reliable Industries. This will increase an asset (machinery) on the
one hand and a liability (creditor) on the other. This type of dual effect takes
place in case of all business transactions and is also known as duality principle.
The duality principle is commonly expressed in terms of fundamental
Accounting Equation, which is as follows :
Assets = Liabilities + Capital
In other words, the equation states that the assets of a business are always
equal to the claims of owners and the outsiders. The claims also called equity
of owners is termed as Capital(owners’ equity) and that of outsiders, as
Liabilities(creditors equity). The two-fold effect of each transaction affects in

such a manner that the equality of both sides of equation is maintained.
The two-fold effect in respect of all transactions must be duly recorded in
the book of accounts of the business. In fact, this concept forms the core of
Double Entry System of accounting, which has been dealt in detail, in
chapter 3.
2.2.7 Revenue Recognition (Realisation) Concept

The concept of revenue recognition requires that the revenue for a business
transaction should be included in the accounting records only when it is
realised. Here arises two questions in mind. First, is termed as revenue and
the other, when the revenue is realised. Let us take the first one first. Revenue
is the gross inflow of cash arising from (i) the sale of goods and services by an
enterprise; and (ii) use by others of the enterprise’s resources yielding interest,
royalties and dividends. Secondly, revenue is assumed to be realised when a
legal right to receive it arises, i.e. the point of time when goods have been sold
or service has been rendered. Thus, credit sales are treated as revenue on the
day sales are made and not when money is received from the buyer. As for the
income such as rent, commission, interest, etc. these are recongnised on a
time basis. For example, rent for the month of March 2005, even if received in
April 2005, will be taken into the profit and loss account of the financial year
ending March 31, 2005 and not into financial year beginning with April 2005.
Similarly, if interest for April 2005 is received in advance in March 2005, it
will be taken to the profit and loss account of the financial year ending
March 2006.
There are some exceptions to this general rule of revenue recognition. In
case of contracts like construction work, which take long time, say 2-3 years
to complete, proportionate amount of revenue, based on the part of contract
completed by the end of the period is treated as realised. Similarly, when
goods are sold on hire purchase, the amount collected in installments is treated
as realised.
2.2.8 Matching Concept

The process of ascertaining the amount of profit earned or the loss incurred
during a particular period involves deduction of related expenses from the
revenue earned during that period. The matching concept emphasises exactly
on this aspect. It states that expenses incurred in an accounting period should
be matched with revenues during that period. It follows from this that the
3 0 Accountancy
revenue and expenses incurred to earn these revenues must belong to the
same accounting period.
As already stated, revenue is recognised when a sale is complete or service
is rendered rather when cash is received. Similarly, an expense is recognised
not when cash is paid but when an asset or service has been used to generate
revenue. For example, expenses such as salaries, rent, insurance are
recognised on the basis of period to which they relate and not when these are
paid. Similarly, costs like depreciation of fixed asset is divided over the periods
during which the asset is used.
Let us also understand how cost of goods are matched with their sales
revenue. While ascertaining the profit or loss of an accounting year, we should
not take the cost of all the goods produced or purchased during that period
but consider only the cost of goods that have been sold during that year. For
this purpose, the cost of unsold goods should be deducted from the cost of
the goods produced or purchased. You will learn about this aspect in detail in
the chapter on financial statement.
The matching concept, thus, implies that all revenues earned during an
accounting year, whether received during that year, or not and all costs
incurred, whether paid during the year, or not should be taken into account
while ascertaining profit or loss for that year.
2.2.9 Full Disclosure Concept
Information provided by financial statements are used by different groups of
people such as investors, lenders, suppliers and others in taking various
financial decisions. In the corporate form of organisation, there is a distinction
between those managing the affairs of the enterprise and those owning it.
Financial statements, however, are the only or basic means of communicating
financial information to all interested parties. It becomes all the more important,
therefore, that the financial statements makes a full, fair and adequate
disclosure of all information which is relevant for taking financial decisions.
The principle of full disclosure requires that all material and relevant facts
concerning financial performance of an enterprise must be fully and completely
disclosed in the financial statements and their accompanying footnotes. This
is to enable the users to make correct assessment about the profitability and
financial soundness of the enterprise and help them to take informed decisions.
To ensure proper disclosure of material accounting information, the Indian
Companies Act 1956 has provided a format for the preparation of profit and
loss account and balance sheet of a company, which needs to be compulsorily
adhered to, for the preparation of these statements. The regulatory bodies
like SEBI, also mandates complete disclosures to be made by the companies,

to give a true and fair view of profitability and the state of affairs.
2.2.10 Consistency Concept

The accounting information provided by the financial statements would be
useful in drawing conclusions regarding the working of an enterprise only
when it allows comparisons over a period of time as well as with the working
of other enterprises. Thus, both inter-firm and inter-period comparisons are
required to be made. This can be possible only when accounting policies and
practices followed by enterprises are uniform and are consistent over the
period of time.
To illustrate, an investor wants to know the financial performance of an
enterprise in the current year as compared to that in the previous year. He
may compare this year’s net profit with that in the last year. But, if the
accounting policies adopted, say with respect to depreciation in the two years
are different, the profit figures will not be comparable. Because the method
adopted for the valuation of stock in the past two years is inconsistent. It is,
therefore, important that the concept of consistency is followed in preparation
of financial statements so that the results of two accounting periods are
comparable. Consistency eliminates personal bias and helps in achieving
results that are comparable.
Also the comparison between the financial results of two enterprises would
be meaningful only if same kind of accounting methods and policies are adopted
in the preparation of financial statements.
However, consistency does not prohibit change in accounting policies.
Necessary required changes are fully disclosed by presenting them in the
financial statements indicating their probable effects on the financial results
of business.
2.2.11 Conservatism Concept

The concept of conservatism (also called ‘prudence’) provides guidance for
recording transactions in the book of accounts and is based on the policy of
playing safe. The concept states that a conscious approach should be adopted
in ascertaining income so that profits of the enterprise are not overstated. If the
profits ascertained are more than the actual, it may lead to distribution of
dividend out of capital, which is not fair as it will lead to reduction in the capital
of the enterprise.
The concept of conservatism requires that profits should not to be recorded
until realised but all losses, even those which may have a remote possibility,
3 2 Accountancy
are to be provided for in the books of account. To illustrate, valuing closing

stock at cost or market value whichever is lower; creating provision for doubtful
debts, discount on debtors; writing of intangible assets like goodwill, patents,
etc. from the book of accounts are some of the examples of the application of
the principle of conservatism. Thus, if market value of the goods purchased
has fallen down, the stock will be shown at cost price in the books but if the
market value has gone up, the gain is not to be recorded until the stock is
sold. This approach of providing for the losses but not recognising the gains
until realised is called conservatism approach. This may be reflecting a
generally pessimist attitude adopted by the accountants but is an important
way of dealing with uncertainty and protecting the interests of creditors against
an unwanted distribution of firm’s assets. However, deliberate attempt to
underestimate the value of assets should be discouraged as it will lead to
hidden profits, called secret reserves.
2.2.12 Materiality Concept

The concept of materiality requires that accounting should focus on material
facts. Efforts should not be wasted in recording and presenting facts, which
are immaterial in the determination of income. The question that arises here
is what is a material fact. The materiality of a fact depends on its nature and
the amount involved. Any fact would be considered as material if it is reasonably
believed that its knowledge would influence the decision of informed user of
financial statements. For example, money spent on creation of additional
capacity of a theatre would be a material fact as it is going to increase the
future earning capacity of the enterprise. Similarly, information about any
change in the method of depreciation adopted or any liability which is likely to
arise in the near future would be significant information. All such information
about material facts should be disclosed through the financial statements
and the accompanying notes so that users can take informed decisions. In
certain cases, when the amount involved is very small, strict adherence to
accounting principles is not required. For example, stock of erasers, pencils,
scales, etc. are not shown as assets, whatever amount of stationery is bought
in an accounting period is treated as the expense of that period, whether
consumed or not. The amount spent is treated as revenue expenditure and
taken to the profit and loss account of the year in which the expenditure
is incurred.
2.2.13 Objectivity Concept

The concept of objectivity requires that accounting transaction should be
recorded in an objective manner, free from the bias of accountants and others.
This can be possible when each of the transaction is supported by verifiable

documents or vouchers. For example, the transaction for the purchase of
materials may be supported by the cash receipt for the money paid, if the
same is purchased on cash or copy of invoice and delivery challan, if the same
is purchased on credit. Similarly, receipt for the amount paid for purchase of
a machine becomes the documentary evidence for the cost of machine and
provides an objective basis for verifying this transaction. One of the reasons
for the adoption of ‘Historical Cost’ as the basis of recording accounting
transaction is that adherence to the principle of objectivity is made possible
by it. As stated above, the cost actually paid for an asset can be verified from
the documents but it is very difficult to ascertain the market value of an asset
until it is actually sold. Not only that, the market value may vary from person
to person and from place to place, and so ‘objectivity’ cannot be maintained if
such value is adopted for accounting purposes.
Fill in the correct word:

1. Recognition of expenses in the same period as associated revenues is called
_______________concept.
2. The accounting concept that refers to the tendency of accountants to resolve
uncertainty and doubt in favour of understating assets and revenues and
overstating liabilities and expenses is known as _______________.
3. Revenue is generally recongnised at the point of sale denotes the concept
of _______________.
4. The _______________concept requires that the same accounting method should
be used from one accounting period to the next.
5. The_______________concept requires that accounting transaction should be free
from the bias of accountants and others.
2.3 Systems of Accounting

The systems of recording transactions in the book of accounts are generally
classified into two types, viz. Double entry system and Single entry system.
Double entry system is based on the principle of “Dual Aspect” which states
that every transaction has two effects, viz. receiving of a benefit and giving of
a benefit. Each transaction, therefore, involves two or more accounts and is
recorded at different places in the ledger. The basic principle followed is that
every debit must have a corresponding credit. Thus, one account is debited
and the other is credited.
Double entry system is a complete system as both the aspects of a transaction
are recorded in the book of accounts. The system is accurate and
3 4 Accountancy
more reliable as the possibilities of frauds and mis-appropriations are minimised.

The arithmetic inaccuracies in records can mostly be checked by preparing the
trial balance. The system of double entry can be implemented by big as well as
small organisations.
Single entry system is not a complete system of maintaining records of
financial transactions. It does not record two-fold effect of each and every
transaction. Instead of maintaining all the accounts, only personal accounts
and cash book are maintained under this system. In fact, this is not a system
but a lack of system as no uniformity is maintained in the recording of
transactions. For some transactions, only one aspect is recorded, for others,
both the aspects are recorded. The accounts maintained under this system
are incomplete and unsystematic and therefore, not reliable. The system is,
however, followed by small business firms as it is very simple and flexible (you
will study about them in detail later in this book).
2.4 Basis of Accounting

From the point of view the timing of recognition of revenue and costs, there
can be two broad approaches to accounting. These are:
(i) Cash basis; and
(ii) Accrual basis.
Under the cash basis, entries in the book of accounts are made when cash is
received or paid and not when the receipt or payment becomes due. Let us say,
for example, if office rent for the month of December 2005, is paid in January
2006, it would be recorded in the book of account only in January 2006.
Similarly sale of goods on credit in the month of January 2006 would not
be recorded in January but say in April, when the payment for the same is
received. Thus this system is incompatible with the matching principle, which
states that the revenue of a period is matched with the cost of the same period.
Though simple, this method is inappropriate for most organisations as profit
is calculated as a difference between the receipts and disbursement of money
for the given period rather than on happening of the transactions.
Under the accrual basis, however, revenues and costs are recognised in
the period in which they occur rather when they are paid. A distinction is
made between the receipt of cash and the right to receive cash and payment
of cash and legal obligation to pay cash. Thus, under this system, the monitory
effect of a transaction is taken into account in the period in which they are
earned rather than in the period in which cash is actually received or paid by
the enterprise. This is a more appropriate basis for the calculation of profits
as expenses are matched against revenue earned in relation thereto. For
example, raw material consumed are matched against the cost of goods sold.
2.5 Accounting Standards

As discussed in the preceding section, the Generally Accepted Accounting
Principles in the form of Basic Accounting Concept have been accepted by the
accounting profession to achieve uniformity and comparability in the financial
statement. This is aimed at increasing the utility of these statement to various
users of the accounting information. But the difficulty is that GAAP permit a
variety of alternative treatments for the same item. For example, various
methods of calculation of cost of inventory are permissible which may be
followed by different enterprises. This may cause problem to the external
users of information, which becomes inconsistent and incomparable. This
necessitates brining in uniformity and consistency in the reporting of
accounting information.
Recognising this need, the Institute of Charted Accountants of India (ICAI)
constituted an Accounting Standards Board (ASB) in April, 1977 for developing
Accounting Standards. The main function of ASB is to identify areas in which
uniformity in standards is required and develop draft standards after wide
discussion with representative of the Government, public sector undertakings,
industry and other organisations. ASB gives due consideration to the
International Accounting Standards as India is a member of International
Account Setting Body. ASB submits the draft of the standards to the Council
of the ICAI, which finalises them and notifies them for use in the presentation
of the financial statements. ASB also makes a periodic review of the accounting
standards.
Accounting standards are written statements of uniform accounting rules
and guidelines or practices for preparing the uniform and consistent financial
statements and for other disclosures affecting the user of accounting
information. However, the accounting standards cannot override the provision
of applicable laws, customs, usages and business environment in the country.
The Institute tries to persuade the accounting profession for adopting the
accounting standards, so that uniformity can be achieved in the presentation
of financial statements. In the initial years the standards are of recommendatory
in nature. Once an awareness is created about the requirements of a standard,
steps are taken to enforce its compliance by making them mandatory for all
companies to comply with. In case of non-compliance, the companies are
required to disclose the reasons for deviations and the financial effect, if any,
arising due to such deviation.
The list of accounting standards is given in the appendix to this chapter.
3 6 Accountancy
Key Terms Introduced in the Chapter
• Cost • Full discloser

• Matching • Generally accepted
• Materiality • Revenue Relisation
• Objectivity • Operating guidelines
• Consistency • Accounting period
• Dual aspect • Money measurement
• Conservatism(Prudence) • Accounting concept
• Going concern • Accounting Principles (GAAP)
• Comparibility

1. Generally Accepted Accounting Principles (GAAP) : Generally Accepted
Accounting principles refer to the rules or guidelines adopted for recording
and reporting of business transactions in order to bring uniformity in the
preparation and presentation of financial statements. These principles are
also referred to as concepts and conventions. From the practicality view point,
the various terms such as principles, postulates, conventions modifying
principles, assumptions, etc. have been used interchangeably and are referred
to as basic accounting concepts, in the present book.
2. Basic Accounting Concepts : The basic accounting concepts are referred to as
the fundamental ideas or basic assumptions underlying the theory and practice
of financial accounting and are broad working rules of accounting activities.
3. Business Entity : This concept assumes that business has distinct and
separate entity from its owners. Thus, for the purpose of accounting, business
and its owners are to be treated as two separate entities.
4. Money Measurement : The concept of money measurement states that only those
transactions and happenings in an organisation, which can be expressed in terms
of money are to be recorded in the book of accounts. Also, the records of the
transactions are to be kept not in the physical units but in the monetary units.
5. Going Concern : The concept of going concern assumes that a business firm
would continue to carry out its operations indefinitely (for a fairly long period
of time) and would not be liquidated in the near future.
6. Accounting Period : Accounting period refers to the span of time at the end of
which the financial statements of an enterprise are prepared to know whether
it has earned profits or incurred losses during that period and what exactly
is the position of its assets and liabilities, at the end of that period.
7. Cost Concept : The cost concept requires that all assets are recorded in the
book of accounts at their cost price, which includes cost of acquisition,
transportation, installation and making the asset ready for the use.
8. Dual Aspect : This concept states that every transaction has a dual or two-
fold effect on various accounts and should therefore be recorded at two places.
The duality principle is commonly expressed in terms of fundamental
accounting equation, which is :
9. Revenue Recognition : Revenue is the gross in-flow of cash arising from the
sale of goods and services by an enterprise and use by others of the enterprise
resources yielding interest royalities and divididends. The concept of revenue
recognition requires that the revenue for a business transaction should be
considered realised when a legal right to receive it arises.
10. Matching : The concept of matching emphasises that expenses incurred in
an accounting period should be matched with revenues during that period.
It follows from this that the revenue and expenses incurred to earn these
revenue must belong to the same accounting period.
11. Full Disclosure : This concept requires that all material and relevant facts
concerning financial performance of an enterprise must be fully and completely
disclosed in the financial statements and their accompanying footnotes.
12. Consistency : This concepts states that accounting policies and practices
followed by enterprises should be uniform and consistent one the period of
time so that results are composable. Comparability results when the same
accounting principles are consistently being applied by different enterprises
for the period under comparison, or the same firm for a number of periods.
13. Conservatism : This concept requires that business transactions should be
recorded in such a manner that profits are not overstated. All anticipated
losses should be accounted for but all unrealised gains should be ignored.
14. Materiality : This concept states that accounting should focus on material
facts. If the item is likely to influence the decision of a reasonably prudent
investor or creditor, it should be regarded as material, and shown in the
financial statements.
15. Objectivity : According to this concept, accounting transactions should be
recorded in the manner so that it is free from the bias of accountants and
others.
16. Systems of Accounting : There are two systems of recording business
transactions, viz. double entry system and single entry system. Under double
entry system every transaction has two-fold effects where as single entry
system is known as incomplete records.
17. Basis of Accounting : The two broad approach of accounting are cash basis
and accrual basis. Under cash basis transactions are recorded only when
cash are received or paid. Whereas under accrual basis, revenues or costs
are recognises when they occur rather than when they are paid.
18. Accounting Standards : Accounting standards are written statements of
uniform accounting rules and guidelines in practice for preparing the uniform
and consistent financial statements. These standards cannot over ride the
provisions of applicable laws, customs, usages and business environment in
the country.
Short Answers
1. Why is it necessary for accountants to assume that business entity will remain
a going concern?
2. When should revenue be recognised? Are there exceptions to the general rule?
3 8 Accountancy
3. What is the basic accounting equation?

4. The realisation concept determines when goods sent on credit to customers
are to be included in the sales figure for the purpose of computing the profit
or loss for the accounting period. Which of the following tends to be used in
practice to determine when to include a transaction in the sales figure for
the period. When the goods have been:
a. dispatched b. invoiced
c. delivered d. paid for
Give reasons for your answer.
5. Complete the following work sheet:
(i) If a firm believes that some of its debtors may ‘default’, it should act on
this by making sure that all possible losses are recorded in the books.
This is an example of the ___________ concept.
(ii) The fact that a business is separate and distinguishable from its owner
is best exemplified by the ___________ concept.
(iii) Everything a firm owns, it also owns out to somebody. This co-incidence
is explained by the ___________ concept.
(iv) The ___________ concept states that if straight line method of depreciation
is used in one year, then it should also be used in the next year.
(v) A firm may hold stock which is heavily in demand. Consequently, the
market value of this stock may be increased. Normal accounting
procedure is to ignore this because of the ___________.
(vi) If a firm receives an order for goods, it would not be included in the
sales figure owing to the ___________.
(vii) The management of a firm is remarkably incompetent, but the firms
accountants can not take this into account while preparing book of
accounts because of ___________ concept.
Long Answers
1. ‘The accounting concepts and accounting standards are generally referred
to as the essence of financial accounting’. Comment.
2. Why is it important to adopt a consistent basis for the preparation of financial
statements? Explain.
3. Discuss the concept-based on the premise ‘do not anticipate profits but
provide for all losses’.
4. What is matching concept? Why should a business concern follow this
concept? Discuss.
5. What is the money measurement concept? Which one factor can make it
difficult to compare the monetary values of one year with the monetary values
of another year?
Project Work
Activity 1
Ruchica’s father is the sole proprietor of ‘Friends Gifts’, a firm engaged in the sale
of gift items. In the process of preparing financial statements, the accountant of
the firm Mr. Goyal fell ill and had to proceed on leave. Ruchica’s father was urgently
in need of the statements as these had to be submitted to the bank, in pursuance
of a loan of Rs. 5 lakh applied for the expansion of the business of the firm.
Ruchica who is studying Accounting in her school, volunteered to complete the
work. On scrutinising the accounts, the banker found that the value of building
bought a few years back for Rs. 7 lakh has been shown in the books at Rs. 20
lakh, which is its present market value. Similarly, as compared to the last year,
the method of valuation of stock was changed, resulting in value of goods to be
about 15 per cent higher. Also, the whole amount of Rs. 70,000 spent on purchase
of personal computer (expected life 5 years) during the year had been charged to
the profits of the current year. The banker did not rely on the financial data
provided by Ruchica. Advise Ruchica for the mistakes committed by her in the
preparation of financial statements in the context of basic concepts in accounting.
Activity 2
A customer has filed a suit against a trader who has supplied poor quality goods
to him. It is known that the court judgment will be in favour of the customer and
the trader will be required to pay the damages. However, the amount of legal
damages is not known with certainity. The accounting year has already been
ended and the books are now finalised to ascertain true profit or loss. The
accountant of the trader has advised him not to consider the expected loss on
account of payment of legal damages because the amount is not certain and the
final judgment of the court is not yet out. Do you think the accountant is right in
his approach.

1. (c) 2. (d) 3. (a) 4. (b)
1. Matching 2. Conservatism
3. Revenue Realisation 4. Consistency
5. Objectivity
APPENDIX
Accounting Standards (AS)
The ICAI has issued the following standards:

AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
AS 5 Net Profit or Loss for the Period, Prior Period items and Changes in
Accounting Policies
AS 6 Depreciation Accounting
AS 7 Construction Contracts
AS 8 Accounting for Research and Development
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 15 Accounting for Retirement Benefits in the Financial Statements of
Employers (recently revised and titled as ‘Employee Benefits’)
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases
AS 20 Earnings Per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income
AS 23 Accounting for Investments in associates in Consolidated Financial
Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Join Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Recording of Transactions-I 3
I n chapter 1 and 2, while explaining the

development and importance of accounting as a
source of disseminating the financial information
along with the discussion on basic accounting
concepts that guide the recording of business
transactions, it has been indicated that accounting
involves a process of identifying and analysing the
business transactions, recording them, classifying
LEARNING OBJECTIVES and summarising their ef fects and finally
communicating it to the interested users of
After studying this chapter, accounting information.
you will be able to:
In this chapter, we will discuss the details of each
• describe the nature of
transaction and source step involved in the accounting process. The first
documents; step involves identifying the transactions to be
• explain the prepa- recorded and preparing the source documents
ration of accounting which are in turn recorded in the basic book of
vouchers; original entry called journal and are then posted to
• apply accounting individual accounts in the principal book called
equation to explain the ledger.
effect of transactions;
• record transactions 3.1 Business Transactions and Source Document
using rules of debit
and credit; After securing good percentage in your previous
• explain the concept of
examination, as promised, your father wishes to
book of original entry buy you a computer. You go to the market along
and recording of with your father to buy a computer. The dealer gives
transactions in journal; a cash memo along with the computer and in
• explain the concept of exchange your father makes cash payment of
ledger and posting of Rs. 35,000. Purchase of computer for cash is an
journal entries to the example of a transaction, which involves reciprocal
ledger accounts.
exchange of two things: (i) payment of cash,
(ii) delivery of a computer. Hence, the transaction
42 Accountancy
involves this aspect, i.e. Give and Take. Payment of cash involves give aspect
and delivery of computer is a take aspect. Thus, business transactions are
exchanges of economic consideration between parties and have two-fold effects
that are recorded in at least two accounts.
Business transactions are usually evidenced by an appropriate documents
such as Cash memo, Invoice, Sales bill, Pay-in-slip, Cheque, Salary slip, etc. A
document which provides evidence of the transactions is called the Source
Document or a Voucher. At times, there may be no documentary for certain items
as in case of petty expenses. In such case voucher may be prepared showing the
necessary details and got approved by appropriate authority within the firm. All
such documents (vouchers) are arranged in chronological order and are serially
numbered and kept in a separate file. All recording in books of account is done
on the basis of vouchers.
Transaction Voucher
Name of Firm :
Voucher No :
Date :
Debit account :
Credit account:
Amount (Rs.) :
Narration :
Authorised By : Prepared By :
Fig. 3.1 : Showing specimen transaction voucher
3.1.1 Preparation of Accounting Vouchers

Accounting vouchers may be classified as cash vouchers, debit vouchers, credit
vouchers, journal vouchers, etc. There is no set format of accounting vouchers.
A specimen of a simple transaction voucher is used in practice is shown in
figure 3.1.
These must be preserved in any case till the audit of the accounts and tax
assessments for the relevant period are completed. Now a days, accounting is
computerised and the necessary accounting vouchers showing the code
number and name of the accounts to be debited and credited are prepared for
the purpose of necessary recording of transactions. A transaction with one
debit and one credit is a simple transaction and the accounting vouchers
prepared for such transaction is known as Transaction Voucher, the format of
Recording of Transactions - I 43
which is shown in figure 3.1. Voucher which records a transaction that entails
multiple debits/credits and one credit/debit is called compound voucher.
Compound voucher may be: (a) Debit Voucher or (b) Credit Voucher; the specimen
is shown in figure 3.2.
Debit Voucher
Name of Firm :
Voucher No : Date :
Credit Account :
Amount :
Debit Accounts
S. No. Code Account Name Amount Narration (i.e. Explanation)

Rs.
CreditVoucher
Name of Firm :
Voucher No : Date :
Debit Account :
Amount :
Credit Accounts

Rs.
Fig. 3.2 : Showing debit and credit vouchers

44 Accountancy
Transactions with multiple debits and multiple credits are called complex
transactions and the accounting voucher prepared for such transaction is
known as Complex Voucher/ Journal Voucher. The format of a complex
transaction voucher is shown in figure 3.3.
Journal Voucher
Name of Firm :
Voucher No : Date :
Debit Entries

Rs.
Credit Entries

Rs.
Fig. 3.3 : Showing specimen of complex transaction voucher
The design of the accounting vouchers depends upon the nature, requirement
and convenience of the business. There is no set format of an accounting
voucher. To distinguish various vouchers, different colour papers and different
fonts of printing are used. Some of the specimen of the accounting vouchers
are given in the earlier pages. A accounting voucher must contain the following
essential elements :
• It is written on a good quality paper;
• Name of the firm must be printed on the top;
• Date of transaction is filled up against the date and not the date of recording
of transaction is to be mentioned;
• The number of the voucher is to be in a serial order;
• Name of the account to be debited or credited is mentioned;
• Debit and credit amount is to be written in figures against the amount;

• Description of the transaction is to be given account wise;
• The person who prepares the voucher must mention his name along with
signature; and
• The name and signature of the authorised person are mentioned on the
voucher.
3.2 Accounting Equation

Accounting equation signifies that the assets of a business are always equal
to the total of its liabilities and capital (owner’s equity). The equations reads
as follows:
A=L+C
Where,
A = Assets
L = Liabilities
C = Capital
The above equation can also be presented in the following forms as its
derivatives to enable the determination of missing figures of Capital(C) or
Liabilities(L).
(i) A – L = C
(ii) A – C = L
Since, the accounting equation depicts the fundamental relationship among
the components of the balance sheet, it is also called the Balance Sheet
Equation. As the name suggests, the balance sheet is a statement of assets,
liabilities and capital.
At any point of time resources of the business entity must be equal to the
claims of those who have financed these resources. The proprietors and
outsiders provide the resources of the business. The claim of the proprietors
is called capital and that of the outsides is known as liabilities. Each element
of the equation is the part of balance sheet, which states the financial position
of the business on a particular date. When we analyse the transactions, we
actually try to know that how balance sheet of a business entity gets affected.
Asset side of the balance sheet is the list of assets, which the business
entity owns. The liabilities side of the balance sheet is the list of owner’s
claims and outsider’s claims, i.e., what the business entity owes. The equality
of the assets side and the liabilities side of the balance sheet is an undeniable
fact and this justifies the name of accounting equation as balance sheet
equation also.
46 Accountancy
For example, Rohit started business with a capital of Rs. 5,00,000. From
the accounting point of view, the resources of this business entity is in the
form of cash, i.e., Rs. 5,00,000. Sources of this business entity is the
contribution by Rohit (Proprietor) Rs. 5,00,000 as Capital .
(For the purpose of understanding we will refer this example as example 1,
throughout the chapter) .
If we put this information in the form of equality of resources and sources,
the picture would emerge somewhat as follows:
Books of Rohit
Balance Sheet as at ..........
Liabilities Amount Assets Amount
Rs. Rs.
Capital 5,00,000 Cash in hand 5,00,000
5,00,000 5,00,000
In the above balance sheet, the total assets are equal to the liabilities of
the business. Since, the business has not yet started its activities and has not
earned any profits; the amount invested in business is still Rs. 5,00,000. In
case any profits are earned, it will increase the invested amount in business.
On the other hand, if business suffers any losses, it will decrease the invested
amount in business.
We will now analyse the transactions listed in example 1 and its effect on
different elements and you will observe that the accounting equation always
remain balanced:
Example 1.
1. Opened a bank account in State Bank of India with an amount of
Rs. 4,80,000.
Analysis of transaction: This transaction increases the cash in hand
(assets) and decreases cash (asset) by Rs. 4,80,000.
2. Bought furniture for Rs. 60,000 and cheque was issued on the same day.
Analysis of transaction: This transaction increases furniture (assets) and
decreases bank (assets) by Rs. 60,000.
3. Bought plant and machinery for the business for Rs. 1,25,000 and an
advance of Rs. 10,000 in cash is paid to M/s Ramjee Lal.
Analysis of transaction: This transaction increases plant and machinery
(assets) by Rs. 1,25,000, decreases cash by Rs. 10,000 and increases
liabilities (M/s Ramjee lal as creditor)by Rs. 1,15,000.
4. Goods purchased from M/s Sumit Traders for Rs. 55,000.

Analysis of transaction: This transaction increases goods (assets) and
increases liabilities (M/s Sumit Traders as creditors) by Rs. 55,000.
5. Goods costing Rs. 25,000 sold to Rajani Enterprises for Rs. 35,000.
Analysis of transaction: This transaction decreases stock of goods (assets)
by Rs. 25,000 and increases assets (Rajani Enterprises as debtors
Rs. 35,000) and capital (with the profit of Rs. 10,000)
The final equation as per the above analysis table can be summarised in
the form of a balance sheet as under:
Balance Sheet as at.....2005
Rs. Rs.
Outsider’s Claims (Creditors) 1,70,000 Cash 10,000

Capital 5,10,000 Bank 4,20,000
Debtors 35,000
Stock 30,000
Furniture 60,000
Plant & Machinery 1,25,000
6,80,000 6,80,000
In terms of accounting equation

A=L+C
Rs. 6,80,000 = Rs. 1,70,000 + Rs. 5,10,000
3.3 Using Debit and Credit

As already stated every transaction involves give and take aspect. In double
entry accounting, every transaction affects and is recorded in at least two
accounts. When recording each transaction, the total amount debited must
equal to the total amount credited. In accounting, the terms — debit and credit
indicate whether the transactions are to be recorded on the left hand side or
right hand side of the account. In its simplest form, an account looks like the
letter T. Because of its shape, this simple form called a T -account (refer
figure 3.4). Notice that the T format has a left side and a right side for recording
increases and decreases in the item. This helps in ascertaining the ultimate
position of each item at the end of an accounting period. For example, if it is
an account of a customer all goods sold shall appear on the left (debit) side of
customer’s account and all payments received on the right side. The difference
between the totals of the two sides called balance shall reflect the amount due
to the customer. In a T account, the left side is called debit (often abbreviated
as Dr.) and the right side is known as credit (often abbreviated as Cr.). To
48
The summary of effects of transactions on accounting equation is in the following analysis table:
(Figures in rupees)
Transaction Cash Bank Assets Goods Furniture Plant and Total Liabilities Capital Total
No. Debtors (Stock) Machinery Assets
5,00,000 5,00,000 ....... 5,00,000 5,00,000
1. (4,80,000) 4,80,000 ....... ....... .......

Post Trans. 20,000 4,80,000 5,00,000 5,00,000 5,00,000
Equation
2. ....... (60,000) 60,000 ....... ....... .......
Post Trans. 20,000 4,20,000 60,000 5,00,000 5,00,,000 5,00,000
Equation
3. (10,000) 1,25,000 1,15,000 1,15,000 1,15,000
Post Trans. 10,000 4,20,000 60,000 1,25,000 6,15,000 1,15,000 5,00,000 6,15,000
Equation
4. 55,000 55,000 55,000 55,000
Post Trans. 10,000 4,20,000 55,000 60,000 1,25,000 6,70,000 1,70,000 5,00,000 6,70,000
Equation
5. 35,000 (25,000) 10,000 10,000 10,000
Final 10,000 4,20,000 35,000 30,000 60,000 1,25,000 6,80,000 1,70,000 5,10,000 6,80,000
Equation
Accountancy
enter amount on the left side of an account is to debit the account. To enter
amount on the right side is to credit the account.
Account Title
(Left Side) (Right Side)
Fig. 3.4 : Showing T-account
3.3.1 Rules of Debit and Credit

All accounts are divided into five categories for the purposes of recording the
transactions: (a) Asset (b) Liability (c) Capital (d) Expenses/Losses, and (e)
Revenues/Gains.
Two fundamental rules are followed to record the changes in these accounts:
(1) For recording changes in Assets/Expenses (Losses):
(i) “Increase in asset is debited, and decrease in asset is credited.”
(ii) “Increase in expenses/losses is debited, and decrease in expenses/
losses is credited.”
(2) For recording changes in Liabilities and Capital/Revenues (Gains):
(i) “Increase in liabilities is credited and decrease in liabilities is debited.”
(ii) “Increase in capital is credited and decrease in capital is debited.”
(iii) “Increase in revenue/gain is credited and decrease in revenue/gain
is debited.”
The rules applicable to the different kinds of accounts have been
summarised in the following chart:
Rules of Debit and Credit
Asset Liabilities
(Increase) (Decrease) (Decrease) (Increase)
+ – – +
Debit Credit Debit Credit
Capital
(Decrease) (Increase) Expenses/Losses

– +
Debit Credit (Increase) (Decrease)
Revenues/Gains + –
Debit Credit
(Decrease) (Increase)
– +
Debit Credit
50 Accountancy
The transactions in Example 1 on page 47 will help you to learn how to

apply these debit and credit rules. Observe the analysis table given on page
48 carefully to be sure that you understand before you go on to the next one.
To illustrate different kinds of events, three more transactions have been added
(transactions 7 to 9).
1. Rohit started business with cash Rs. 5,00,000
Analysis of Transaction : The transaction increases cash on one hand and increases
capital on the other hand. Increases in assets are debited and increases in capital
are credited. Therefore record the transaction with debit to Cash and credit to Rohit’s
Capital.
Cash Account Capital Account
(1) 5,00,000 (1) 5,00,000
(6) 10,000
2. Opened a bank account with an amount of Rs. 4,80,000

Analysis of Transaction: The transaction increases the cash at bank on one hand
and decreases cash in hand on the other hand. Increases in assets are debited and
a decreases in assets are credited. Therefore, record the transactions with debit to
Bank account and credit to Cash account.
Cash Account Bank Account
(1) 5,00,000 (2) 4,80,000 (2) 4,80,000
3. Bought furniture for Rs. 60,000 and issued cheque for the same
Analysis of Transaction : This transaction increases furniture (assets) on one hand
and decreases bank (assets) on the other hand by Rs. 60,000. Increases in assets
are debited and decreases are credited. Therefore record the transactions with debit
to Furniture account and credit to Bank account.
Furniture Account Bank Account
(1) 60,000 (2) 4,80,000 (3) 60,000
4. Bought Plant and Machinery from Ramjee lal for the business for Rs. 1,25,000
and an advance of Rs. 10,000 in cash is given.
Analysis of Transaction : This transaction increases plant and machinery (assets) by
Rs. 1,25,000, decreases cash by Rs. 10,000 and increases liabilities (M/s Ramjee
Lal as creditor) by Rs. 1,15,000. Increases in assets are debited whereas decreases
in assets are credited. On the other hand increases in liabilities are credited. Therefore,
record the transaction with debit to furniture account and with credit to Cash and
Ramjee Lal’s account.
Cash Account Plant and Machinery Account
(1) 5,00,000 (2) 4,80,000 (4) 1,25,000

(4) 10,000
Ramjee Lal’s Account
(4) 1,15,000
5. Goods purchased from Sumit Traders for Rs. 55,000

Analysis of transaction : This transaction increases purchases (expenses) and
increases liabilities (M/s Sumit Traders as creditors) by Rs. 55,000. Increases in
expenses are debited and increases in liabilities are credited. Therefore record the
transaction with debit to Purchases account and credit to Sumit Traders account.
Purchases Account Sumit Traders Account
(5) 55,000 (5) 55,000
6. Goods costing Rs. 25,000 sold to Rajani Enterprises for Rs. 35,000
Analysis of transaction : This transaction increases sales (Revenue) and increases
assets (Rajani Enterprises as debtors). Increases in assets are debited and increases
in revenue are credited. Therefore record the entry with credit to Sales account and
debit to Rajani Enterprises account.
Sales Account Rajani Enterprises Account

(6) 35,000 (6) 35,000
7. Paid the monthly store rent Rs. 2,500 in cash

Analysis of transaction : The payment of rent is an expense which decreases capital
thus, are recorded as debits. Credit cash to record decrease in assets.
Rent Account Cash Account
(7) 2,500 (7) 5,00,000 (2) 4,80,000

(4) 10,000
(7) 2,500
8. Paid Rs. 5,000 as salary to the office employees

Analysis of transaction : The payment of salary is an expense which decreases capital
thus, are recorded as debits. Credit Cash to record decrease in assets.
52 Accountancy
Salary Account Cash Account
(8) 5,000 (1) 5,00,000 (2) 4,80,000

(4) 10,000
(7) 2,500
(8) 5,000
9. Received cheque as full payment from Rajani Enterprises and deposited same
day into bank
Analysis of transaction : This transaction increase assets( Bank) on the one hand
and decreases assets(Rajani Enterprises as debtors) on the other hand. Increase in
assets is debited whereas decrease in assets is credited. Therefore record the entry
with debit to Bank account and credit to Rajani Enterprises account.
Rajani Enterprises Account Bank’s Account
(6) 35,000 (9) 35,000 (2) 4,80,000 (3) 60,000

(9) 35,000
1. Double entry accounting requires that :

(i) All transactions that create debits to asset accounts must create credits to
liability or capital accounts;
(ii) A transaction that requires a debit to a liability account require a credit to an
asset account;
(iii) Every transaction must be recorded with equal debits equal total credits.
2. State different kinds of transactions that increase and decrease capital.
3. Does debit always mean increase and credit always mean decrease?
4. Which of the following answers properly classifies these commonly used accounts:
(1) Building (2) Wages (3) Credit sales (4) Credit purchases (5) Electricity charges
due but not yet paid(outstanding electricity bills) (6) Godown rent paid in
advance(prepaid godown rent) (7) Sales (8) Fresh capital introduced (9) Drawings
(10) Discount paid
Assets Liabilities Capital Revenue Expense
(i) 5,4, 3, 9,6 2,10 8,7
(ii) 1, 6 4, 5 8 7, 3 2,9,10
(iii) 2,10,4 4,6 8 7,5 1,3,9
Illustration 1
Analyse the effect of each transaction on assets and liabilities and show that the both
sides of Accounting Equation (A = L + C) remains equal :
(i) Introduced Rs. 8,00,000 as cash and Rs. 50,000 by stock.
(ii) Purchased plant for Rs. 3,00,000 by paying Rs. 15,000 in cash and balance at a
later date.
(iii) Deposited Rs. 6,00,000 into the bank.
(iv) Purchased office furniture for Rs. 1,00,000 and made payment by cheque.
(v) Purchased goods worth Rs. 80,000 for cash and for Rs. 35,000 in credit.
(vi) Goods amounting to Rs. 45,000 was sold for Rs. 60,000 on cash basis.
(vii) Goods costing to Rs. 80,000 was sold for Rs. 1,25,000 on credit.
(viii) Cheque issued to the supplier of goods worth Rs. 35,000.
(ix) Cheque received from customer amounting to Rs. 75,000.
(x) Withdrawn by owner for personal use Rs. 25,000.
Solution
Transaction (i) It affects Cash and Inventory on the assets side and Capital on the other
hand. There is increase in cash by Rs. 8, 00,000 and Inventory of goods by Rs. 50,000 on
assets side of the equation. Capital is increased by Rs. 8, 50,000.
Rs.
Cash + Inventory(Stock)
8,00,000 + 50,000 = 8,50,000
Total 8,50,000 = 8,50,000
Transaction (ii) It affects Cash and Plant and Machinery on the assets side and liabilities
on the other side of the equation. There is an increase in plant and machinery by Rs. 3,
00,000 and decrease in cash by Rs. 15,000. Liability to pay to the supplier of plant and
machinery increases by Rs. 2,85,000.
Rs.
Cash +Inventory + Plant and Machinery
8,00,000 + 50,000 = 8,50,000
(15,000) 3,00,000 = 2,85,000
7,85,000 + 50,000 +3,00,000 = 2,85,000 + 8,50,000
Total 11,35,000 = 11,35,000
Transaction (iii) It affects assets side only. The composition of the asset side changes.
Cash decreases by Rs. 6,00,000 and by the same amount bank increases.
Rs.
Cash + Inventory + Plant and + Bank =
Machinery
7,85,000 + 5,0000 + 3,00,000 = 2,85,000 + 8,50,000
(6,00,000) + 6,00,000
1,85,000 + 50,000 + 3,00,000 + 6,00,000 = 2,85,000 + 8,50,000
Total 11,35,000 = 11,35,000
Transaction (iv) It affects assets side only. The composition of the asset side changes.
Furniture increases by Rs. 1,00,000 and by the same amount bank decreases.
54 Accountancy
Rs.
Cash + Inventory + Plant and + Bank + Furniture
Machinery
1,85,000 + 50,000 + 3,00,000 + 6,00,000 = 2,85,000 + 8,50,000
(1,00,000) + 1,00,000
1,85,000 + 50,000 +3,00,000 +5,00,000 + 1,00,000 = 2,85,000 + 8,50,000
Total 11,35,000 = 11,35,000
Transaction (v) It affects Cash and Inventory on the assets side and liability on the other
side. There is decrease in cash by Rs. 80,000 and increase of inventory of goods by
Rs. 1,15,000 on the assts side of the equation. Liabilities increases by Rs. 35,000.
Rs.
Cash + Inventory +Plant and + Bank + Furniture
Machinery
1,85,000 + 50,000 + 3,00,000 + 5,00,000 + 1,00,000 = 2,85,000 + 8,50,000
(80,000) + 1,15,000 = 35,000
1,05,000 + 1,65,000 +3,00,000 +5,00,000 + 1,00,000 = 3,20,000 + 8,50,000
Total 11,70,000 = 11,70,000
Transaction (vi) It affects Cash and Inventory on the assets side and capital on the other
side. There is an increase in cash by Rs. 60,000 and decrease in inventory of goods by
Rs. 45,000 on the assets side of the equation. Capital increases by Rs. 15,000.
Rs.
Assets = Liabilitie + Capital
Cash + Inventory + Plant and + Bank + Furniture
Machinery
1,05,000 + 1,65,000 + 3,00,000 + 5,00,000 + 1,00,000 = 3,20,000 + 8,50,000
60,000 + (45,000) + 15,000
1,65,000 + 1,20,000 +3,00,000 +5,00,000 + 1,00,000 = 3,20,000 + 8,65,000
Total 11,85,000 = 11,85,000
Transaction (vii) It affects Debtors and Inventory on the assets side and capital on the
other side. There is increase in debtors by Rs. 1, 25,000 and decrease in Inventory of
goods by Rs. 80,000 on the assets side of the equation. Capital increases by Rs.45, 000.
Rs.
Cash + Inventory +Plant and + Bank + Furniture + Debtors
Machinery
1,65,000 + 1,20,000 + 3,00,000 + 5,00,000 + 1,00,000 = 3,20,000 + 8,65,000
(80,000) + 1,25,000 = + 45,000
1,65,000 + 40,000 +3,00,000 +5,00,000 + 1,00,000 + 1,25,000 = 3,20,000 + 9,10,000
Total 12,30,000 = 12,30,000
Transaction (viii) It affects Bank on the assets side on one side and liability on the other
side. There is decrease in bank by Rs. 35,000 on the assets side and liability also decreases
by Rs. 35,000.
Rs.
Machinery
1,65,000 + 40,000 + 3,00,000 + 5,00,000 + 1,00,000 + 1,25,000 = 3,20,000 + 9,10,000
(35,000) = (35,000)
1,65,000 + 40,000 + 3,00,000 +4,65,000 + 1,00,000 + 1,25,000= 2,85,000 + 9,10,000
Total 11,95,000 = 11,95,000
Transaction (ix) It affects assets side only. The composition of the assets side changes.
Bank increases by R. 75,000 and by the same amount Debtors decreases.
Rs.
Machinary
1,65,000 + 40,000 + 3,00,000 + 4,65,000 + 1,00,000 + 1,25,000 = 2,85,000 + 9,10,000
+ 75,000 (75,000)
1,65,000 + 40,000 + 3,00,000 + 5,40,000 + 1,00,000 + 50,000 = 2,85,000 + 9,10,000
Total 11,95,000 = 11,95,000
Transaction (x) It affects Cash on the asset side and Capital on the other hand. There
is decrease in Cash by Rs. 25,000 on the assets side whereas capital decreases
by Rs. 25,000.
Rs.
Machinery
1,65,000 + 40,000 + 3,00,000 + 5,40,000 + 1,00,000 + 50,000 = 2,85,000 + 9,10,000
(25,000) + (25,000)
1,40,000+ 40,000 +3,00,000 +5,40,000 + 1,00,000 + 50,000 = 2,85,000 + 8,85,000
Total 11,95,000 = 11,95,000
3.4 Books of Original Entry

In the preceding pages, you learnt about debits and credits and observed how
transactions affect accounts. This process of analysing transactions and recording
their effects directly in the accounts is helpful as a learning exercise. However, real
accounting systems do not record transactions directly in the accounts. The book in
which the transaction is recorded for the first time is called journal or book of original
entry. The source document, as discussed earlier, is required to record the transaction
in the journal. This practice provides a complete record of each transaction in one
place and links the debits and credits for each transaction. After the debits and
credits for each transaction are entered in the journal, they are transferred to the
individual accounts. The process of recording transactions in journal is called
journalising. Once the journalising process is completed, the journal entry provides
56 Accountancy
a complete and useful description of the event’s effect on the organisation. The process
of transferring journal entry to individual accounts is called p o s t i n g .
This sequence causes the journal to be called the Book of Original Entry and
the ledger account as the Principal Book of entry. In this context, it should be
noted that on account of the number and commonality of most transactions,
the journal is subdivided into a number of books of original entry as follows:
(a) Journal Proper
(b) Cash book
(c) Other day books:
(i) Purchases (journal) book
(ii) Sales (journal) book
(iii) Purchase Returns (journal) book
(iv) Sale Returns (journal) book
(v) Bills Receivable (journal) book
(vi) Bills Payable (journal) book
In this chapter you will learn about the process of journalising and their
posting into ledger. The cash book and other day books are dealt in detail in
chapter 4.
3.4.1 Journal
This is the basic book of original entry. In this book, transactions are recorded
in the chronological order, as and when they take place. Afterwards,
transactions from this book are posted to the respective accounts. Each
transaction is separately recorded after determining the particular account to
be debited or credited. The format of Journal is shown is figure 3.5
Journal
Date Particulars L.F. Debit Credit
Amount Amount
Rs. Rs.
Fig. 3.5 : Showing the format of journal

The first column in a journal is Date on which the transaction took place.
In the Particulars column, the account title to be debited is written on the first
line beginning from the left hand corner and the word ‘Dr.’ is written at the
end of the column. The account title to be credited is written on the second
line leaving sufficient margin on the left side with a prefix ‘To’. Below the
account titles, a brief description of the transaction is given which is called

Narration. Having written the Narration a line is drawn in the Particulars
column, which indicates the end of recording the specific journal entry. The
column relating to Ledger Folio records the page number of the ledger book on
which relevant account is appears. This column is filled up at the time of
posting and not at the time of making journal entry.
The Debit amount column records the amount against the account to be
debited and similarly the Credit Amount column records the amount against
the account to be credited. It may be noted that, the number of transactions
is very large and these are recorded in number of pages in the journal book.
Hence, at the end of each page of the journal book, the amount columns are
totaled and carried forward (c/f) to the next page where such amounts are
recorded as brought forward (b/f) balances.
The journal entry is the basic record of a business transaction. It may be
simple or compound. When only two accounts are involved to record a
transaction, it is called a simple journal entry.
For Example, Goods Purchased on credit for Rs.30,000 from M/s Govind
Traders on December 24, 2005, involves only two accounts: (a) Purchases A/c
(Goods), (b) Govind Traders A/c (Creditors). This transaction is recorded in
the journal as follows :
Journal
Amount Amount
Rs. Rs.
2005
Dec.24 Purchases A/c Dr. 30,000
To Govind Traders A/c 30,000
(Purchase of goods- in-trade from
Govind Traders)
It will be noticed that although the transaction results in an increase in

stock of goods, the account debited is purchases, not goods. In fact, as
explained in chater 7 the goods account is divided into five accounts, viz.
purchases account, sales account, purchases returns account, sales returns
account, and stock account. When the number of accounts to be debited or
credited is more than one, entry made for recording the transaction is called
compound journal entry. That means compound journal entry involves multiple
accounts. For example, For Rs. 25,000 Office furniture is purchased from
Modern Furniture’s on July 4, 2005 and Rs. 5,000 is paid by cash immediately
and balance of Rs. 20,000 is still payable. It increases furniture (assets) by
Rs. 25,000, decreases cash (assets) by Rs. 5,000 and increases liability by Rs.
20,000. The entry made in the journal on July 4, 2005 is :
58 Accountancy
Journal
Amount Amount
Rs. Rs.
2005
July 4 Office Furniture A/c Dr. 25,000
To Cash A/c 5,000
To Modern Furniture A/c 20,000
(Purchase of office furniture from
Modern Furnitures)
Now refer to example 1(on page 47 again and observe how the transactions
listed are recorded in the journal:
Books of Rohit
Journal
Amount Amount
Rs. Rs.
Cash A/c Dr. 5,00,000
To Capital A/c 5,00,000
(Business started with cash)
Bank A/c Dr. 4,80,000
To Cash A/c 4,80,000
(Opened bank account with State
Bank of India)
Furniture A/c Dr. 60,000
To Bank A/c 60,000
( Purchased furniture and made
payment through bank))
Plant and Machinery A/c Dr. 1,25,000
To Cash A/c 10,000
To Ramjee Lal 1,15,000
(Bought Plant and Machinery from
M/s Ramjee Lal, made an advance
payment by cash for Rs. 10,000 and
balance at the later date )
Purchases A/c Dr. 55,000
To M/s Sumit Traders A/c 55,000
(Goods bought on credit)
Rajani Enterprises A/c Dr. 35,000
To Sales A/c 35,000
(Goods sold on profit)
Total 12,55,000 12,55,000
Illustration 2.
Soraj Mart furnishes the following information :
Transactions during the month of April, 2005 are as under :
Date Details
1.4.2005 Business started with cash Rs. 1,50,000.
1.4.2005 Goods purchased form Manisha Rs. 36,000.
1.4.2005 Stationery purchased for cash Rs. 2,200.
2.4.2005 Open a bank account with SBI for Rs. 35,000.
2.4.2005 Goods sold to Priya for Rs. 16,000.
3.4.2005 Received a cheque of Rs. 16,000 from Priya.
5.4.2005 Sold goods to Nidhi Rs. 14,000.
08.4.2005 Nidhi pays Rs. 14,000 cash.
10.4.2005 Purchased goods for Rs. 20,000 on credit from Ritu.
14.4.2005 Insurance paid by cheque Rs. 6,000.
18.4.2005 Paid rent Rs. 2,000.
20.4.2005 Goods costing Rs. 1,500 given as charity.
24.4.2005 Purchased office furniture for Rs. 11,200.
29.4.2005 Cash withdrawn for household purposes Rs. 5000.
30.4.2005 Interest received cash Rs.1,200.
30.4.2005 Cash sales Rs.2,300.
30.4.2005 Commission paid Rs. 3,000 by cehque.
30.4.2005 Telephone bill paid by cheque Rs. 2,000.
30.4.2005 Payment of salaries in cash Rs. 12,000.
Journalise the transactions.

Solution
Books of Saroj Mart
Journal
Amount Amount
Rs. Rs.
2005
Apr.01 Cash A/c Dr. 1,50,000
Apr.01 Purchases A/c Dr. 36,000
To Manisha A/c 36,000
(Goods purchase on credit)
Apr.01 Stationery A/c Dr. 2,200
To Cash A/c 2,200
( Purchase of stationery for cash)
Total c/f 1,88,200 1,88,200
60 Accountancy
Total b/f 1,88,200 1,88,200

Apr.02 Bank A/c Dr. 35,000
To Cash A/c 35,000
(Opened a bank account with SBI)
Apr.02 Priya A/c Dr. 16,000
To Sales A/c 16,000
(Goods sold to Priya On Credit)
To Priya A/c 16,000
(Cheque Received from Priya)
Apr.05 Nidhi A/c Dr. 14,000
To Sales A/c 14,000
(Sale of goods to Nidhi on credit)
Apr.08 Cash A/c Dr. 14,000
To Nidhi A/c 14,000
(Cash received from Nidhi)
Apr.10 Purchases A/c Dr. 20,000
To Ritu A/c 20,000
(Purchase of goods on credit)
Apr.14 Insurance Premium A/c Dr. 6,000
To Bank A/c 6,000
(Payment of Insurance premium by
cheque)
Apr.18 Rent A/c Dr. 2,000
To Cash A/c 2,000
(Rent paid)
Apr.20 Charity A/c Dr. 1,500
To Purchases A/c 1,500
(Goods given as charity)
Apr.24 Furniture A/c Dr. 11,200
To Cash A/c 11,200
(Purchase of office furniture)
Apr.29 Drawings A/c Dr. 5,000
To Cash A/c 5,000
(With drawl of cash from the business
for personal use of the proprietor)
To Interest received A/c 1,200
(Interest received)
To Sales A/c 2,300
(Sale of goods for cash)
Total c/f 3,32,400 3,32,400
Total c/f 3,32,400 3,32,400

Apr.30 Commission A/c Dr. 3,000
To Bank A/c 3,000
(Commission paid by cheque)
Apr.30 Telephone expenses A/c Dr. 2,000
To Cash A/c 2,000
(Payment of telephone bill)
Apr.30 Salaries A/c Dr. 12,000
To Cash A/c 12,000
(Payment of salary to the office persons)
Total 3,49,400 3,49,400
Illustration 3
Prove that the accounting equation is satisfied in all the following transactions of Sita
Ram house by preparing the analysis table. Also record the transactions in Journal.
(i) Business commenced with a capital of Rs. 6,00,000.
(ii) Rs. 4,50,000 deposited in a bank account.
(iii) Rs. 2,30,000 Plant and Machinery Purchased by paying Rs. 30,000 cash
immediately.
(iv) Purchased goods worth Rs. 40,000 for cash and Rs. 45,000 on account.
(v) Paid a cheque of Rs. 2, 00,000 to the supplier for Plant and Machinery.
(vi) Rs. 70,000 cash sales (of goods costing Rs. 50,000).
(vii) Withdrawn by the proprietor Rs. 35,000 cash for personal use.
(viii) Insurance paid by cheque of Rs. 2,500.
(ix) Salary of Rs. 5,500 outstanding.
(x) Furniture of Rs. 30,000 purchased in cash.
Solution
Journal
Amount Amount
Rs. Rs.
(i) Cash A/c Dr. 6,00,000
(ii) Bank A/c Dr. 4,50,000
To Cash A/c 4,50,000
(Cash deposited into the bank)
Total c/f 10,50,000 10,50,000
62 Accountancy
Total c/f 10,50,000 10,50,000

(iii) Plant and Machinery A/c Dr. 2.30,000
To Cash A/c 30,000
To Creditors A/c 2,00,000
(Purchase of plant and machinery by
paying Rs. 30,000 cash and balance
on a later date)
(iv) Purchases A/c Dr. 85,000
To Cash A/c 40,000
To Creditors A/c 45,000
(Bought goods for cash as well as on
credit)
(v) Creditor’s A/c Dr. 2,00,000
To Bank A/c 2,00,000
(Payment made to the supplier of plant
and machinery)
(vi) Cash A/c Dr. 70,000
To Sales A/c 70,000
(Sold goods on profit)
(vii) Drawings A/c Dr. 35,000
To Cash A/c 35,000
(Withdrew cash for personal use)
(viii) Insurance A/c Dr. 2,500
To Bank A/c 2,500
(Paid insurance by cheque)
(ix) Outstanding salary A/c Dr. 5,500
To Salary A/c 5,500
(Salary outstanding )
(x) Furniture A/c Dr. 30,000
To Cash A/c 30,000
(Furniture purchased for cash)
Total 17,08,000 17,08,000

State the title of the accounts affected, type of account and the account to be debited
and account to be credited :
Rs
1. Bhanu commenced business with cash 1,00,000
2. Purchased goods on credit from Ramesh 40,000
3. Sold goods for cash 30,000
4. Paid salaries 3,000
5. Furniture purchased for cash 10,000
Statement showing the effect of various transaction on accounting equation
(Figures in rupees)
No. Cash Bank Stock Fur- Plant and Total = Non-trade Trade Capital Total
niture Machinery Creditors Creditors
1 6,00,000 6,00,000 = 6,00,000 6,00,000

2 6,00,000 - - - - 6,00,000 = - - 6,00,000 6,00,000
(4,50,000) 4,50,000
3 1,50,000 4,50,000 -- -- - 6,00,000 = - - 6,00,000 6,00,000
Recording of Transactions - I
(30,000) - - - 2,30,000 2,00,000 2,00,000 - - 2,00,000

4 1,20,000 4,50,000 - - 2,30,000 8,00,000 = 2,00,000 - 600,000 8,00,000
(40,000) - 85,000 - - 45,000 - 45,000 - 45,000
5 80,000 4,50,000 85,000 - 2,30,000 8,45,000 = 2,00,000 45,000 600,000 8,45,000
- (2,00,000) - - - (2,00,000) (2,00,000) - - (2,00,000)
6 80,000 2,50,000 85,000 - 2,30,000 6,45,000 = - 45,000 6,00,000 20,000
70,000 - (50,000) - - 20,000 - - 20,000 20,000
7 1,50,000 2,50,000 35,000 - 2,30,000 6,65,000 = - 45,000 6,20,000 6,65,000
(35,000) - - (35,000) (35,000) (35,000)
8 1,15,000 2,50,000 35,000 - 2,30,000 6,30,000 = - 45,000 5,85,000 6,30,000
(2,500) (2,500) (2,500) (2,500)
9 1,15,000 2,47,500 35,000 - 2,30,000 6,27,500 = - 45,000 5,82,500 6,27,500
5,500 - (5,500)
10 1,15,000 2,47,500 35,000 - 2,30,000 6,27,500 = 5,500 45,000 5,77,000 6,27,500
(30,000) - - 30,000 - - - - -
85,000 2,47,500 35,000 30,000 2,30,000 6,27,500 = 5,500 45,000 5,77,000 6,27,500
63
64 Accountancy
6. Borrowed from bank 50,000

7. Sold goods to Sarita 10,000
8. Cash paid to Ramesh on account 20,000
9. Rent paid 1,500
Transaction Name of Accounts Type of Accounts Affected Accounts
No. Affected (Assets, Liabilities Capital, Increase/Decrease
Revenues and Expenses)
1 2 1 2 1 2
1.
2.
3.
4.
5.
6.
7.
8.
9.
3.5 The Ledger

The ledger is the principal book of accounting system. It contains different accounts
where transactions relating to that account are recorded. A ledger is the collection of
all the accounts, debited or credited, in the journal proper and various special
journal (about which you will learn in chapter 4). A ledger may be in the form of
bound register, or cards, or separate sheets may be maintained in a loose leaf binder.
In the ledger, each account is opened preferably on separate page or card.
Utility
A ledger is very useful and is of utmost importance in the organisation. The
net result of all transactions in respect of a particular account on a given date
can be ascertained only from the ledger. For example, the management on a
particular date wants to know the amount due from a certain customer or the
amount the firm has to pay to a particular supplier, such information can be
found only in the ledger. Such information is very difficult to ascertain from
the journal because the transactions are recorded in the chronological order
and defies classification. For easy posting and location, accounts are opened
in the ledger in some definite order. For example, they may be opened in the
same order as they appear in the profit and loss account and in balance
sheet. In the beginning, an index is also provided. For easy identification, in
big organisations, each account is also allotted a code number.
Format of the account is shown in figure 3.6.
Name of the Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
Rs. Rs.
Fig. 3.6 : Showing format of a ledger
According to this format the columns will contain the information as given below:
An account is debited or credited according to the rules of debit and credit
already explained in respect of each category of account.
Title of the account : The Name of the item is written at the top of the format as
the title of the account. The title of the account ends with suffix ‘Account’.
Dr./Cr. : Dr. means Debit side of the account that is left side and Cr. means
Credit side of the account, i.e. right side.
Date : Year, Month and Date of transactions are posted in chronological order
in this column.
Particulars : Name of the item with reference to the original book of entry is
written on debit/credit side of the account.
Journal Folio : It records the page number of the original book of entry on
which relevant transaction is recorded. This column is filled up at the time of
posting.
Amount : This column records the amount in numerical figure, corresponding
to what has been entered in the amount column of the original book of entry.

Choose the Correct Answer :
1. The ledger folio column of journal is used to:
(a) Record the date on which amount posted to a ledger account.
(b) Record the number of ledger account to which information is posted.
(c) Record the number of amounts posted to the ledger account.
(d) Record the page number of the ledger account.
2. The journal entry to record the sale of services on credit should include:
(a) Debit to debtors and credit to capital.
(b) Debit to cash and Credit to debtors.
(c) Debit to fees income and Credit to debtors.
(d) Debit to debtors and Credit to fees income.
3. The journal entry to record purchase of equipment for Rs. 2,00,000 cash and a
balance of Rs. 8,00,000 due in 30 days include:
(a) Debit equipment for Rs. 2,00,000 and Credit cash 2,00,000.
66 Accountancy
(b) Debit equipment for Rs. 10,00,000 and Credit cash Rs. 2,00,000 and creditors
Rs. 8,00,000.
(c) Debit equipment Rs. 2,00,000 and Credit debtors Rs. 8,00,000.
(d) Debit equipment Rs. 10,00,000 and Credit cash Rs. 10,00,000.
4. When a entry is made in journal:
(a) Assets are listed first.
(b) Accounts to be debited listed first.
(c) Accounts to be credited listed first.
(d) Accounts may be listed in any order.
5. If a transaction is properly analysed and recorded:
(a) Only two accounts will be used to record the transaction.
(b) One account will be used to record transaction.
(c) One account balance will increase and another will decrease.
(d) Total amount debited will equals total amount credited.
6. The journal entry to record payment of monthly bill will include:
(a) Debit monthly bill and Credit capital.
(b) Debit capital and Credit cash.
(c) Debit monthly bill and Credit cash.
(d) Debit monthly bill and Credit creditors.
7. Journal entry to record salaries will include:
(a) Debit salaries Credit cash.
(b) Debit capital Credit cash.
(c) Debit cash Credit salary.
(d) Debit salary Credit creditors.
Distinction between Journal and Ledger

The Journal and the Ledger are the most important books of the double entry
mechanism of accounting and are indispensable for an accounting system.
Following points of comparison are worth noting :
1. The Journal is the book of first entry (original entry); the ledger is the
book of second entry.
2. The Journal is the book for chronological record; the ledger is the book
for analytical record.
3. The Journal, as a book of source entry, gets greater importance as
legal evidence than the ledger.
4. Transaction is the basis of classification of data within the Journal;
Account is the basis of classification of data within the ledger.
5. Process of recording in the Journal is called Journalising; the process
of recording in the ledger is known as Posting.
3.5.1 Classification of Ledger Accounts

We have seen earlier that all ledger accounts are put into five categories namely,
assets, liabilities, capital, revenues/gains and expense losses. All these
accounts may further be put into two groups, i.e. permanent accounts and
temporary accounts. All permanent accounts are balanced and carried forward
to the next accounting period. The temporary accounts are closed at the end
of the accounting period by transferring them to the trading and profit and
loss account. All permanent accounts appears in the balance sheet. Thus, all
assets, liabilities and capital accounts are permanent accounts and all revenue
and expense accounts are temporary accounts. This classification is also
relevant for preparing the financial statements.
3.6 Posting from Journal
Posting is the process of transferring the entries from the books of original
entry (journal) to the ledger. In other words, posting means grouping of all the
transactions in respect to a particular account at one place for meaningful
conclusion and to further the accounting process. Posting from the journal is
done periodically, may be, weekly or fortnightly or monthly as per the
requirements and convenience of the business.
The complete process of posting from journal to ledger has been discussed below:
Step 1 : Locate in the ledger, the account to be debited as entered in the journal.
Step 2 : Enter the date of transaction in the date column on the debit side.
Step 3 : In the ‘Particulars’ column write the name of the account through
which it has been debited in the journal. For example, furniture sold for cash
Rs. 34,000. Now, in cash account on the debit side in the particulars column
‘Furniture’ will be entered signifying that cash is received from the sale of
furniture. In Furniture account, in the ledger on the credit side is the
particulars column, the word, cash will be recorded. The same procedure is
followed in respect of all the entries recorded in the journal.
Step 4 : Enter the page number of the journal in the folio column and in the
journal write the page number of the ledger on which a particular account appears.
Step 5 : Enter the relevant amount in the amount column on the debit side.
It may be noted that the same procedure is followed for making the entry on
the credit side of that account to be credited. An account is opened only once
in the ledger and all entries relating to a particular account is posted on the
debit or credit side, as the case may be.
We will now see how the transactions listed in example on page 47 are
posted to different accounts from the journal.
68 Accountancy
Cash Account
Dr. Cr.
Rs. Rs.
Capital 5,00,000 Bank 4,80,000
Plant and 10,000
Machinery
Capital Account
Dr. Cr.
Rs. Rs.
Cash 5,00,000
Bank Account
Dr. Cr.
Rs. Rs.
Cash 4,80,000 Furniture 60,000
Furniture Account
Dr. Cr.
R s. Rs.
Bank 60,000
Plant and Machinery Account

Dr. Cr.
Rs. Rs.
Cash 10,000
Ramjee lal 1,15,000
Ramjee Lal’s Account

Dr. Cr.
Rs. Rs.
Plant and 1,15,000
Machinery
Purchases Account
Dr. Cr.
Rs. Rs.
Sumit 55,000
Traders
Sumit Traders Account

Dr. Cr.
Rs. Rs.
Purchases 55,000
Rajani Enterprises Account

Dr. Cr.
Rs. Rs.
Sales 35,000
Sales Account
Dr. Cr.
Rs. Rs.
Rajani Enter 35,000
prises
Fill in the blanks:

1. Issued a cheque for Rs.8,000 to pay rent. The account to be debited is ............
2. Collected Rs. 35,000 from debtors. The account to be credited is ............
3. Purchased office stationary for Rs. 18,000. The account to be credited is ...........
4. Purchased new machine for Rs. 1,70,000 and issued cheque for the same.
The account to be debited is ............
5. Issued cheque for Rs. 70,000 to pay off on of the creditors. The account to
be debited is ............
6. Returned damaged office stationary and received Rs. 50,000. The account
to be credited is ............
7. Provided services for Rs. 65,000 on credit. The account to be debited is ...........
70 Accountancy
Illustration 4
Journalise the following transactions of M/s Mallika Fashion House and post the entries
to the Ledger:
Date Details Amount
2005 Rs.
June 05 Business started with cash 2,00,000
June 08 Opened a bank account with Syndicate Bank 80,000
June 12 Goods purchased on credit from M/s Gulmohar Fashion House 30,000
June 12 Purchase office machines, paid by cheque 20,000
June 18 Rent paid by cheque 5,000
June 20 Sale of goods on credit to M/s Mohit Bros 10,000
June 22 Cash sales 15,000
June 25 Cash paid to M/s Gulmohar Fashion House 30,000
June 28 Received a cheque from M/s Mohit Bros 10,000
June 30 Salary paid in cash 6,000
Solution
(i) Recording the transactions
Books of Mallika Fashion House
Journal
Amount Amount
Rs. Rs.
2005
June 05 Cash A/c Dr. 2,00,000
June 08 Bank A/c Dr. 80,000
To Cash A/c 80,000
(Opened a current account with
syndicate bank)
June 12 Purchases A/c Dr. 30,000
To Gulmohar Fashion House A/c 30,000
(Goods purchased on credit)
June 12 Office Machines A/c Dr. 20,000
To Bank A/c 20,000
(Office machine purchased)
June 18 Rent A/c Dr. 5,000
To Bank A/c 5,000
(Rent paid)
June 20 Mohit Bros A/c Dr. 10,000
To Sales A/c 10,000
(Goods sold on credit)
Total c/f 3,45,000 3,45,000
Total b/f 3,45,000 3,45,000

June 22 Cash A/c Dr. 15,000
To Sales A/c 15,000
(Goods sold for cash)
June 25 Gulmohar Fashion House A/c Dr. 30,000
To Cash A/c 30,000
(Cash paid to Gulmohar
Fashion House)
June 28 Bank A/c Dr. 10,000
To Mohit Bros A/c 10,000
(Payment received in full and
final settlement)
June 30 Salary A/c Dr. 6,000
To Cash A/c 6,000
(Monthly salary paid)
Total 4,06,000 4,06,000
(ii) Posting in the Ledger Book
Cash Account
Dr. Cr.
Rs. Rs.
2005 2005
June 5 Capital 2,00,000 June 8 Bank 80,000
June 22 Sales 15,000 June 25 Gulmohar 30,000
Fashion House
June 30 Salary 6,000
Capital Account
Dr. Cr.
Rs. Rs.
2005
June 5 Cash 2,00,000
Bank Account
Dr. Cr.
Rs. Rs.
2005 2005
June 08 Cash 80,000 June 12 Office Machines 30,000
June 28 Mohit Bros. 10,000 June 18 Rent 5,000
72 Accountancy
Purchases Account
Dr. Cr.
Rs. Rs.
2005 2005
June 12 Gulmohar 30,000
Fashion House
Gulmohar Fashion House Account

Dr. Cr.
Rs. Rs.
2005 2005
June 25 Cash 30,000 June 12 Purchases 30,000
Office Machines Account

Dr. Cr.
Rs. Rs.
2005
June 12 Bank 20,000
Rent Account
Dr. Cr.
Rs. Rs.
2005
June 18 Bank 5,000
Mohit Bros. Account

Dr. Cr.
Rs. Rs.
2005 2005
June 20 Sales 10,000 June 28 Cash 10,000
Sales Account
Dr. Cr.
Rs. Rs.
2005 2005
June 20 June 20 Mohit Bros. 10,000
June 22 Cash 15,000
Salary Account
Dr. Cr.
Rs. Rs.
2005
June 30 Cash 6,000
Illustrtion 5
Journalise the following transactions of M/s Time Zone and post them to the ledger accounts :
Date Details Amount
2005 Rs.
Dec. 01 Business started with cash 1,20,000
Dec. 02 Opened a bank account with ICICI 4,00,00
Dec. 04 Goods purchased for cash 12,000
Dec. 10 Paid cartage 500
Dec. 12 Goods sold on credit to M/s Lara India 25,000
Dec. 14 Cash received from M/s Lara India 10,000
Dec. 16 Goods returned from Lara India 3,000
Dec. 18 Paid trade expenses 700
Dec. 19 Goods purchased on credit from Taranum 32,000
Dec. 20 Cheque received from M/s Lara India for final settlement 11,500
and deposited sameday into bank
Dec. 22 Goods returned to Taranum 1,500
Dec. 24 Paid for stationery 1,200
Dec. 26 Cheque given to Taranum on account 20,000
Dec. 28 Paid rent by cheque 4,000
Dec. 29 Drew cash for personal use 10,000
Dec. 30 Cash sales 12,000
Dec. 31 Goods sold to M/s Rupak Traders 11,000
Solution
Books of Time Zone
Journal
Amount Amount
Rs. Rs.
2005
Dec. 01 Cash A/c Dr. 1,20,000
( Business started with cash)
02 Bank A/c Dr. 40,000
To Cash A/c 40,000
(Opened a current account with
ICICI bank)
04 Purchases A/c Dr. 12,000
To Cash A/c 12,000
(Goods purchased for cash)
Total c/f 1,72,000 1,72,000
74 Accountancy
Total b/f 1,72,000 1,72,000

10 Cartage A/c Dr. 500
To Cash A/c 500
(Cartage paid)
12 Lara India A/c Dr. 25,000
To Sales A/c 25,000
14 Cash A/c Dr. 10,000
To Lara India A/c 10,000
(Cash received from Lara India)
16 Sales Return A/c Dr. 3,000
(Goods returned from Lara India)
18 Trade Expenses A/c Dr. 700
To Cash A/c 700
(Trade expenses paid)
19 Purchases A/c Dr. 32,000
To Tranum’s A/c 32,000
(Goods purchased on credit)
20 Bank A/c Dr. 11,500
Discount A/c Dr. 500
(Cheque received for final settlement)
22 Taranum’s A/c Dr. 1,500
To Purchase Return’s A/c 1,500
(Goods returned to Tranum)
24 Stationery A/c Dr. 1,200
To Cash A/c 1,200
(Cash paid for stationery)
26 Taranum’s A/c Dr. 20,000
To Bank A/c 20,000
(Cheque given to Tranum)
28 Rent A/c Dr. 4,000
To Bank A/c 4,000
(Rent paid by cheque)
29 Drawings A/c Dr. 10,000
To Cash A/c 10,000
(Cash withdrawn for personal use)
30 Cash A/c Dr. 12,000
To Sales A/c 12,000
(Goods sold for cash)
31 Rupak Trader A/c Dr. 11,000
To Sales A/c 11,000
Total 3,14,900 3,14, 900
Posting in the Ledger Book :

Cash Account
Dr. Cr.
Rs. Rs.
2005 2005
Dec. 01 Capital 1,20,000 Dec. 02 Bank 40,000
Dec. 14 Lara India 10,000 Dec. 04 Purchase 12,000
Dec. 30 Sales 12,000 Dec. 10 Cartage 500
Dec. 18 Trade 700
Expenses
Dec. 24. Stationery 1,200
Dec. 29 Drawings 1,000
Capital Account
Dr. Cr.
Rs. Rs.
2005
Dec.01 Cash 1,20,000
Bank Account
Dr. Cr.
Rs. Rs.
2005 2005
Dec.02 Cash 40,000 Dec.26 Taranum’s 20,000
Dec.20 Lara India 11,500 Dec.28 Rent 4,000
Purchases Account
Dr. Cr.
Rs. Rs.
2005
Dec.04 Cash 12,000
Dec.19 Taranum 32,000
Cartage Account
Dr. Cr.
Rs. Rs.
2005
Dec.10 Cash 500
76 Accountancy
Lara India Account

Dr. Cr.
Rs. Rs.
2005 2005
Dec.12 Sales 25,000 Dec. 14 Cash 10,000
Dec. 16 Sales return 3,000
Dec. 20 Bank 11,500
Discount 500
Sales Account
Dr. Cr.
Rs. Rs.
2005
Dec.12 Lara India 25,000
Dec.30 Cash 12,000
Dec.31 Rupak Traders 11,000
Sales Return Account

Dr. Cr.
Rs. Rs.
2005
Dec.16 Lara India 3,000
Trade Expenses Account

Dr. Cr.
Rs. Rs.
2005
Dec.18 Cash 700
Taranum Account
Dr. Cr.
Rs. Rs.
2005 2005
Dec.22 Purchase 1,500 Dec.19 Purchase 32,000
Return
Dec.26 Bank 20,000
Discount Received Account

Dr. Cr.
Rs. Rs.
2005
Dec.20 Lara India 500
Purchases Return Account

Dr. Cr.
Rs. Rs.
2005
Dec.22 Taranum 1,500
Stationery Account
Dr. Cr.
Rs. Rs.
2005
Dec. Cash 1,200
Rent Account
Dr. Cr.
Rs. Rs.
2005
Dec. 28 Bank 4,000
Drawings Account
Dr. Cr.
Rs. Rs.
2005
Dec. 29 Cash 10,000
Rupak Traders Account

Dr. Cr.
Rs. Rs.
2005
Dec. 31 Sales 11,000
78 Accountancy

Select Right Answer:
1. Voucher is prepared for:
(i) Cash received and paid
(ii) Cash/Credit sales
(iii) Cash/Credit purchase
(iv) All of the above
2. Voucher is prepared from:
(i) Documentary evidence
(ii) Journal entry
(iii) Ledger account
(iv) All of the above
3. How many sides does an account have?
(i) Two
(ii) Three
(iii) one
(iv) None of These
4. A purchase of machine for cash should be debited to:
(i) Cash account
(ii) Machine account
(iii) Purchase account
(iv) None of these
5. Which of the following is correct?
(i) Liabilities = Assets + Capital
(ii) Assets = Liabilities – Capital
(iii) Capital = Assets – Liabilities
(iv) Capital = Assets + Liabilities.
6. Cash withdrawn by the Proprietor should be credited to:
(i) Drawings account
(ii) Capital account
(iii) Profit and loss account
(iv) Cash account
7. Find the correct statement:
(i) Credit a decrease in assets
(ii) Credit the increase in expenses
(iii) Debit the increase in revenue
(iv) Credit the increase in capital
8. The book in which all accounts are maintained is known as:
(i) Cash Book
(ii) Journal
(iii) Purchases Book
(iv) Ledger
9. Recording of transaction in the Journal is called:
(i) Casting
(ii) Posting
(iii) Journalising
(iv) Recording
• Source Documents • Credit

• Accounting Equation • Debit
• Books of Original Entry • Account
• Journalising and Posting • Ledger
• Double Entry Book Keeping· • Journal
1. Meaning of source documents : Various business documents such as invoice,

bills, cash memos, vouchers, which form the basis and evidence of a business
transaction recorded in the books of account, are called source documents.
2. Meaning of accounting equation : A statement of equality between debits and
credits signifying that the assets of a business are always equal to the total
liabilities and capital.
3. Rules of debit and credit : An account is divided into two sides. The left side of
an account is known as debit and the credit. The rules of debit and credit
depend on the nature of an account. Debit and Credit both represent either
increase or decrease, depending on the nature of an account. These rules are
summarised as follows :
Name of an account Debit Credit
Assets Increase Decrease
Liabilities Decrease Increase
Capital Decrease Increase
Revenues Decrease Increase
Expenses increase Decrease
4. Books of Original entry : The transactions are first recorded in these books in
a chronological order. Journal is one of the books of original entry. The process
of recording entries in the journal is called journalising.
5. Ledger : A book containing all accounts to which entries are transferred from
the books of original entry. Posting is process of transferring entries from
books of original entry to the ledger.
Short Answers
1. States the three fundamental steps in the accounting process.
2. Why is the evidence provided by source documents important to accounting?
3. Should a transaction be first recorded in a journal or ledger? Why?
4. Are debits or credits listed first in journal entries? Are debits or credits
indented?
5. Why are some accounting systems called double accounting systems?
6. Give a specimen of an account.
80 Accountancy
7. Why are the rules of debit and credit same for both liability and capital?
8. What is the purpose of posting J.F numbers that are entered in the journal at
the time entries are posted to the accounts.
9. What entry (debit or credit) would you make to: (a) increase revenue (b) decrease
in expense, (c) record drawings (d) record the fresh capital introduced by the
owner.
10. If a transaction has the effect of decreasing an asset, is the decrease recorded
as a debit or as a credit? If the transaction has the effect of decreasing a
liability, is the decrease recorded as a debit or as a credit?
Long Answers
1. Describe the events recorded in accounting systems and the importance of
source documents in those systems?
2. Describe how debits and credits are used to analyse transactions.
3. Describe how accounts are used to record information about the effects of
transactions?
4. What is a journal? Give a specimen of journal showing at least five entries.
5. Differentiate between source documents and vouchers.
6. Accounting equation remains intact under all circumstances. Justify the
statement with the help of an example.
7. Explain the double entry mechanism with an illustrative example.
Numerical Questions
Analysis of Transactions
1. Prepare accounting equation on the basis of the following :
(a) Harsha started business with cash
Rs.2,00,000
(b) Purchased goods from Naman for cash
Rs. 40,000
(c) Sold goods to Bhanu costing Rs.10,000/-
Rs. 12,000
(d) Bought furniture on credit
Rs. 7,000
(Ans: Asset = cash Rs. 1,60,000 + Goods Rs. 30,000 + Debtors Rs. 12,000
+ Furniture Rs. 7,000 = Rs. 2,09,000; Liabilities = Creditors Rs. 7,000 +
Capital Rs. 2,02,000 = Rs. 2,09,000)
2. Prepare accounting equation from the following:
(a) Kunal started business with cash
Rs.2,50000
(b) He purchased furniture for cash
Rs. 35,000
(c) He paid commission Rs. 2,000

(d) He purchases goods on credit Rs. 40,000
(e) He sold goods (Costing Rs.20,000) for cash Rs. 26,000
(Ans: Asset = Cash Rs. 2,39,000 + Furniture Rs. 35,000 + Goods Rs. 20,000
= Rs. 2,94,000; Liabilities = Creditors Rs. 40,000 + Capital Rs. 2,54,000=
Rs. 2,94,000)
3. Mohit has the following transactions, prepare accounting equation:
(a) Business started with cash Rs. 1,75,000
(b) Purchased goods from Rohit Rs. 50,000
(c) Sales goods on credit to Manish (Costing Rs. 17,500) Rs. 20,000
(d) Purchased furniture for office use Rs. 10,000
(e) Cash paid to Rohit in full settlement Rs. 48,500
(f) Cash received from Manish Rs. 20,000
(g) Rent paid Rs. 1,000
(h) Cash withdrew for personal use Rs. 3,000
(Ans: Cash Rs. 1,33,000 + Goods Rs. 32,500 + Furniture Rs. 10,000
= Rs. 1,75,500; Liabilition = Capital Rs. 1,77,500)
4. Rohit has the following transactions :
(a) Commenced business with cash Rs.1,50,000
(b) Purchased machinery on credit Rs. 40,000
(c) Purchased goods for cash Rs. 20,000
(d) Purchased car for personal use Rs. 80,000
(e) Paid to creditors in full settlement Rs. 38,000
(f) Sold goods for cash costing Rs. 5,000 Rs. 4,500
(g) Paid rent Rs. 1,000
(h) Commission received in advance Rs. 2,000
Prepare the Accounting Equation to show the effect of the above
transactions on the assets, liabilities and capital.
(Ans: Assets = Cash Rs. 17,500 + Machine Rs. 40,000 + Goods Rs. 15,000
= Rs. 72,500; Liabilities = Commission Rs. 2,000 + Capital Rs. 70,500
= Rs. 72,500)
5. Use accounting equation to show the effect of the following transactions of
M/s Royal Traders:
(a) Started business with cash Rs.1,20,000
(b) Purchased goods for cash Rs. 10,000
(c) Rent received Rs. 5,000
(d) Salary outstanding Rs. 2,000
(e) Prepaid Insurance Rs. 1,000
82 Accountancy
(f) Received interest Rs. 700

(g) Sold goods for cash (Costing Rs. 5,000) Rs. 7,000
(h) Goods destroyed by fire Rs. 500
(Ans: Assets = Cash Rs. 1,22,700 + Goods Rs. 4,500 + Prepaid insurance
Rs. 1,000; Liabilities = Outstanding salary Rs. 2,000 + Capital Rs. 1,26,200)
6. Show the accounting Equation on the basis of the following transaction:
(a) Udit started business with:
(i) Cash Rs. 5,00,000
(ii) Goods Rs. 1,00,000
(b) Purchased building for cash Rs. 2, 00,000
(c) Purchased goods from Himani Rs. 50,000
(d) Sold goods to Ashu (Cost Rs. 25,000) Rs. 36, 000
(e) Paid insurance premium Rs. 3,000
(f) Rent outstanding Rs. 5,000
(g) Depreciation on building Rs. 8,000
(h) Cash withdrawn for personal use Rs. 20,000
(i) Rent received in advance Rs. 5,000
(j) Cash paid to himani on account Rs. 20,000
(k) Cash received from Ashu Rs. 30,000
(Ans : Assets = Cash Rs. 2,92,000 + Goods Rs. 1,25,000 + Building
Rs. 1,92,000 + Debitors Rs. 6,000 = 6,15,000: Laibilities = Creditors
Rs. 30,000 + Outstanding Rent Rs. 5,000 + Rent Rs. 5,000 + Capital
Rs. 5,75,000 = Rs. 6,15,000)
7. Show the effect of the following transactions on Assets, Liabilities and
Capital through accounting equation:
(a) Started business with cash Rs. 1,20,000
(b) Rent received Rs. 10,000
(c) Invested in shares Rs. 50,000
(d) Received dividend Rs. 5,000
(e) Purchase goods on credit from Ragani Rs. 35,000
(f) Paid cash for house hold Expenses Rs. 7,000
(g) Sold goods for cash (costing Rs.10,000) Rs. 14,000
(h) Cash paid to Ragani Rs. 35,000
(i) Deposited into bank Rs. 20,000
(Ans: Assets = Cash Rs. 37,000 + Shares Rs. 50,000 + Goods Rs. 25,000 +
Bank Rs. 20,000 = Rs. 1,32,000; Liabilities = Capital Rs. 1,32,000)
8. Show the effect of following transaction on the accounting equation:
(a) Manoj started business with
(i) Cash Rs. 2,30,000
(ii) Goods Rs. 1,00,000

(iii) Building Rs. 2,00,000
(b) He purchased goods for cash Rs. 50,000
(c) He sold goods(costing Rs.20,000) Rs. 35,000
(d) He purchased goods from Rahul Rs. 55,000
(e) He sold goods to Varun (Costing Rs. 52,000) Rs. 60,000
(f) He paid cash to Rahul in full settlement Rs. 53,000
(g) Salary paid by him Rs. 20,000
(h) Received cash from Varun in full settlement Rs. 59,000
(i) Rent outstanding Rs. 3,000
(j) Prepaid Insurance Rs. 2,000
(k) Commission received by him Rs. 13, 000
(l) Amount withdrawn by him for personal use Rs. 20,000
(m) Depreciation charge on building Rs. 10,000
(n) Fresh capital invested Rs. 50,000
(o) Purchased goods from Rakhi Rs. 6,000
(Ans: Assets = Cash Rs. 2,42,000 + Goods Rs. 1,43,000 +Building Rs.1,90,000
+ Prepaid Insurouce Rs. 2,000 = Rs. 5,77,000; Liabilities = Outstanding Rent
Rs. 3,000 + Creditor Rs. 10,000 + Capital Rs. 5,64,000 = Rs. 5,77,000)
9. Transactions of M/s Vipin Traders are given below.

Show the effects on Assets, Liabilities and Capital with the help of accounting
Equation.
(a) Business started with cash Rs. 1,25,000
(b) Purchased goods for cash Rs. 50,000
(c) Purchase furniture from R.K. Furniture Rs. 10,000
(d) Sold goods to Parul Traders (Costing Rs. 7,000 vide Rs.9,000
bill no. 5674)
(e) Paid cartage Rs. 100
(f) Cash Paid to R.K. furniture in full settlement Rs. 9,700
(g) Cash sales (costing Rs.10,000) Rs. 12,000
(h) Rent received Rs. 4,000
(i) Cash withdrew for personal use Rs. 3,000
(Ans: Asset = cash Rs. 78,200 + Goods Rs. 33,000 + Furniture Rs. 10,000
Debtors Rs. 9,000= Rs. 1,30,200; Liabilities = Capital Rs. 1,30,200)
10. Bobby opened a consulting firm and completed these transactions during
November, 2005:
84 Accountancy
(a) Invested Rs. 4,00,000 cash and office equipment with Rs. 1,50,000 in
a business called Bobbie Consulting.
(b) Purchased land and a small office building. The land was worth
Rs. 1,50,000 and the building worth Rs. 3, 50,000. The purchase price
was price was paid with Rs. 2,00,000 cash and a long term note payable
for Rs. 8,00,000.
(c) Purchased office supplies on credit for Rs. 12,000.
(d) Bobbie transferred title of motor car to the business. The motor car
was worth Rs. 90,000.
(e) Purchased for Rs. 30,000 additional office equipment on credit.
(f) Paid Rs. 75,00 salary to the office manager.
(g) Provided services to a client and collected Rs. 30,000
(h) Paid Rs. 4,000 for the month’s utilities.
(i) Paid supplier created in transaction c.
(j) Purchase new office equipment by paying Rs. 93,000 cash and trading
in old equipment with a recorded cost of Rs. 7,000.
(k) Completed services of a client for Rs. 26,000. This amount is to be
paid within 30 days.
(l) Received Rs. 19,000 payment from the client created in transaction k.
(m) Bobby withdrew Rs. 20,000 from the business.
Analyse the above stated transactions and open the following T-accounts:
Cash, client, office supplies, motor car, building, land, long term payables,
capital, withdrawals, salary, expense and utilities expense.
Journalising
11. Journalise the following transactions in the books of Himanshu:
2005 Rs.
Dec.01 Business started with cash 75,000
Dec.07 Purchased goods for cash 10,000
Dec.09 Sold goods to Swati 5,000
Dec.12 Purchased furniture 3,000
Dec.18 Cash received from Swati In full settlement 4,000
Dec.25 Paid rent 1,000
Dec.30 Paid salary 1,500
12. Enter the following Transactions in the Journal of Mudit :
2006 Rs.
Jan.01 Commenced business with cash 1,75,000
Jan.01 Building 1,00,000
Jan.02 Goods purchased for cash 75,000
Jan.03 Sold goods to Ramesh 30,000

Jan.04 Paid wages 500
Jan.06 Sold goods for cash 10,000
Jan.10 Paid for trade expenses 700
Jan.12 Cash received from Ramesh 29,500
Discount allowed 500
Jan.14 Goods purchased for Sudhir 27,000
Jan.18 Cartage paid 1,000
Jan.20 Drew cash for personal use 5,000
Jan.22 Goods use for house hold 2,000
Jan.25 Cash paid to Sudhir 26,700
13. Journalise the following transactions:
2005 Rs.
Dec. 01 Hema started business with cash 1,00,000
Dec. 02 Open a bank account with SBI 30,000
Dec. 04 Purchased goods from Ashu 20,000
Dec.06 Sold goods to Rahul for cash 15,000
Dec.10 Bought goods from Tara for cash 40,000
Dec.13 Sold goods to Suman 20,000
Dec.16 Received cheque from Suman 19,500
Dec.20 Cheque given to Ashu on account 10,000
Dec.22 Rent paid by cheque 2,000
Dec.23 Deposited into bank 16,000
Dec.25 Machine purchased from Parigya 10,000
Dec.26 Trade expenses 2,000
Dec.28 Cheque issued to Parigya 10,000
Dec.29 Paid telephone expenses by cheque 1,200
Dec.31 Paid salary 4,500
14. Jouranlise the following transactions in the books of Harpreet Bros.:
(a) Rs.1,000 due from Rohit are now a bad debts.
(b) Goods worth Rs.2,000 were used by the proprietor.
(c) Charge depreciation @ 10% p.a for two month on machine costing
Rs.30,000.
(d) Provide interest on capital of Rs. 1,50,000 at 6% p.a. for 9 months.
86 Accountancy
(e) Rahul become insolvent, who owed is Rs. 2,000 a final dividend of
60 paise in a rupee is received from his estate.
15. Prepare Journal from the transactions given below :
(a) Cash paid for installation of machine Rs. 500
(b) Goods given as charity Rs. 2,000
(c) Interest charge on capital @7% p.a. when total Rs. 70,000
capital were
(d) Received Rs.1,200 of a bad debts written-off last year.
(e) Goods destroyed by fire Rs. 2,000
(f) Rent outstanding Rs. 1,000
(g) Interest on drawings Rs. 900
(h) Sudhir Kumar who owed me Rs. 3,000 has failed to pay the amount.
He pays me a compensation of 45 paise in a rupee.
(i) Commission received in advance Rs. 7,000
Posting
16. Journalise the following transactions, post to the ledger:
2005 Rs.
Nov. 01 Business started with (i) Cash 1,50,000
(ii) Goods 50,000
Nov. 03 Purchased goods from Harish 30,000
Nov. 05 Sold goods for cash 12,000
Nov. 08 Purchase furniture for cash 5,000
Nov. 10 Cash paid to Harish on account 15,000
Nov. 13 Paid sundry expenses 200
Nov. 15 Cash sales 15,000
Nov. 18 Deposited into bank 5,000
Nov. 20 Drew cash for personal use 1,000
Nov. 22 Cash paid to Harish in full settlement of account 14,700
Nov. 25 Good sold to Nitesh 7,000
Nov. 26 Cartage paid 200
Nov. 27 Rent paid 1,500
Nov. 29 Received cash from Nitesh 6,800
Nov. 30 Salary paid 3,000
17. Journalise the following transactions is the journal of M/s Goel
Brothers and post them to the ledger.
2006 Rs.
Jan. 01 Started business with cash 1,65,000
Jan. 02 Open bank account in PNB 80,000

Jan. 04 Goods purchased from Tara 22,000
Jan. 05 Goods purchased for cash 30,000
Jan. 08 Goods sold to Naman 12,000
Jan. 10 Cash paid to tara 22,000
Jan. 15 Cash received from Naman 11,700
Jan. 16 Paid wages 200
Jan. 18 Furniture purchased for office use 5,000
Jan. 20 withdrawn from bank for personal use 4,000
Jan. 22 Issued cheque for rent 3,000
Jan. 23 goods issued for house hold purpose 2,000
Jan. 24 drawn cash from bank for office use 6,000
Jan. 26 Commission received 1,000
Jan. 27 Bank charges 200
Jan. 28 Cheque given for insurance premium 3,000
Jan. 29 Paid salary 7,000
Jan. 30 Cash sales 10,000
18 Give journal entries of M/s Mohit traders, Post them to the Ledger
from the following transactions :
August 2005 Rs.
1. Commenced business with cash 1,10,000
2. Opened bank account with H.D.F.C. 50,000
3. Purchased furniture 20,000
7. Bought goods for cash from M/s Rupa Traders 30,000
8. Purchased good from M/s Hema Traders 42,000
14. Sold goods on credit to M/s. Gupta Traders 12,000
16. Rent paid 4,000
18. Paid trade expenses 1,000
20. Received cash from Gupta Traders 12,000
22. Goods return to Hema Traders. 2,000
23. Cash paid to Hema Traders 40,000
25. Bought postage stamps 100
30. Paid salary to Rishabh 4,000
19. Journalise the following transaction in the Books of the M/s Bhanu
Traders and Post them into the Ledger.
December, 2005 Rs.
1. Started business with cash 92,000
2. Deposited into bank 60,000
88 Accountancy
4. Bought goods on credit from Himani 40,000

6. Purchased goods from cash 20,000
8. Returned goods to Himani 4,000
14. Cheque given to Himani 36,000
17. Goods sold to M/s Goyal Traders. 3,50,000
19. Drew cash from bank for personal use 2,000
21. Goyal traders returned goods 3,500
22. Cash deposited into bank 20,000
26. Cheque received from Goyal Traders 31,500
28. Goods given as charity 2,000
29. Rent paid 3,000
30. Salary paid 7,000
31. Office machine purchased for cash 3,000
20. Journalise the following transaction in the Book of M/s Beauti
traders. Also post them in the ledger.
Dec. 2005 Rs.
1. Started business with cash 2,00,000
2. Bought office furniture 30,000
3. Paid into bank to open an current account 1,00,000
5. Purchased a computer and paid by cheque 2,50,000
6. Bought goods on credit from Ritika 60,000
8. Cash sales 30,000
9. Sold goods to Karishna on credit 25,000
12. Cash paid to Mansi on account 30,000
14. Goods returned to Ritika 2,000
15. Stationery purchased for cash 3,000
16. Paid wages 1,000
18. Goods returned by Karishna 2,000
20. Cheque given to Ritika 28,000
22. Cash received from Karishna on account 15,000
24. Insurance premium paid by cheque 4,000
26. Cheque received from Karishna 8,000
28. Rent paid by cheque 3,000
29. Purchased goods on credit from Meena Traders 20,000
21. Journalise the following transaction in the books of Sanjana and
post them into the ledger :
January, 2006 Rs.

1. Cash in hand 6,000
Cash at bank 55,000
Stock of goods 40,000
Due to Rohan 6,000
Due from Tarun 10,000
3. Sold goods to Karuna 15,000
6. Goods sold to Heena 5,000
8. Purchased goods from Rupali 30,000
10. Goods returned from Karuna 2,000
14. Cash received from Karuna 13,000
15. Cheque given to Rohan 6,000
16. Cash received from Heena 3,000
20. Cheque received from Tarun 10.000
22. Cheque received from to Heena 2,000
25. Cash given to Rupali 18,000
26. Paid cartage 1,000
27. Paid salary 8,000
28. Cash sale 7,000
29. Cheque given to Rupali 12,000
30. Sanjana took goods for Personal use 4,000
31. Paid General expense 500

1. (iii), 2 (Capital increases by net profit and fresh capital introduced, decreases
by drawings and net loss), 3 (No), 4 (ii)
1. Cash account and capital account, Assets and Liabilities, Assest increase
and capital increase.
2. Purchase account and Remesh account, Expenses and Liabilities, Expenses
and Liabilities increases.
3. Cash account and sales account, Assets and Revenues, Assets and Revenues
increases.
4. Salaries account and cash account, Expense and Assets, Expenses increases
Assets decreases.
5. Furniture account and Cash account, Asset increases Asset decreases.
6. Loan account and Bank, Liability and Asset, Liabilities increases Asset
decreases.
90 Accountancy
7. Sarita account and Sales account, Asset and Revenue, Assets decreases
Revenue decreases.
8. Ramesh account and Cash, liabilities and Assets, Liabilities decreases Assets
increases.
9. Rent account and Cash account, Expense and Assets, Expenses increases
Assets decreases.
1(d), 2(d), 3(b), 4(b), 5(d), 6(c), 7(a)
Test your understanding - IV
1. Rent 2. Debtors 3. Cash
4. Machine 5. Creditors 6. Office stationary
7. Debtors
1 (iv), 2 (i), 3 (i), 4 (ii), 5 (iii), 6 (iv), 7 (iv), 8 (iv), 9 (iii).
Recording of Transactions-II 4
I n chapter 3, you lear nt that all the

business transactions are first recorded in the
journal and then they are posted in the ledger
accounts. A small business may be able to record
all its transactions in one book only, i.e., the journal.
But as the business expands and the number of
transactions becomes large, it may become
cumbersome to jour-nalise each transaction. For
quick, efficient and accurate recording of business
transactions, Journal is sub-divided into special
journals. Many of the business transactions are
repetitive in nature. They can be easily recorded in
LEARNING OBJECTIVES
special journals, each meant for recording all the
After studying this transactions of a similar nature. For example, all
chapter, you will be able
cash transactions may be recorded in one book, all credit
to :
sales transactions in another book and all credit
• state the need for
special purpose books;
purchases transactions in yet another book and so on.
These special journals are also called daybooks or
• record the transactions
in cash book and post
subsidiary books. Transactions that cannot be recorded
them in the ledger; in any special journal are recorded in journal called the
• prepare the petty cash Journal Proper. Special journals prove economical and
book; make division of labour possible in accounting work. In
• record the transactions this chapter we will discuss the following special purpose
in the special purpose books:
books; • Cash Book
• post the entries in the • Purchases Book
special purpose book
and to the ledger; • Purchases Return (Return Outwards) Book
• balance the ledger
• Sales Book
accounts. • Sales Return (Return Inwards) Book
• Journal Proper
Recording of Transactions - II 92
4.1 Cash Book

Cash book is a book in which all transactions relating to cash receipts and
cash payments are recorded. It starts with the cash or bank balances at the
beginning of the period. Generally, it is made on monthly basis. This is a very
popular book and is maintained by all organisations, big or small, profit or
not-for-profit. It serves the purpose of both journal as well as the ledger (cash)
account. It is also called the book of original entry. When a cashbook is
maintained, transactions of cash are not recorded in the journal, and no
separate account for cash or bank is required in the ledger.
4.1.1 Single Column Cash Book

The single column cash book records all cash transactions of the business in
a chronological order, i.e., it is a complete record of cash receipts and cash
payments. When all receipts and payments are made in cash by a business
organisation only, the cash book contains only one amount column on each
(debit and credit) side. The format of single column cash book is shown in
figure 4.1.
Cash Book
Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
Rs. Rs.
Fig. 4.1 : Format of single column cash book
Recording of entries in the single column cash book and its balancing is
illustrated by an example. Consider the following transactions of M/s Roopa
Traders observe how they are recorded in a single column cash book.
Date Details Amount

Rs.
2005
Nov. 01 Cash in hand 30,000
Nov. 04 Cash received from Gurmeet 12,000
Nov. 08 Insurance paid (Annual Instalment) 6,000
Nov. 13 Purchased furniture 13,800
Nov. 16 Sold goods for cash 28,000
Nov. 17 Purchased goods from Mudit in cash 17,400
Nov. 20 Purchase stationery 1,100
Nov. 24 Cash paid to Rukmani in full settlement of account 12,500
Nov. 27 Sold goods to Kamal for cash 18,200

Nov. 30 Paid monthly rent 2,500
Nov. 30 Paid salary 3,500
Nov. 30 Deposited in bank 8,000
Roopa Traders
Cash Book
Dr. Cr.
Rs. Rs.
2005 2005
Nov. 01 Balance b/d 30,000 Nov. 08 Insurance 6,000
Nov. 04 Gurmeet 12,000 Nov. 13 Furniture 13,800
Nov. 16 Sales 28,000 Nov. 17 Purchases 17,400
Nov. 27 Sales 18,200 Nov. 20 Stationery 1,100
Nov. 24 Rukmani 12,500
Nov. 30 Rent 2,500
Nov. 30 Salary 3,500
Nov. 30 Bank 8,000
Nov. 30 Balance c/d 23,400
88,200 88,200
Dec.01 Balance b/d 23,400
Posting of the Single Column Cash Book

As evident from figure 4.1, the left side of the cash book shows the receipts of
the cash whereas the right side of the cash book shows all the payments
made in cash. The accounts appearing on then debit side for the cash book
are credited in the respective ledger accounts because cash has been received
in respect of them. Thus, in our example, an entry ‘cash received from Gurmeet‘
appears on the debit side of the cash book conveys that the cash has been
received from Gurmeet. Therefore, in the ledger, Gurmeet’s account will be
credited by writing ‘Cash’ in the particulars column on the credit side. Similarly,
all the account names appearing on the credit side of the cash book are debited
as cash/cheque has been paid in respect of them. Now, notice, how the
transactions in our example are posted to the related ledger accounts:
Books of Roopa Traders

Gurmeet’s Account
Dr. Cr.
Rs. Rs.
2005
Nov.04 Cash 12,000
Sales Account
Dr. Cr.
Rs. Rs.
2005
Nov. 16 Cash 28,000
Nov. 27 Cash 18,200
Insurance Account
Dr. Cr.
Rs. Rs.
2005
Nov. 08 Cash 6,000
Furniture Account
Dr. Cr.
Rs. Rs.
2005
Nov. 13 Cash 13,800
Purchases Account
Dr. Cr.
Rs. Rs.
2005
Nov. 17 Cash 17,400
Stationery Account
Dr. Cr.
Rs. Rs.
2005
Nov. 20 Cash 1,100
Rukmani’s Account
Dr. Cr.
Rs. Rs.
2005
Nov.24 Cash 12,500
Rent Account
Dr. Cr.
Rs. Rs.
2005
Nov.30 Cash 2,500
Salary Account
Dr. Cr.
Rs. Rs.
2005
Nov. 30 Cash 3,500
Bank’s Account
Dr. Cr.
Rs. Rs.
2005
Nov.30 Cash 8,000
4.1.2 Double Column Cash Book

In this type of cash book, there are two columns of amount on each side of the
cash book. In fact, now-a-days bank transactions are very large in number. In
many organisations, as far as possible, all receipts and payments are affected
through bank.
A businessman generally opens a current account with a bank. Bank, do
not allow any interest on the balance in current account but charge a small
amount, called incidental charges, for the services rendered.
For depositing cash/cheques in the bank account, a form has to be filled,
which is called a pay-in-slip. (refer figure 4.2) It contains a counterfoil also
which is returned to the customer (depositor) with the signature of the cashier,
as receipt.
The bank issues blank cheque forms, to the account holder for withdrawing
money. (refer figure 4.3) The depositor writes the name of the party to whom
payment is to be made after the words Pay printed on the cheque. Cheque
Fig. 4.2 : A pay-in-slip
Fig. 4.3 : A cheque
forms have the printed word bearer, which means payment is to be made to
the person whose name has been written after the words “pay” or the bearer
of the cheques. When the world ‘bearer’ is struck off by drawing a line, the
cheque becomes an order cheque. It means payment is to be made to the
person whose name is written on the cheque or to his order after proper
identification.
Cheques are generally crossed in practice. The payment of a crossed cheque
cannot be made direct to the party on the counter. It is to be paid only through
a bank. When two parallel lines are drawn across the cheque, it is said to be
crossed. The various types of crossing providing different degrees of safety to
the payment are shown in figure 4.4.
In case of an A/c payee only crossing, the amount of the cheque can be
deposited only in the account of the person whose name appears on the cheque.
When the name of the bank is written between two parallel lines, it becomes a
special crossing and the payment can be made only to the bank whose name
has been written between the two lines.
Though this is rarely done, a cheque can be transferred by the payee (the
person in whose favour the cheque has been drawn) to another person, if it is
not crossed A/c payee only. A bearer cheque can be passed on by mere delivery.
An order cheque can be transferred by endorsement and delivery. Endorsement
means the writing of instructions to pay the cheque to a particular person
and then singing it on the back of the cheque.
lhi
De
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Ne
ly
ble
On
ia,
tia
.
ee
Ind
Co
go
ay
e
&
of
tN
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nk
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Sta
Fig. 4.4 : Types of crossing
When the number of bank transactions is large; it is convenient to have a

separate amount column for bank transactions in the cash book itself instead
of recording them in the journal. This helps in getting information about the
position of the bank account from time to time. Just like cash transactions,
all payments into the bank are recorded on the left side and all withdrawals/
payments through the bank are recorded on the right side. When cash is
deposited in the bank or cash is withdrawn from the bank, both the entries
are recorded in the cash book. This is so because both aspects of the transaction
appear in the cash book itself. When cash is paid into the bank, the amount
deposited is written on the left side in the bank column and at the same time
the same amount is entered on the right side in the cash column. The reverse
entries are recorded when cash is withdrawn from the bank for use in the
office. Against such entries the word C, which stands for contra is written in
the L.F. column indicating that these entries are not to be posted to the ledger
account.
The bank column is balanced in the same way as the cash column. However,
in the bank column, there can be credit balance also because of overdraft
taken from the bank. Overdraft is a situation when cash withdrawn from the
bank exceeds the amount of deposit. Entries in respect of cheques received
should be made in the bank column of the cash book. When a cheque is
received, it may be deposited into the bank on the same day or it may be
deposited on another day. In case, it is deposited on the same day the amount
is recorded in the bank column of the cash book on the receipts side. If the
cheque is deposited on another day, in that case, on the date of receipt it is
treated as cash received and hence recorded in the cash column on the receipts
side. On the day of deposit to the bank, it is shown in the Bank Column on
receipt (Dr.) side and in the Cash Column on the payment (Cr.) side. This is a
contra entry.
If a cheque received from a customer is dishonoured, the bank will return
the dishonoured cheque and debit the firm’s account. On receipt of such
cheque or intimation from the bank, the firm will make an entry on the credit
side of the cash book by entering the amount of the dishonoured cheque in
the bank column and the name of the customer in the particulars column.
This entry will restore the position prevailing before the receipt of the cheque
form the customer and its deposit in the bank. Dishonour of a cheque means
return of the cheque unpaid, generally due to insufficient funds in the
customer’s account with the bank.
If the bank debits the firm on account of interest, commission or other
charges for bank services, the entry will be made on the credit side in bank
column. If the bank credits the firm’s account, the entry will be made on the
debit side of the cash book in the appropriate column. The format of double
column cash book is shown in figure 4.5.
Cash Book
Dr. Cr.
Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
Rs. Rs. Rs. Rs.
Fig. 4.5 : Format of a double column cashbook

We will now learn how the transactions are recorded in the double column
cash book.
Consider the following example:
The following transactions related to M/s Tools India :
Date Details Amount

Rs.
2005
Sept. 01 Bank balance 42,000
Sept. 01 Cash balance 15,000
Sept. 04 Purchased goods by cheque 12,000
Sept. 08 Sales of goods for cash 6,000
Sept. 13 Purchased machinery by cheque 5,500
Sept. 16 Sold goods and received cheque (deposited same day) 4,500
Sept. 17 Purchase goods from Mriaula in cash 17,400
Sept. 20 Purchase stationery by cheque 1,100
Sept. 24 Cheque given to Rohit 1,500
Sept. 27 Cash withdrawn from bank 10,000
Sept. 30 Rent paid by cheque 2,500
Sept. 30 Paid salary 3,500
The double column cash book based upon above business transactions will
prepared as follows :
Cash Book
Dr. Cr.
Rs. Rs. Rs. Rs.
2005 2005
Sept. Sept.
01 Balance b/d 15,000 42,000 04 Purchases 12,000
08 Sales 6,000 13 Machine 5,500
16 Sales 4,500 17 Purchase 17,400
27 Bank C 10,000 20 Stationery 1,100
24 Rohit 1,500
27 Cash C 10,000
30 Rent 2,500
30 Salary 3,500
30 Balance c/d 10,100 13,900
31,000 46,500 31,000 46,500
Oct.
01 Balance b/d 10,100 13,900
Posting of the Double Column Cash Book

When the bank column is maintained in the cash book, the bank account
also is not opened in the ledger. The bank column serves the purpose of the
bank account. Entries marked C (being contra entries as explained earlier)
are ignored while posting from the cash book to the ledger. These entries
represent debit or credit of cash account against the bank account or vice-
versa. We will now see how the transactions recorded in double column cash
book are posted to the individual accounts.
Purchases Account
Dr. Cr.
Rs. Rs.
2005
Sept.04 Bank 12,000
Sept. 17 Cash 17,400
Sales Account
Dr. Cr.
Rs. Rs.
2005
Sept. 08 Cash 6,000
Sept. 16 Bank 4,500
Machinery Account
Dr. Cr.
Rs. Rs.
2005
Sept. 13 Bank 5,500
Stationery Account
Dr. Cr.
Rs. Rs.
2005
Sept.20 Bank 1,100
Rohit’s Account
Dr. Cr.
Rs. Rs.
2005
Sept.24 Bank 1,500
Rent Account
Dr. Cr.
Rs. Rs.
2005
Sept.30 Bank 2,500
Salary Account
Dr. Cr.
Rs. Rs.
2005
Sept.30 Cash 3,500
4.1.3 Petty Cash Book

In every organisation, a large number of small payments such as conveyance,
cartage, postage, telegrams and other expenses (collectively recorded under
miscellaneous expenses) are made. These are generally repetitive in nature. If
all these payments are handled by the cashier and are recorded in the main
cash book, the procedure is found to be very cumbersome. The cashier may
be overburdened and the cash book may become very bulky. To avoid this,
large organisations normally appoint one more cashier (petty cashier) and
maintain a separate cash book to record these transactions. Such a cash
book maintained by petty cashier is called petty cash book.
The petty cashier works on the Imprest system. Under this system, a definite
sum, say Rs. 2,000 is given to the petty cashier at the beginning of a certain
period. This amount is called imprest amount. The petty cashier goes on making
all small payments out of this imprest amount and when he has spent the
substantial portion of the imprest amount say Rs.1,780, he gets reimbursement
of the amount spent from the head cashier. Thus, he again has the full imprest
amount in the beginning of the next period. The reimbursement may be made
on a weekly, fortnightly or monthly basis, depending on the frequency of small
payments. (In certain cases, the petty cash system is operated through the
main cash book itself. In such instances, the petty cash book is not maintained
independently.)
The petty cash book generally has a number of columns for the amount on
the payment side (credit) besides the first other amount column. Each of the
amount columns is allotted for items of specific payments, which are most
common. The last amount column is designated as ‘Miscellaneous’ followed
by a ‘Remarks’ column. In the miscellaneous column those payments are
recorded for which a separate column does not exist. In the ‘Remarks’ the
nature of payment is recorded. At the end of the period, all amount columns
are totaled. The total amount column l shows the total amount spent and to
be reimbursed. On the receipt (debit) side, there is only one amount column.
Columns for the date, voucher number and particulars are common for both
receipts and payments.
Box 1
Advantages of Maintaining Petty Cash Book
1. Saving of Time and efforts of chief cashier: The chief cashier is not required to
deal with petty disbursements. He can concentrate on cash transactions involving
large amount of cash. It saves time and labour and helps chief cashier to discharge
his duties more effectively
2. Effective control over cash disbursements: Cash control becomes easy because of
division of work. The head cashier can control big payments directly and petty
payments by keeping a proper check on the petty cashier. This way the chances
of making frauds and embezzlements become very difficult.
3. Convenient recording: Recording of petty disbursements in the main cash book
makes it bulky and unmanageable. Further, the materiality principle requires
that insignificant details need not be given in the main cashbook. This way the
cash book reveals only material and useful information.
Recording of such small payments becomes easy as the totals of different types
of expenses are posted to ledger. It also saves time and effort of posting individual
items in the ledger. In nutshell it can be stated that preparation of petty cash
book is a cost reduction control measure.
For example, Mr. Mohit, the petty cahier of M/s Samaira Traders received
Rupees 2,000 on May 01, 2005 from the Head Cashier. For the month, details
of petty expenses are listed here under:
Date Details Amount

Rs.
2005
May
02 Auto fare 55
03 Courier services 40
04 Postal stamps 105
05 Erasers/Sharpeners/Pencils/Pads 225
06 Speed post charges 98
08 Taxi fare (Rs.105 + Rs.90) 195
08 Refreshments 85
10 Auto fare 60
12 Registered postal charges 42
13 Telegram 34
14 Cartage 25
16 Computer stationery 165
19 Bus fare 24
19 STD call charges 87
20 Office sanitation including disinfectant (Rs. 36 + Rs. 24) 60
22 Refreshment 45
23 Photo stating charges 47
28 Courier services 40
29 Unloading charges 40
30 Bus fare 15
Posting from the Petty Cash Book

The petty cash book is balanced periodically. The difference between the total
receipts and total payments is the balance with the petty cashier. The balance is
carried to the next period and the petty cashier is paid the amount actually spent.
A petty cash account is opened in the ledger. It is debited with the amount given
to petty cashier. Each expense account is individually debited with the periodic
total as per the respective column by writing “petty cash account” and the petty
cash account is credited with the total expenditure incurred during the period by
writing sundries as per petty cash book. The petty cash account is balanced. It
reflect the actual cash with the petty cashier.
The petty cash book for the month will be prepared as follows :
Book of Samaira Traders
Petty Cash Book
Amount Date Particulars Voucher Amount Analysis of Payments
Received No. paid
Rs. 2005 Rs. Postage Telephone Conveyance Stationery Misc.
May & Telegram
2,000 01 Cash received
02 Auto fare 55 55
03 Courier services 40 40
04 Postal stamps 105 105
05 Erasers/Sharpeners 225 225
Recording of Transactions - II
/Pencils
06 Speed post charges 98 98
08 Taxi fare (105 + 90) 195 195
08 Refreshments 85 85
10 Auto fare 60 60
12 Registered postal 42 42
charges
13 Telegram 34 34
14 Cartage 25 25
16 Computer stationery 165 165
19 Bus fare 24 24
19 STD call charges 87 87
20 Office sanitation 60 60
including disinfectant
(36+24)
22 Refreshment 45 45
23 Photo stating charges 47 47
28 Courier services 40 40
29 Unloading charges 40 40
30 Bus fare 15 15
1,487 325 121 349 390 302
31 Balance c/d 513
2,000 2,000
Jun.
513 01 Balance b/d
1,487 01 Cash received
104
Books of Samaira Traders

Journal
Amount Amount
Rs. Rs.
2005
May 01 Petty cash A/c Dr. 2,000
To Cash A/c 2,000
(Cash paid to petty cashier)
May 31 Postage A/c Dr. 325
Telephone & Telegram A/c Dr. 121
Conveyance A/c Dr. 349
Stationary A/c Dr. 390
Miscellaneous expenses A/c Dr. 302
To Petty cash A/c 1,487
(Petty expenses posted to petty
cash account)
Petty cash A/c Dr. 1,487
To Cash A/c 1,487
(Cash paid to petty cashier)
Petty Cash Account

Dr. Cr.
Rs. Rs.
2005 2005
May 01 Cash 2,000 May 31 Sundries as 1,487
per petty cash
book
May 31 Balance c/d 513
2,000 2,000
Jun. 01 Balance b/d 513
Jun. 01 Cash 1,487
Books of Samaria Traders

Postage Account
Dr. Cr.
Rs. Rs.
2005
May 31 Petty cash 325
Telephone and Telegrams Account

Dr. Cr.
Rs. Rs.
2005
Conveyance Account
Dr. Cr.
Rs. Rs.
2005
Stationery Account
Dr. Cr.
Rs. Rs.
2005
Miscellaneous Expenses Account
Dr. Cr.
Rs. Rs.
2005
4.1.4 Balancing of Cash Book

On the left side, all cash transactions relating to cash receipts (debits) and on
the right side all transactions relating to cash payments (credits) are entered
date-wise. When a cash book is maintained, a separate cash book in the
ledger is not opened. The cash book is balanced in the same way as an account
in the ledger. But it may be noted that in the case of the cash book, there will
always be debit balance because cash payments can never exceed cash receipts
and cash in hand at the beginning of the period.
The source document for cash receipts is generally the duplicate copy of
the receipt issued by the cashier. For payment, any document, invoice, bill,
receipt, etc. on the basis of which payment has been made, will serve as a
source document for recording transactions in the cash book. When payment
has been made, all these documents, popularly known as vouchers, are given
a serial number and filed in a separate file for future reference and verification.
Illustration 1
From the following transactions made by M/s Kuntia Traders, prepare the single column
cashbook.
Date Details Amount

Rs.
2005
Sept. 01 Cash in hand 40,000
Sept. 02 Deposited in bank 16,000
Sept. 04 Received from Puneet in full settlement of claim 11,700
of Rs. 12,000.
Sept. 05 Cash paid to Rukmani in full settlement of claim of 6,850
Rs.7,000
Sept. 06 Sold goods to Sudhir for cash 14,800
Sept. 06 Paid quarterly insurance premium on policy for 2,740
proprietor’s wife
Sept. 07 Purchased office furniture 8,000
Sept. 07 Purchased stationery 1,700
Sept. 07 Paid cartage 120
Sept. 10 Paid Kamal, discount allowed by him Rs. 6,800 200
Sept. 11 Received from Gurmeet, discount allowed to him Rs.14,500 500
Sept. 12 Amount withdrawn for house hold use 5,000
Sept. 14 Electricity bill paid 1,160
Sept. 17 Goods sold for cash 23,000
Sept. 21 Bought goods from Kamal on cash basis 17,000
Sept. 24 Paid telephone charges 2,300
Sept. 26 Paid postal charges 520
Sept. 28 Paid monthly rent 4,200
Sept. 29 Paid monthly wages and salary 8,250
Sept. 29 Bought goods for cash 11,000
Sept. 30 Sold goods for cash 15,600
Solution
Books of Kuntia Traders
Cash Book
Dr. Cr.
Rs. Rs.
2005 2005
Sept. 01 Balance b/d 40,000 Sept. 02 Bank 16,000
Sept. 04 Puneet 11,700 Sept. 05 Rukmani 6,850
Sept. 06 Sales 14,800 Sept. 06 Drawings 2,740
Sept. 11 Gurmeet 14,500 Sept. 07 Office furniture 8,000
Sept. 17 Sales 23,000 Sept. 07 Stationery 1,700
Sept. 30 Sales 15,600 Sept. 07 Cartage 120
Sept. 10 Kamal 6,800
Sept. 12 Drawings 5000
Sept. 14 Electric charges 1,160
Sept. 21 Purchases 17,000
Sept. 24 Telephone 2,300

charges
Sept. 28 Postal charges 520
Sept. 29 Rent 4,200
Sept. 29 Wages & Salary 8,250
Sept. 30 Balance c/d 27,960
1,19,600 1,19,600
Oct. 01 Balance b/d 27,960
Illustration 2
Record the following transactions in double column cash book and balance it.
Date Details Amount

Rs.
2005
Aug. 01 Cash balance 15,000
Bank balance 10,000
Aug. 03 Paid insurance premium by cheque 4,200
Aug. 08 Cash sales 22,000
Cash discount 750
Aug. 09 Payment for cash purchases 21,000
Cash discount 700
Aug. 09 Cash deposited in bank 15,000
Aug. 10 Telephone bill paid by cheque 2,300
Aug. 14 Withdrawn from bank for personal use 6,000
Aug. 16 Withdrawn from bank office use 14,500
Aug. 20 Received cheque from John in full and final settlement 10,700
and deposited the same in the bank
Aug. 23 Received cash from Michael 6,850
Aug. 24 Stationery purchased for cash 1,800
Aug. 25 Cartage paid in cash 350
Aug. 25 Cheque received from Kumar 4,500
Aug. 28 Cheque received from Kumar deposited in Bank 4,500
Aug. 31 Cheque deposited on Aug. 28 dishonoured and returned
by the bank
Aug. 31 Rent paid by cheque 4,000
Aug. 31 Paid wages to the watchman in cash 3,000
Aug. 31 Paid cash for postage 220
Solution
Cash Book
Dr. Cr.
Rs. Rs. Rs. Rs.
2005 2005
Aug. Aug.
01 Balance b/d 15,000 10,000 03 Insurance 4,200
08 Sales 22,000 09 Purchases 21,000
09 Cash C 15,000 09 Bank C 15,000
16 Bank C 14,500 10 Telephone 2,300
expenses
20 John 10,700 14 Drawings 6,000
23 Michael 6,850 16 Cash C 14,500
25 Kumar 4,500 24 Printing and 1,800
stationery
28 Cash C 4,500 25 Cartage 350
31 Balance c/d 6,000 28 Bank C 4,500
31 Kumar 4,500
31 Rent 4,000
31 Wages 3,000
31 Postage 220
31 Balance c/d 16,980 4,700
62,850 40,200 62,850 40,200
Sept.
01 Balance b/d 16,980 4,700
Illustration 3
Prepare bank column cash book from the following tansactions of M/s Laser Zone for the
month of January 2005 and post them to the related ledger accounts :
Date Details Amount

Rs.
Jan. 01 Cash in hand 4,000
Bank overdraft 3,200
Jan. 04 Wage paid 400
Jan. 07 Purchased goods by cheque 2,000
Jan. 09 Purchased furniture for cash 2,200
Jan. 11 Cash paid to Rohit 2,000
Jan. 14 Deposited into bank 7,000
Jan. 16 Bank charged interest on overdraft 200
Jan. 20 Paid telephone bill by cheque 600

Jan. 25 Sale of goods and received cheque 3,000
(deposited same day)
Jan. 27 Paid rent 800
Jan. 29 Drew cash for personal use 500
Jan. 30 Paid salary 1,000
Jan. 31 Interest collected by bank 1,700
Solution
Books of Laser Zone
Cash Book
Dr. Cr.
Rs. Rs. Rs. Rs.
2005 2005
Jan. Jan.
01 Balance b/d 4,000 01 Balance b/d 3,200
05 Sales 7,000 04 Wages 400
13 Sales 4,500 07 Purchase 2,000
14 Cash C 7,000 09 Furniture 2,200
25 Sales 3,000 11 Rohit 2,000
31 Interest 1,700 14 Bank C 7,000
16 Overdraft 200
interest
20 Telephone 600
27 Rent 800
29 Drawings 500
30 Salary 1,000
01 Balance c/d 1,600 5,700
15,500 11,700 15,500 11,700
Oct.
01 Balance b/d 1,600 5,700
Wages Account
Dr. Cr.
Rs. Rs.
2005
Jan.04 Cash 400
Sales Account
Dr. Cr.
Rs. Rs.
2005
Jan. 05 Cash 7,000
Jan.13 Cash 4,500
Jan.25 Bank 3,000
Purchases Account
Dr. Cr.
Rs. Rs.
2005
Jan.07 Bank 2,000
Furniture Account
Dr. Cr.
Rs. Rs.
2005
Jan. 09 Cash 2,200
Rohit Account
Dr. Cr.
Rs. Rs.
2005
Jan. 11 Cash 2,000
Ovedraft Interest (Paid) Account

Dr. Cr.
Rs. Rs.
2005
Jan.16 Bank 200
Telephone Expenses Account

Dr. Cr.
Rs. Rs.
2005
Jan.20 Bank 600
Rent Account
Dr. Cr.
Rs. Rs.
2005
Jan.27 Cash 800
Drawings Account
Dr. Cr.
Rs. Rs.
2005
Jan.29 Cash 500
Salary Account
Dr. Cr.
Rs. Rs.
2005
Jan.30 Cash 1,000
Interest (Received) Account

Dr. Cr.
Rs. Rs.
2005
Jan.31 Bank 1,700
Illustration 4
Prepare double column cash book of M/s Advance Technology Pvt. Ltd for the month of
December 2005 from the following transactions :
Date Details Amount

Rs.
2005
Dec. 01 Cash in hand 3,065
Cash at bank 6,780
Dec. 02 Cash paid to petty cashier 1,000
Dec. 03 Received cheque from Priya 3,000
Dec. 05 Deposited into bank 1,200
Dec. 06 Priya’s cheque deposited into bank 3,000
Dec. 08 Purchased furniture by cheque 6,500
Dec. 10 Paid trade expenses 400
Dec. 13 Bank charges 300

Dec. 15 Dividend collected by bank 1,200
Dec. 16 Paid electric bill by cheque 600
Dec. 17 Cash purchases 2,000
Dec. 19 Paid for advertising 1,000
Dec. 21 Goods sold and received a cheque 6,000
Dec. 22 Paid legal charges 500
Dec. 23 Drew from bank for personal use 2,000
Dec. 24 Paid establishment expenses 340
Dec. 25 Paid for printing of bill book 850
Dec. 26 Paid insurance premium by cheque 2,150
Dec. 28 Paid salary by cheque 4,000
Dec. 29 Rent paid 3,000
Dec. 30 Commission received by cheque 2,500
Dec. 31 Paid for charity by cheque 800
Solution
Books of Advance Technology
Cash Book
Dr. Cr.
Rs. Rs. Rs. Rs.
2005 2005
Dec. Dec.
01 Balance b/d 3,065 6,780 02 Petty Cashier 1,000
03 Priya 3,000 05 Bank C 1,200
04 Sales 2,000 06 Bank C 3,000
06 Cash C 3,000 10 Trade expenses 400
12 Sales 9,000 13 Bank charges 300
15 Dividend 1,200 16 Electric charges 600
21 Sales 6,000 17 Purchases 2,000
27 Sales 7,200 19 Advertisement 1,000
30 Commission 2,500 22 Legal charges 500
23 Drawings 2,000
24 Establishment 340
expenses
25 Printing 850
26 Insurance 2,150
premium
28 Salary 4,000
29 Rent 3,000
31 Charity 800
31 Balance c/d 10,975 4,330
24,265 20,680 24,265 20,680
2006
Jan.
01 Balance b/d 10,975 4,330
(ii) Ledger Posting
Petty Cashier’s Account

Dr. Cr.
Rs. Rs.
2005
Dec.02 Cash 1,000
Priya’s Account
Dr. Cr.
Rs. Rs.
2005
Dec. 03 Cash 3,000
Sales Account
Dr. Cr.

Rs. Rs.
2005
Dec.04 Cash 2,000
Dec.12 Cash 9,000
Dec.21 Bank 6,000
Dec.27 Cash 7,200
Furniture Account
Dr. Cr.

Rs. Rs.
2005
Dec.08 Bank 6,500
Trade Expenses Account

Dr. Cr.

Rs. Rs.
2005
Dec.10 Cash 400
Bank Charges Account

Dr. Cr.

Rs. Rs.
2005
Dec.13 Bank 300
Dividend Account
Dr. Cr.
Rs. Rs.
2005
Dec.15 Bank 1,200
Electric Charges Account

Dr. Cr.
Rs. Rs.
2005
Dec.16 Bank 600
Purchases Account
Dr. Cr.
Rs. Rs.
2005
Dec. 17 Cash 2,000
Advertisement Account
Dr. Cr.
Rs. Rs.
2005
Dec. 19 Cash 1,000
Legal Charges Account

Dr. Cr.
Rs. Rs.
2005
Dec. 22 Cash 500
Drawings Account
Dr. Cr.
Rs. Rs.
2005
Dec. 24 Bank 2,000
Establishment Expenses Account

Dr. Cr.
Rs. Rs.
2005
Dec. 24 Cash 340
Printing Account
Dr. Cr.
Rs. Rs.
2005
Dec. 25 Cash 850
Insurance Premium Account

Dr. Cr.
Rs. Rs.
2005
Dec. 26 Bank 2,150
Salary Account
Dr. Cr.
Rs. Rs.
2005
Dec. 28 Bank 4,000
Rent Account
Dr. Cr.
Rs. Rs.
2005
Dec. 29 Cash 3,000
Commission Received Account

Dr. Cr.
Rs. Rs.
2005
Dec. 30 Bank 2,500
Charity Account
Dr. Cr.
Rs. Rs.
2005
Dec. 31 Bank 800
4.2 Purchases (Journal) Book

All credit purchases of goods are recorded in the purchases journal whereas
cash purchases are recorded in the cash book. Other purchases such as
purchases of office equipment, furniture, building, are recoded in the journal
proper if purchased on credit or in the cash book if purchased for cash. The
source documents for recording entries in the book are invoices or bills received
by the firm from the supplies of the goods. Entries are made with the net
amount of the invoice. Trade discount and other details of the invoice need
not be recorded in this book. The format of the purchases journal is shown in
figure 4.6.
Purchases (Journal) Book
Date Invoice Name of Supplier L.F. Amount
No. (Account to be credited) Rs.
Fig. 4.6 : Format of purchases (journal) book
The monthly total of the purchases book is posted to the debit of purchases
account in the ledger. Individual suppliers accounts may be posted daily.
Consider the following details obtained from M/s Kanika Traders and observe
how the entries are recorded in the purchase journal.
Date Details
2005
Aug. 04 Purchased from M/s Neema Electronics (invoice no. 3250): 20 Mini-size T.V.
@ Rs.2,000 per piece, 15 Tape recorders @ Rs. 12,500 per piece. Trade discount
on all items @ 20%.
Aug. 10 Bought from M/s Pawan Electronics (invoice no. 8260): 10 Video cassettes @
Rs. 150 per piece, 20 Tape recorders @ Rs. 1,650 per piece. Trade discout
@ 10% on purchases.
Aug. 18 Purchased from M/s. Northern Electronics (invoice no. 4256): 15 Northern
stereos @ Rs. 4,000 per piece, 20 Northern colour T.V. @ Rs. 14,500 per piece.
Trade discount @ 12.5%.
Aug. 26 Purchased form M/s Neema Electronics (Invoice No. 3294): 10 Mini-size T.V.
@ Rs. 1,000 per piece, 5 Colour T.V. @ Rs. 12,500 per piece. Trade discount
@ 20%.
Aug. 29 Bought from M/s Pawan Electronics: (Invoice No. 8281) 20 Video cassettes @
150 per piece 25 Tape recorders @ Rs. 1,600 per piece. Trade discount @ 10%
on purchases.
Books of Kanika Traders

Date Invoice Name of Supplier L.F. Amount
2005
Aug.04 3250 Neema Electronics 1,82,000
Aug.10 8260 Pawan Electronics 31,050
Aug.18 4256 Northern Electronics 3,06,250
Aug.26 3294 Neema Electronics 54,000
Aug.29 8281 Pawan Electronics 38,700
Aug.31 6,12,000
Posting from the purchases journal is done daily to their respective accounts
with the relevant amounts on the credit side. The total of the purchases journal
is periodically posted to the debit of the purchases account normally on the
monthly basis. However, if the number of transactions is very large, this total
may be done and posted at some other convenient time interval such as daily,
weekly or fortnightly. The posting from the purchases journal to the ledger
from is illustrated as follows:
Books of Kanika Electronics
Neema Electronics
Dr. Cr.
Rs. Rs.
2005
Aug.04 Purchases 1,82,000
Aug. 26 Purchases 54,000
Pawan Electronics
Dr. Cr.
Rs. Rs.
2005
Northern Electronics
Dr. Cr.
Rs. Rs.
2005
Aug.18 Purchases 3,06,250
Purchases Account
Dr. Cr.
Rs. Rs.
2005
Aug. 31 Sundries as 6,12,000
per Purchases
Journal
4.3 Purchases Return (Journal) Book

In this book, purchases return of goods are recorded. Sometimes goods
purchased are returned to the supplier for various reasons such as the goods
are not of the required quality, or are defective, etc. For every return, a debit
note (in duplicate) is prepared and the original one is sent to the supplier for
making necessary entries in his book. The supplier may also prepare a note,
which is called the credit note. The source document for recording entries in
the purchases return journal is generally a debit note. A debit note will contain
the name of the party (to whom the goods have been returned) details of the
goods returned and the reason for returning the goods. Each debit note is
serially numbered and dated. The format of the purchases return journal is
shown in figure 4.7(a).
Purchases Return (Journal) Book
Date Debit Name of the Supplier L.F. Amount
Note No. (Account to be debited) Rs.
Fig 4.7(a) : Format of Purchases return (journal)book

Box 2
Debit and Credit Notes

A Debit note is a document evidencing a debit to be raised against a party for reasons
other than sale on credit. On finding that goods supplied are not as per the terms of
the order placed, the defective goods are returned to the supplier of the goods and a
note is prepared to debit the supplier; or when an additional sum is recoverable
from a customer such a note is prepared to debit the customer with the additional
dues. In these two situations the note is called a debit note (refer figure 4.7(b)).
A Credit note is prepared, when a party is to be given a credit for reasons other
than credit purchase. It is a common practice to make it in red ink. When goods are
received back from a customer, a credit note should be sent to him. The suggested
proforma of credit note is shown in figure 4.7(c).
Name of the Firm Issuing the Note
Address of the Firm

No. Date of Issue .........
DEBIT NOTE
Against : Supplier’s Name
Goods returned as per delivery Amount (Rs)
Challan No.
(Details of goods returned)
(Rupees ...........only)
Signature of the Manager with date
Fig. 4.7(b) : Showing a specimen of debit note
Name of the Firm Issuing the Note
Address of the Firm

No. Date of Issue .........
CREDIT NOTE
Against : Customer’s Name
Goods returned by the customer Amount (Rs)
Challan No.
(Details of goods returned)
(Rupees ...........only)
Signature of the Manager with date
Fig. 4.7(c) : Showing a specimen credit note
Refer to the purchases (journal) book of Kanika Traders you will notice that
20 mini size T.V.’s and 15 tape- recorders were bought from Neema Electronics
for Rs. 1,82,000 However, on delivery 2 mini T.V.’s and tape recorders were
found defective and were returned back vide debit note no. 03/2005. In this
case, the purchases return books will be prepared as follows :

Note (Account to be debited) Rs.
No.
03/2005 Neema Electronics 13,200
13,200
Posting from the purchases returns journal requires that the supplier’s
individual accounts are debited with the amount of returns and the purchases
returns account is credited with the periodical total.
Neema Electronics Account

Dr. Cr.
Rs. Rs.
Purchases 13,200
Return

Dr. Cr.
Rs. Rs.
Sundries as 13,200
per purchase
returns book
4.4 Sales (Journal) Book

All credit sales of merchandise are recorded in the sales journal. Cash sales
are recorded in the cash book. The format of the sales journal is similar to
that of the purchases journal explained earlier. The source document for
recording entries in the sales journal are sales invoice or bill issued by the
firm to the customers. The date of sale, invoice number, name of the customer
and amount of the invoice are recorded in the sales journal. Other details
about the sales transaction including terms of payment are available in the
invoice. In fact, two or more than two copies of a sales invoice are prepared for
each sale. The book keeper makes entries in the sales journal from one copy
of the sales invoice. The format of the sales joournal is shown in figure 4.8. In
the sales journal, one additional column may be added to record sales tax
recovered from the customer and to be paid to the government within the
stipulated time. Periodically, at the end of each month the amount column is
total led and posted to the credit of sales account in the ledger. Posting to the
debit side of individual customer’s accounts may be made daily.
Sales (Journal) Book

Date Invoice Name of the Customer L.F. Amount
No. (Account to be debited) Rs.
Fig. 4.8 : Format of sales (journal) cash book
For example M/s Koina Supplies sold on credit:

(i) Two water purifiers @ Rs. 2,100 each and five buckets @ Rs 130 each to
M/s Raman Traders (Invoice no. 178 dated April 06, 2005).
(ii) Five road side containers @ Rs 4,200 each to M/s Nutan enterprises
(Invoice no 180 dated April 09, 2005) .
(iii) 100 big buckets @ Rs 850 each to M/s Raman traders (Invoice no. 209,
dated April 28, 2005).
The above stated transactions will be entered in a sales journal as follows:
Books of Koina Suppliers

Date Invoice Name of the customer L.F. Amount
2005
April 06 178 Raman Traders 4,850
April 09 180 Nutan Enterprises 21,000
April 28 209 Raman Traders 85,000
April 30 1,10,850
Posting from the sales journal are done to the debit of customer’s accounts
kept in the ledger. Like the purchases journal, individual customer’s accounts
are generally posted daily, with the amount involved. The sales journal is also
totaled periodically (generally monthly), and this total is credited to sales
account in the ledger. The sales (journal) book illustrated above will be posted
in the related ledger account in the following manner:
Raman Traders Account

Dr. Cr.
Rs. Rs.
2005
Apr. 06 Sales 4,850
Apr. 28 Sales 85,000
Nutan Enterprises Account

Dr. Cr.
Rs. Rs.
2005
Apr.01 Sales 21,000
Sales Account
Dr. Cr.
Rs. Rs.
2005
Apr. 30 Sundries as 1,10,850
per sales book
4.5 Sales Return (Journal) Book

This journal is used to record return of goods by customers to them on credit.
On receipt of goods from the customer, a credit note is prepared, like the debit
note referred to earlier. The difference between the credit not and the debit
note is that the former is prepared by the seller and the latter is prepared by
the buyer. Like the debit note, the credit note is also prepared in duplicate
and contains detail relating to the name of the customer, details of the
merchandise received back and the amount. Each credit note is serially
numbered and dated. The source document for recording entries in the sales
return book is generally the credit note. The format of the sales return book is
shown in figure 4.9
Sales Return (Journal) Book

Date Credit Name of the customer L.F. Amount
No. (Account to be Credited) Rs.
Fig. 4.9 : Format of sales return (journal) book

Refer to the sales (journal) book of Koina Supplier of you will find that two
water purifiers were sold to Raman Traders for Rs 2,100 each, out of which
one purifier was returned back due to the manufacturing defect (credit note
no. 10/2005). In this case, the sales return (Journal) book will be prepared
as follows :

No. (Account to be Credited) Rs.
10/2005 Raman Traders 2,100
2,100
Posting to the sales return journal requires that the customer’s account be
credited with the amount of returns and the sales return account be debited
with the periodical total in the same way as is done in case of posting from the
purchases journal.
Raman Traders Account

Dr. Cr.
Rs. Rs.
Sales Return 2,100

Dr. Cr.
Rs. Rs.
Sundries 2,100
as per sales
return book
Illustration 5
Enter the following transactions of M/s Hi-Life Fashions in purchases and purchases
return book and post them to the ledger accounts for the month of September 2005:
Date Details
Sept. 01 Purchase of following goods on cr edit from M/s Ratna T raders,
as per Invoice No.714:
25 Shirts @ Rs.300 per shirt
20 Pants @ Rs.700 per pant
Less 10% trade discount
Sept. 08 Purchase of following goods on credit from M/s Bombay Fashion House,
as per Invoice No.327 ;
10 Fancy Trousers @ Rs.500 per trouser

20 Fancy Hat @ Rs. 100 per hat
Sept. 10 Goods returned to M/s Ratana Traders,as per debit note No.102 :
3 shirts @ Rs.300 per shirt
1 Pant @ Rs.700 per pant
Sept. 15 Pur chase of following goods on credit from M/s Zolta Fashions,
as per Invoice No.6781 :
10 Jackets @ Rs.1000 per jacket
5 Plain shirts Rs.200 per shirts
Less 15% trade discount.
Sept. 20 Purchase of following goods on cr edit from M/s Bride Palace,
as per Invoice No.1076 :
10 Fancy Lengha @ Rs.2,000 per lengha
Sept. 24 Goods returned to M/s Bombay Fashion House as per debit note No.103 :
2 Fancy Trousers @ Rs.500 per trouser
4 Fancy Hat @ Rs.100 per hat
Sept. 28 Goods returned to M/s Bride Palace as per debit note No.105 :
1 Fancy Lengha @ Rs.2,000 per lengha
Solution
Books of Hi-life Fashions
Date Invoice Name of the Supplier L.F. Amount

2005
Sept.01 714 Ratana Traders 19,350
Sept.08 327 Bombay Fashion House 6,650
Sept.15 6781 Zolta Fashions 9,350
Sept.20 1076 Bride Palace 19,000
Sept.30 54,350

2005
Sept. 10 102 Ratana Traders 1,440
Sept. 24 103 Bombay Fashion House 1,330
Sept. 28 106 Bride Palace 1,900
Sept. 30 4,670
(ii) Ledger Posting

Books of M/s Hi-Life Fashions
Ratana Traders Account
Dr. Cr.
Rs. Rs.
2005 2005
Sept. 10 Purchases 1,440 Sept.01 Purchases 19,350
return
Bombay Fashion House Account

Dr. Cr.
Rs. Rs.
2005 2005
Sept. 24 Purchases 1,330 Sept. 08 Purchases 6,650
return
Zolta Fashions Account

Dr. Cr.
Rs. Rs.
2005
Bride Palace Account

Dr. Cr.
Rs. Rs.
2005
Sept. 28 Purchases 1,900 Sept. 20 Purchases 19,000
return
Purchases Account
Dr. Cr.
Rs. Rs.
2005
Sept. 30 Sundries as 54,350
per purchases
journal

Dr. Cr.
Rs. Rs.
2005
Sept. 30 Sundries as 4,670
per purchases
return book
Illustration 6
Enter the following transactions in the Sales and Sales Return book of M/s Vineet Stores:
Date Details
Dec.01. Sold goods on credit to M/s Rohit Stores as per invoice no.325 :
30 Kids Books @ Rs. 60 each.
20 Animal Books @ Rs. 50 each
Dec. 05 Sold goods on credit to M/s Mera Stores as per invoice no.328 :
100 Greeting Cards @ Rs.12 each.
50 Musical Cards @ Rs. 50 each
Dec. 10 Sold Goods on credit to M/s Mega Stationers as per invoice no.329 :
50 Writing Pads @ Rs. 20 each.
50 Colour Books @ Rs. 30 each
20 Ink Pads @ 16 each
Dec. 15 Goods Returned from M/s Rohit Stores as per credit note no.201:
2 Kids Books @ Rs. 60 each
1 Animal Book @ Rs. 50 each
Dec. 19 Sold goods on credit to M/s Abha Traders as per invoice no.355 :
100 Cards Books @ Rs. 10 each.
50 Note Books @ Rs. 35 each
Dec. 22 Goods returned from M/s Mega Stationers as per credit note no.204:
2 Colour Books @ Rs. 30 each
Dec. 26 Sold goods on credit to M/s Bharti Stores as per invoice no.325 :
100 Greeting Cards @ Rs. 20 each.
100 Fancy Envelopes @ Rs. 5 each
Dec. 30 Goods returned from M/s Abha Traders as per credit note no.207 :
20 Cards Books @ Rs. 10 each
5 Note Book@ Rs. 35 each
Solution
Books of Veneet Stores
Date Invoice Name of the Customer J.F. Amount

2005
Dec.01 325 Rohit Stores 2,800
Dec.05 328 Mera Stores 3,515
Dec.10 329 Mega Stationers 2,820
Dec.19 335 Abha Traders 2,375
Dec.26 340 Bharti Stores 2,500
Dec. 31 14,010

Date Credit Name of the Customer L.F. Amount
Note No. (Account to be credited) Rs.
2005
Dec. 15 201 Rohit Stores 170
Dec. 22 204 Mega Stationers 150
Dec. 30 206 Abha Traders 333
Dec. 31 653
(ii) Ledger Posting

Rohit Stores Account
Dr. Cr.
Rs. Rs.
2005 2005
Dec. 01 Sales 2800 Dec.15 Sales return 170
Mera Stores Account

Dr. Cr.
Rs. Rs.
2005
Dec. 05 Sales 3,515
Mega Stationers Account

Dr. Cr.
Rs. Rs.
2005 2005
Dec.10 Sales 2,820 Dec.22 Sales return 150
Abha Traders Account

Dr. Cr.
Rs. Rs.
2005
Dec.19 Sales 2,375 Dec.30 Sales return 333
Bharti Stores Account

Dr. Cr.
Rs. Rs.
2005
Dec.26 Sales 2,500
Sales Account
Dr. Cr.
Rs. Rs.
2005
Dec. 31 Sundries as 14,010
per sales book

Dr. Cr.
2005 Rs. Rs.
Dec.31 Sundries as 653
per sales
return book
4.6 Journal Proper

A book maintained to record transactions, which do not find place in special
journals, is known as Journal Proper or Journal Residual.
Following transactions are recorded in this journal:
1. Opening Entry: In order to open new set of books in the beginning of new
accounting year and record therein opening balances of assets, liabilities
and capital, the opening entry is made in the journal.
2. Adjustment Entries: In order to update ledger account on accrual basis,
such entries are made at the end of the accounting period. Such as
Rent outstanding, Prepaid insurance, Depreciation and Commission
received in advance.
3. Rectification entries: To rectify errors in recording transactions in the

books of original entry and their posting to ledger accounts this journal
is used.
4. Transfer entries: Drawing account is transferred to capital account at
the end of the accounting year. Expenses accounts and revenue accounts
which are not balanced at the time of balancing are opened to record
specific transactions. Accounts relating to operation of business such
as Sales, Purchases, Opening Stock, Income, Gains and Expenses etc
and drawing are closed at the end of the year and their Total/balances
are transferred to Trading and Profit and Loss account by recording the
journal entries. These are also called closing entries.
5. Other entries: In addition to the above mentioned entries in the points
number 1 to 4, recording of the following transaction is done in the
journal proper :
(i) At the time of a dishonour of a cheque the entry for cancellation for
discount received or discount allowed earlier.
(ii) Purchase/sale of items on credit other than goods.
(iii) Goods withdrawn by the owner for personal use.
(iv) Goods distributed as samples for sales promotion.
(v) Endorsement and dishonour of bills of exchange.
(vi) Transaction in respect of consignment and joint venture, etc.
(vii) Loss of goods by fire/theft/spoilage.
Select the Correct Answer

(a) When a firm maintains a cash book, it need not maintain ;
(i) Journal Proper
(ii) Purchases (journal) book
(iii) Sales (journal) book
(iv) Bank and cash account in the ledger
(b) Double column cash book records:
(i) All transactions
(ii) Cash and bank transactions
(iii) Only cash transactions
(iv) Only credit transactions
(c) Goods purchased on cash are recorded in the :
(i) Purchases (journal) book
(ii) Sales (journal) book
(iii) Cash book
(iv) Purchases return (journal)book
(d) Cash book does not record transaction of :

(i) Cash nature
(ii) Credit nature
(iii) Cash and credit nature
(iv) None of these
(e) Total of these transactions is posted in purchase account :
(i) Purchase of furniture
(ii) Cash and credit purchase
(iii) Purchases return
(iv) Purchase of stationery
(f) The periodic total of sales return journal is posted to :
(i) Sales account
(ii) Goods account
(iii) Purchases return account
(iv) Sales return account
(g) Credit balance of bank account in cash book shows :
(i) Overdraft
(ii) Cash deposited in our bank
(iii) Cash withdrawn from bank
(iv) None of these
(h) The periodic total of purchases return journal is posted to :
(i) Purchase account
(ii) Profit and loss account
(iii) Purchase returns account
(iv) Furniture account
(i) Balancing of account means :
(i) Total of debit side
(ii) Total of credit side
(iii) Difference in total of debit & credit
(iv) None of these
4.7 Balancing the Accounts

Accounts in the ledger are periodically balanced, generally at the end of the
accounting period, with the object of ascertaining the net position of each amount.
Balancing of an account means that the two sides are totaled and the difference
between them is shown on the side, which is shorter in order to make their
totals equal. The words ‘balance c/d’ are written against the amount of the
difference between the two sides. The amount of balance is brought (b/d) down
in the next accounting period indicating that it is a continuing account, till
finally settled or closed.
In case the debit side exceeds the credit side, the difference is written on
the credit side, if the credit side exceeds the debit side, the difference between
the two appears on the debit side and is called debit and credit balance
respectively. The accounts of expenses losses and gains/revenues are not
balanced but are closed by transferring to trading and profit and loss account.
The balancing of the an account is illustrated below with the help of an example
explaining the complete process of recording the transactions, posting to ledger
and balancing there of.
Date Details
2005
Apr. 01 Commenced business with cash Rs. 1,00,000.
Apr.02 Deposited in bank Rs. 40,000.
Apr. 02 Purchased for cash furniture Rs. 6,000;
Land Rs. 42,000.
Apr.l 03 Paid cheque to M/s Malika & Brothers for purchase of electric wires and
plugs Rs. 17,000.
Apr. 04 Bought of M/s Handa Co. vide invoice no. 544:
(i) 28 Immersion Heaters 1,000 Watt of Smg. Ltd. @ Rs. 50, and
(ii) 40 Tube lights @ Rs.35. trade discount @ 12.5%.
Apr.l 04 Purchased stationery for cash Rs. 2,300.
Apr. 05 Loan from M/s Dayal Traders. @ 6% Rs. 25,000 and deposited money in
the bank on the next day.
Apr. 05 Paid cartage Rs. 80 and other charges Rs. 20.
Apr. 06 Bought of M/s Burari. Ltd. on account vide Invoice No. 125:
(i) 50 Table lamps (Universal) @ Rs. 80 :
(ii) 20 Electric kettles (General) @ Rs. 125.
(iii) 5 Electric iron@ Rs. 300. trade discount 20%.
Apr. 07 Sales to M/s Ramneek on account vide invoice no. 871:
(i) 10 Immersion heaters1000 watt @ Rs. 60.
(ii) 5 Table lamps @ Rs. 100:
(iii) 2 Electric irons @ 320.
Apr. 08 Sales to M/s Kapadia on credit vide invoice no. 880
(i) 15 Immersion heaters @ 60:
(ii) 15 Tube lights @ Rs. 38.
Apr. 10 Return inwards from Ramneek :
(i) 2 Immersion heaters,
(ii) 1 Electric iron.
Apr. 11 Paid rent by cheque Rs. 4,000.
Apr. 11 Purchased from M/s Rungta. for cash:
(i) 5 Immersion heaters 1000 watt @ Rs. 45.
Apr. 12 Returned goods to Burari Ltd. :
(i) 3 Table lamps (Universal)
(ii) 2 Electric kettles
(iii) 1 Electric iron.
Apr. 15 Purchased on account furniture from quality Furniture Ltd. Rs. 8,000.
Apr. 16 Paid for advertisement Rs. 1,200.
Apr. 18 Sales to M/s Daman on account vide invoice no. 902:
(i) 10 Electric kettles (General) @ Rs. 130.
Apr. 19 Purchased from M/s Kochhar Co. on credit vide invoice no.205:
(i) 25 Electric Mixers @ Rs. 600.
(ii) 40 Electric irons (Special) @ Rs. 540. trade discount 20%.
Apr. 20 Sales to M/s Ramneek on account vide bill no.925: 4 Electric Mixers
@ Rs. 600.
Apr. 21 Received cheque of Rs.3,700 from M/s Ramneek for full and final settlement
of claim. The cheque deposited in bank after two days.
Apr. 21 Purchased from M/s Burari Ltd. on credit vide invoice no.157:
(i) 10 Electric kettles @ Rs. 125
(ii) 20 Electric lamps @ Rs. 80 trade discount @ 20%.
Apr. 23 Sales to M/s Nutan on account vide invoice no.958:
(i) 2 Electric Mixers @ Rs. 600.
Apr. 23 Cash sales of Electric wires and plugs Rs. 14,500, cash discount allowed
Rs. 200.
Apr. 24 Cash purchases from M/s Hitesh:
(i) 5 Electric fans @ Rs. 740.
Apr. 25 Paid electricity bill Rs. 1,320.
Apr. 25 Made full and final payment to M/s Burari Ltd. by cheque discount allowed
by them Rs. 320.
Apr. 26 Purchased stationery on account from M/s Mohit Mart Rs. 3,200.
Apr. 27 Sales to M/s Daman on account vide Invoice No. 981:
(i) 15 Table lamps @ Rs. 100
(ii) 10 Immersion heaters 1000 watt @ Rs. 80.
Apr. 28 Deposited in bank Rs. 5,000.
Apr. 30 Withdrew Rs. 8,000 for personal use.
Apr. 30 Paid telephone bill Rs. 2700 by cheque.
Apr. 30 Paid insurance Rs. 1,600 by cheque.
Apr. 30 Paid to M/s Handa Co. Rs.2,450 by cheque; and Rs. 28,000 to M/s Kochhar
and co. by cheque who allowed Rs. 1,280 as discount.

2005
Apr. 04 544 Handa Co. 2,450
Apr. 06 125 Burari Ltd. 6,400
Apr. 19 205 Kochhar Co. 29,280
Apr. 21 157 Burari Ltd. 2,280
Apr. 30 40,410

2005
Apr. 07 871 Ramneek 1,740
Apr. 08 880 Kapadia 1,470
Apr. 18 902 Daman 1,300
Apr. 20 925 Ramneek 2,400
Apr. 23 958 Nutan 1,200
Apr. 27 981 Daman 2,300
Apr. 30 10,410

(Account to be debited)
2005
Apr. 12 Burari Ltd. 632
Apr. 30 632

(Account to be credited) Rs.
Apr. 10 Ramneek 440

Apr. 30 440
Journal Proper
Amount Amount
Rs. Rs.
2005
Apr. 15 Furniture A/c Dr. 8,000
To Quality Furniture A/c 8,000
(Purchase of furniture on credit)
Apr. 25 Burari Ltd A/c Dr. 320
To Discount A/c 320
(Discount received)
Apr. 26 Stationery A/c Dr. 3,200
To Mohit Mart A/c 3,200
(Purchase of Stationery items on credit)
Apr. 30 Kochhar A/c 1,280
To Discount A/c 1,280
(Discount received)
Total 12,800 12,800
Cash Book
Rs. Rs. Rs. Rs.
2005 2005
Apr. April
01 Capital 1,00,000 02 Bank C 40,000
05 6% Loan 25,000 02 Land 42,000
06 Cash C 25,000 03 Purchases 17,000
21 Ramneek 3,700 04 Stationery 2,300
23 Cash C 3,700 05 Miscellaneous 100
expenses
23 Sales 14,500 06 Bank C 25,000
28 Cash C 5,000 11 Rent 4,000
11 Purchases 225
16 Advertisement 1,200
23 Bank C 3,700
24 Purchases 3,700
25 Electric 1,320
charges
25 Burari Ltd. 7,728
28 Bank C 5,000
30 Drawings 8,000
30 Telephone 2,700
charges
30 Insurance 1,600
30 Handa Co. 2,450
30 Kochhar & Co. 28,000
30 Balance c/d 4,655 10,222
30 1,43,200 73,700 30 1,43,200 73,700
May
01 Balance b/d 4,655 10,222
The recorded transactions will be posted in the ledger.
Capital Account
Dr. Cr.

Rs. Rs.
2005 2005
Apr.30 Balance c/d 1,00,000 Apr.01 Cash 1,00,000
1,00,000 1,00,000
6% Loan Account
Dr. Cr.

Rs. Rs.
2005 2005
Apr. 30 Balance c/d 25,000 April 05 Cash 25,000
25,000 25,000
Ramneek’s Account
Dr. Cr.

Rs. Rs.
2005 2005
Apr. 07 Sales 1,740 April10 Sales return 440
Apr. 20 Sales 2,400 April21 Cash 3,700
4,140 4,140
Sales Account
Dr. Cr.
Rs. Rs.
2005
Apr. 23 Cash 14,500
Apr. 30 Sundries 10,410
24,910
Furniture Account
Dr. Cr.
Rs. Rs.
2005 2005
Apr. 02 Cash 6,000 Apr. 30 Balance c/d 14,000
Apr. 15 Quality 8,000
Furniture
14,000 14,000
Land Account
Dr. Cr.
Rs. Rs.
2005 2005
Apr. 02 Cash 42,000 Apr.30 Balance c/d 42,000
42,000 42,000
Purchases Account
Dr. Cr.
Rs. Rs.
2005
Apr. 03 Bank 17,000
Apr. 11 Bank 225
Apr. 24 Cash 3,700
Apr. 30 Sundries 40,410
61,335
Stationery Account
Dr. Cr.
Rs. Rs.
2005
Apr. 04 Cash 2,300
Apr. 26 Mohit mart 3,200
5,500
Miscellaneous Expenses Account

Dr. Cr.
Rs. Rs.
2005
Apr. 05 Cash 100
100
Rent Account
Dr. Cr.
Rs. Rs.
2005
Apr. 04 Bank 4,000
4,000
Advertisement Account
Dr. Cr.
Rs. Rs.
2005
Apr.16 Cash 1,200
1,200
Electric Charges Account

Dr. Cr.
Rs. Rs.
2005
Apr. 25 Cash 1,320
1,320
Drawings Account
Dr. Cr.
Rs. Rs.
2005
Apr. 30 Cash 8,000
8,000
Telephone Charges Account

Dr. Cr.
Rs. Rs.
2005 2005
Apr. 30 Bank 2,700
2,700
Insurance Account
Dr. Cr.
Rs. Rs.
2005
Apr. 30 Bank 1,600
1,600
Quality Furniture Account

Dr. Cr.
Rs. Rs.
2005 2005
Apr. 30 Balance c/d 8,000 Apr. 15 Furniture 8,000
8,000 8,000
Mohit Mart Account

Dr. Cr.
Rs. Rs.
2005 2005
Apr. 30 Balance c/d 3,200 Apr. 26 Stationery 3,200
3,200 3,200

Dr. Cr.
Rs. Rs.
2005
Apr. 30 Sundries 632
632
Handa Company Account

Dr. Cr.
Rs. Rs.
2005 2005
Apr. 30 Bank 2,450 Apr. 04 Purchases 2,450
2,450 2,450
Burari Ltd. Account

Dr. Cr.
Rs. Rs.
2005 2005
Apr. 12 Purchases 632 Apr. 06 Purchases 6,400
return
Discount 320
8,680 8,680
Kochhar Account
Dr. Cr.
Rs. Rs.
2005 2005
Discount 1,280
29,280 29,280

Dr. Cr.
Rs. Rs.
2005 2005
Apr. 30 Sundries 440 Apr. 30
. 440
Kapadia Account
Dr. Cr.
Rs. Rs.
2005 2005
Apr. 08 Sales 1,470 Apr. 30 Balance c/d 1,470
1,470 1,470
Daman Account
Dr. Cr.
Rs. Rs.
2005 2005
Apr. 27 Sales 2,300
3,600 3,600
Nutan Account
Dr. Cr.
Rs. Rs.
2005 2005
1,200 1,200
Discount Received Account

Dr. Cr.
Rs. Rs.
2005
Apr. 25 Burari Ltd 320
Apr. 30 Kochhar 1,280
1,600

1. Fill in the Correct Words :
(a) Cash book is a ......... journal.
(b) In Journal proper, only.........discount is recorded.
(c) Return of goods purchased on credit to the suppliers will be entered in ......
Journal.
(d) Assets sold on credit are entered in .........
(e) Double column cash book records transaction relating to .........and .........
(f) Total of the debit side of cash book is .........than the credit side.
(g) Cash book does not record the .........transactions.
(h) In double column cash book .........transactions are also recorded.
(i) Credit balance shown by a bank column in cash book is .........
(j) The amount paid to the petty cashier at the beginning of a period is known as
.........amount.
(k) In purchase book goods purchased on .........are recorded.
2. State whether the following statements are True or False :
(a) Journal is a book of secondary entry.
(b) One debit account and more than one credit account in a entry is called
compound entry.
(c) Assets sold on credit are entered in sales journal.
(d) Cash and credit purchases are entered in purchasejJournal.
(e) Cash sales are entered in sales journal.
(f) Cash book records transactions relating to receipts and payments.
(g) Ledger is a subsidiary book.
(h) Petty cash book is a book having record of big payments.
(i) Cash received is entered on the debit side of cash book.

(j) Transaction recorded both on debit and credit side of cash book is known as
contra entry.
(k) Balancing of account means total of debit and credit side.
(l) Credit purchase of machine is entered in purchase journal.

• Posting • Sales (Journal) Book
• Day books • Balancing of Accounts
• Cash book • Purchase (Journal) book
• Petty Cash book • Purchases return (Journal) Book
• Sales return (Journal) Book

1. Journal : Basic book of original entry.
2. Cash book : A book used to record all cash receipts and payments.
3. Petty cash book : A book used to record small cash payments.
4. Purchase journal : A special journal in which only credit purchases are recorded
5. Sales journal : A special journal in which only credit sales are recorded
6. Purchases Return Book : A book in which return of merchandise purchased is
recorded.
7. Sales Return Book : A special book in which returns of merchandise sold on
credit are recorded.
Questions For Practice

Short Answers
1. Briefly state how the cash book is both journal and a ledger.
2. What is the purpose of contra entry?
3. What are special purpose books?
4. What is petty cash book? How it is prepared?
5. Explain the meaning of posting of journal entries?
6. Define the purpose of maintaining subsidiary journal.
7. Write the difference between return Inwards and return ouwards.
8. What do you understand by ledger folio?
9. What is difference between trade discount and cash discount?
10. Write the process of preparing ledger from a journal.
11. What do you understand by Imprest amount in petty cash book?
Long Answers
1. Explain the need for drawing up the special purpose books.
2. What is cash book? Explain the types of cash book.
3. What is contra entry? How can you deal this entry while preparing double
column cash book?
4. What is petty cash book? Write the advantages of petty cash book?
5. Describe the advantages of sub-dividing the Journal.
6. What do you understand by balancing of account?
Numerical Questions
Simple Cash Book
1. Enter the following transactions in a simple cash book for December 2005:
Rs.
01 Cash in hand 12,000
05 Cash received from Bhanu 4,000
07 Rent Paid 2,000
10 Purchased goods Murari for cash 6,000
15 Sold goods for cash 9,000
18 Purchase stationery 300
22 Cash paid to Rahul on account 2,000
28 Paid salary 1,000
30 Paid rent 500
(Ans. Cash in hand Rs. 13,200)
2. Record the following transaction in simple cash book for November 2005:
Rs
04 Cash paid to Hari 600
07 Purchased goods 800
12 Cash received from Amit 1,960
16 Sold goods for cash 800
20 Paid to Manish 590
25 Paid cartage 100
31 Paid salary 1,000
3. Enter the following transaction in Simple cash book for December 2005 :
Rs.
06 Paid to Sonu 45
08 Purchased goods 600
15 Received cash from Parkash 960
20 Cash sales 500
25 Paid to S.Kumar 1,200
30 Paid rent 600
Bank Column Cash Book
4. Record the following transactions in a bank column cash book for December
2005:
Rs.
01 Started business with cash 80,000
04 Deposited in bank 50,000
10 Received cash from Rahul 1,000

15 Bought goods for cash 8,000
22 Bought goods by cheque 10,000
25 Paid to Shyam by cash 20,000
30 Drew from Bank for office use 2,000
31 Rent paid by cheque 1,000
(Ans. Cash in hand Rs. 5,000: cash at bank Rs. 37,000)
5. Prepare a double column cash book with the help of following information
for December 2005 :
Rs.
01 Started business with cash 1,20,000
03 Cash paid into bank 50,000
05 Purchased goods from Sushmita 20,000
06 Sold goods to Dinker and received a cheque 20,000
10 Paid to Sushmita cash 20,000
14 Cheque received on December 06, 2005 deposited into bank
18 Sold goods to Rani 12,000
20 Cartage paid in cash 500
22 Received cash from Rani 12,000
27 Commission received 5,000
30 Drew cash for personal use 2,000
(Ans. Cash in hand Rs. 64,500 : Cash at bank Rs. 70,000)
6. Enter the following transactions in double column cash book of M/s Ambica
Traders for November 2005:
Rs.
01 Commenced business with cash 50,000
03 Opened bank account with ICICI 30,000
05 Purchased goods for cash 10,000
10 Purchased office machine for cash 5,000
15 Sales goods on credit from Rohan and received chaeque 7,000
18 Cash sales 8,000
20 Rohan’s cheque deposited into bank
22 Paid cartage by cheque 500
25 Cash withdrawn for personal use 2,000
30 Paid rent by cheque 1,000
(Ans. Cash in hand Rs. 11,000, Cash at bank Rs. 35,500)
7. Prepare double column cash book from the following information for
September 2005:
Rs.
01 Cash In hand 7,500
03 Paid wages 200
05 Cash sales 7,000
10 Cash deposited into bank 4,000
15 Goods purchased and paid by cheque 2,000
20 Paid rent 500
25 Drew from bank for personal use 400

30 Salary paid 1,000
(Ans. Cash in hand Rs. 8,800, Bank overdraft Rs. 1,900)
8. Enter the following transaction in a double column cash book of M/s.Mohit
Traders for January 2005 :
Rs.
03 Goods purchased for cash 1,200
05 Paid wages 200
10 Cash sales 8,000
15 Deposited into bank 6,000
22 Sold goods for cheque which was deposited into 2,000
bank same day
25 Paid rent by cheque 1,200
28 Drew from bank for personal use 1,000
31 Bought goods by cheque 1,000
(Ans. Cash in hand Rs. 4,100 Cash at bank Rs. 2,500)
9. Prepare double column cash book from the following transactions for the
year December 2005:
Rs.
Cash at bank 5,000
03 Purchased goods for cash 3,000
05 Received cheque from Jasmeet 10,000
08 Sold goods for cash 7,000
10 Jasmeet’s cheque deposited into bank
12 Purchased goods and paid by cheque 20,000
15 Paid establishment expenses through bank 1,000
18 Cash sales 7,000
20 Deposited into bank 10,000
24 Paid trade expenses 500
27 Received commission by cheque 6,000
29 Paid Rent 2,000
30 Withdrew cash for personal use 1,200
31 Salary paid 6,000
(Ans. Cash in hand Rs. 8,800 cash at bank Rs. 10,000)
10. M/s Ruchi trader started their cash book with the following balances on
Dec. 01 2005 : cash in hand Rs.1,354 and balance in bank current account
Rs.7560. He had the following transaction in the month of December, 2005:
Rs.
03 Cash sales 2,300
05 Purchased goods, paid by cheque 6,000
08 Cash sales 10,000
15 Sales goods, received cheque(deposited same day) 20,000
18 Purchased motor car paid by cheque 15,000
20 Cheque received from Manisha(deposited same day) 10,000

22 Cash Sales 7,000
25 Manisha’s cheque returned dishonoured
28 Paid Rent 2,000
29 Paid telephone expenses by cheque 500
31 Cash withdrawn for personal use 2,000
Prepare bank column cash book
(Ans. Cash in hand Rs. 15,954 cash at bank Rs. 6,060)
Petty Cash Book
11. Prepare petty cash book from the following transactions. The imprest
amount is Rs.2,000.
Rs.
January
01 Paid cartage 50
02 STD charges 40
02 Bus fare 20
03 Postage 30
04 Refreshment for employees 80
06 Courier charges 30
08 Refreshment of customer 50
10 Cartage 35
15 Taxi fare to manager 70
18 Stationery 65
20 Bus fare 10
22 Fax charges 30
25 Telegrams charges 35
27 Postage stamps 200
29 Repair on furniture 105
30 Laundry expenses 115
31 Miscellaneous expenses 100
(Ans. Cash balance Rs. 925)
12. Record the following transactions during the week ending Dec.30, 2005
with a weekly imprest Rs. 500
Rs.
24 Stationery 100
25 Bus fare 12
25 Cartage 40
26 Taxi fare 80
27 Wages to casual labour 90
29 Postage 80
(Ans. Cash balance Rs. 98)
Other Subsidiary Books
13. Enter the following transactions in the Purchase Journal (Book) of
M/s Gupta Traders of July 2005 :
01 Bought from Rahul Traders as per invoice no.20041

40 Registers @ Rs.60 each
80 Gel Pens @ Rs.15 each
50 note books @ Rs.20 each
Trade discount 10%.
15 Bought from Global Stationers as per invoice no.1132
40 Ink Pads @ Rs.8 each
50 Files @ Rs.10 each
20 Color Books @ Rs. 20 each
Trade Discount 5%
23 Purchased from Lamba Furniture as per invoice no.3201
2 Chairs @ 600 per chair
1 Table @ 1000 per table
25 Bought from Mumbai Traders as per invoice no.1111
10 Paper Rim @ Rs.100 per rim
400 drawing Sheets @ Rs.3 each
20 Packet water colour @ Rs.40 per packet
(Ans: Total of purchases book Rs. 8,299)
14. Enter the following transactions in sales (journal) book of M/s.Bansal
electronics:
September
01 Sold to Amit Traders as per bill no.4321
20 Pocket Radio @ 70 per Radio
2, T.V. set, B&W.(6”) @ 800 Per T.V.
10. Sold to Arun Electronics as per bill no.4351
5 T.V. sets (20”) B&W @ Rs.3,000 per T.V.
2 T.V. sets (21”) Colour @ Rs. 4,800 per T.V.
22 Sold to Handa Electronics as per bill no.4,399
10 Tape recorders @ Rs. 600 each
5 Walkman @ Rs. 300 each
28 Sold to Harish Trader as per bill no.4430
10 Mixer Juicer Grinder @ Rs. 800 each.
(Ans. Total of sales book Rs. 43,100)
15. Prepare a purchases return (journal) book from the following transactions
for January 2006.
Rs.
05 Returned goods to M/s Kartik Traders 1,200
10 Goods returned to Sahil Pvt. Ltd. 2,500
17 Goods returned to M/s Kohinoor Traders.
for list price Rs.2,000 less 10% trade discount.
28 Return outwards to M/s Handa Traders 550
(Ans. Total of purchases return book Rs. 6,050)
16. Prepare Return Inward Journal(Book) from the following transactions of

M/s Bansal Electronics for November 2005:
Rs.
04 M/s Gupta Traders returned the goods 1,500
10 Goods returned from M/s Harish Traders 800
18 M/s Rahul Traders returned the goods not as per 1,200
specifications
28 Goods returned from Sushil Traders 1,000
(Ans : Total of sales return Rs. 4,500)
Recording, Posting and Balancing
17. Prepare proper subsidiary books and post them to the ledger from the
following transactions for the month of February 2006:
Rs.
01 Goods sold to Sachin 5,000
04 Purchase from Kushal Traders 2,480
06 Sold goods to Manish Traders 2,100
07 Sachin returned goods 600
08 Returns to Kushal Traders 280
10 Sold to Mukesh 3,300
14 Purchased from Kunal Traders 5,200
15 Furniture purchased from Tarun 3,200
17 Bought of Naresh 4,060
20 Return to Kunal Traders 200
22 Return inwards from Mukesh 250
24 Purchased goods from Kirit & Co. for list price of 5,700
less 10% trade discount
25 Sold to Shri Chand goods 6600
26 Sold to Ramesh Brothers 4,000
28 Return outwards to Kirit and Co. 1,000
28 Ramesh Brothers returned goods Rs. 500.
Ans : (Total of sales book Rs.20,670, purchases book Rs.16,870,
Purchases return book Rs.1,380, sales return book Rs.1,350).
18. The following balances of ledger of M/s Marble Traders on April 01, 2006
Rs.
Cash in hand 6,000
Cash at bank 12,000
Bills receivable 7,000
Ramesh (Cr.) 3,000
Stock (Goods) 5,400
Bills payable 2,000
Rahul (Dr.) 9,700
Himanshu (Dr.) 10,000
Transactions during the month were:

April Rs.
01 Goods sold to Manish 3,000
02 Purchased goods from Ramesh 8,000
03 Received cash from Rahul in full settlement 9,200
05 Cash received from Himanshu on account 4,000
06 paid to Remesh by cheque 6,000.
08 Rent paid by cheque 1,200
10 Cash received from manish 3,000
12 Cash sales 6,000
14 Goods returned to Ramesh 1,000
15 Cash paid to Ramesh in full settlement 3,700
Discount received 300
18 Goods sold to Kushal 10,000
21 Drew for personal use 1,000
22 Goods return from Kushal 1,200
24 Cash received from Kushal 6,000
26 Paid for stationery 100
27 Postage charges 60
28 Salary Paid 2,500
29 Goods purchased from Sheetal Traders 7,000
30 Sold goods to Kirit 6000
Goods purchased from Handa Traders 5,000
Journlise the above transactions and post them to the ledger.

a. (iv) b. (ii) c. (iii) d. (ii) e. (ii) f. (iv) g .(ii) h. (iii) i. (iii)
1. (a) subsidiary (b) cash (c) purchases return (d) journal proper
(e) cash, bank (f) more (g) credit (h) bank
(i) overdraft (j) imprest (k) credit
2. (a) False (b) True (c) False (d) False
(e) False (f) True (g) True (h) False
(i) True (j) True (k) False (l) False
Bank Reconciliation Statement 5
I n chapter 4, you have learnt that

the business organisations keep a record of their
cash and bank transactions in a cash book. The
cash book also serves the purpose of both the cash
account and the bank account and shows the
balance of both at the end of the period.
Once the cash book has been balanced, it is
usual to check its details with the records of the
firm’s bank transactions as recorded by the bank.
To enable this check, the cashier needs to ensure
that the cash book is completely up to date and a
recent bank statement (or a bank passbook) has
been obtained from the bank. A bank statement
or a bank passbook is a copy of a bank account as
LEARNING OBJECTIVES shown by the bank records. This enable the bank
After studying this customers to check their funds in the bank
chapter, you will be able regularly and update their own records of
to : transactions that have occurred. An illustrative
• state the meaning and bank passbook of a current account is shown in
need for the preparation figure 5.1.
of bank reconciliation
statement; The amount of balance shown in the passbook
• identify causes of or the bank statement must tally with the balance
difference between as shown in the cash book. But in practice, these
bank balance as per are usually found to be different. Hence, we have
cash book and pass to ascertain the causes for such difference. It will
book;
be observed that a bank statement/passbook
• prepare the bank
reconciliation statement;
shows all deposits in the credit column and
• ascertain the correct withdrawals in the debit column. Thus, if deposits
bank balance as per exceed withdrawals it shows a credit balance and
cash book; if withdrawals exceed deposits it will show a debit
balance (overdraft).
5.1 Need for Reconciliation

It is generally experienced that when a comparison is made between the bank
balance as shown in the firm’s cash book, the two balances do not tally.
Hence, we have to first ascertain the causes of difference thereof and then
reflect them in a statement called Bank Reconciliation Statement to reconcile
(tally) the two balances.
In order to prepare a bank reconciliation statement we need to have a
bank balance as per the cash book and a bank statement as on a particular
day along with details of both the books. If the two balances differ, the entries
in both the books are compared and the items on account of which the
difference has arisen are ascertained with the respective amounts involved so
that the bank reconciliation statement may be prepared. Its format shown in
figure 5.5.
Particulars Amount
Rs.
Balance as per cash book .......

Add: Cheques issued but not presented .......
Interest credited by the bank .......
.......
Less: Cheques deposited but not credited by the bank .......
Bank charges not recorded in the cash book .......
Balance as per the passbook xxxx
Fig. 5.2 : Proforma of bank reconciliation statement
It can also be prepared with two amount columns one showing additions
(+ column) and another showing deductions (-column). For convenience, we
usually adopt this treatment.
Particulars Amount Amount

Rs. Rs.
(+) (–)
Balance as per cash book ......
Cheques issued but not presented ` ......
Interest credited by the bank ......
Cheque deposited but not credited by the bank ......
Bank charges not recorded in the cash book ......
Balance as per the passbook. xxxx
Fig. 5.3 : Proforma of bank reconcitiation statement (table form)

DHERENDRA NATIONAL BANK MULTI-MODULE PACKAGE DATE : 01/09/2005
CONNAUGHT PLACE STATEMENT OF ACCOUNT OP.ID : GK
FROM 01/09/2005 TO 29/12/2005 PAGE NO. : 1
ACCOUNT NO. 03355
NAME : DEV PANDIT
KHADWAI, RUNAKUTA, DELHI
PIN CODE : 110034
DATE PARTICULARS CHEQUE DEBIT CREDIT BALANCE + REMARKS

No. Rs. P. Rs. P. Rs. P.
Opening 50,782.30 +
Bank Reconciliation Statement
Balance :
04/08/2005 DELHI PLA 356376 35,000.00 15,782.30 +
07/08/2005 TO SELF 356377 10,000.00 5,782.30 +
13/08/2005 BY CLG 10,673,00 16,455,30 +
13/08/2005 BY CLG 9,143.00 25,598.30 +
17/08/2005 TO SELF 356378 20,000.00 5,598.30 +
21/08/2005 BY CLG 25,808.00 31,406.30 +
26/08/2005 BY CLG 32,949.00 64,355,30 +
02/09/2005 To SELF 356381 30,000.00 34,355.30 +
04/09/2005 DELHI PLASTIC 356382 10,000.00 24,355.30 +
08/09/2005 ICICI 657755 6,074.00 18,281.30 +
09/09/2005 BY CLG 3,146.00 21,427.30 +
13/09/2005 TO SELF 356380 9,500,00 11,927.30 +
15/09/2005 BY CLG 5,320.00 17,247.30 +
15/09/2005 BY CLG 18,564.00 35,811.30 +
16/09/2005 TO SERVICE CHARGES 120.00 35,691.30 +
21/09/2005 TO SELF 356383 20,000.00 15,691.30 +
25/09/2005 TO SELF 356385 10,000.00 5,691.30 +
27/09/2005 BY CLG 16,198.00 21,889.30 +
FOR DHERENDRA NATIONAL BANK

ACCOUNTANT/MANAGER
Fig. 5.1 : Specimen of bank statement (current account)

152
Reconciliation of the cash book and the bank passbook balances amounts
to an explanation of differences between them. The differences between the
cash book and the bank passbook is caused by:
• timing differences on recording of the transactions.
• errors made by the business or by the bank.
5.1.1 Timing Differences

When a business compares the balance of its cash book with the balance
shown by the bank passbook, there is often a difference, which is caused
by the time gap in recording the transactions relating either to payments
or receipts. The factors affecting time gap includes :
5.1.1(a) Cheques issued by the bank but not yet presented for payment
When cheques are issued by the firm to suppliers or creditors of the firm,
these are immediately entered on the credit side of the cash book. However,
the receiving party may not present the cheque to the bank for payment
immediately. The bank will debit the firm’s account only when these cheques
are actually paid by the bank. Hence, there is a time lag between the issue of
a cheque and its presentation to the bank which may cause the difference
between the two balances.
5.1.1(b) Cheques paid into the bank but not yet collected
When firm receives cheques from its customers (debtors), they are
immediately recorded in the debit side of the cash book. This increases
the bank balance as per the cash book. However, the bank credits the
customer account only when the amount of cheques are actually realised.
The clearing of cheques generally takes few days especially in case of
outstation cheques or when the cheques are paid-in at a bank branch
other than the one at which the account of the firm is maintained. This
leads to a cause of difference between the bank balance shown by the
cash book and the balance shown by the bank passbook.
5.1.1(c) Direct debits made by the bank on behalf of the customer

Sometimes, the bank deducts amount for various services from the account
without the firm’s knowledge. The firm comes to know about it only when
the bank statement arrives. Examples of such deductions include: cheque
collection charges, incidental charges, interest on overdraft, unpaid cheques
deducted by the bank – i.e. stopped or bounced, etc. As a result, the balance
as per passbook will be less than the balance as per cash book.
5.1.1(d) Amounts directly deposited in the bank account

There are instances when debtors(customers) directly deposits money into
firm’s bank account. But, the firm does not receive the intimation from any
source till it receives the bank statement. In this case, the bank records the
receipts in the firm’s account at the bank but the same is not recorded in the
firm’s cash book. As a result, the balance shown in the bank passbook will be
more than the balance shown in the firm’s cash book.
5.1.1(e) Interest and dividends collected by the bank

When the bank collects interest and dividend on behalf of the customer, then
these are immediately credited to the customers account. But the firm will know
about these transactions and record the same in the cash book only when it
receives a bank statement. Till then the balances as per the cash book and
passbook will differ.
5.1.1(f) Direct payments made by the bank on behalf of the customers

Sometimes the customers give standing instructions to the bank to make
some payment regularly on stated days to the third parties. For example,
telephone bills, insurance premium, rent, taxes, etc. are directly paid by the
bank on behalf of the customer and debited to the account. As a result, the
balance as per the bank passbook would be less than the one shown in the
cash book.
5.1.1(g) Cheques deposited/bills discounted dishonoured

If a cheque deposited by the firm is dishonoured or a bill of exchange drawn
by the business firm is discounted with the bank is dishonoured on the date
of maturity, the same is debited to customer’s account by the bank. As this
information is not available to the firm immediately, there will be no entry in
the firm’s cash book regarding the above items. This will be known to the firm
when it receives a statement from the bank. As a result, the balance as per
the passbook would be less than the cash book balance.
5.1.2 Differences Caused by Errors

Sometimes the difference between the two balances may be accounted for by
an error on the part of the bank or an error in the cash book of the business.
This causes difference between the bank balance shown by the cash book
and the balance shown by the bank statement.
5.1.2(a) Errors committed in recording transaction by the firm

Omission or wrong recording of transactions relating to cheques issued, cheques
deposited and wrong totalling, etc. committed by the firm while recording entries
in the cash book cause difference between cash book and passbook balance.
5.1.2(b) Errors committed in recording transactions by the bank

Omission or wrong recording of transactions relating to cheques deposited
and wrong totalling, etc. committed by the bank while posting entries in the
passbook also cause differences between passbook and cash book balance.

I. Read the following transactions and identify the cause of difference on the basis of
time gap or errors made by business firm/bank. Put a sign (9 ) for the correct
cause.
S.No. Transactions Time Gap Errors

made by
business/
bank
1. Cheques issued to customers but not
presented for payment.
2. Cheque amounting to Rs. 5,000 issued
to M/s. XYZ but recorded as Rs. 500
in the cash book.
3. Interest credited by the bank but yet
not recorded in the cash book.
4. Cheque deposited into the bank but
not yet collected by the bank.
5. Bank charges debited to firm’s current
account by the bank.
II. Fill in the blanks :

(i) Passbook is a copy of.............as it appears in the ledger of the bank.
(ii) When money is with drawn from the bank, the bank ............. the account of
the customer.
(iii) Nor mally, the cash book shows a debit balance, passbook shows
.............balance.
(iv) Favourable balance as per the cash book means .............balance in the bank
column of the cash book.
(v) If the cash book balance is taken as starting point the items which make the
cash book balance smaller than the passbook must be .............for the purpose
of reconciliation.
(vi) If the passbook shows a favourable balance and if it is taken as the starting
point for the purpose of bank reconciliation statement then cheques issued
but not presented for payment should be .............to find out cash balance.
(vii) When the cheques are not presented for payment, favourable balance as per
the cash book is .............than that of the passbook.
(viii) When a banker collects the bills and credits the account passbook overdraft
shows .............balance.
(ix) If the overdraft as per the passbook is taken as the starting point, the cheques
issued but not presented are to be .............in the bank reconciliation
statement.
(x) When the passbook balance is taken as the starting point items which makes
the passbook balance .............than the balance in the cash book must be
deducted for the purpose of reconciliation.
5.2 Preparation of Bank Reconciliation Statement

After identifying the causes of difference, the reconciliation may be done in
the following two ways:
(a) Preparation of bank reconciliation statement without adjusting cash book
balance.
(b) Preparation of bank reconciliation statement after adjusting cash book
balance.
It may be noted that in practice, the bank reconciliation statement is
prepared after adjusting the cash book balance, about which you will study
later in the chapter.
5.2.1 Preparation of Bank Reconciliation Statement without adjusting Cash

Book Balance
To prepare bank reconciliation statement, under this approach, the balance
as per cash book or as per passbook is the starting item. The debit balance as
per the cash book means the balance of deposits held at the bank. Such a
balance will be a credit balance as per the passbook. Such a balance exists
when the deposits made by the firm are more than its withdrawals. It indicates
the favourable balance as per cash book or favourable balance as per the
passbook. On the other hand, the credit balance as per the cash book indicates
bank overdraft. In other words, the excess amount withdrawn over the amount
deposited in the bank. It is also known as unfavourable balance as per cash
book or unfavourable balance as per passbook.
We may have four different situations while preparing the bank

reconciliation statement. These are :
1. When debit balance (favourable balance) as per cash book is given and
the balance as per passbook is to be ascertained.
2. When credit balance (favourable balance) as per passbook is given and
the balance as per cash book is to be ascertained.
3. When credit balance as per cash book (unfavourable balance/overdraft
balance) is given and the balance as per passbook is to ascertained.
4. When debit balance as per passbook (unfavourable balance/overdraft
balance) is given and the cash book balance as per is to ascertained.
5.2.1(a) Dealing with favourable balances

The following steps may be initiated to prepare the bank reconciliation
statement:
(i) The date on which the statement is prepared is written at the top, as
part of the heading.
(ii) The first item in the statement is generally the balance as shown by the
cash book. Alternatively, the starting point can also be the balance as
per passbook.
(iii) The cheques deposited but not yet collected are deducted.
(iv) All the cheques issued but not yet presented for payment, amounts
directly deposited in the bank account are added.
(v) All the items of charges such as interest on overdraft, payment by bank
on standing instructions and debited by the bank in the passbook but
not entered in cash book, bills and cheques dishonoured etc. are
deducted.
(vi) All the credits given by the bank such as interest on dividends collected,
etc. and direct deposits in the bank are added.
(vii) Adjustment for errors are made according to the principles of rectification
of errors. (The rectification of errors has been discussed in detail in
chapter 6.)
(viii) Now the net balance shown by the statement should be same as shown
by the passbook.
It may be noted that treatment of all items shall be the reverse of the above
if we adjust passbook balance as the starting point.(see illustration 3)
The following solved illustrations will help you understand dealing with
favourable balance as per cash book and passbook.
Illustration 1
From the following particulars of Mr. Vinod, prepare bank reconciliation statement as on
March 31, 2005.
1. Bank balance as per cash book Rs. 50,000.
2. Cheques issued but not presented for payment Rs. 6,000.
3. The bank had directly collected dividend of Rs. 8,000 and credited to bank account
but was not entered in the cash book.
4. Bank charges of Rs. 400 were not entered in the cash book.
5. A cheques for Rs. 6,000 was deposited but not collected by the bank.
Solution
Bank Reconciliation Statement of Mr. Vinod as on March 31, 2005
Particulars + –
Rs. Rs.
1. Balance as per cash book 50,000

2. Cheques issued but not presented for payment 6,000
3. Dividends collected by the bank 8,000
4. Cheque deposited but not credited by the bank 6,000
5. Bank charges debited by the bank 400
6. Balance as per passbook. 57,600
64,000 64,000
Illustration 2
From the following particulars of Anil & Co. prepare a bank reconciliation statement as
on August 31, 2005.
1. Balance as per the cash book Rs. 54,000.
2. Rs. 100 bank incidental charges debited to Anil & Co. account, which is not recorded
in cash book.
3. Cheques for Rs. 5,400 is deposited in the bank but not yet collected by the bank.
4. A cheque for Rs. 20,000 is issued by Anil & Co. not presented for payment.
Solution
Bank Reconciliation Statement of Anil & Co. as on August 31, 2005
Particulars (+) (–)
Amount Amount
Rs. Rs.
1. Balance as per cash book 54,000 -
2. Cheqeus issued but not presented for payment 20,000 -
3. Cheques deposited but not credited by the bank - 5,400
4. Bank incidental charges debited by the bank - 100
5. Balance as per passbook - 68,500
74,000 74,000
Illustration 3
The bank passbook of M/s. Boss & Co. showed a balance of Rs. 45,000 on May 31, 2005.
1. Cheques issued before May 31,2005, amounting to Rs. 25,940 had not been
presented for encashment.
2. Two cheques of Rs. 3,900 and Rs. 2,350 were deposited into the bank on May 31
but the bank gave credit for the same in June.
3. There was also a debit in the passbook of Rs. 2,500 in respect of a cheque
dishonoured on 31.5.2005. Prepare a bank reconciliation statement as on
May 31, 2005.
Solution
Bank Reconciliation Statement of Bose & Co as on May 31, 2005
Amount Amount
Rs. Rs.
1. Balance as per passbook 45,000
2. Cheques deposited but not collected by the bank 6,250
(Rs. 3,900+ Rs. 2,350)
3. Cheque dishonoured recorded only in passbook 2,500
4. Cheques issued but not presented for payment 25,940
5. Balance as per cash book 27,810
53,750 53,750
5.2.1(b) Dealing with overdrafts

So far we have dealt with bank reconciliation statement where bank balances
has been positive – i.e., there has been money in the bank account. However,
businesses sometimes have overdrafts at the bank. Overdrafts are where the
bank account becomes negative and the businesses in effect have borrowed
from the bank. This is shown in the cash book as a credit balance. In the
bank statement, where the balance is followed by Dr. (or sometimes OD) means
that there is an overdraft and called debit balance as per passbook.
An overdraft is treated as negative figure on a bank reconciliation statement.
The following solved illustration will help you understand the preparation of
bank reconciliation statement when there is an overdraft.
Illustration 4
On March 31, 2005, Rakesh had on overdraft of Rs. 8,000 as shown by his cash book.
Cheques amounting to Rs. 2,000 had been paid in by him but were not collected by the
bank. He issued cheques of Rs. 800 which were not presented to the bank for payment.
There was a debit in his passbook of Rs. 60 for interest and Rs. 100 for bank charges.
Prepare bank reconciliation statement.
Solution
Bank Reconciliation Statement of Rakesh as on April 01, 2005

Amount Amount
Rs. Rs.
1. Overdraft as per cash book 8,000

2. Cheques deposited but not yet collectedcharged by the bank 2,000
3. Bank charges 60
4. Cheques issued but not presented for payment 800 100
5. Balance as per bank passbook (overdraft) 9,360
10,160 10,160
Illustration 5
On March 31, 2005 the bank column of the cash book of Agrawal Traders showed a credit
balance of Rs. 1,18,100 (Overdraft). On examining of the cash book and the bank statement,
it was found that :
1. Cheques received and recorded in the cash book but not sent to the bank of collection
Rs. 12,400.
2. Payment received from a customer directly by the bank Rs. 27,300 but no entry
was made in the cash book.
3. Cheques issued for Rs. 1,75,200 not presented for payment.
Interest of Rs. 8,800 charged by the bank was not entered in the cash book. Prepare
bank reconciliation statement.
Solution
Bank Reconciliation Statement of Agarwal Traders as on March 31, 2005
Amount Amount
Rs. Rs.
1. Overdraft as per cash book 1,18,100
2. Cheques received and recorded in the cash book but not 12,400
sent to the bank for collection
3. Interest on bank overdraft debited by the bank but not 8,800
entered in the cash book
4. Payment received from the customer directly 27,300
5. Credited in the bank a/c but not entered in the cash book 1,75,200
6. Cheques issued but not presented for payment
7. Balance as per the passbook (favourable balance) 63,200
2,02,500 2,02,500
Illustration 6
From the following particulars of Asha & Co. prepare a bank reconciliation statement on
December 31, 2005.
Rs.
Overdraft as per passbook 20,000
Interest on overdraft 2,000
Insurance Premium paid by the bank 200
Cheque issued but not presented for payment 6,500
Cheque deposited but not yet cleared 6,000
Wrongly debited by the bank 500
Solution
Bank Reconciliation Statement of Asha & Co as on December 31, 2005
Amount Amount
Rs. Rs.
1. Overdraft as per passbook 20,000

2. Interest on overdraft 2,000
3. Insurance premium paid by the bank 200
4. Cheque issued but not presented for payment 6,500
5. Cheques deposited but not yet cleared 6,000
6. Wrongly debited by the bank 500
7. Balance as per the cash book (overdraft) 17,800
26,500 26,500
Illustration 7
From the following particulars, prepare a bank reconciliation statement as on
March 31, 2001.
(a) Debit balance as per cash book is Rs. 10,000.
(b) A cheque for Rs. 1,000 deposited but not recorded in the cash book.
(c) A cash deposit of Rs. 200 was recorded in the cash book if there is not bank,
column therein.
(d) A cheque issued for Rs. 250 was recorded as Rs. 205 in the cash column.
(e) The debit balance of Rs. 1,500 as on the previous day was brought forward as a
credit balance.
(f) The payment side of the cash book was under cast by Rs. 100.
(g) A cash discount allowed of Rs. 112 was recorded as Rs. 121 in the bank column.
(h) A cheque of Rs. 500 received from a debtor was recorded in the cash book but not
deposited in the bank for collection.
(i) One outgoing cheque of Rs. 300 was recorded twice in the cash book.
Solution
Bank Reconciliation statement as on September 30, 2004
Amount Amount
Rs. Rs.
1. Debit balance as per cash book 10,000
2. Error in carrying forward 3,000
3. Cheque recorded twice in cash book 300
4. Cheque deposit not record in bank column 200
5. Cheque deposit but not recorded 1,000
6, Under casting of payment side 100
7. Cheque issued but not entered 250
8. A cash discount wrongly recorded in bank column 121
9. Cheque recorded but not deposited 500
10. Credit balance as per passbook 13,529
14,500 14,500
Illustration 8
From the following particulars, prepare the bank reconciliation statement of Shri Krishan
as on March 31, 2005.
(a) Balance as per passbook is Rs. 10,000.
(b) Bank collected a cheque of Rs. 500 on behalf of Shri Krishan but wrongly credited
it to Shri Krishan’s account.
(c) Bank recorded a cash book deposit of Rs. 1,589 as Rs. 1,598.
(d) Withdrawal column of the passbook under cast by Rs. 100.
(e) The credit balance of Rs. 1,500 as on the pass-book was recorded in the debit
balance.
(f) The payment of a cheque of Rs. 350 was recorded twice in the passbook.
(g) The pass-book showed a credit balance. For a cheque of Rs. 100 deposited by Shri
Kishan.
Solution
Bank Reconciliation Statement as on March 31, 2005
Amount Amount
Rs. Rs.
1. Credit balance as per passbook 10,000

2. Cheque wrongly credited to another customer account 500
3. Error in carrying forward 3,000
4. Cheque recorded twice 350
5. Excess credit for cash deposit 9
6. Under casting of withdrawal column 100
7. Wrong credit 1,000
8. Debit balance as per cash book 12,741
13,850 13,850

Select the Correct Answer:
1. A bank reconciliation statement is prepared by :
(a) Creditors (b) Bank
(c) Account holder in a bank (d) Debtors
2. A bank reconciliation statement is prepared with the balance :
(a) Passbook (b) Cash book
(c) Both passbook and cash book (d) None of these
3. Passbook is a copy of :
(a) Copy of customer Account (b) Bank column of cash book
(c) Cash column of cash book (d) Copy of receipts and payments
4. Unfavourable bank balance means :
(a) Credit balance in passbook (b) Credit balance in cash book
(c) Debit balance in cash book (d) None of these
5. Favourable bank balance means :
(a) Credit balance in the cash book (b) Credit balance in passbook
(c) Debit balance in the cash book (d) Both b and c
6. A bank reconciliation statement is mainly prepared for :
(a) Reconcile the cash balance of the cash book.
(b) Reconcile the difference between the bank balance shown
by the cash book and bank passbook
(c) Both a and b
(d) None of these
5.2.2 Preparation of Bank Reconciliation Statement with Adjusted

Cash Book
When we look at the various items that normally cause the difference between
the passbook balance and the cash book balance, we find a number of items,
which appear only in the passbook. Why not first record such items in the
cash book to work out the adjusted balance (also known as amended balance)
of the cash book and then prepare the bank reconciliation statement. This
shall reduce the number of items responsible for the difference and have the
correct figure of balance at bank in the balance sheet. In fact, this is exactly
what is done in practice whereby only those items which cause the difference
on account of the time gap in recording appear in bank reconciliation statement.
These are as (i) cheques issued but not yet presented, (ii) cheques deposited
but not yet collected, and (iii) due to an error in the passbook. The step wise
preparation of bank reconciliation statement is shown in figure 5.4.
Illustration 9
The following is the summary of a cash book for December, 2004.
Cash Book (Bank Column)
Rs. Rs.
Receipts 13,221 Balance b/d 6,849
Balance c/d 4,986 Payments 11,358
18,207 18,207
All receipts are banked and payments are made by cheques. On investigation the
following are observed:
1. Bank charges of Rs. 1,224 entered in the bank statement have not been entered in
cash book.
2. Cheques drawn amounting to Rs. 2,403 have not been presented to the bank for
payment.
3. Cheques received totalling Rs. 6,858 have been entered in the cash book and deposited
in the bank, but have not been credited by the bank until January, 2005.
4. A cheque for Rs. 198 has been entered as a receipt in the cash book instead of as
payment.
5. A cheque for Rs. 225 has been debited by the bank in error.
6. A cheque received for Rs. 720 has been returned by the bank and marked “No
funds available”, no adjustment had been made in the cash book.
7. All dividends receivable are credited directly to the bank account. During December,
an amount of Rs. 558 was credited by the bank and no entry is made in the cash book.
8. A cheque drawn for Rs. 54 has been incorrectly entered in the cash book as Rs.594.
9. The balance brought forward should have been Rs. 639.
10. The bank statement as on December, 31, 2004 showed an overdraft of Rs. 10,458.
(a) You are required to prepare an amended cash book and
(b) Prepare a bank reconciliation statement as on Dec. 31, 2004.
Solution
Amended Cash Book
(Bank column)
Dr. Cr.
Rs. Rs.
Dividends received 558 Balance b/d 4,986

Bank charges 1,224
Adj. for cheque drawn for 540 Adj. regarding cheque 396
Rs.54 entered as Rs.594 entered as receipt
Adj. of balance brought 450 Adj. regarding cheque 720
forward returned
Balance c/d 5,778
7,326 7,326
Balance b/d 5,778
Bank Reconciliation Statement as on Dec. 31, 2004
Rs. Rs.
Overdraft as per bank statement 10,458
Add: Cheque issued but not yet presented for payment 2,403
12,861
Less: Cheques deposited but not yet credited 6,858
Cheque debited in error 225 7,083
Balance as per cash book 5,778
Illustration 10
The bank overdraft of Smith Ltd., on December 31, 2004 as per cash book is Rs.18,000
From the following information, asscertain the adjusted cash balance and prepare bank
reconciliation statement Rs.
(i) Unpresented cheques 6,000
(ii) Uncleared cheques 3,400
(iii) Bank interest debited in the passbook only 1,000
(iv) Bills collected and credited in the passbook only 1,600
(v) Cheque of Arun traders dishonoured 1,000
(vi) Cheque issued to Kapoor & Co. not yet entered in the 600
of cash book.
Amended Cash Book (Bank Column)
Dr. Cr.
Rs. Rs.
Bills collected as per 1,600 Balance b/d 18,000
passbook
Balance c/d 19,000 Interest 1,000
Cheque dishonoured
(Arun Traders) 1,000
Kapoor and Co. 600
(cheque)
20,600 20,600
Balance b/d 19,000
Bank Reconciliation Statement as on December 31, 2004
Bank overdraft as per cash book 19,000

Add Uncleared cheques 3,400
22,400
Less Unpresented cheques 6,000
Bank overdraft as per passbook 16,400
Fig. 5.4 : Showing the step wise preparation of bank reconcilation statement
A Small Project — An Activity of Preparation of Bank Reconcilation Statement

Kamlesh works as a cashier for Aqua Products Co. His responsibilities include
maintainance of the firm’s. The firm’s cash book for July 2005 which Kamlesh
has just finished entering and balancing for the month is shown in exhibit 1.
Help Kamlesh to prepare the bank reconciliation statement.
Note : the cash column is omitted). A copy of firm’s bank statement dated July 31, 2005 is
also illustrated in exhibiy 2. The numerical difference between the two is Rs. 261.30.
(Bank statement Rs. 903.00 – Cash book Rs. 641.70).
Aqua Products – Cash Book
Date Particulars Bank Date Particulars Bank

Rs. Rs.
2005 2005
July 01 Balance b/d 756.209 July 02 Aditya 004450 50.009
July 03 Kanishk Enterprises 220.009 July 02 Verma & Co. 004451 130.00
July 15 Rampaul and Sons 330.009 July 02 Gytri & Co. 004452 10.009
July 31 Sarin Bros 63.00 July 08 Mehta Ltd. 004453 27.50
July 14 Subash & Co. 89.009
July 14 Kaushik 004454 49.009
July 15 Kriosk Ltd. 004455 250.009
July 26 Insurance premium 122.009
(SO)
July 31 Balance c/d 641.70
1,369.20 1,369.20
July 31 Balance b/d 641.70
Exhibit-1
5.4
Bank Statement
Account Aqual Products Co.
Account Number 79014456
Ledger No. 17
Date July 31, 2005
Date Details Debit Credit Balance

Rs. Rs. Rs.
2005
July 01 Balance 756.20 Cr.9
July 04 Cheques 220.00 9 976.20 Cr.
July 09 004450 50.009 926.20 Cr.
July 14 004452 10.009 916.20 Cr.
July 16 Subash & Co. (DD) 89.009 827.20 Cr.
July 19 Cheques 330.00 9 1,157.20 Cr.
July 24 004455 250.009 907.20 Cr.
July 26 Insurance Premium 122.009 785.20 Cr.
July 30 004454 49.009 736.20 Cr.
July 31 Bank charges 12.95 723.25 Cr.
July 31 Ruchita Limited 179.75 903.00 Cr.
Exhibit 2
Solution
Step 1 : Tick off the items in both cash book and bank statement (as shown in Exhibit 2).
Step 2 : Updating the cash book from the bank statement.
The unticked items on the bank statement indicate items that have not yet been entered
in Aqua Products Co.’s cash book. These are :
(i) Receipt on July 31 by Ruchita Limited amounting to Rs. 179.75
(ii) Bank charges debited by bank on July 31 amounting to Rs. 12.95
These items needs to be entered in the cash book to up date it (refer exhibit 3 – The
new entries are shown in darker type).
Aqua Products Cash Book (Extract)
Date Details Bank Date Details Bank
Rs. Rs.
2005 2005
July 31 Balance b/d 641.70 July 31 Bank charges 12.95
July 31 Ruchita Limited 179.75 Jul. 31 Balance c/d 808.50
821.45 821.45
Aug. 01 Balance b/d 808.50
Exhibit 3
Step 3 : Balance the cash book bank columns to produce an updated balance.
As shown in exhibit 3, the balance of the bank column stands at Rs. 808.50. But then
a difference is Rs. 94.50 (i.e. Rs. 903.00 – 808.50) still exists.
Step 4 : Identify the remaining unticked items from the cash book.
These are Rs.
1. Receipts on July 31 from Sarin Bros 63.00
2. Payments made on July 02 to Verma & Co. 130.00
(Cheque No. 004457)
3. Payments made on July 08 to Mehta Ltd. 27.50
(Cheque No. 004453)
These above three items will appear in next month’s bank statement as these are due to
time gap. These are the items which will appear in the bank reconciliation statement.
Aqua Products Co.

Bank Reconciliation Statement as on July 31, 2005
Rs.
Balance at bank as per cash book 808.50
Add Unpresented cheques
Verma and Co. 130.00
Mehta and Co. 27.50 157.50
966.00
Less Outstanding lodgement 63.00
Balance at bank as per bank statement 903.00
Do it Yourself
You are a trainee accountant for Kamraj Limited, a small printing company. One of
your tasks is to enter transactions in the company’s cash book, check the entries on
receipt of the bank statement, update the cash book and make any amendments as
necessary. You are then asked to prepare a bank reconciliation statement at the end
of the month.
The company’s cash book (showing the bank money columns only) and the bank
statement are shown below.
You are required to :
• compare the cash book with the bank statement.
• Make the entries necessary to update the cash book.
• Calculate the adjusted bank balance as per cash book.
Kamrat Ltd. – Cash Book

Rs. Rs.
2005 2005
Aug. 01 Balance b/d 1,946 Aug. 02 XYZ Insurance 75
Aug. 01 Kapoor & Co. 249 Aug. 02 Nanda & Co. 200100 206
Aug. 05 V. S. Rao 188 Aug. 04 Daily Ltd. 200101 315
Aug. 08 S. K. Alok 150 Aug. 07 Garage Charges200102 211
Aug. 10 E. Norries Ltd. 440 Aug. 09 M.D. Finance 120
Aug. 18 Samaira Ltd. 65 Aug. 13 Hill Bros 200103 22
Aug. 27 Harsh Vardan 520 Aug. 20 Akshey Ltd. 200104 137
Aug. 30 IBP Partners 82 Aug. 27 Kalakriti Ltd. 270
Aug. 31 Balance c/d 2,284
3,640 3,640
Sep. 01 Balance b/d 2,284
Exhibit 1
ABC STATEMENT
12, Mall Road, Gurgaon.
Account Kamraj Limited Account No.
78300582
Date August 31, 2004
Date Particulars Debit Credit Balance

Rs.
2005
Aug. 01 Balance 1,946 CR
Aug. 02 Cheques 249 2,195 CR
Aug. 04 XYZ Insurance (DD) 75 2,120 CR
Aug. 04 200101 315 1,805 CR
Aug. 05 V. S. Rao 188 1,993 CR
Aug. 09 200102 211 1,932 CR
Aug. 12 N. P. Finance (SO) 120 2,252 CR
Aug. 27 Kalakriti Ltd. 270 2,047 CR
Aug. 30 Tony Bros 92 2,139 CR
Aug. 31 Bank charges 55 2,084 CR
Aug. 31 Surya Finance (SO) 1,000 1,084 CR
Exhibit 2
Name of business..........
Bank Reconciliation Statement as at ..........
Balance at bank as per cash book ..........
Add : unpresented cheque(s) ..........
Less : outstanding lodgement(s) not yet entered on bank statement
Balance at bank as per bank statement ..........
Note : show the working clearly and step-wise
Test your Understanding - III

State whether each of the following statements is True or False
1. Passbook is the statement of account of the customer maintained by the bank.
2. A business firm periodically prepares a bank reconciliation statement to reconcile
the bank balance as per the cash book with the passbook as these two show
different balances for various reasons.
3. Cheques issued but not presented for payment will reduce the balance as per
the passbook.
4. Cheques deposited but not collected will result in increasing the balance of the
cash book when compared to passbook.
5. Overdraft as per the passbook is less than the overdraft as per cash book when
there are cheques deposited but not collected by the banker.
6. The debit balance of the bank account as per the cash book should be equal to
the credit balance of the account of the business in the books of the bank.
7. Favourable bank balance as per the cash book will be less than the bank passbook
balance when there are unpresented cheques for payment.
8. Direct collections received by the bank on behalf of the customers would increase
the balance as per the bank passbook when compared to the balance as per the
cash book.
9. When payments made by the bank as per the standing instructions of the
customer, the balance in the passbook will be more when compared to the cash
book.

1. Bank Reconciliation Statement
2. Cash book and Passbook

1. Bank Reconciliation Statement : A statement prepared to reconcile the bank
balance as per cash book with the balance as per passbook or bank statement,
by showing the items of difference between the two accounts.
2. Causes of difference :
– timing of recoding the transaction.
– error made by business or by the bank.
3. Correct cash balance: It may happens that some of the receipts or payments
are missing from either of the books and errors, if any, need to be rectified.
This arise the need to look at the entries/errors recorded in both statements
and other information available and compute the correct cash balance before
reconciling the statements.

Short Answers
1. State the need for the preparation of bank reconciliation statement?
2. What is a bank overdraft?
3. Briefly explain the statement ‘wrongly debited by the bank’ with the help of
an example.
4. State the causes of difference occurred due to time lag.
5. Briefly explain the term ‘favourable balance as per cash book’
6. Enumerate the steps to ascertain the correct cash book balance.
Long Answers
1. What is a bank reconciliation statement. Why is it prepared?
2. Explain the reasons where the balance shown by the bank passbook does
not agree with the balance as shown by the bank column of the cash book.
3. Explain the process of preparing bank reconciliation statement with
amended cash balance.
Numerical Questions
Favourable balance of cash book and passbook –
1. From the following particulars, prepare a, bank reconciliation statement
as at March 31, 2005.
(i) Balance as per cash book Rs. 3,200
(ii) Cheque issued but not presented for payment Rs. 1,800
(iii) Cheque deposited but not collected upto March 31, 2005 Rs. 2000
(iv) Bank charges debited by bank Rs. 150
(Ans: Balance as per passbook Rs. 2,800)
2. On March 31 2005 the cash book showed a balance of Rs. 3,700 as cash at
bank, but the bank passbook made up to same date showed that cheques
for Rs. 700, Rs. 300 and Rs. 180 respectively had not presented for payment,
Also, cheque amounting to Rs. 1,200 deposited into the account had not
been credited. Prepare a bank reconciliation statement.
(Ans : Balance as per passbook Rs. 3,680).
3. The cash book shows a bank balance of Rs. 7,800. On comparing the cash
book with passbook the following discrepancies were noted :
(a) Cheque deposited in bank but not credited Rs. 3,000
(b) Cheque issued but not yet present for payment Rs. 1,500
(c) Insurance premium paid by the bank Rs. 2,000
(d) Bank interest credit by the bank Rs. 400
(e) Bank charges Rs. 100
(d) Directly deposited by a customer Rs. 4,000
(Ans: Balance as per passbook Rs. 8,600).
4. Bank balance of Rs. 40,000 showed by the cash book of Atul on December
31, 2005. It was found that three cheques of Rs. 2,000, Rs. 5,000 and
Rs. 8,000 deposited during the month of December were not credited in
the passbook till January 02, 2005. Two cheques of Rs. 7,000 and Rs.
8,000 issued on December 28, were not presented for payment till January
03, 2005. In addition to it bank had credited Atul for Rs. 325 as interest
and had debited him with Rs. 50 as bank charges for which there were no
corresponding entries in the cash book.
Prepare a bank reconciliation statement as on December 31, 2004.
5. On comparing the cash book with passbook of Naman it is found that on
March 31, 2005, bank balance of Rs. 40,960 showed by the cash book
differs from the bank balance with regard to the following :
(a) Bank charges Rs 100 on March 31, 2005, are not entered in the cash
book.
(b) On March 21, 2005, a debtor paid Rs. 2,000 into the company’s bank
in settlement of his account, but no entry was made in the cash book
of the company in respect of this.
(c) Cheques totaling Rs. 12,980 were issued by the company and duly
recorded in the cash book before March 31, 2005, but had not been
presented at the bank for payment until after that date.
(d) A bill for Rs. 6,900 discounted with the bank is entered in the cash
book with recording the discount charge of Rs. 800.
(e) Rs. 3,520 is entered in the cash book as paid into bank on March 31st,
2005, but not credited by the bank until the following day.
(f) No entry has been made in the cash book to record the dishon or on
March 15, 2005 of a cheque for Rs. 650 received from Bhanu.
Prepare a reconciliation statement as on March 31, 2005.
6. Prepare bank reconciliation statement as on December 31, 2004. On this
day the passbook of Mr. Himanshu showed a balance of Rs. 7,000.
(a) Cheques of Rs. 1,000 directly deposited by a customer.
(b) The bank has credited Mr. Himanshu for Rs. 700 as interest.
(c) Cheques for Rs. 3000 were issued during the month of December but
of these cheques for Rs. 1,000 were not presented during the month of
December.
(Ans: Balance as per cash book Rs. 3,300).
7. From the following particulars prepare a bank reconciliation statement
showing the balance as per cash book on December 31, 2005.
(a) Two cheques of Rs. 2,000 and Rs. 5,000 were paid into bank in October,
2005 but were not credited by the bank in the month of December.
(b) A cheque of Rs. 800 which was received from a customer was entered
in the bank column of the cash book in December 2004 but was omitted
to be banked in December, 2004.
(c) Cheques for Rs. 10,000 were issued into bank in January 2005 but
not credited by the bank on December 31, 2005.
(d) Interest on investment Rs. 1,000 collected by bank appeared in the
passbook.
Balance as per Passbook was Rs. 50,000
(Ans: Balance as per cash book Rs. 47,800)
8. Balance as per passbook of Mr. Kumar is 3,000.
(a) Cheque paid into bank but not yet cleared
Ram Kumar Rs. 1,000
Kishore Kumar Rs. 500
(b) Bank Charges Rs. 300
(c) Cheque issued but not presented
Hameed Rs. 2,000
Kapoor Rs. 500
(d) Interest entered in the passbook but not entered in the cash book Rs. 100
Prepare a bank reconciliation statement.
9. The passbook of Mr. Mohit current account showed a credit Balance of
Rs. 20,000 on dated December 31, 2005. Prepare a Bank Reconciliation
Statement with the following information.
(i) A cheque of Rs. 400 drawn on his saving account has been shown on
current account.
(ii) He issued two cheques of Rs. 300 and Rs. 500 on of December 25, but
only the Ist cheque was presented for payment.
(iii) One cheque issued by Mr. Mohit of Rs. 500 on December 25, but it was
not presented for payment whereas it was recorded twice in the cash
book.
Unfavourable balance of cash book

10. On Ist January 2005, Rakesh had an overdraft of Rs. 8,000 as showed by
his cash book. Cheques amounting to Rs. 2,000 had been paid in by him
but were not collected by the bank by January 01, 2005. He issued cheques
of Rs. 800 which were not presented to the bank for payment up to that
day. There was a debit in his passbook of Rs. 60 for interest and Rs. 100
for bank charges. Prepare bank reconciliation statement for comparing
both the balance.
(Ans : Overdraft as per passbook Rs. 9,360)
11. Prepare bank reconciliation statement.
(i) Overdraft shown as per cash book on December 31, 2005 Rs. 10,000.
(ii) Bank charges for the above period also debited in the passbook
Rs. 100.
(iii) Interest on overdraft for six months ending December 31, 2005
Rs. 380 debited in the passbook.
(iv) Cheques issued but not incashed prior to December 31, 2005
amounted to Rs. 2,150.
(v) Interest on Investment collected by the bank and credited in the
passbook Rs. 600.
(vi) Cheques paid into bank but not cleared before December, 31 2005
were Rs. 1,100.
(Ans: overdraft as per passbook Rs. 8,830).
12. Kumar find that the bank balance shown by his cash book on December
31, 2005 is Rs. 90,600 (Credit) but the passbook shows a difference due
to the following reason:
A cheque (post dated) for Rs. 1,000 has been debited in the bank column
of the cash book but not presented for payment. Also, a cheque for
Rs. 8,000 drawn in favour of Manohar has not yet been presented for
payment. Cheques totaling Rs. 1,500 deposited in the bank have not yet
been collected and cheque for Rs. 5,000 has been dishonoured.
(Ans: overdraft as per passbook Rs. 1,03,600).
13. On December 31, 2005, the cash book of Mittal Bros. Showed an overdraft
of Rs. 6,920. From the following particulars prepare a Bank Reconciliation
Statement and ascertain the balance as per passbook.
(1) Debited by bank for Rs. 200 on account of Interest on overdraft and
Rs. 50 on account of charges for collecting bills.
(2) Cheques drawn but not encashed before December, 31 2005 for
Rs. 4,000.
(3) The bank has collected interest and has credited Rs. 600 in passbook.
(4) A bill receivable for Rs. 700 previously discounted with the bank
had been dishonoured and debited in the passbook.
(5) Cheques paid into bank but not collected and credited before
December 31, 2005 amounted Rs. 6,000.
(Ans : Overdraft as per passbook Rs. 9,270).
Unfavourable balance of the passbook

14. Prepare bank reconciliation statement of Shri Bhandari as on December
31, 2005
(i) The Payment of a cheque for Rs. 550 was recorded twice in the
passbook.
(ii) Withdrawal column of the passbook under cast by Rs. 200
(iii) A Cheque of Rs. 200 has been debited in the bank column of the
Cash Book but it was not sent to bank at all.
(iv) A Cheque of Rs. 300 debited to Bank column of the passbook was
not sent to the bank.
(v) Rs. 500 in respect of dishonoured cheque were entered in the
passbook but not in the cash book.
Overdraft as per passbook is Rs. 20,000.
(Ans: Overdraft as per cash book Rs. 20,350).
15. Overdraft shown by the passbook of Mr. Murli is Rs. 20,000. Prepare
bank reconciliation statement on dated December 31, 2005.
(i) Bank charges debited as per passbook Rs. 500.
(ii) Cheques recorded in the cash book but not sent to the bank for
collection Rs. 2,500.
(iii) Received a payment directly from customer Rs. 4,600.
(iv) Cheque issued but not presented for payment Rs. 6,980.
(v) Interest credited by the bank Rs. 100.
(vi) LIC paid by bank Rs. 2,500.
(vii) Cheques deposited with the bank but not collected Rs. 3,500.
16. Raghav & Co. have two bank accounts. Account No. I and Account No. II.
From the following particulars relating to Account No. I, find out the balance
on that account of December 31, 2005 according to the cash book of
the firm.
(i) Cheques paid into bank prior to December 31, 2005, but not credited
for Rs. 10,000.
(ii) Transfer of funds from account No. II to account no. I recorded by
the bank on December 31, 2005 but entered in the cash book after
that date for Rs. 8,000.
(iii) Cheques issued prior to December 31, 2005 but not presented until
after that date for Rs. 7,429.
(iv) Bank charges debited by bank not entered in the cash book for
Rs. 200.
(v) Interest Debited by the bank not entered in the cash book Rs. 580.
(vi) Overdraft as per Passbook Rs. 18,990.
17. Prepare a bank reconciliation statement from the following particulars

and show the balance as per cash book.
(i) Balance as per passbook on December 31, 2005 overdrawn
Rs. 20,000.
(ii) Interest on bank overdraft not entered in the cash book Rs. 2,000.
(iii) Rs. 200 insurance premium paid by bank has not been entered in
the cash book.
(iv) Cheques drawn in the last week of December, 2005, but not cleared
till date for Rs. 3,000 and Rs. 3,500.
(v) Cheques deposited into bank on November, 2005, but yet to be
credited on dated December 31, 2005 Rs. 6,000.
(vii) Wrongly debited by bank Rs. 500.
18. The passbook of Mr. Randhir showed an overdraft of Rs. 40,950 on March
31, 2005.
Prepare bank reconciliation statement on March 31, 2005.
(i) Out of cheques amounting to Rs. 8,000 drawn by Mr. Randhir on
March 27 a cheque for Rs. 3,000 was encashed on April 03.
(ii) Credited by bank with Rs. 3,800 for interest collected by them, but
the amount is not entered in the cash book.
(iii) Rs. 10,900 paid in by Mr. Randhir in cash and by cheques on March,
31 cheques amounting to Rs. 3,800 were collected on April, 07.
(iv) A Cheque of Rs. 780 credited in the passbook on March 28 being
dishonoured is debited again in the passbook on April 01, 2005. There
was no entry in the cash book about the dishonour of the cheque until
April 15.
(Ans: Overdraft as per cash book Rs. 36,350)
Project
1. You are employed by Silk and Carpets as their cashier. Your main
responsibility is to maintain the company’s cash book and prepare a bank
reconciliation statement at the end of each month.
The cash book (showing the bank money columns only) is set out below
together with a copy of the bank statement for February 2005.

• Reconcile the cash book with the bank statement.
• Make the entries necessary to update the cash book..
• Start with the balance as per the cash book, list any unpresented cheques
and sub-total on the reconciliation statement.
• Enter details of bank lodgements.
• Calculate the balance as per the bank statement and check your total against
the bank statement for accuracy.
Silk & Carpets Ltd. Cash Book

Cash Book
Dr. Cr.
Rs. Rs.
2005 2005
Feb. 01 Balance b/d 1,425 Feb. 01 Bhargav Bros 98
Feb. 01 Brown & Co. 157 Feb. 01 Maruti Ltd. 400460 50
Feb. 04 Brindas 243 Feb. 03 Jackson Ltd. 400461 540
Feb. 08 Robinson Ltd. 91 Feb. 09 Spencer Partners 400462 42
Feb. 13 Morris 75 Feb. 09 Ivory Computer 400463 490
Feb. 20 Kinki and Co. 420 Feb. 10 Surya Insurance 300
Feb. 28 Howell Ltd. 94 Feb. 16 Shankar Garage 400464 110
Feb. 23 Petty cash 400465 50
Feb. 27 Swaroop & Co. 400466 120
Feb. 28 Balance c/d 705
2,505 2,505
Feb. 08 Balance b/d 705

ROHTAGI BANK STATEMENT

10, Shastri Road, New Delhi.
Account Brooklyn Limited Account No. 29842943

Date February 28, 2005

2004
Feb. 01 Balance 1,425 Cr.
Feb. 02 Cheques 157 1,582 Cr.
Feb. 04 Maruti Ltd. 50 1,532 Cr.
Feb. 02 400460 98 1,434 Cr.
Feb. 06 Brindas 243 1,677 Cr.
Feb. 12 Surya Insurance (DD) 300 1,468 Cr.
Feb. 14 Morris 75 1,543 Cr.
Feb. 14 400463 490 1,053 Cr.
Feb. 26 Rajeshwar 103 1,370 Cr.
Feb. 26 400465 50 1,320 Cr.
Feb. 27 Soumya 220 1,540 Cr.
Feb. 28 Bank charges 38 1,502 Cr.
2. As accounts assistant for Chinnar Limited your main task is to enter

transactions into the company’s cash book, check the entries against the
bank statement and prepare a monthly bank reconciliation statement.
The cash book (showing the bank money columns only) and bank statement
for October 2005 are set out below.

• Reconcile the cash book with the bank statement.
• Make the entries necessary to update the cash book.
• Balance the bank columns of the cash book and calculate the revised bank
balance.
• Start with the balance as per the cash book, list any unpresented cheques
and sub-total on the reconciliation statement.
• Enter details of bank lodgements.
• Calculate the balance as per the bank statement and check your total against
the bank statement for accuracy.
Chinnar Limited – Cash Book

Cash Book
Date Particulars Bank Date Particulars Bank.

Rs. Rs.
Oct. 01 Balance b/d 2,521 Oct. 01 Sharp & Co Rent 400
Oct. 04 Allen Rogers 620 Oct. 04 I. Oswal 210526 367
Oct. 08 Moore & Kale 27 Oct. 05 Health & Sports 210527 1,108
Oct. 11 Howard Limited 48 Oct. 08 Evon & Son 210528 320
Oct. 11 Barrett & Bryson 106 Oct. 13 Khare Garage 210529 32
Oct. 12 D Patel 301 Oct. 14 J. Choudrey 210530 28
Oct. 20 Cohen & Co. 58 Oct. 22 Astha Insurance (DD) 139
Oct. 25 J McGilvery 209 Oct. 25 Soma Computers 210531 1,800
Oct. 31 Balance c/d 604 Oct. 30 Rastogi 300
4,494 4,494
Nov. 01 Balance b/d 604
OM BANK STATEMENT
99, Jawahar Marg
Account Chinnar Limited Account No. 06618432
Date October 31, 2005

Rs.
2004
Oct. 01 Balance 2,521 Cr.
Oct. 01 Sharp & Co 400 2,121 Cr.
Oct. 04 Allen Rogers 620 2,741 Cr.
Oct. 07 210526 367 2,374 Cr.
Oct. 11 Cheques 154 2,528 Cr.
Oct. 13 D Patel (BGC) 301 2,829 Cr.
Oct. 15 Cheques 27 2,856 Cr.
Oct. 18 210528 320 2,536 Cr.
Oct. 18 210527 1,108 1,428 Cr.
Oct. 22 Astha Insurance (DD) 139 1,289 Cr.
Oct. 27 210531 1,800 511 Dr.
Oct. 28 Bharadwaj’s 114 397 Dr.
Oct. 29 Rastogi 300 697 Dr.
Oct. 29 Bank Interest 53 750 Dr.
Oct. 29 Bank Charges 45 795 Dr.

(I) 1. Time Gap 2. Error 3. Time gap
4. Time gap 5. Time gap
(II) (i) Customer account (ii) Debit (iii) Credit
(iv) Debit (v) Added (vi) Deducted
(vii) loss (viii) Loss (ix) Added
(x) Higher

1. (b) 2. (c) 3. (a) 4. (a) 5. (c) 6.(b)

1. (T) 2. (T) 3. (F) 4. (T) 5. (F) 6.(T), 7.(T) 8.(T) 9.(F)
Trial Balance and Rectification of Errors 6
I n the earlier chapters, you have learnt about the

basic principles of accounting that for every debit
there will be an equal credit. It implies that if the
sum of all debits equals the sum of all credits, it is
LEARNING OBJECTIVES presumed that the posting to the ledger in terms
After studying this chapter, of debit and credit amounts is accurate. The trial
you will be able to : balance is a tool for verifying the correctness of
• state the meaning of debit and credit amounts. It is an arithmetical
trial balance; check under the double entry system which verifies
• enumerate the objectives that both aspects of every transaction have been
of preparing trial
balance ;
recorded accurately. This chapter explains the
meaning and process of preparation of trial balance
• prepare trial balance;
and the types of errors and their rectification.
• explain the types of
errors;
6.1 Meaning of Trial Balance
• state various process
of locating errors ;
A trial balance is a statement showing the
• identify the errors which
balances, or total of debits and credits, of all the
affect the agreement of
trial balance and those accounts in the ledger with a view to verify the
which do not affect the arithmatical accuracy of posting into the ledger
agreement of trial accounts. Trial balance is an important statement
balance;
in the accounting process. which shows final
• rectify the errors position of all accounts and helps in preparing
without preparing
suspense account; the final statements. The task of preparing the
and statements is simplified because the accountant
• rectify the errors with can take the account balances from the trial
suspense account. balance instead of looking them up in the ledger.
182 Accountancy
Trial Balance of ......as on March 31, 2005
Account T itle L.F Debit Credit

Amount Amount
Rs. Rs.
Total
Fig. 6.1 : Showing format of a trial balance
It is normally prepared at the end of an accounting year. However, an

organisation may prepare a trial balance at the end of any chosen period,
which may be monthly, quarterly, half yearly or annually depending upon its
requirements.
In order to prepare a trial balance following steps are taken:
• Ascertain the balances of each account in the ledger.
• List each account and place its balance in the debit or credit column, as
the case may be. (If an account has a zero balance, it may be included in
the trial balance with zero in the column for its normal balance).
• Compute the total of debit balances column.
• Compute the total of the credit balances column.
• Verify that the sum of the debit balances equal the sum of credit balances.
If they do not tally, it indicate that there are some errors. So one must
check the correctness of the balances of all accounts. It may be noted
that all assets expenses and receivables account shall have debit balances
whereas all liabilities, revenues and payables accounts shall have credit
balances (refer figure 6.2).
6.2 Objectives of Preparing the Trial Balance

The trial balance is prepared to fulfill the following objectives :
1. To ascertain the arithmetical accuracy of the ledger accounts.
2. To help in locating errors.
3. To help in the preparation of the financial statements.
Account T itle L.F. Debit Credit

Amount Amount
Rs. Rs.
• Capital 9
• Land and Buildings 9
• Plant and Machinery 9
• Equipment 9
• Furniture and Fixtures 9
• Cash in Hand 9
• Cash at Bank 9
• Debtors 9
• Bills Receivable 9
• Stock of Raw Materials 9
• Work in Progress 9
• Stock of Finished Goods 9
• Prepaid Insurance 9
• Purchases 9
• Carriage Inwards 9
• Carriage Outwards 9
• Sales 9
• Sales Return 9
• Purchases Return 9
• Interest Paid 9
• Commission/Discount Received 9
• Salaries 9
• Long Term Loan 9
• Bills Payable 9
• Creditors 9
• Outstanding Salaries 9
• Outstanding Interest Earned 9
• Advances from Customers 9
• Drawings 9
• Reserve Fund 9
• Provision for Doubtful Debts 9
Total xxx xxx
Fig. 6.2 : Illustrative trial balance
6.2.1 To Ascertain the Arithmetical Accuracy of Ledger Accounts

As stated earlier, the purpose of preparing a trial balance is to asceitain whether
all debits and credit are properly recorded in the ledger or not and that all
accounts have been correctly balanced. As a summary of the ledger, it is a list
of the accounts and their balances. When the totals of all the debit balances
184 Accountancy
and credit balances in the trial balance are equal, it is assumed that the
posting and balancing of accounts is arithmetically correct. However, the
tallying of the trial balance is not a conclusive proof of the accuracy of the
accounts. It only ensures that all debits and the corresponding credits have
been properly recorded in the ledger.
6.2.2 To Help in Locating Errors

When a trial balance does not tally (that is, the totals of debit and credit
columns are not equal), we know that at least one error has occured. The
error (or errors) may have occured at one of those stages in the accounting
process: (1) totalling of subsidiary books, (2) posting of journal entries in the
ledger, (3) calculating account balances, (4) carrying account balances to the
trial balance, and (5) totalling the trial balance columns.
It may be noted that the accounting accuracy is not ensured even if the
totals of debit and credit balances are equal because some errors do not affect
equality of debits and credits. For example, the book-keeper may debit a correct
amount in the wrong account while making the journal entry or in posting a
journal entry to the ledger. This error would cause two accounts to have
incorrect balances but the trial balance would tally. Another error is to record
an equal debit and credit of an incorrect amount. This error would give the
two accounts incorrect balances but would not create unequal debits and
credits. As a result, the fact that the trial balance has tallied does not imply
that all entries in the books of original record (journal, cash book, etc.) have
been recorded and posted correctly. However, equal totals do suggest that
several types of errors probably have not occured.
6.2.3 To Help in the Preparation of the Financial Statements

Trial balance is considered as the connecting link between accounting records
and the preparation of financial statements. For preparing a financial
statement, one need not refer to the ledger. In fact, the availability of a tallied
trial balance is the first step in the preparation of financial statements. All
revenue and expense accounts appearing in the trial balance are transferred
to the trading and profit and loss account and all liabilities, capital and assets
accounts are transferred to the balance sheet.
(Preparation of the financial statements is explained in chapters, 9 and 10).
6.3 Preparation of Trial Balance

A trial balance can be prepared in the following three ways :
(i) Totals Method
(ii) Balances Method
(iii) Totals-cum-balances Method
6.3.1 Totals method

Under this method, total of each side in the ledger (debit and credit) is ascertained
separately and shown in the trial balance in the respective columns. The total of
debit column of trial balance should agree with the total of credit column in the
trial balance because the accounts are based on double entry system. However,
this method is not widely used in practice, as it does not help in assuming accuracy
of balances of various accounts and and preparation of the fianancial statements.
6.3.2 Balances Method

This is the most widely used method in practice. Under this method trial
balance is prepared by showing the balances of all ledger accounts and then
totalling up the debit and credit columns of the trial balance to assure their
correctness. The account balances are used because the balance summarises
the net effect of all transactions relating to an account and helps in preparing
the financial statements. It may be noted that in trial balance, normally in
place of balances in individual accounts of the debtors, a figure of sundry
debtors is shown, and in place of individual accounts of creditors, a figure of
sundry creditors is shown.
6.3.3 Totals-cum-balances Method

This method is a combination of totals method and balances method. Under
this method four columns for amount are prepared. Two columns for writing
the debit and credit totals of various accounts and two columns for writing
the debit and credit balances of these accounts. However, this method is also
not used in practice because it is time consuming and hardly serves any
additional or special purpose.
Let us now learn how will the trial balance be prepared using each of
these methods with the help of the following example :
Mr. Rawat’s ledger shows the following accounts for his business. Help
him in preparing the trial balance using : (i) Totals method,
(ii) Balances method, (iii) Totals-cum-Balances method.
186 Accountancy
Rahul’s Capital Account

Dr. Cr.
Rs. Rs.
2005 2005
Dec. 31 Balance c/d 60,000 Jan. 01 Balance b/d 40,000
Cash 20,000
60,000 2006 60,000
Jan. 01 Balance b/d 60,000
Rohan’s Account
Dr. Cr.
Rs. Rs.
2005 2005
Cash 40,000 Jan. 01 Balance b/d 10,000
Dec. 31 Balance c/d 20,000 Purchases 50,000
60,000 2006 60,000

Machinery Account
Dr. Cr.
Rs. Rs.
2005 2005
Dec. 31 Balance b/d 20,000 Depreciation 3,000
Dec. 31 Balance c/d 17,000
20,000 20,000
2006
Rahul’s Account
Dr. Cr.
Rs. Rs.
2005 2005
Jan. 01 Balance b/d 15,000 Cash 55,000
Sales 60,000 Dec. 31 Balance c/d 20,000
2006 75,000 75,000
Sales Account
Dr. Cr.
Rs. Rs.
2005
Rahul 60,000
Cash 10,000
70,000
Cash Account
Dr. Cr.
Rs. Rs.
2005 2005
Jan. 01 Balanc e b/d 15,000 Rohan 40,000
Capital 20,000 Wages 5,000
Rahul 55,000 Purchases 12,000
Sales 10,000 Dec. 31 Balance c/d 43,000
1,00,000 1,00,000
2006
Wages Account
Dr. Cr.
Rs. Rs.
2005
Cash 5,000
5,000
Depreciation Account
Dr. Cr.
Rs. Rs.
2005
Machinery 3,000
3,000
188 Accountancy
Purchases Account
Dr. Cr.
Rs. Rs.
2005
Rohan 50,000
Cash 12,000
62,000
The trial balance under the three methods is illustrated below:
(i) Trial Balance as at March 31, 2005

(Using Totals Method)
Account L.F. Debit Credit

Title Total Total
Rs. Rs.
Rawat’s Capital 60,000
Rohan 40,000 60,000
Machinery 20,000 3,000
Rahul 75,000 55,000
Sales 70,000
Cash 1,00,000 57,000
Wages 5,000
Depreciation 3,000
Purchases 62,000
3,05,000 3,05,000
(ii) Trial Balance as at March 31, 2005

(Using Balances Method)
Account T itle L.F. Debit Credit

Balance Balance
Rs. Rs.
Rawat’s Capital 60,000
Rohan’s Capital 20,000
Machinery 17,000
Rahul 20,000
Sales 70,000
Cash 43,000
Wages 5,000
Depreciation 3,000
Purchases 62,000
Total 1,50,000 1,50,000
(iii) Trial Balance as at March 31, 2005

(Using Totals-cum-Balances Method)
Account Title L.F. Debit Credit Debit Credit

Total Total Balance Balance
Rs. Rs. Rs. Rs.
Rawat’s Capital 60,000 60,000
Rohan 40,000 60,000 20,000
Machinery 20,000 3,000 17,000
Rahul 75,000 55,000 20,000
Sales 70,000 70,000
Cash 1,00,000 57,000 43,000
Wages 5,000 5,000
Depreciation 3,000 3,000
Purchases 62,000 62,000
Total 3,05,000 3,05,000 1,50,000 1,50,000

Indicate against each amount wheather it is a debit or a credit balance, and prepare
a trial balance as at March 31, 2005 based on the following balances:
Accounts T itle Amount
Rs.
Capital 1,00,000
Drawings 16,000
Machinery 20,000
Sales 2,00,000
Purchases 2,10,000
Sales return 20,000
Purchases return 30,000
Wages 40,000
Goodwill 60,000
Interest received 15,000
Discount allowed 6,000
Bank loan 90,000
Debtors :
Nathu 55,000
Roopa 20,000
Creditors :
Reena 35,000
Ganesh 25,000
Cash 54,000
Stock on April 01, 2004 16,000
190 Accountancy
6.4. Significance of Agreement of Trial Balance

It is important for an accountant that the trial balance should tally. Normally a
tallied trial balance means that both the debit and the credit entries have been
made correctly for each transaction. However, as stated earlier, the agreement of
trial balance is not an absolute proof of accuracy of accounting records. A tallied
trial balance only proves, to a certain extent, that the posting to the ledger is
arithmetically correct. But it does not guarantee that the entry itself is correct.
There can be errors, which affect the equality of debits and credits, and there can
be errors, which do not affect the equality of debits and credits. Some common
errors include the following:
• Error in totalling of the debit and credit balances in the trial balance.
• Error in totalling of subsidiary books.
• Error in posting of the total of subsidiary books.
• Error in showing account balances in wrong column of the tiral balance,
or in the wrong amount.
• Omission in showing an account balance in the trial balance.
• Error in the calculation of a ledger account balance.
• Error while posting a journal entry: a journal entry may not have been
posted properly to the ledger, i.e., posting made either with wrong amount
or on the wrong side of the account or in the wrong account.
• Error in recording a transaction in the journal: making a reverse entry,
i.e., account to be debited is credited and amount to be credited is debited,
or an entry with wrong amount.
• Error in recording a transaction in subsidiary book with wrong name or wrong
amount.
6.4.1 Classification of Errors

Keeping in view the nature of errors, all the errors can be classified into the
following four categories:
• Errors of Commission
• Errors of Omission
• Errors of Principle
• Compensating Errors
6.4.2 Errors of Commission

These are the errors which are committed due to wrong posting of transactions,
wrong totalling or balancing of the accounts, wrong casting of the subsidiary
books, or wrong recording of amount in the books of original entry, etc.
For example: Raj Hans Traders paid Rs. 25,000 to Preetpal Traders (a supplier
of goods). This transaction was correctly recorded in the cashbook. But while
posting to the ledger, Preetpal’s account was debited with Rs. 2,500 only. This
constitutes an error of commission. Such an error by definition is of clerical
nature and most of the errors of commission affect in the trial balance.
6.4.3 Errors of Omission

The errors of omission may be committed at the time of recording the
transaction in the books of original entry or while posting to the ledger. There
can be of two types:
(i) error of complete omission
(ii) error of partial omission
When a transaction is completely omitted from recording in the books of
original record, it is an error of complete omission. For example, credit sales
to Mohan Rs. 10,000, not entered in the sales book. When the recording of
transaction is partly omitted from the books, it is an error of partial omission.
If in the above example, credit sales had been duly recorded in the sales book
but the posting from sales book to Mohan’s account has not been made, it
would be an error of partial omission.
6.4.4 Errors of Principle

Accounting entries are recorded as per the generally accepted accounting
principles. If any of these principles are violated or ignored, errors resulting
from such violation are known as errors of principle. An error of principle may
occur due to incorrect classification of expenditure or receipt between capital
and revenue. This is very important because it will have an impact on financial
statements. It may lead to under/over stating of income or assets or liabilities,
etc. For example, amount spent on additions to the buildings should be treated
as capital expenditure and must be debited to the asset account. Instead, if
this amount is debited to maintenance and repairs account, it has been treated
as a revenue expense. This is an error of principle. Similarly, if a credit purchase
of machinery is recorded in purchases book instead of journal proper or rent
paid to the landlord is recorded in the cash book as payment to landlord,
these errors of principle. These errors do not affect the trial balance.
6.4.5 Compensating Errors

When two or more errors are committed in such a way that the net effect of
these errors on the debits and credits of accounts is nil, such errors are called
compensating errors. Such errors do not affect the tallying of the trial balance.
For example, if purchases book has been overcast by Rs. 10,000 resulting in
excess debit of Rs. 10,000 in purchases account and sales returns book is
undercast by Rs. 10,000 resulting in short debit to sales returns account is a
192 Accountancy
case of two errors compensating each other’s effect. One plus is set off by the
other minus, the net effect of these two errors is nil and so they do not affect
the agreement of trial balance.
6.5 Searching of Errors

If the trial balance does not tally, it is a clear indication that at least one error
has occured. The error (or errors) needs to be located and corrected before
preparing the financial statements.
If the trial balance does not tally, the accountant should take the following
steps to detect and locate the errors :
• Recast the totals of debit and credit columns of the trial balance.
• Compare the account head/title and amount appearing in the trial balance,
with that of the ledger to detect any difference in amount or omission of an
account.
• Compare the trial balance of current year with that of the previous year to
check additions and deletions of any accounts and also verify whether
there is a large difference in amount, which is neither expected nor
explained.
• Re-do and check the correctness of balances of individual accounts in
the ledger.
• Re-check the correctness of the posting in accounts from the books of
original entry.
• If the difference between the debit and credit columns is divisible by 2,
there is a possibility that an amount equal to one-half of the difference
may have been posted to the wrong side of another ledger account. For
example, if the total of the debit column of the trial balance exceeds by Rs.
1,500, it is quite possible that a credit item of Rs.750 may have been
wrongly posted in the ledger as a debit item. To locate such errors, the
accountant should scan all the debit entries of an amount of Rs. 750.
• The difference may also indicate a complete omission of a posting. For
example, the difference of Rs. 1,500 given above may be due to omissions
of a posting of that amount on the credit side. Thus, the accountant should
verify all the credit items with an amount of Rs. 1,500.
• If the difference is a multiple of 9 or divisible by 9, the mistake could be
due to transposition of figures. For example, if a debit amount of Rs. 459
is posted as Rs. 954, the debit total in the trial balance will exceed the
credit side by Rs. 495 (i.e. 954 – 459 = 495). This difference is divisible by
9. A mistake due to wrong placement of the decimal point may also be
checked by this method. Thus, a difference in trial balance divisible by 9
helps in checking the errors for a transposed mistake.
6.6 Rectification of Errors

From the point of view of rectification, the errors may be classified into the
following two categories :
(a) errors which do not affect the trial balance.
(b) errors which affect the trial balance.
This distinction is relevant because the errors which do not affect the trial
balance usually take place in two accounts in such a manner that it can be
easily rectified through a journal entry whereas the errors which affect the
trial balance usually affect one account and a journal entry is not possible for
rectification unless a suspense account has been opened.
6.6.1 Rectification of Errors which do not Affect the Trial Balance

These errors are committed in two or more accounts. Such errors are also
known as two sided errors. They can be rectified by recording a journal entry
giving the correct debit and credit to the concerned accounts.
Examples of such errors are – complete omission to record an entry in the
books of original entry; wrong recording of transactions in the book of accounts;
complete omission of posting to the wrong account on the correct side, and
errors of principle.
The rectification process essentially involves:
• Cancelling the effect of wrong debit or credit by reversing it; and
• Restoring the effect of correct debit or credit.
For this purpose, we need to analyse the error in terms of its effect on the
accounts involved which may be:
(i) Short debit or credit in an account ; and/or
(ii) Excess debit or credit in an account.
Therefore, rectification entry can be done by :
(i) debiting the account with short debit or with excess credit,
(ii) crediting the account with excess debit or with short credit.
The procedure for rectification for such errors is explained with the help of
following examples :
(a) Credit sales to Mohan Rs. 10,000 were not recorded in the sales book. This is an
error of complete omission. Its affect is that Mohan’s account has not been debited
and Sales account has not been credited. Accordingly, recording usual entry for
credit sales will rectify the error.
Mohan’s A/c Dr. 10,000

To Sales A/c 10,000
194 Accountancy
(b) Credit sales to Mohan Rs. 10,000 were recorded as Rs. 1,000 in the sales book.
This is an error of commission. The effect of wrong recording is shown below:
To Sales A/c 1,000
Correct effect should have been:
To Sales A/c 10,000
Now that Mohan’s account has to be given an additional debit of Rs. 9,000
and sales account has to be credited with additional amount of Rs. 9,000,
rectification entry will be :
To Sales A/c 9,000
(c) Credit sales to Mohan Rs. 10,000 were recorded as Rs. 12,000. This is an error of
commission. The effect of wrong entry made has been :
To Sales A/c 12,000
Correct effect should have been :
To Sales A/c 10,000
You can see that there is an excess debit of Rs. 2,000 in Mohan’s account
and excess credit of Rs. 2,000 in sales account.
The, rectification entry will be recorded as follows:
Sales A/c Dr. 2,000
To Mohan‘s A/c 2,000

(d) Credit sales to Mohan Rs. 10,000 was correctly recorded in the sales book but was
posted to Ram’s account. This is an error of commission. The effect of wrong posting
has been :
Ram’s A/c Dr. 10,000
To Sales A/c 10,000
To Sales A/c 10,000
Notice that there is no error in sales account. But Ram’s account has been
debited with Rs. 10,000 instead of Mohan’s account.
Hence rectification entry will be :
To Ram’s A/c 10,000
(e) Rent paid Rs. 2,000 was wrongly shown as payment to landlord in the
cash book:
The effect of wrong posting has been :
Landlord’s A/c Dr. 2,000
To Cash A/c 2,000
Rent A/c Dr. 2,000
To Cash A/c 2,000
Landlord’s account has been wrongly debited instead of Rent account.

Hence, rectification entry will be :
Rent A/c Dr. 2,000
To Landlord’s A/c 2,000

196 Accountancy
Record the rectification entry for the following transactions:

1. Credit sales to Rajni Rs. 5,000 recorded in Purchases book:
This is an error of ..........................................
State the wrong entry recorded in the book of accounts
The rectification entry will be:
2. Furniture purchased from M/s Rao Furnishigs for Rs. 8,000 was entered into
the purchases book .
This is the error of ........................................
3. Cash sales to Radhika Rs. 15,000 was shown as receipt of commission in the
cash book.
This is the error of ..............................................
The rectificatin entry will be:
4. Cash received from Karim Rs. 6,000 posted to Nadeem.

This is the error of ........................................
State the wrong entry recorded in the book of accounts:
6.6.2 Rectification of Errors Affecting Trial Balance

The errors which affect only one account can be rectified by giving an exaplanatory
note in the account affected or by recording a journal entry with the help of the
Suspense Account. Suspense Account is explained later in this chapter. Examples
of such errors are error of casting; error of carrying forward; error of balancing;
error of posting to correct account but with wrong amount; error of posting to
the correct account but on the wrong side; posting to the wrong side with the
wrong amount; omitting to show an account in the trial balance.
An error in the books of original entry, if discovered before it is posted to
the ledger, may be corrected by crossing out the wrong amount by a single
line and writing the correct amount above the crossed amount and initialling
it. An error in an amount posted to the correct ledger account may also be
198 Accountancy
corrected in a similar way, or by making an additional posting for the difference

in amount and giving an explanatory note in the particulars column. But
errors should never be corrected by erasing or overwriting reduces the
authenticity of accounting records and give an impression that something is
being concealed. A better way therefore is by noting the correction on the
appropriate side for neutralising the effect of the error. Take for example a
case where Shyam’s account was credited short by Rs. 190. This will be rectified
by an additional entry for Rs. 190 on the credit side of his account as follows.
Shyam’s Account
Dr. Cr.
Rs. Rs.
Difference in 190
amount posted
short on.....
Take another example, purchases book was undercast by Rs. 1,000. The effect
of this entry is on purchases account (debit side) where the total of purchases
book is posted
Purchases Account
Dr. Cr.
Rs. Rs.
Undercasting 1,000
purchases
book for the
month of....
Suspese Account
Even if the trial balance does not tally due to the existence of one sided errors,
accountant has to carry forward his accounting process prepare financial
statements. The accountant tallies his trial balance by putting the difference
on shorter side as ‘suspense account’.
The process of opening of suspense account can be understood with the help
of the following example :
Consider the sales book of an organisation.
Sales Book (Journal)

Date Invoice Name of customers L.F. Amount
No. (Accounts to be debited) Rs.
Ashok traders 20,000

Bimal service centre 10,000
Chopra enterprises 5,000
Diwakar and sons 15,000
50,000
If sales to Diwakar and sons were not posted to his account, ledger will
show the following position :
Ashok Traders Account
Dr. Cr.

Rs. Rs.
Sales 20,000 Balance c/d 20,000
20,000 20,000
Bimal Service Centre’s Account

Dr. Cr.

Rs. Rs.
10,000 10,000
Chopra Enterprises Account

Dr. Cr.

Rs. Rs.
5,000 5,000
Sales Account
Cr. Dr.
Rs. Rs.
Sundries 50,000
200 Accountancy
The trial balance when prepared on the basis of above balances will not
tally. Its credit column total will amount to Rs. 50,000 and debit column total
to Rs. 35,000. The trial balance would differ with Rs. 15,000. This difference
will be temporarily put to suspense account and trial balance will be made to
agree in the ledger.
In the above case, difference in trial balance has arisen due to one sided
error (omission of posting to Diwakar and sons’s account). In a real situation,
there can be many other such one-sided errors which cause a difference in
trial balance and thus result in opening of the suspense account. Till the all
errors affecting agreement of trial balance are not located it is not possible to
rectify them and tally the trial balance in such a situation, is shown in the
Suspense account, make the total of debit and credit columns and proceed
further with the accounting process.
When the errors are located and the specific accounts and amounts involved
are identified, the amounts are transferred from suspense account to the
relevant accounts thereby closing the suspense account. Thus, suspense
account is not placed in any particular category of accounts and is just a
temporary phenomenon.
While rectifying one-sided errors using suspense account, the following steps
are taken:
(i) Identify the account affected due to error.
(ii) Ascertain the amount of excess debit/credit or short debit/credit in the
affected account.
(iii) If the error has resulted in excess debit or short credit in the affected
account, credit the account with the amount of excess debit or short
credit.
(iv) If the error has resulted in excess credit or short debit in the affected
account, debit the account with the amount of excess credit or short
debit.
(v) Complete the journal entry by debiting or crediting the suspense account
as another account affected otherwise.
We will now discuss the process of rectification using suspense account:
(a) Credit sales to Mohan Rs. 10,000 were not posted to his account. This is
an error of partial omission comitted while posting entries of the sales
book.
Wrong effect has been :
Mohan’s A/c Dr. Nil

To Sales A/c 10,000

To Sales A/c 10,000
The rectification entry will be :

To Suspense A/c 10,000
(b) Credit sales to Mohan Rs. 10,000 were posted to his account as Rs. 7000. This is
an error of commission. Mohan’s account has been debited with Rs. 7,000 instead
of Rs. 10,000 resulting in short debit of Rs. 3,000.
The wrong effect has been :

To Sales A/c 10,000

To Sales A/c 10,000
Hence, rectification entry will be:

To Suspens A/c 3,000
(c) Credit sales to Mohan Rs. 10,000 were posted to his account as Rs. 12,000.
This is an error of commission. The wrong effect has been :

To Sales A/c 10,000
Correct effect should have been

To Sales A/c 10,000
Suspense A/c Dr. 2,000

To Mohan’s A/c 2,000
(d) Purchases book overcast by Rs. 1,000. Errors in casting of subsidiary books
affect only those accounts where totals of the subsidiary books involved are
202 Accountancy
posted. The accounts of individual parties are not af fected. Consider the
following example.

Date Invoice Name of suppliers L.F. Amount
No. (Accounts to be credited) Rs.
Dheru 8,000
Chandraprakash 7,000
Sachin 6,000
21,000
Wrong total 22,000
due to overcasting.
Dheru’s Account
Dr. Cr.
Rs. Rs.
Purchases 8,000
Chandraprakash’s Account
Dr. Cr.

Rs. Rs.
Purchases 7,000
Sachin’s Account
Dr. Cr.
Rs. Rs.
Purchases 6,000
Purchases Account
Dr. Cr.
Rs. Rs.
Sundries 22,000
As you can notice that there is no error in accounts of Dheeru, Chanderprakash and
Sachin. Only purchases account has been debited with Rs. 1,000 extra. Hence, rectification
entry will be :

6.6.3 Rectification of Errors in the Next Accounting Year

If some errors committed during an accounting year are not located and
rectified before the finalisation of financial statements, suspense account
cannot be closed and its balance will be carried forward to the next accounting
period. When the errors committed in one accounting year are located and
rectified in the next accounting year, profit and loss adjustment account is
debited or credited in place of accounts of expenses/losses and incomes/
gains in order to avoid impact on the income statement of next accounting
period. You will learn about this aspect at an advanced stage of your studies
in accounting.
Box 1
Guiding Principles of Rectification of Errors
1. If error is committed in books of original entry then assume all postings are
done accordingly.
2. If error is at the posting stage then assume that recording in the subsidiary
books has been correctly done.
3. If error is in posting to a wrong account (without mentioning side and amount of
posting) then assume that posting has been done on the right side and with the
right amount.
4. If posting is done to a correct account but with wrong amount (without mentioning
side of posting) then assume that posting has been done on the correct side.
5. If error is posting to a wrong account on the wrong side (without mentioning
amount of posting) then assume that posting has been done with the amount as
per the original recording of the transaction.
6. If error is of posting to a wrong account with wrong amount (without mentioning
the side of posting) then assume that posting has been done on the right side.
7. If posting is done to a correct account on the wrong side (without mentioning
amount of posting) then assume that posting has been done with correct amount
as per original recording.
8. Any error in posting of individual transactions in subsidiaries books relates to
individual account only, the sales account, purchase account, sales return
account or purchases return account are not involved.
204 Accountancy
9. If a transaction is recorded in cash book, then the error in posting relates to the
other affected account, not to cash account/bank account
10. If a transaction is recorded through journal proper, then the phrase ‘transaction
was not posted’ indicates error in both the accounts involved, unless stated
otherwise.
11. Error in casting of subsidiary books will affect only that account where total of
the particular book is posted leaving the individual personal accounts unaffected.

Show the effect through Journal entries :
1. Credit sales to Mohan Rs. 10,000 were posted to his account as Rs. 12,000
This is an error of ..................................
The correct effect should have been :
The rectification entry will be.
2. Cash paid to Neha Rs. 2,000 was not posted to her account. This is an error of
..................................

3. Sales returns from Megha Rs. 1,600 were posted to her account as Rs. 1,000.
This is an error of ..................................
4. Depreciation written off on furniture Rs. 1,500 was not posted to depreciation
account. This is an error of ................
The rectification entry :
Illustration 1
Rectify the following errors :

Credit purchases from Raghu Rs. 20,000
(i) were not recorded.
(ii) were recorded as Rs. 10,000.
(iii) were recorded as Rs. 25,000.
(iv) were not posted to his account.
(v) were posted to his account as Rs. 2,000.
(vi) were posted to Reghav’s account.
(vii) were posted to the debit of Raghu’s account.
(viii) were posted to the debit of Raghav.
(ix) were recorded through sales book.
206 Accountancy
Solution
(i)

To Raghu’s A/c 20,000
(Credit purchases from Raghu omitted to be recorded, now corrected)
(ii)

(Credit purchases from Raghu recorded as Rs. 10,000 instead of Rs 20,000,
now corrected)
(iii)
Raghu’s A/c Dr. 5,000

(Credit purchases from Raghu recorded as Rs. 25,000 instead of
Rs. 20,000).
(iv)

(Credit purchases from Raghu not posted to his account now corrected).
(v)

(Credit purchases from Raghu Rs. 20,000 posted to his account as
Rs. 2,000
(vi)
Raghav’s A/c Dr. 20,000

(Credit purchases from Raghu wrongly credited to Raghav, now corrected)
(vii)

(Credit purchases from Raghu Rs. 20,000 wrongly posted to the debit of
his account, now corrected).
(viii)

To Raghav’s A/c 20,000
(Credited purchases from Raghu Rs. 20,000 wrongly debited to Raghav,
now corrected).
(ix)
Sales A/c Dr. 20,000

(Credit purchases from Raghu wrongly recorded through sales book, now
corrected).
Illustration 2
Rectify the following errors :
Cash sales Rs. 16,000
(i) were not posted to sales account.
(ii) were posted as Rs. 6,000 in sales account.
(iii) were posted to commission account.
Solution
(i)

To Sales A/c 16,000
(Cash sales not posted to sales account now rectified)
(ii)

To Sales A/c 10,000
(Cash sales Rs. 16,000 were posted to sales account as Rs. 6,000, now
rectified)
(iii)
Commission A/c Dr. 16,000

To Sales A/c 16,000
(Cash sales posted to commission account instead of sales account,
now corrected)
208 Accountancy
Illustration 3
Depreciation written-off as the machinery Rs. 2,000
(i) was not posted
(ii) was not posted to machinery account
(iii) was not posted to depreciation account
Solution
(i) It was recorded through journal proper. From journal proper posting to all the
accounts are made individually. Hence, no posting was made to depreciation account
and machinery account. Therefore, rectification entry will be :
Depreciation A/c Dr. 2,000

To Machinery A/c 2,000
(Depreciation on machinery not posted, now corrected)
(ii) In this case posting was not made to machinery account. It is to be assumed that
depreciation account should have been correctly debited. Therefore, rectification
entry shall be :

(Depreciation on machinery not posted to Machinery account, now
corrected).
(iii) In this case depreciation account was not been debited. However, machinery account
must have been correctly credited. Therefore, rectification entry shall be :

(Depreciation on machinery not posted to Depreciation account, now
corrected).
Illustration 4
Trial balance of Anurag did not agree. It showed an excess credit Rs. 10,000. Anurag put
the difference to suspense account. He located the following errors :
(i) Sales return book over cast by Rs. 1,000.
(ii) Purchases book was undercast by Rs. 600.
(iii) In the sales book total of page no. 4 was carried forward to page 5 as Rs. 1,000
instead of Rs. 1,200 and total of page 8 was carried forward to page 9 as
Rs. 5,600 instead of Rs. 5,000.
(iv) Goods returned to Ram Rs. 1,000 were recorded through sales book.
(v) Credit purchases from M & Co. Rs. 8,000 were recorded through sales book.
(vi) Credit purchases from S & Co. Rs. 5,000 were recorded through sales book.
However, S & Co. were correctly credited.
(vii) Salary paid Rs. 2,000 was debited to employee’s personal account.
Solution
(i)

To Sales Return A/c 1,000
(Sales returns book overcast by Rs. 1,000, now corrected).
(ii)
Purchases A/c Dr. 600

To Suspense A/c 600
(Purchases book undercast by Rs. 600, now corrected)
(iii)
Sales A/c Dr. 400

To Suspense A/c 400
(Error in carry forward of sales book, now corrected).
Note : Errors in carry forward the total of one page to another during
a period finally affects the total of that book resulting in error of under/overcastting.
In this case, carry forward from page 4 to 5 resulted in undercasting of Rs. 200 and
carry forward from page 8 to page 9 resulted in overcasting of Rs. 600. Overall
overcastting being Rs. 600–200 = Rs. 400.
(iv)
Sales A/c Dr. 1,000

To Return Outwards A/c 1,000
(Return Outwards wrongly recorded through sales book, now rectified).
(v)

Sales A/c Dr. 8,000
To M & Co.’s A/c 16,000
(Credit purchases wrongly recorded through sales book, now rectified).
(vi)

Sales A/c Dr. 5,000
(Credit purchases wrongly recorded through sales book, however suppliers
account correctly credited, now rectified).
210 Accountancy
(vii)
Salary A/c Dr. 2,000

To Employee’s personal A/c 2,000
(Salary paid wrongly debited to employee’s personal account, now
corrected)
Suspense Account
Dr. Cr.
Rs. Rs.
Difference as per 10,000
trial balance Purchases 600
Sales return 1,000 Sales 400
Purchases 5,000
Sales 5,000
11,000 11,000
Illustration 5
Trial balance of Rahul did not agree. Rahul put the difference to suspense account.
Subsequently, he located the following errors :
(i) Wages paid for installation of Machinery Rs. 600 was posted to wages account.
(ii) Repairs to Machinery Rs. 400 debited to Machinery account.
(iii) Repairs paid for the overhauling of second hand machinery purchased Rs. 1,000
was debited to Repairs account.
(iv) Own business material Rs. 8,000 and wages Rs. 2,000 were used for construction
of building. No adjustment was made in the books.
(v) Furniture purchased for Rs. 5,000 was posted to purchase account as Rs. 500.
(vi) Old machinery sold to Karim at its book value of Rs. 2,000 was recorded through
sales book.
(vii) Total of sales returns book Rs. 3,000 was not posted to the ledger.
Rectify the above errors and prepare suspense account to ascertain the original
difference in trial balance.
(i)
Machinery A/c Dr. 600

To Wages A/c 600
(Wages paid for installation of machinery wrongly debited to wages account,
now rectified)
(ii)
Repairs A/c Dr. 400

To Machinery A/c 400
(Repairs paid wrongly debited to machinery account now rectified)
(iii)
Machinery A/c Dr. 1,000

To Repairs A/c 1,000
(Repairs for overhauling of second hand machinery purchased, wrongly
debited to repairs account, now rectified).
(iv)
Building A/c Dr. 10,000

To Wages A/c 2,000
(Material and wages used for construction of Building, not debited to
building account).
(v)

To Purchases A/c 500
(Furniture purchased for Rs. 5,000 wrongly debited to purchases account
as Rs. 500, now rectified).
(vi)
Sales A/c Dr. 2,000

To Machinery 2,000
(Sale of machinery wrongly recorded in sales book, now rectified).
(vii)
Sales Return A/c Dr. 3,000

(Total of sales returns book not posted to ledger, now rectified).
Suspense Account

Rs. Rs.
Difference as per 7,500 Furniture 4,500

trial balance Sales return 3.000
7,500 7,500
Hence, original difference in Trial Balance was Rs. 7,500 excess credited.
212 Accountancy
Illustration 6
Trial balance of Anant Ram did not agree. It showed an excess credit of Rs. 16,000. He
put the difference to suspense account. Subsequently the following errors were located:
(i) Cash received from Mohit Rs. 4,000 was posted to Mahesh as Rs. 1,000.
(ii) Cheque for Rs. 5,800 received from Arnav in full settlement of his account of Rs.
6,000, was dishonoured. No entry was passed in the books on dishonour of the
cheque.
(iii) Rs. 800 received from Khanna, whose account had previously been written off as
bad, was credited to his account.
(iv) Credit sales to Manav for Rs. 5,000 was recorded through the purchases book as
Rs. 2,000.
(v) Purchases book undercast by Rs. 1,000.
(vi) Repairs on machinery Rs. 1,600 wrongly debited to Machinery account as Rs. 1,000.
(vii) Goods returned by Nathu Rs. 3,000 were taken into stock. No entry was recorded
in the books.
Solution
(i)
Mahesh’s A/c Dr. 1,000

To Mohit’s A/c 4,000
(Cash received from Mohit Rs. 4,000 wrongly posted to Mahesh as
Rs.1,000, now rectified)
(ii)
Arnav’s A/c Dr. 6,000

To Bank A/c 5,800
To Discount Allowed A/c 200
(Cheque received from Arnav for Rs. 5,800 in full settlement of his account
of Rs. 6,000, dishonoured but no entry made in books, now rectified)
(iii)
Khanna’s A/c Dr. 800

To Bad debts recovered A/c 800
(Bad debts recovered wrongly credited to Khanna’s account, now rectified)
(iv)
Manav’s A/c Dr. 7,000

To Sales A/c 5,000
(Credit sales to Manav Rs. 5,000 wrongly recorded through purchases
book as Rs. 2,000, now rectified)
(v)

(Purchases book undercast by Rs. 1,000)
(vi)
Repairs A/c Dr. 1,600

To Suspense A/c 600
(Repairs on machinery Rs. 1,600 wrongly debited to machinery account
as Rs. 1,000, now rectified)
(vii)

To Nathu’s A/c 3,000
(Sales return from Nathu not recorded)
Suspense Account
Dr. Cr.

Rs. Rs.
Difference as per Purchases 1,000

trial balance 16,000 Repairs 600
Mohit 3,000 Balance c/d 17,400
19,000 19,000
Note : Even after rectification of errors suspense account is showing a debit balance
of Rs. 17,400. This is due to non-detection of errors affecting trial balance. Balance
of suspense account will be carried forward to the next year and will be eliminated
as and when all the remaining errors affecting trial balance are located.
214 Accountancy
Illustration 7
Trial balance of Kailash did not agree. He put the difference to suspense account. The
following errors were discovered :
(i) Goods withdrawn by Kailash for personal use Rs. 500 were not recorded in the
books.
(ii) Discount allowed to Ramesh Rs.60 on receiving Rs. 2,040 from him was not recorded
in the books.
(iii) Discount received from Rohan Rs. 50 on paying Rs. 3,250 to him was not posted at all.
(iv) Rs. 700 received from Khalil, a debtor, whose account had earlier been written-off
as bad, were credited to his personal account.
(v) Cash received from Govil, a debtor, Rs. 5,000 was posted to his account as Rs. 500.
(vi) Goods returned to Mahesh Rs. 700 were posted to his account as Rs. 70.
(vii) Bill receivable from Narayan Rs. 1,000 was dishonoured and wrongly debited to
allowances account as Rs. 10,000.
Give journal entries to rectify the above errors and prepare suspense account to ascertain
the amount of difference in trial balance.
Solution.
(i)
Drawings A/c Dr. 500

To Purchases A/c 500
(Goods withdrawn by proprietor for personal use not recorded, now
rectified).
(ii)
Discount allowed A/c Dr. 60

To Ramesh’s A/c 60
(Discount allowed to Ramesh not recorded, now rectified)
(iii)
Rohan’s A/c Dr. 50

To Discount received A/c 50
(Discount received from Rohan not posted , now corrected)
(iv)
Khalil’s A/c Dr. 700

To Bad debts recovered A/c 700
(Bad debts recovered wrongly credited to debtor’s personal account, now
corrected)
(v)

To Govil’s A/c 4,500
(Cash received from Govil Rs. 5,000 wrongly posted to his account as
Rs. 500)
(vi)
Mahesh’s A/c Dr. 630

To Suspense A/c 630
(Goods returned to Mahesh Rs. 700 wrongly posted to his account as
Rs. 70, now corrected)
(vii)
Narayan’s A/c Dr. 1,000

To Allowances A/c 10,000
(Bill receivables from Narayan Rs. 1,000 wrongly debited to allowances
account as Rs. 10,000).
Suspense Account
Dr. Cr.
Rs. Rs.
Govil 4,500 Mahesh 630
Allowances 9,000 Difference as per 12,870
trial balance
13,500 13,500
Tick the Correct Answer

(1) Agreement of trial balance is affected by:
(a) One sided errors only.
(b) Two sided errors only.
(c) Both a and b.
(d) None of the above.
(2) Which of the following is not an error of principle:
(a) Purchase of furniture debited to purchases account.
(b) Repairs on the overhauling of second hand machinery purchased debited to
repairs account.
216 Accountancy
(c) Cash received from Manoj posted to Saroj.

(d) Sale of old car credited to sales account.
(3) Which of the following is not an error of commission:
(a) Overcasting of sales book.
(b) Credit sales to Ramesh Rs. 5,000 credited to his account.
(c) Wrong balancing of machinery account.
(d) Cash sales not recorded in cash book.
(4) Which of following errors will be rectified through suspense account:
(a) Sales return book undercast by Rs. 1,000.
(b) Sales return by Madhu Rs. 1,000 not recorded.
(c) Sales return by Madhu Rs 1,000. recorded as Rs,100.
(d) Sales return by Madhu Rs. 1,000 recorded through purchases returns book
(5) If the trial balance agrees, it implies that:
(a) There is no error in the books.
(b) There may be two sided errors in the book.
(c) There may be one sided error in the books.
(d) There may be both two sided and one sided errors in the books.
(6) If suspense account does not balance off even after rectification of errors it implies
that:
(a) There are some one sided errors only in the books yet to be located.
(b) There are no more errors yet to be located.
(c) There are some two sided errors only yet to be located.
(d) There may be both one sided errors and two sided errors yet to be located.
(7) If wages paid for installation of new machinery is debited to wages Account, it is:
(a) An error of commission.
(b) An error of principle.
(c) A compensating error.
(d) An error of omission.
(8) Trial balance is:
(a) An account.
(b) A statement.
(c) A subsidiary book.
(d) A principal book.
(9) A Trial balance is prepared:
(a) After preparation financial statement.
(b) After recording transactions in subsidiary books.
(c) After posting to ledger is complete.
(d) After posting to ledger is complete and accounts have been balanced,
• Trial Balance • Compensating Error

• Error of Commission • Error of Principle
• Error Omission • Suspense Account
1. Meaning of trial balance : A statement showing the abstract of the balance

(debit/credit) of various accounts in the ledger.
2. Objectives of trial balance : The main objectives of preparing the trial balance
are : (i) to ascertain the arithmetical accuracy of the ledger accounts; (ii) to
help in locating errors; and (iii) to help in the preparatioon of the final accounts.
3. Preparation of trial balance by the balance method : In this method, the trial
balance has three columns. The first column is for the head of the account,
the second column for writing the debit balance and the third for the credit
balance of each account in the ledger.
4. Various types of errors :
(i) Errors of commission : Errors caused due to wrong recording of a
transaction, wrong totalling, wrong casting, wrong balancing, etc.
(ii) Errors of Omission : Errors caused due to omission of recording a
transaction entirely or party in the books of account.
(iii) Errors of Principle : Errors arising due to wrong classificatrion of receipts
and payments between revenue and capital receipts and revenue and
capital expenditure.
(iv) Compensating errors : Two or more errors committed in such a way that
they nullify the effect of each other on the debits and credits.
5. Rectification of errors : Errors affecting only one account can be rectified by
giving an explanatory note or by passing a journal entry. Errors which affect
two or more accounts are rectified by passing a journal entry.
6. Meaning and utility of suspense account : An account in which the difference
in the trial balance is put till such time that errors are located and rectified.
It facilitates the preparation of financial statements even when the trial balance
does not tally.
7. Disposal of suspense account : When all the errors are located and rectified
the suspense account stands disposed off.

Short Answers
1. State the meaning of a trial balance?
2. Give two examples of errors of principle?
3. Give two examples of errors of commission?
4. What are the methods of preparing trial balance?
5. What are the steps taken by an accountant to locate the errors in the trial
balance?
6. What is a suspense account? Is it necessary that is suspense account will
balance off after rectification of the errors detected by the accountant? If
not, then what happens to the balance still remaining in suspense account?
7. What kinds of errors would cause difference in the trial balance. Also list
examples that would not be revealed by a trial balance?
8. State the limitations of trial balance?
218 Accountancy
Long Answers
1. Describe the purpose for the preparation of trial balance.
2. Explain errors of principle and give two examples with measures to rectify
them.
3. Explain the errors of commission and give two examples with measures to
rectify them.
4. What are the different types of errors that are usually committed in recording
business transaction.
5. As an accounts for a company, you are disappointed to learn that the
totals in your new trial balance are not equal. After going through a careful
analysis, you have discovered only one error. Specifically, the balance of
the Office Equipment account has a debit balance of Rs. 15,600 on the
trial balance. However, you have figured out that a correctly recorded credit
purchase of pendrive for Rs 3,500 was posted from the journal to the ledger
with a Rs. 3,500 debit to Office Equipment and another Rs. 3,500 debit to
creditors accounrts. Answer each of the following questions and present
the amount of any misstatement :
(a) Is the balance of the office equipment account overstated, understated,
or correctly stated in the trial balance?
(b) Is the balance of the creditors account overstated, understated, or
correctly stated in the trial balance?
(c) Is the debit column total of the trial balance overstated, understated,
or correclty stated?
(d) Is the credit column total of the trial balance overstated, understated,
or correctly stated?
(e) If the debit column total of the trial balance is Rs. 2,40,000 before
correcting the error, what is the total of credit column.
Numerical Questions
1. Rectify the following errors :
(i) Credit sales to Mohan Rs. 7,000 were not recorded.
(ii) Credit purchases from Rohan Rs. 9,000 were not recorded.
(iii) Goods returned to Rakesh Rs. 4,000 were not recorded.
(iv) Goods returned from Mahesh Rs. 1,000 were not recorded.
(i) Credit sales to Mohan Rs. 7,000 were recorded as Rs.700.
(ii) Credit purchases from Rohan Rs. 9,000 were recorded. as Rs.900.
(iii) Goods returned to Rakesh Rs. 4,000 were recorded as Rs 400.
(iv) Goods returned from Mahesh Rs. 1,000 were recorded as Rs.100.
(i) Credit sales to Mohan Rs. 7,000 were recorded as Rs.7,200.
(ii) Credit purchases from Rohan Rs. 9,000 were recorded as Rs. 9,900.
(iii) Goods returned to Rakesh Rs. 4,000 were recorded as Rs 4,040.
(iv) Goods returned from Mahesh Rs. 1,000 were recorded as Rs.1,600.

(a) Salary paid Rs. 5,000 was debited to employee’s personal account.
(b) Rent Paid Rs. 4,000 was posted to landlord’s personal account.
(c) Goods withdrawn by proprietor for personal use Rs. 1,000 were debited
to sundry expenses account.
(d) Cash received from Kohli Rs. 2,000 was posted to Kapur’s account.
(e) Cash paid to Babu Rs. 1,500 was posted to Sabu’s account.
(a) Credit Sales to Mohan Rs. 7,000 were recorded in purchases book.
(b) Credit Purchases from Rohan Rs. 9,00 were recorded in sales book.
(c) Goods returned to Rakesh Rs. 4,000 were recorded in the sales return
book.
(d) Goods returned from Mahesh Rs. 1,000 were recorded in purchases
return book.
(e) Goods returned from Nahesh Rs. 2,000 were recorded in purchases book.
(a) Sales book overcast by Rs. 700.
(b) Purchases book overcast by Rs. 500.
(c) Sales return book overcast by Rs. 300.
(d) Purchase return book overcast by Rs. 200.
(a) Sales book undercast by Rs.300.
(b) Purchases book undercast by Rs.400.
(c) Return Inwards book undercast by Rs.200.
(d) Return outwards book undercast by Rs.100.
8. Rectify the following errors and ascertain the amount of difference in trial
balance by preparing suspense account :
(a) Credit sales to Mohan Rs. 7,000 were not posted.
(b) Credit purchases from Rohan Rs. 9,000 were not posted.
(c) Goods returned to Rakesh Rs. 4,000 were not posted.
(d) Goods returned from Mahesh Rs. 1,000 were not posted.
(e) Cash paid to Ganesh Rs. 3,000 was not posted.
(f) Cash sales Rs. 2,000 were not posted.
(Ans : Difference in trial balance Rs. 2,000 excess credit).
9. Rectify the following errors and ascertain the amount of difference in trial
balance by preparing suspense account :
(a) Credit sales to Mohan Rs. 7,000 were posted as Rs. 9,000.
(b) Credit purchases from Rohan Rs. 9,000 were posted as Rs. 6,000.
(c) Goods returned to Rakesh Rs. 4,000 were posted as Rs. 5,000.
(d) Goods returned from Mahesh Rs. 1,000 were posted as Rs. 3,000.
(e) Cash sales Rs. 2,000 were posted as Rs. 200.
(Ans : Difference in trial balance Rs. 5,800 excess debit.)
220 Accountancy

(a) Credit sales to Mohan Rs. 7,000 were posted to Karan.
(b) Credit purchases from Rohan Rs. 9,000 were posted to Gobind.
(c) Goods returned to Rakesh Rs. 4,000 were posted to Naresh.
(d) Goods returned from Mahesh Rs. 1,000 were posted to Manish.
(e) Cash sales Rs. 2,000 were posted to commission account.
11. Rectify the following errors assuming that a suspense account was opened.
Ascertain the difference in trial balance.
(a) Credit sales to Mohan Rs. 7,000 were posted to the credit of his account.
(b) Credit purchases from Rohan Rs. 9,000 were posted to the debit of his
account as Rs. 6,000.
(c) Goods returned to Rakesh Rs. 4,000 were posted to the credit of his
account.
(d) Goods returned from Mahesh Rs. 1,000 were posted to the debit of his
(e) Cash sales Rs. 2,000 were posted to the debit of sales account as Rs. 5,000.
(Ans : Difference in trial balance Rs. 3,000 excess debit).
12. Rectify the following errors assuming that a suspense account was opened.
(a) Credit sales to Mohan Rs. 7,000 were posted to Karan as Rs. 5,000.
(b) Credit purchases from Rohan Rs. 9,000 were posted to the debit of
Gobind as Rs 10,000.
(c) Goods returned to Rakesh Rs. 4,000 were posted to the credit of Naresh
as Rs 3,000.
(d) Goods returned from Mahesh Rs. 1,000 were posted to the debit of
Manish as Rs. 2,000.
(e) Cash sales Rs. 2,000 were posted to commission account as Rs. 200.
(Ans : Difference in trial balance Rs. 14, 800 excess debit).
13. Rectify the following errors assuming that suspense account was opened.
(a) Credit sales to Mohan Rs. 7,000 were recorded in Purchase Book.
However, Mohan’s account was correctly debited.
(b) Credit purchases from Rohan Rs. 9,000 were recorded in sales book.
However, Rohan’s account was correctly credited.
(c) Goods returned to Rakesh Rs. 4,000 were recorded in sales return
book. However, Rakesh’s account was correctly debited.
(d) Goods returned from Mahesh Rs. 1,000 were recorded through
purchases return book. However, Mahesh’s account was correctly
credited.
(e) Goods returned to Naresh Rs. 2,000 were recorded through purchases
book. However, Naresh’s account was correctly debited.

(a) Furniture purchased for Rs. 10,000 wrongly debited to purchases
account.
(b) Machinery purchased on credit from Raman for Rs. 20,000 was
recorded through purchases book.
(c) Repairs on machinery Rs. 1,400 debited to machinery account.
(d) Repairs on overhauling of secondhand machinery purchased Rs. 2,000
was debited to Repairs account.
(e) Sale of old machinery at book value of Rs. 3,000 was credited to sales account.
15. Rectify the following errors assuming that suspension account was opened.
(a) Furniture purchased for Rs. 10,000 wrongly debited to purchase
(b) Machinery purchased on credit from Raman for Rs. 20,000 recorded
through Purchases Book as Rs. 6,000.
(c) Repairs on machinery Rs. 1,400 debited to Machinery account as
Rs. 2,400.
(d) Repairs on overhauling of second hand machinery purchased Rs. 2,000
was debited to Repairs account as Rs. 200.
(e) Sale of old machinery at book value Rs. 3,000 was credited to sales
(a) Depreciation provided on machinery Rs. 4,000 was not posted.
(b) Bad debts written off Rs. 5,000 were not posted.
(c) Discount allowed to a debtor Rs. 100 on receiving cash from him was not
posted.
(d) Discount allowed to a debtor Rs. 100 on receiving cash from him was
not posted to discount account.
(e) Bill receivable for Rs. 2,000 received from a debtor was not posted.
(a) Depreciation provided on machinery Rs. 4,000 was posted as Rs. 400.
(b) Bad debts written off Rs. 5,000 were posted as Rs. 6,000.
(c) Discount allowed to a debtor Rs. 100 on receiving cash from him was
posted as Rs. 60.
(d) Goods withdrawn by proprietor for personal use Rs. 800 were posted
as Rs. 300.
(e) Bill receivable for Rs. 2,000 received from a debtor was posted as
Rs. 3,000.
18. Rectify the following errors assuming that suspense account was opened.
(a) Depreciation provided on machinery Rs. 4,000 was not posted to
Depreciation account.
222 Accountancy
(b) Bad debts written-off Rs. 5,000 were not posted to Debtors account.
(c) Discount allowed to a debtor Rs. 100 on receiving cash from him was
not posted to discount allowed account.
(d) Goods withdrawn by proprietor for personal use Rs. 800 were not posted
to Drawings account.
(e) Bill receivable for Rs. 2,000 received from a debtor was not posted to
Bills receivable account.
19. Trial balance of Anuj did not agree. It showed an excess credit of Rs. 6,000.
He put the difference to suspense account. He discovered the following
errors.
(a) Cash received from Ravish Rs. 8,000 posted to his account as
Rs. 6,000.
(b) Returns inwards book overcast by Rs. 1,000.
(c) Total of sales book Rs. 10,000 was not posted to Sales account.
(d) Credit purchases from Nanak Rs. 7,000 were recorded in sales Book.
However, Nanak’s account was correctly credited.
(e) Machinery purchased for Rs. 10,000 was posted to purchases account
as Rs. 5,000. Rectify the errors and prepare suspense account.
(Ans : Total of suspense account Rs. 19,000).
20. Trial balance of Raju showed an excess debit of Rs. 10,000. He put the
difference to suspense account and discovered the following errors :
(a) Depreciation written-off the furniture Rs. 6,000 was not posted to
Furniture account.
(b) Credit sales to Rupam Rs. 10,000 were recorded as Rs. 7,000.
(c) Purchases book undercast by Rs. 2,000.
(d) Cash sales to Rana Rs. 5,000 were not posted.
(e) Old Machinery sold for Rs. 7,000 was credited to sales account.
(f) Discount received Rs. 800 from kanan on playing cash to him was not
posted. Rectify the errors and prepare suspense account.
(Ans : Balance carried forward in suspense account Rs. 1,000 (cr.)).
21. Trial balance of Madan did not agree and he put the difference to
suspense account. He discovered the following errors:
(a) Sales return book overcast by Rs. 800.
(b) Purchases return to Sahu Rs. 2,000 were not posted.
(c) Goods purchased on credit from Narula Rs. 4,000 though taken into
stock, but no entry was passed in the books.
(d) Installation charges on new machinery purchased Rs. 500 were debited
to sundry expenses account as Rs. 50.
(e) Rent paid for residential accommodation of madam (the proprietor)
Rs. 1,400 was debited to Rent account as Rs. 1,000.
Rectify the errors and prepare suspense account to ascertain the
difference in trial balance.
22. Trial balance of Kohli did not agree and showed an excess debit of Rs.
16,300. He put the difference to a suspense account and discovered the
following errors:
(a) Cash received from Rajat Rs. 5,000 was posted to the debit of Kamal
as Rs. 6,000.
(b) Salaries paid to an employee Rs. 2,000 were debited to his personal
account as Rs. 1200.
(c) Goods withdrawn by proprietor for personal use Rs. 1,000 were credited
to sales account as Rs. 1,600.
(d) Depreciation provided on machinery Rs. 3,000 was posted to Machinery
account as Rs. 300.
(e) Sale of old car for Rs. 10,000 was credited to sales account as
Rs. 6,000. Rectify the errors and prepare suspense account.
(Ans : total of suspense account : Rs. 17,700).
23. Give journal entries to rectify the following errors assuming that suspense
account had been opened.
(a) Goods distributed as free sample Rs. 5,000 were not recorded in the
books.
(b) Goods withdrawn for personal use by the proprietor Rs. 2,000 were
not recorded in the books.
(c) Bill receivable received from a debtor Rs. 6,000 was not posted to his
account.
(d) Total of Returns inwards book Rs. 1,200 was posted to Returns
outwards account.
(e) Discount allowed to Reema Rs. 700 on receiving cash from her was
recorded in the books as Rs. 70.
24. Trial balance of Khatau did not agree. He put the difference to suspense account
and discovered the following errors :
(a) Credit sales to Manas Rs. 16,000 were recorded in the purchases book
as Rs. 10,000 and posted to the debit of Manas as Rs. 1,000.
(b) Furniture purchased from Noor Rs. 6,000 was recorded through
purchases book as Rs. 5,000 and posted to the debit of Noor Rs. 2,000.
(c) Goods returned to Rai Rs. 3,000 recorded through the Sales book as
Rs. 1,000.
(d) Old machinery sold for Rs. 2,000 to Maneesh recorded through sales
book as Rs. 1,800 and posted to the credit of Manish as Rs. 1,200.
(e) Total of Returns inwards book Rs. 2,800 posted to Purchase account.
Rectify the above errors and prepare suspense account to ascertain
the difference in trial balance.
25. Trial balance of John did not agree. He put the difference to suspense
account and discovered the following errors :
(a) In the sales book for the month of January total of page 2 was carried
forward to page 3 as Rs. 1,000 instead of Rs. 1200 and total of page 6
was carried forward to page 7 as Rs. 5,600 instead of Rs. 5,000.
224 Accountancy
(b) Wages paid for installation of machinery Rs. 500 was posted to wages
account as Rs. 50.
(c) Machinery purchased from R & Co. for Rs. 10,000 on credit was entered
in Purchase Book as Rs. 6,000 and posted there from to R & Co. as
Rs. 1,000.
(d) Credit sales to Mohan Rs. 5,000 were recorded in Purchases Book.
(e) Goods returned to Ram Rs. 1,000 were recorded in Sales Book.
(f) Credit purchases from S & Co. for Rs. 6,000 were recorded in sales
book. However, S & Co. was correctly credited.
(g) Credit purchases from M & Co. Rs. 6,000 were recorded in Sales Book
as Rs. 2,000 and posted there from to the credit of M & Co. as
Rs. 1,000.
(h) Credit sales to Raman Rs. 4,000 posted to the credit of Raghvan as
Rs. 1,000.
(i) Bill receivable for Rs. 1,600 from Noor was dishonoured and posted to
debit of Allowances account.
(j) Cash paid to Mani Rs. 5,000 against our acceptance was debited to
Manu.
(k) Old furniture sold for Rs. 3,000 was posted to Sales account as
Rs. 1,000.
(l) Depreciation provided on furniture Rs. 800 was not posted.
(m) Material Rs. 10,000 and wages Rs. 3,000 were used for construction
of building. No adjustment was made in the books.
Rectify the errors and prepare suspense to ascertain the difference in
trial balance.

Test your understanding - I
Trial Balance Total Rs. 5,17,000
Test your understanding - II
1. Purchases A/c Dr. 5,000

To Rajni’s A/c 5,000
Rajni’s A/c Dr. 5,000

To Sales A/c 5,000
Rajni’s A/c Dr. 10,000

To Sales A/c 5,000
2. Purchases A/c Dr. 8,000

To Rao’s A/c 8,000

3. Cash A/c Dr. 15,000

To Commission A/c 15,000
Cash A/c Dr. 15,000

To Sales A/c 15,000
Commission A/c Dr. 15,000

To Sales A/c 15,000
4. Cash A/c Dr. 6, 000

To Nadeem’s A/c 6,000
Cash A/c Dr. 6,000

To Karim’s A/c 6,000

1. Error of Commission
Mohan’s A/c Dr. 12, 000

To Sales A/c 12,000

To Sales A/c 10,000

2. Error of Partial omission
xxx A/c Dr. 2,000

To Cash A/c 2,000
Neha’s A/c Dr. 2,000

Neha’s A/c Dr. 2,000

226 Accountancy

To Megha’s A/c 1,600
Sales Returns A/c Dr. 1,600

To Megha’s A/c 1,600
Suspense A/c Dr. 600

To Megha’s A/c 600
xxx Dr. 1,500
To Furniture A/c 1,500


1. (c) 2. (c) 3. (d) 4. (a) 5. (b) 6. (a) 7. (b) 8. (b) 9. (d)

Depreciation, Provisions and Reserves 7
M atching principle requires that the revenue of

a given period is matched against the expenses
for the same period. This ensures ascertainment of
the correct amount of profit or loss. If some cost is
LEARNING OBJECTIVES incurred whose benefits extend for more than one
accounting period then it is not justified to charge
After studying this chapter, the entire cost as expense in the year in which it is
you will be able to :
incurred. Rather such a cost must be spread over
• explain the meaning of the periods in which it provides benefits.
depreciation and
distinguish it from
Depreciation, which is the main subject matter of
amortisation and the present chapter, deals with such a situation.
depletion; Further, it may not always be possible to ascertain
• state the need for with certainty the amount of some particular
charging depreciation expense. Recall that the principle of conservatism
and identify its causes; (prudence) requires that instead of ignoring such
• compute depreciation items of expenses, adequate provision must be
using straight line and made and charged against profits of the current
written down value period. Moreover, a part of profit may be retained
methods;
in the business in the form of reserves to provide
• record transactions for growth, expansion or meeting certain specific
relating to depreciation
and disposition of
needs of the business in future. This chapter deals
assets; with two distinct topics and hence is being
• explain the meaning presented in two different sections. First section
and purpose of creating deals with depreciation and second section deals
provisions and reserves; with provisions and reserves.
• distinguish between
reserves and provisions;
SECTION – I
• explain the nature of
various types of 7.1 Depreciation
provisions and reserves
including secret reserve. Now you are aware that fixed assets are the assets
which are used in business for more than one
228 Accountancy
accounting year. Fixed assets (technically referred to as “depreciable assets”)

tend to reduce their value once they are put to use. In general, the term
“Depreciation” means decline in the value of a fixed assets due to use, passage
of time or obsolescence. In other words, if a business enterprise procures a
machine and uses it in production process then the value of machine declines
with its usage. Even if the machine is not used in production process, we can
not expect it to realise the same sales price due to the passage of time or
arrival of a new model (obsolescence). It implies that fixed assets are subject
to decline in value and this decline is technically referred to as depreciation.
As an accounting term, depreciation is that part of the cost of a fixed asset
which has expired on account of its usage and/or lapse of time. Hence,
depreciation is an expired cost or expense, charged against the revenue of a
given accounting period. For example, a machine is purchased for Rs.1,00,000
on April 01, 2005. The useful life of the machine is estimated to be 10 years.
It implies that the machine can be used in the production process for next 10
years till March 31, 2015. You understand that by its very nature, Rs. 1,00,000
is a capital expenditure during the year 2005. However, when income statement
(Profit and Loss account) is prepared, the entire amount of Rs.1,00,000 can
not be charged against the revenue for the year 2005, because of the reason
that the capital expenditure amounting to Rs.1,00,000 is expected to derive
benefits (or revenue) for 10 years and not one year. Therefore, it is logical to
charge only a part of the total cost say Rs.10,000 (one tenth of Rs. 1,00,000)
against the revenue for the year 2005. This part represents, the expired cost
or loss in the value of machine on account of its use or passage of time and is
referred to as ‘Depreciation’. The amount of depreciation, being a charge against
profit, is debited to the profit and loss account.
7.1.1 Meaning of Depreciation

Depreciation may be described as a permanent, continuing and gradual
shrinkage in the book value of fixed assets. It is based on the cost of assets
consumed in a business and not on its market value.
According to Institute of Cost and Management Accounting, London (ICMA)
terminology “ The depreciation is the diminution in intrinsic value of the asset
due to use and/or lapse of time.”
Accounting Standard-6 issued by The Institute of Chartered Accountants
of India (ICAI) defines depreciation as “a measure of the wearing out, consumption
or other loss of value of depreciable asset arising from use, effluxion of time or
obsolescence through technology and market-change. Depreciation is allocated
so as to charge fair proportion of depreciable amount in each accounting period
during the expected useful life of the asset. Depreciation includes amortisation
of assets whose useful life is pre-determined”.
Box 1
AS-6 (Revised): Depreciation
• Depreciation is “a measure of the wearing out, consumption or other loss of

value of depreciable asset arising from use, effluxion of time or obsolescence
through technology and market-change. Depreciation is allocated so as to charge
fair proportion of depreciable amount in each accounting period during the
expected useful life of the asset. Depreciation includes amortisation of assets
whose useful life is pre-determined”.
• Depreciation has a significant effect in determining and presenting the financial
position and results of operations of an enterprise. Depreciation is charged in
each accounting period by reference to the extent of the depreciable amount.
• The subject matter of depreciation, or its base, are ‘depreciable’ assets which.
• “are expected to be used during more than one accounting period.
• have a limited useful life; and
• are held by an enterprise for use in production or supply of goods and services,
for rental to others, or for administrative purposes and not for the purpose of
sale in the ordinary course of business.”
• The amount of depreciation basically depends upon three factors, i.e. Cost, Useful
life and Net realisable value.
• Cost of a fixed asset is “the total cost spent in connection with its acquisition,
installation and commissioning as well as for add item or improvement of the
depreciable asset”.
• Useful life of an asset is the “period over which it is expected to be used by the
enterprise”.
• There are two main methods of calculating depreciation amount.
• straight line method
• written down value method
• Selection of appropriate method depends upon the following factors:
• type of the asset
• nature of the use of such asset
• circumstances prevailing in the business.
• The selected depreciation method should be applied consistently from period to
period. Change in depreciation method may be allowed only under specific
circumstances.
Depreciation has a significant effect in determining and presenting the

financial position and results of operations of an enterprise. Depreciation is
charged in each accounting period by reference to the extent of the depreciable
amount. It should be noted that the subject matter of depreciation, or its
base, are ‘depreciable’ assets which:
• “are expected to be used during more than one accounting period;
• have a limited useful life; and
• are held by an enterprise for use in production or supply of goods and
services, for rental to others, or for administrative purposes and not for
the purpose of sale in the ordinary course of business.”
230 Accountancy
Examples of depreciable assets are machines, plants, furnitures, buildings,

computers, trucks, vans, equipments, etc. Moreover, depreciation is the
allocation of ‘depreciable amount’, which is the “historical cost”, or other
amount substituted for historical cost less estimated salvage value.
Another point in the allocation of depreciable amount is the ‘expected useful
life’ of an asset. It has been described as “either (i) the period over which a
depreciable asset is expected to the used by the enterprise, or (ii) the number
of production of similar units expected to be obtained from the use of the
asset by the enterprise.”
7.1.2 Features of Depreciation

Above mentioned discussion on depreciation highlights the following features
of depreciation:
1. It is decline in the book value of fixed assets.
2. It includes loss of value due to effluxion of time, usage or obsolescence.
For example, a business firm buys a machine for Rs. 1,00,000 on April
01, 2000. In the year 2002, a new version of the machine arrives in the
market. As a result, the machine bought by the business firm becomes
outdated. The resultant decline in the value of old machine is caused by
obsolescence.
3. It is a continuing process.
4. It is an expired cost and hence must be deducted before calculating taxable
profits. For example, if profit before depreciation and tax is Rs. 50,000,
and depreciation is Rs. 10,000; profit before tax will be:
(Rs.)
Profit before depreciation & tax 50,000
(-) Depreciation (10,000)
Profit before tax 40,000
5. It is a non-cash expense. It does not involve any cash outflow. It is the
process of writing-off the capital expenditure already incurred.
Do it Yourself
Look at your surroundings and identify at least five depreciable assets in your home,
school, hospital, printing press and in a bakery.
7.2 Depreciation and other Similar Terms

There are some terms—like depletion and amortisation, which are also used
in connection with depreciation. This has been due to the similar treatment
given to them in accounting on the basis of similarity of their outcome, since
they represent the expiry of the usefulness of different assets.
7.2.1 Depletion
The term depletion is used in the context of extraction of natural resources
like mines, quarries, etc. that reduces the availability of the quantity of the
material or asset. For example, if a business enterprise is into mining business
and purchases a coal mine for Rs. 10,00,000. Then the value of coal mine
declines with the extraction of coal out of the mine. This decline in the value of
mine is termed as depletion. The main difference between depletion and
depreciation is that the former is concerned with the exhaution of economic
resources, but the latter relates to the usage of an asset. In spite of this, the
result is erosion in the volume of natural resources and expiry of the service
potential. Therefore, depletion and depreciation are given similar accounting
treatment.
7.2.2 Amortisation
Amortisation refers to writing-off the cost of intangible assets like patents,
copyright, trade marks, franchises, leasehold mines which have entitlements
to use for a specified period of time. The procedure for amortisation or periodic
write-off of a portion of the cost of intangible assets is the same as that for the
depreciation of fixed assets. For example, if a business firm buys a patent for
Rs. 10,00,000 and estimates that its useful life will be 10 years then the
business firm must write-off Rs. 10,00,000 over 10 years. The amount so
written- off is technically referred to as amortisation.
7.3 Causes of Depreciation

These have been very clearly spelt out as part of the definition of depreciation
in the Accounting Standard 6 and are being elaborated here.
7.3.1 Wear and Tear due to Use or Passage of Time

Wear and tear means deterioration, and the consequent diminution in an
assets value, arising from its use in business operations for earning revenue.
It reduces the asset’s technical capacities to serve the purpose for, which it
has been meant. Another aspect of wear and tear is the physical deterioration.
An asset deteriorates simply with the passage of time, even though they are
not being put to any use. This happens especially when the assets are exposed
to the rigours of nature like weather, winds, rains, etc.
232 Accountancy
7.3.2 Expiration of Legal Rights

Certain categories of assets lose their value after the agreement governing
their use in business comes to an end after the expiry of pre-determined
period. Examples of such assets are patents, copyrights, leases, etc. whose
utility to business is extinguished immediately upon the removal of legal
backing to them.
7.3.3 Obsolescence
Obsolescence is another factor leading to depreciation of fixed assets. In
ordinary language, obsolescence means the fact of being “out-of-date”.
Obsolescence implies to an existing asset becoming out-of-date on account of
the availability of better type of asset. It arises from such factors as:
• Technological changes;
• Improvements in production methods;
• Change in market demand for the product or service output of the asset;
• Legal or other description.
7.3.4 Abnormal Factors

Decline in the usefulness of the asset may be caused by abnormal factors
such as accidents due to fire, earthquake, floods, etc. Accidental loss is
permanent but not continuing or gradual. For example, a car which has been
repaired after an accident will not fetch the same price in the market even if it
has not been used.

1. You are looking at the profit and loss account of three business enterprises. You
find the term depletion in first case and amortisation in third case. State the type
of business of two enterprises are into.
2. A pharmaceutical manufacturer has just developed and registered a patent for a
rare medicine. Which term will appear in its profit and loss account regarding the
cost of patent written-off.
7.4 Need for Depreciation

The need for providing depreciation in accounting records arises from
conceptual, legal, and practical business consideration. These considerations
provide depreciation a particular significance as a business expense.
7.4.1 Matching of Costs and Revenue
The rationale of the acquisition of fixed assets in business operations is that
these are used in the earning of revenue. Every asset is bound to undergo
some wear and tear, and hence lose value, once it is put to use in business.
Therefore, depreciation is as much the cost as any other expense incurred in
the normal course of business like salary, carriage, postage and stationary,
etc. It is a charge against the revenue of the corresponding period and must
be deducted before arriving at net profit according to ‘Generally Accepted
Accounting Principles’.
7.4.2 Consideration of Tax

Depreciation is a deductible cost for tax purposes. However, tax rules for the
calculation of depreciation amount need not necessarily be similar to current
business practices,
7.4.3 True and Fair Financial Position

If depreciation on assets is not provided for, then the assets will be over valued
and the balance sheet will not depict the correct financial position of the
business. Also, this is not permitted either by established accounting practices
or by specific provisions of law.
7.4.4 Compliance with Law

Apart from tax regulations, there are certain specific legislations that indirectly
compel some business organisations like corporate enterprises to provide
depreciation on fixed assets.

State whether the following statements are true or false:
1. Depreciation is a non-cash expense.
2. Depreciation is also charged on current assets.
3. Depreciation is decline in the market value of tangible fixed assets.
4. The main cause of depreciation is wear and tear caused by its usage.
5. Depreciation must be charged so as to ascertain true profit or loss of the
business.
6. Depletion term is used in case of intangible assets.
7. Depreciation provides fund for replacement.
8. When market value of an asset is higher than book value, depreciation is not
charged.
9. Depreciation is charged to reduce the value of asset to its market value.
10. If adequate maintenance expenditure is incurred, depreciation need not be
charged.
234 Accountancy
7.5 Factors Affecting the Amount of Depreciation

The determination of depreciation depends on three parameters, viz. cost,
estimated useful life and probable salvage value.
7.5.1 Cost of Asset

Cost (also known as original cost or historical cost) of an asset includes invoice
price and other costs, which are necessary to put the asset in use or working
condition. Besides the purchase price, it includes freight and transportation
cost, transit insurance, installation cost, registration cost, commission paid
on purchase of asset add items such as software, etc. In case of purchase of a
second hand asset it includes initial repair cost to put the asset in workable
condition. According to Accounting Standand-6 of ICAI, cost of a fixed asset is
“the total cost spent in connection with its acquisition, installation and
commissioning as well as for addition or improvement of the depreciable asset”.
For example, a photocopy machine is purchased for Rs. 50,000 and Rs. 5,000
is spent on its transportation and installation. In this case the original cost of
the machine is Rs. 55,000 (i.e. Rs. 50,000 + Rs.5,000 ) which will be written-
off as depreciation over the useful life of the machine.
7.5.2 Estimated Net Residual Value

Net Residual value (also known as scrap value or salvage value for accounting
purpose) is the estimated net realisable value (or sale value) of the asset at the
end of its useful life. The net residual value is calculated after deducting the
expenses necessary for the disposal of the asset. For example, a machine is
purchased for Rs. 50,000 and is expected to have a useful life of 10 years. At
the end of 10th year it is expected to have a sale value of Rs. 6,000 but
expenses related to its disposal are estimated at Rs. 1,000. Then its net residual
value shall be Rs. 5,000 (i.e. Rs. 6,000 – Rs. 1,000).
7.5.3 Depreciable Cost

Depreciable cost of an asset is equal to its cost (as calculated in point 7.5.1
above) less net residual value (as calculated in point 7.5.2,) Hence, in the
above example, the depreciable cost of machine is Rs. 45,000 (i.e., Rs. 50,000
– Rs. 5,000.) It is the depreciable cost, which is distributed and charged as
depreciation expense over the estimated useful life of the asset. In the above
example, Rs. 45,000 shall be charged as depreciation over a period of 10
years. It is important to mention here that total amount of depreciation charged
over the useful life of the asset must be equal to the depreciable cost. If total
amount of depreciation charged is less than the depreciable cost then the
capital expenditure is under recovered. It violates the principle of proper

matching of revenue and expense.
7.5.4 Estimated Useful Life

Useful life of an asset is the estimated economic or commercial life of the
asset. Physical life is not important for this purpose because an asset may
still exist physically but may not be capable of commercially viable production.
For example, a machine is purchased and it is estimated that it can be used
in production process for 5 years. After 5 years the machine may still be in
good physical condition but can’t be used for production profitably, i.e., if it is
still used the cost of production may be very high. Therefore, the useful life of
the machine is considered as 5 years irrespective of its physical life. Estimation
of useful life of an asset is difficult as it depends upon several factors such as
usage level of asset, maintenance of the asset, technological changes, market
changes, etc. As per Accounting Standard – 6 useful life of an asset is normally
the “period over which it is expected to be used by the enterprise”. Normally,
useful life is shorter than the physical life. The useful life of an asset is expressed
in number of years but it can also be expressed in other units, e.g., number of
units of output (as in case of mines) or number of working hours. Useful life
depends upon the following factors :
• Pre-determined by legal or contractual limits, e.g. in case of leasehold
asset, the useful life is the period of lease.
• The number of shifts for which asset is to be used.
• Repair and maintenance policy of the business organisation.
• Technological obsolescence.
• Innovation/improvement in production method.
• Legal or other restrictions.
7.6 Methods of Calculating Depreciation Amount

The depreciation amount to be charged for during an accounting year depends
up on depreciable amount and the method of allocation. For this, two methods
are mandated by law and enforced by professional accounting practice in
India. These methods are straight line method and written down value method.
Besides these two main methods there are other methods such as – annuity
method, depreciation fund method, insurance policy method, sum of years
digit method, double declining method, etc. which may be used for determining
the amount of depreciation. The selection of an appropriate method depends
upon the following :
236 Accountancy
• Type of the asset;

• Nature of the use of such asset;
• Circumstances prevailing in the business;
As per Accounting Standard-6, the selected depreciation method should
be applied consistently from period to period. Change in depreciation method
may be allowed only under specific circumstances.
7.6.1 Straight Line Method

This is the earliest and one of the widely used methods of providing
depreciation. This method is based on the assumption of equal usage of the
asset over its entire useful life. It is called straight line for a reason that if the
amount of depreciation and corresponding time period is plotted on a graph,
it will result in a straight line (figure 7.1).
It is also called fixed installment method because the amount of depreciation
remains constant from year to year over the useful life of the asset. According
to this method, a fixed and an equal amount is charged as depreciation in
every accounting period during the lifetime of an asset. The amount annually
charged as depreciation is such that it reduces the original cost of the asset to
its scrap value, at the end of its useful life. This method is also known as fixed
percentage on original cost method because same percentage of the original
cost (infact depreciable cost) is written off as depreciation from year to year.
The depreciation amount to be provided under this method is computed
by using the following formula:
Cost of asset − Estimated net residential value

Depreciation =
Estimated useful life of the asset
Rate of depreciation under straight line method is the percentage of the

total cost of the asset to be charged as deprecation during the useful lifetime
of the asset. Rate of depreciation is calculated as follows:
Annual depreciation amount

Rate of Depreciation = × 100
Acquisition cost
Consider the following example, the original cost of the asset is Rs. 2,50,000.
The useful life of the asset is 10 years and net residual value is estimated to
be Rs. 50,000. Now, the amount of depreciation to be charged every year will
be computed as given below:
Annual Depreciation Amount

Acqusition cost of asset − Estimated net residential value
=
Estimated life of asset
Rs. 2,50,000 − Rs. 50,000
i.e. = = Rs. 20,000
10
Fig. 7.1 : Depreciation amount under straight line method
The rate of depreciation will be calculated as :

Annual depreciation amount
(i) Rate of Depreciation = Acquisition cost
× 100
From point (i), the annual depreciation amounts to Rs. 20,000.

Rs. 20,000
Thus, the rate of depreciation will be = × 100 = 8%
Rs. 2,50,000
7.6.1.1 Advantages of Straight Line Method

Straight Line method has certain advantages which are stated below:
• It is very simple, easy to understand and apply. Simplicity makes it a
popular method in practice;
• Asset can be depreciated upto the net scrap value or zero value. Therefore,
this method makes it possible to distribute full depreciable cost over useful
life of the asset;
• Every year, same amount is charged as depreciation in profit and loss
account. This makes comparison of profits for different years easy;
• This method is suitable for those assets whose useful life can be estimated
accurately and where the use of the asset is consistent from year to year
such as leasehold buildings.
238 Accountancy
7.6.1.2 Limitations of Straight Line Method

Although straight line method is simple and easy to apply it suffers from
certain limitations which are given below.
• This method is based on the faulty assumption of same utility of the asset
in different accounting years;
• With the passage of time, work efficiency of the asset decreases and repair
and maintenance expense increases. Hence, under this method total
amount charged against profit on account of depreciation and repair taken
together will not be uniform throughout the life of the asset, rather it will
keep on increasing from year to year.
7.6.2 Written Down Value Method

Under this method, depreciation is charged on the book value of the asset.
Since book value keeps on reducing by the annual charge of depreciation, it is
also known as reducing balance method. This method involves the application
of a pre-determined proportion/percentage of the book value of the asset at
the beginning of every accounting period, so as to calculate the amount of
depreciation. The amount of depreciation reduces year after year.
For example, the original cost of the asset is Rs. 2,00,000 and depreciation
is charged @ 10% p.a. at written down value, then the amount of depreciation
will be computed as follows:
10
(i) Depreciation (I year) = Rs. 20,00,000 ×
= Rs. 20,000
100
(ii) Written down value = Rs. 2,00,000 – 20,000 = Rs.1,80,000
(at the end of the I year)
10
(iii) Depreciation (II year) = Rs. 1,80,000 ×= Rs. 18,000
100
(iv) Written down value = Rs. 1,80,000 – Rs.18,000 = 1,62,000
(at the end of the II year)
10
(v) Depreciation (III year) = Rs. 1,62,000 × = Rs.16,200
100
(vi) Written down value = Rs. 1,62,000 – Rs. 16,200 = Rs. 1,45,800
(at the end of III year)
As evident from the example, the amount of depreciation goes on reducing
year after year. For this reason, it is also known reducing installment or
diminishing value method. This method is based upon the assumption that
the benefit accruing to business from assets keeps on diminishing as the
asset becomes old (refer figure 7.2). This is due to the reason that a pre-
determined percentage is applied to a gradually shrinking balance on the
asset account every year. Thus, large amount is recovered depreciation charge
in the earlier years than in later years.
Fig. 7.2 : Depreciation amount using written down value method
Under written down value method, the rate of depreciation is computed by

using the following formula:
⎡ s⎤
R = ⎢1 − n ⎥ ×100
⎣⎢ c ⎥⎦
Where, r = Rate of depreciation

n = Expected useful life
s = Scrap value
c = Cost of an asset
For example, the original cost of a truck is Rs. 9,00,000 and its net salvage
value after 16 years of useful life is Rs. 50,000 then the appropriate rate of
depreciation will be computed as under:
⎡ 50,000 ⎤
R = ⎢1 − 16 ⎥ × 100 = (1 − 0.834) × 100 = 16.6%
⎢⎣ 9,00,000 ⎥⎦
7.6.2.1 Advantages of Written Down Value Method

Written down value method has the following advantages:
• This method is based on a more realistic assumption that the benefits
from asset go on diminishing with the passage of time. Hence, it calls for
proper allocation of cost because higher depreciation is charged in earlier
years when asset’s utility is more as compared to later years when it
becomes less useful;
• It results into almost equal burden on profit or loss account of depreciation
and repair expenses taken together every year;
240 Accountancy
• Income Tax Act accept this method for tax purposes;

• As a large portion of cost is written-off in earlier years, loss due to
obsolescence gets reduced;
• This method is suitable for fixed assets, which lasts for long and which
require increased repair and maintenance expenses with passage of time.
It can also be used where obsolescence rate is high.
7.6.2.2 Limitations of Written Down Value Method
Although this method is based upon a more realistic assumption it suffers
from the following limitations.
• As depreciation is calculated at fixed percentage of written down value,
depreciable cost of the asset cannot be fully written-off. The value of the
asset can never be zero;
• It is difficult to ascertain a suitable rate of depreciation.
7.7 Straight Line Method and Written Down Method: A Comparative Analysis
Straight line and written down value methods are generally used for calculating
depreciation amount in practice. Following are the points of differences between
these two methods.
7.7.1 Basis of Charging Depreciation

In straight line method, depreciation is charged on the basis of original cost or
(historical cost). Whereas in written down value method, the basis of charging
depreciation is net book value (i.e., original cost less depreciation till date) of
the asset, in the beginning of the year.
7.7.2 Annual Charge of Depreciation

The annual amount of depreciation charged every year remains fixed or
constant under straight line method. Whereas in written down value method
the annual amount of depreciation is highest in the first year and subsequently
declines in later years. The reason for this difference, is the difference in the
basis of charging depreciation under both methods. Under straight line method
depreciation is calculated on original cost while under written down value
method it is calculated on written down value.
7.7.3 Total Charge Against Profit and Loss Account on Account of

Depreciation and Repair Expenses
It is a well-accepted phenomenon that repair and maintenance expenses
increase in later years of the useful life of the asset. Hence, total charge against
profit and loss account in respect of depreciation and repair expenses increases
in later years under straight line method. This happens because annual
depreciation charge remains fixed while repair expenses increase. On the other
hand, under written down value method, depreciation charge declines in later
years, therefore total of depreciation and repair charge remains similar or
equal year after year.
7.7.4 Recognition by Income Tax Law

Straight line method is not recognised by Income Tax Law while written down
value method is recognised by the Income Tax Law.
7.7.5 Suitability
Straight line method is suitable for assets in which repair charges are less,
the possibility of obsolescence is less and scrap value depends upon the time
period involved. Such as freehold land and buildings, patents, trade marks,
etc. Written down value method is suitable for assets, which are affected by
technological changes and require more repair expenses with passage of time
such as plant and machinery, vehicles, etc.
Basis of Difference Straight Line Method Written Down Value

Method
1. Basis of charging depre- Original cost Book Value (i.e. original

ciation cost less depr eciation
char ged till date)
2. Annual depreciation charge Fixed (Constant) year Declines year after year
3. Total charge against Unequal year after year. Almost equal every year.
profit and loss account in It increases in later years.
respect of depreciation
and repairs
4. Recognition by income Not recognised Recognised
tax law
5. Suitablity It is suitable for assets in It is suitable for assets,
which repair charges are which ar e af fected by
less, the possibility of technological changes
and obsolescence is low and require more repair
scrap value depends upon expenses with passage of
the time period involved. time.
Fig. 7.3 : Comparison of straight line and written down value method
242 Accountancy

There are two dentists Dr. Aggarwal and Dr. Mehta in your locality who are
competitors. Both of them have recently bought an equipment for treatment of
patients. Dr. Aggarwal has decided to write-off an equal amount of depreciation
every year while Dr. Mehta wants to write-off a larger amount in earlier years. They
do not know anything about the methods of depreciation. Can you inform them
more about the methods of depreciation they are applying even without knowing
anything about accounting in formal. Who is more wise in your opinion? Give reasons
in support of your answer.
7.8 Methods of Recording Depreciation

In the books of account, there are two types of arrangements for recording
depreciation on fixed assets:
• Charging depreciation to asset account or
• Creating Provision for depreciation/Accumulated depreciation account.
7.8.1 Charging Depreciation to Asset account

According to this arrangement, depreciation is deducted from the depreciable
cost of the asset ( credited to the asset account) and charged (or debited) to
profit and loss account. Journal entries under this recording method are as
follows:
1. For recording purchase of asset (only in the year of purchase)
Asset A/c Dr. (with the cost of asset including
installation, freight, etc.)
To Bank/Vendor A/c
2. Following two entries are recorded at the end of every year
(a) For deducting depreciation amount from the cost of the asset.
Depreciation A/c Dr. (with the amount of depreciation)
To Asset A/c
(b) For charging depreciation to profit and loss account.
Profit & Loss A/c Dr. (with the amount of depreciation)
To Depreciation A/c
3. Balance Sheet Treatment
When this method is used, the fixed asset appears at its net book value (i.e. cost
less depreciation charged till date) on the asset side of the balance sheet and not at
its original cost (also known as historical cost).
7.8.2 Creating Provision for Depreciation Account/Accumulated

This method is designed to accumulate the depreciation provided on an asset
in a separate account generally called ‘depreciation provision’ or ‘accumulated
depreciation’. Such accumulation of depreciation enables that the asset account

need not be disturbed in any way and it continues to be shown at its original
cost over the successive years of its useful life. There are some basic
characteristic of this method of recording depreciation, which are given below:
• Asset account continues to appear at its original cost year after year over
its entire life;
• Depreciation is accumulated on a separate account instead of being
adjusted into the asset account at the end of each accounting period.
The following journal entries are recorded under this method:
1. For recording purchase of asset (only in the year of purchase)
Asset A/c Dr. (with the cost of asset including
installation, expenses etc.)
To Bank/Vendor A/c (cash/credit purchase)
2. Following two journal entries are recorded at the end of each year:
(a) For crediting depreciation amount to provision for depreciation account
Depreciation A/c Dr. (with the amount of depreciation)
To Provision for depreciation A/c
(b) For charging depreciation to profit and loss account
Profit & Loss A/c Dr. (with the amount of depreciation)
To Depreciation A/c
3. Balance sheet treatment
In the balance sheet, the fixed asset continues to appear at its original cost on the
asset side. The depreciation charged till that date appears in the provision for depreciation
account, which is shown either on the “liabilities side” of the balance sheet or by way of
deduction from the original cost of the asset concerned on the asset side of the balance
sheet.
Illustration 1
M/s Singhania and Bros. purchased a plant for Rs. 5,00,000 on April, 01 2002, and
spent Rs. 50,000 for its installation. The salvage value of the plant after its useful life of
10 years is estimated to be Rs. 10,000. Record journal entries for the year 2002-03 and
draw up Plant Account and Depreciation Account for first three years given that the
depreciation is charged using straight line method if :
(i) The books of account close on March 31 every year; and
(ii) The firm charges depreciation to the asset account.
244 Accountancy
Solution
Books of Singhania and Bros.
Journal

Amount Amount
Rs. Rs.
2002
Apr. 01 Plant A/c Dr. 5,00,000
(Purchased plant for Rs. 5,00,000)
Apr. 01 Plant A/c Dr. 50,000
To Bank A/c 50,000
(Expenses incurred on installation)
2003
Mar. 31 Depreciation A/c Dr. 54,000
To Plant A/c 54,000
(Depreciation charged on asset)
Mar. 31 Profit and Loss A/c Dr. 54,000
To Depreciation A/c 54,000
(Depreciation debited to profit and
loss account)
Plant Account
Dr. Cr.
Rs. Rs.
2002 2003
Apr. 01 Bank 5,00,000 Mar. 31 Depreciation 54,000
Balance c/d 4,96,000
Bank 50,000
(Installation
expenses)
5,50,000 5,50,000
2003 2004
Apr. 01 Balance b/d 4,96,000 Mar. 31 Depreciation 54,000
4,96,000 4,96,000
2004 2005
4,42,000 4,42,000
2005
Apr. 01 Balance b/d 3,88,000
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amounts

Rs. Rs.
2003 2003
Mar. 31 Plant 54,000 Mar. 31 Profit and Loss 54,000
2004 2004
Mar. 31 Plant 54,000 Mar. 31 Profit and Loss 54,000
2005 2005
Mar. 31 Plant 54,000 Mar. 31 Profit & Loss 54,000
Workings Notes
(1) Calculation of original cost
(Rs.)
Purchase cost 5,00,000
Add: Installation cost 50,000
Original cost 5,50,000
Salvage value 10,000
Useful life 10 years
Rs. 5,50,000 − Rs. 10,000
(2) Depreciation amount = = Rs. 54,000 p.a.
10
Illustration 2
M/s Mehra and Sons acquired a machine for Rs. 1,80,000 on October 01, 2003, and
spent Rs 20,000 for its installation. The firm writes-off depreciation at the rate of 10% on
original cost every year. Record necessary journal entries for the year 2003 and draw up
Machine Account and Depreciation Account for first three years given that:
(i) The book of accounts closes on March 31 every year; and
(ii) The firm charges depreciation to asset account.
Solution
Books of Mehra and Sons
Journal
Debit Credit
Date Particulars L.F. Amount Amount
Rs. Rs.
2003
Oct. 01 Machine A/c Dr. 1,80,000
(Purchased machine for Rs.1,80,000)
Oct. 01 Machine A/c Dr. 20,000
To Bank A/c 20,000
(Expenses incurred on installation)
246 Accountancy
2004
To Machine A/c 10,000
Depreciation charged on machine)
(Depreciation debited to profit and loss
account)
2005
(Depreciation charged on machine)
(Depreciation debited to profit and loss
account)
2006
(Depreciation charged on machine)
(Depreciation debited to profit and
loss account)
Books of M/s Mehra and Sons

Machine Account
Dr. Cr.
Rs. Rs.
2003 2004
Oct. 01 Bank 1,80,000 Mar. 31 Depreciation 10,000
Oct. 01 Bank 20,000 (for 6 months)
(Installation Balance c/d 1,90,000
expenses) Mar. 31
2,00,000 2,00,000
2004
1,70,000
Balance c/d
1,90,000 1,90,000
2005 2006
1,70,000 1,70,000
Dr. Cr.
Rs. Rs.
2004 2004
Mar. 31 Machine 10,000 Mar. 31 Profit & Loss 10,000
10,000 10,000
2005
Mar. 31 Machine 20,000 Mar. 31 Profit & Loss 20,000
20,000 20,000
2006 2006
Dec. 31 Machine 20,000 Dec. 31 Profit & Loss 20,000
20,000 20,000
Working Notes
(1) Calculation of original cost of the machine
Rs.
Purchase cost 1,80,000
Add Installation cost (20,000)
Original cost 2,00,000
(2) Depreciation expense = 10% of Rs. 2,00,000 every year
= Rs. 20,000 p.a.
(3) During the year 2003, depreciation shall be charged only for 6 months, as
acquisition date is October 01, 2003, i.e. the asset is used only for 6 months
during the year 2003-04.
6
(4) Depreciation (2003 − 4) = 20,000 × = Rs. 10,000
12
Illustration 3
Based on data given in question number 2 record journal entries and prepare Machine
account, Depreciation account and Provision for Depreciation account for the first 3 years
if Provision for depreciation account is maintained by the firm.
Solution
Books of Mehra and Sons
Machine Account
Dr. Cr.
Rs. Rs.
2003 2004
Oct. 1 Bank 1,80,000 Mar. 31 Balance c/d 2,00,000
Oct. 1 Bank
(Installation 20,000
expenses)
2,00,000 2,00,000
248 Accountancy
2004 2005
Apr. 01 Balance b/d 2,00,000 Mar. 31 Balance c/d 2,00,000
2,00,000 2,00,000
Provision for Depreciation Account

Dr. Cr.
Rs. Rs.
2004 2004
Mar. 31 Balance c/d 10,000 Mar. 31 Depreciation 10,000
10,000 10,000
2005 2004
Mar. 31 Balance c/d 30,000 Apr. 01 Balance b/d 10,000
Mar. 31 Depreciation 20,000
30,000 30,000
2006 2005
Mar. 31 Balance c/d 50,000 Apr. 1 Balance b/d 30,000
2006
Mar. 31 Depreciation 20,000
50,000 50,000
Dr. Cr.
Rs. Rs.
2004 2004
Mar. 31 Provision for 10,000 Mar.31 Profit & Loss 10,000
Deprection
10,000 10,000
2005 2005
Depreciation
20,000 20,000
2006 2006
Depreciation
20,000 20,000
Illustration 4
M/s. Dalmia Textile Mills purchased machinery on April 01, 2001 for Rs. 2,00,000 on
credit from M/s Ahuja and sons and spent Rs. 10,000 for its installation. Depreciation is
provided @10% p.a. on written down value basis. Prepare Machinery Account for the first
three years. Books are closed on March 31, every year.
Solution
Books of Dalmia Textiles mills
Machinery Account
Dr. Cr.
Rs. Rs.
2001 2002
Apr. 01 Bank 2,00,000 Mar. 31 Depreciation 21,0001
Bank 10,000 Balance c/d 1,89,000
2,10,000 2,10,000
2002 2003
1,89,000 1,89,000
2003 2004
1,70,100 1,70,100
2004 Balance b/d 1,53,090
Working Notes
1. Calculation of the amount of depreciation (Rs.)
Original cost on 01.01.2001 2,10,000 (i.e. 2,00,000 + 10,000)
Less: Depreciation for the year 2001
(@10% of 2,10,000) (21,000)1
WDV on 31.12.2001/01.01.2002 1,89,000
(@10% of 1,89,000) (18,900)2
WDV on 31.12.2002/01.01.2003 1,70,100
(@10% of 1,70,100) (17,010)3
WDV on 31.12.2003 1,53,090
Illustration 5
M/s Sahani Enterprises acquired a printing machine for Rs. 40,000 on July 01, 2001 and
spent Rs. 5,000 on its transport and installation. Another machine for Rs. 35,000 was
purchased on January 01, 2003. Depreciation is charged at the rate of 20% on written
down value. Prepare Printing Machine account for the years ended on March, 31, 2002,
2003, 2004 and 2005.
250 Accountancy
Solution
Books of Sahani Enterprises
Printing Machine Account
Dr. Cr.
Rs. Rs.
2001 2002
Jul. 01 Bank 40,000 Mar. 31 Depreciation 6,7501
Bank 5,000 Balance c/d 38,250
45,000 45,000
2002 2003
Apr. 01 Balance b/d 38,250 Mar. 31 Depreciation 9,4002

Jan. 01 Bank 35,000 Balance c/d 63,850
73,250 73,250
2003 2004
Apr. 01 Balance b/d 63,850 Mar.31 Depreciation 12,7703
Balance c/d 51,080
63,850 63,850
2004
Apr. 01 Balance b/d 51,080
Working Notes
(Rs.)
Orignal cost machine purchased on July 01,2001 45,000
(–) Depreciation till Mar. 31, 2002 (for 9 months @ 20%) (6,750)1
38,250
+ Cost of new machine purchased on Jan. 01,2003 (35,000)
73,250
(–) Depreciation for the year 2002-2003
(20% of 38,250 + 20% of Rs. 35,000 for 3 month) (9,400)2
WDV on Mar. 31, 2003 63,850
(–) Depreciation for the year 2003 – 04 (20% of Rs. 73,850) (12,770)3
WDV on Mar. 31, 2004 51,080

Basaria Confectioner bought a cold storage plant on July 01, 2003 for Rs.1,00,000.
Compare the amount of depreciation charged for first three years using:
1. Rate of depreciation @ 10% on original cost basis;
2. Rate of depreciation @ on written down value basis;
3. Also, plot the computed amount of depreciation on a graph.
7.9 Disposal of Asset

Disposal of asset can take place either (a) at the end of its useful life or (b)
during its useful life (due to obsolescence or any other abnormal factor).
If it is sold at the end of its useful life, the amount realised on account of the
sale of asset as scrap should be credited to the asset account and the balance
is transferred to profit and loss account. In this regard the following journal
entries are recorded.
1. For sale of asset as scrap
Bank A/c Dr.
To Asset A/c
2. For transfer of balance in asset account
(a) In case of profit
Asset A/c Dr.
To Profit and Loss A/c
(b) In case of loss
Profit and Loss A/c Dr.
To Asset A/c
In case, however, the provision for depreciation account has been in use
for recording the depreciation, then before passing the above entries transfer
the balance of the provision for depreciation account to the asset account by
recording the following journal entry:
Provision for depreciation A/c Dr.
To Asset A/c
For example, R.S. Limited purchased a vehicle for Rs. 4, 00,000. After
4 years its salvage value is estimated at Rs. 40,000. To find out the amount of
depreciation to be charged every year based on straight line basis, and show
as to how the vehicle account would appear for four years assuming it is sold
for Rs. 50,000 at the end when
(a) depreciation is charged to asset account; and
(b) provision for depreciation account is maintained.
Consider the following entries in the book of account of R.S. Limited
(a) When depreciation is charged to assets account
Books of R.S. Limited

Vehicle Account
Dr. Cr.
Rs. Rs.
I Bank 4,00,000 End of Depreciation 90,000
year the year Balance c/d 3,10,000
4,00,000 4,00,000
252 Accountancy
II Balance b/d 3,10,000 End of Depreciation 90,000

year the year Balance c/d 2,20.000
3,10,000 3,10,000
III Balance b/d 2,20,000 End of Depreciation 90,000
year the year Balance c/d 1,30,000
2,20,000 2,20,000
IV Balance b/d 1,30,000 Depreciaton 99,000
year Profit and 10,000 Bank 50,000
loss (Profit on
sale of vehicle)
1,40,000 1,40,000
(b) When Provision for depreciation account is maintained.

Books of R.S. Limited
Vehicle Account
Dr. Cr.
Rs. Rs.
I Bank 4,00,000 End of Balance c/d 4,00,000

year the year
4,00,000 4,00,000
II Balance b/d 4,00,000 End of Balance c/d 4,00,000

year the year
4,00,000 4,00,000
III Balance b/d 4,00,000 End of Balance c/d 4,00,000

year the year
4,00,000 4,00,000
IV Balance b/d 4,00,000 Provison for 3,60,000
year Profit and loss 10,000 depreciation
(Profit on Sale Bank 50,000
of Vehicle)
4,10,000 4,10,000
Provision for Depreciation

Dr. Cr.
Rs. Rs.
Ist Balance b/d 90,000 End of Depreciation 90,000
year year
90,000 90,000
II Balance b/d 1,80,000 End of Balance c/d 90,000

year the year Depreciation 90,000
1,80,000 1,80,000
III Balance b/d 2,70,000 End of Balance c/d 1,80,000
year the year Depreciation 90,000
2,70,000 2,70,000
IV Machinery 3,60,000 End of Balance c/d 2,70,000
year the year Provison for 90,000
Depreciation
3,60,000 3,60,000
7.9.1 Use of Asset Disposal Account

Asset disposal account is designed to provide a complete and clear view of all
the transactions involved in the sale of an asset under one account head. The
concerned variables are the original cost of the asset, depreciation accumulated
on the asset upto date, sale price of the asset, value of the parts of the asset
retained for use, if any and the resultant profit or loss on disposal. The balance
of this amount is transferred to the profit and loss account.
This method is generally used when a part of the asset is sold and
provision for depreciation account exists.
Under this method, a new account titled Asset Disposal Account is opened.
The original cost of the asset being sold is debited to the asset disposal account
and accumulated depreciation amount appearing in provision for depreciation
account relating to that asset till the date of disposal is credited to the asset
disposal account. The net amount realised from the sale of the asset is also
credited to this account. The balance of asset disposal account shows profit
or loss which is transferred to profit and loss account. The advantage of this
method is that it gives a full picture of all the transactions related to asset
disposal at one place. The journal entries required for the preparation of asset
disposal account is as follows:
1. Asset Disposal A/c Dr. (with the original cost of asset,
To Asset A/c being sold)
2. Provision for Depreciation A/c Dr. (with the accumulated balance in
To Asset Disposal A/c provision for depreciation account)
3. Bank A/c Dr. (with the net sales proceeds)
To Asset Disposal A/c
Asset Disposal Account may ultimately show a debit or credit balance.
The debit balance on the account indicate loss on disposal and would be dealt
with as follows:
254 Accountancy
Profit and Loss A/c Dr. (with the amount of loss on sale)
To Asset Disposal A/c
The credit balance of the account, profit on disposal and would be closed
by the following journal entry:
Asset Disposal A/c Dr. (with the amount of profit on sale)
For example, Karan Enterprises has the following balances in its books
as on March 31, 2005
Machinery (gross value): Rs. 6,00,000
Provision for depreciation: Rs. 2,50,000
A machine purchased for Rs. 1,00,000 on November 01, 2001, having
accumulated depreciation amounting to Rs. 60,000 was sold on April 1, 2006 for
Rs. 35,000. The Asset Disposal account will be prepared in the following manner:
Books of Karan Enterprises

Machinery Disposal Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars L.F. Amount
Rs. Rs.
2006 2006
Apr. 01 Machinery 1,00,000 Apr. 01 Provision for 60,000
depreciation
Apr. 01 Bank 35,000
2007
Mar. 31 Profit & Loss
(Loss on sale) 5,0001
1,00,000 1,00,000
Machinery Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2005 2005
Mar. 31 Balance b/d 6,00,000 Apr. 01 Machine
Disposal 1,00,000
2006
Mar. 31
6,00,000 6,00,000
Working Notes
(1) Computation of loss on sale of machinery Rs.
Original cost of the asset being sold 1,00,000
Less: accumulated depreciation (60,000)
40,000
(2) Sales value realised (35,000)

Loss on sale (i.e. Rs. 40,000 – Rs. 35,000) 5,0001
Illustration 6
On January 01 2001, Khosla Transport Co. purchased five trucks for Rs. 20,000 each.
Depreciation has been provided at the rate of 10% p.a. using straight line method and
accumulated in provision for depreciation acount. On January 01, 2002, one truck was
sold for Rs. 15,000. On July 01, 2003, another truck (purchased for Rs. 20,000 on Jan
01, 2001) was sold for Rs. 18,000. A new truck costing Rs. 30,000 was purchased on
October 01, 2003. You are required to prepare trucks account, Provision for depreciation
account and Truck disposal account for the years ended on December 2001, 2002 and
2003 assuming that the firm closes its accounts in December every year.
Solution
Book of Khosla Transport Co.
Trucks Account
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
Rs. Rs.
2001 2001
Jan. 01 Bank 1,00,000 Dec. 31 Balance c/d 1,00,000
(Purchase of
truck) 1,00,000 1,00,000
2002 2002
Jan. 01 Balance b/d 1,00,000 Jan. 01 Truck disposal 20,000
Dec 31 Balance c/d 80,000
1,00,000 1,00,000
2003 2003
Jan. 01 Balance b/d 80,000 Jul. 01 Truck disposal 20,000
Oct. 01 Bank 30,000 Dec. 31 Balance c/d 90,000
(Purchase of
new truck) 1,10,000 1,10,000
Truck Disposal Account

Dr. Cr.
Rs. Rs.
2002 2002
Jan. 01 Machinery 20,000 Jan. 01 Provision for 2,000
Depreciation
Jan. 01 Bank (Sale) 15,000
Jan. 01 Profit & Loss 3,0004
(Loss on sale)
20,000 20,000
256 Accountancy
2003 2003
Jul. 01 Machinery 20,000 Jul. 01 Provision for
Jul. 01 Profit & Loss 3,000 Depreciation
(Profit on sale)5 (Rs. 2,000 +
2,000 +1,000) 5,000
Jul. 01 Bank (Sale) 18,000
23,000 23,000

Dr. Cr.
Rs. Rs.
2001 2001
Dec. 31 Balance c/d 10,000 Dec. 31 Depreciation 10,0001
10,000 10,000
2002 2002
Jan. 01 Truck Disposal 2,000 Jan. 01 Balance b/d 10,000
18,000 18,000
2003 2003
Jan. 01 Truck Disposal 5,000 Jan. 1 Balance b/d 16,000
Dec. 31 Balance c/d 18,750 Dec. 31 Depreciation
(Rs. 6000+
1000+750) 7,7503
23,750 23,750
Working Notes
1. Calculation of amount of depreciation Rs.
Year - 2001
10% on Rs. 1,00,000 for one year 10,0001
Year - 2002
10% on Rs. 80,000 for one year 80002
Year – 2003
10% on Rs. 60,000 for 1 year 6,000
10% on Rs. 20,000 for six months 1,000
10% on Rs. 30,000 for three months 7,50
7,7503
2. Loss on sale of first truck
Original cost on January 01, 2001 20,000
Less depreciation at 10% (2,000)
Book value on January 1, 2002 18,000
Sales price realised on 01.01.2002 (15,000)
Loss on sale of first machine 3,0004
3. Profit on Sale of Second Truck

Original cost on January 01, 2001 20,000
Less Depreciation at 10% for year 2001 (2,000)
Depreciation at 10% for 2002 (2,000)
Depreciation @10% for 6 months till July, 2003 (1,000)
Book value on 1.7.2003 15,000
Sale price 18,000
Profit on sale 3,0005
Illustration 7
On April 01, 2004, following balances appeared in the books of M/s Kanishka Traders:
Furniture account Rs. 50,000, Provision for depreciation on furniture Rs. 22,000. On
October 01, 2004 a part of furniture purchased for Rupees 20,000 on April 01, 2000 was
sold for Rs. 5,000. On the same date a new furniture costing Rs. 25,000 was purchased.
The depreciation was provided @ 10% p.a. on original cost of the asset and no depreciation
was charged on the asset in the year of sale. Prepare furniture account and provision for
depreciation account for the year ending March 31, 2005.
Solution
Books of Kanishka Traders
Furniture Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F Amount
Rs. Rs.
2004 2004
Apr. 01 Balance b/d 50,000 Oct.01 Bank 5,000
Oct. 10 Bank 25,000 Apr. 01 Provision for 8,000
depreciation 7,0001
Profit and Loss
(Loss on sale)
Balance c/d 55,000
75,000 75,000
Provision for Depreciation on Furniture Account

Dr. Cr.
Date Particulars J.F. Amount Date Particular J.F. Amount
Rs. Rs.
2004 2004
Oct. 01 Furniture 8,000 Apr. 01 Balance b/d 22,000
(Accumulated
depreciation on
furniture sold)
2005 2005
Mar. 31 Balance c/d 18,250 Mar. 31 Depreciation
(Rs. 3,000 + 4,250
26,250 1,250) 26,250
258 Accountancy
Working Notes
1. Calculation of amount of depreciation
Calculation of loss on sale Rs.
Original cost of furniture on 01.10.2004 20,000
Less: Depreciation for 4 year from 01.04.2000 to
31.04.2004 (no depreciation for the year of sale
@10% p.a. on original cost 8,000
Value as on 01.10.2004 12,000
Sale price 5,000
2. Loss on sale 7,0001
Depreciation for the year 2004-05
10% of Rs. 30,000 (Rs. 50,000 – Rs. 20,000) for full year 3,000
10% of Rs. 25,000 for 6 month 1,250
4,250
Illustration 8
Solve illustration 07, if the firm maintains furniture disposal account prepared along
with furniture account and provision for depreciation on furniture account.
Books of Anil Traders

Furniture Account
Dr. Cr.
Rs. Rs.
2004 2004
Apr. 01 Balance b/d 50,000 Apr. 01 Furniture 20,000
disposal
Oct.01 Bank 25,000 2005
Mar. 31 Balance c/d 55,000
75,000 75,000
Provision for Depreciation on Furniture Account

Dr. Cr.
Rs. Rs.
2004 2004
Oct.01 Furniture 8,000 Apr.01 Balance b/d 22,000
disposal
2005 2005
Mar. 31 Balance c/d 18,250 Mar.31 Depreciation 4,250
26,250 26,250
Furniture Disposal Account

Dr. Cr.
Rs. Rs.
2004 2004
Oct.01 Furniture 20,000 Oct.01 Provision for
Depreciation 8,000
Bank 5,000
Profit & Loss
(Loss on sale) 7,000
20,000 20, 000
Illustration 9
On Jan 01, 2001 Jain & Sons purchased a second hand plant costing Rs. 2,00,000 and
spent Rs. 10,000 on its overhauling. It also spent Rs. 5,000 on transportation and
installation of the plant. It was decided to provide for depreciation @ of 20% on written
down value. The plant was destroyed by fire on July 31, 2004 and an insurance claim of
Rs. 50,000 was admitted by the insurance company. Prepare plant account, accumulated
depreciation account and plant disposal account assuming that the company closes its
books on December 31, every year.
Solution
Books of Jain & Sons.

Plant Account
Dr. Cr.
Rs. Rs.
2001 2001
Jan. 01 Bank 2,15,000 Dec. 31 Balance c/d 2,15,000
2,15,000 2,15,000
2002 2002
Jan. 01 Balance b/d 2,15,000 Dec. 31 Balance c/d 2,15,000
2,15,000 2,15,000
2003 2003
Jan. 01 Balance b/d 2,15,000 Dec. 31 Balance c/d 2,15,000
2,15,000 2,15,000
2004 2004
Jan. 01 Balance b/d 2,15,000 Jul. 31 Plant disposal 2,15,000
2,15,000 2,15,000
260 Accountancy
Accumulated Depreciation Account

Dr. Cr.
Rs. Rs.
2001 2001
43,000 43,000
2002 2002
Jan. 01 Balance c/d 77,400 Jan. 01 Balance b/d 43,000
Depreciation 34,4002
77,400 77,400
2003 2003
Dec. 31 Balance c/d 1,04,920 Jan. 01 Balance b/d 77,400
Dec. 31 Depreciation 27,5203
1,04,920 1,04,920
2004
2004 Jan. 01 Balance b/d 1,04,920
Jul. 31 Plant disposal 1,17,763 July 31 Depreciation 12,8434
1,17,763 1,17,763
Plant Disposal Account

Dr. Cr.
Rs. Rs.
2004 2004
Jul. 31 Plant 2,15,000 Jul. 31 Accumulated 1,17,763
depreciation
Insurance Co. 50,000
Profit & Loss 47,2375
(Loss on sale)
2,15,000 2,15,000
Working Notes:
1. Calculation of Depreciation Amount (Rs.)
Original cost on 01.01.2001 2,15,000
(2,00,000 + 10,000+ 5,000)
Depreciation for the year 2001
(@20% of Rs. 2,15,000) (43,0001)
1,72,000

(@20% of Rs. 1,72,000) (34,4002)
1,37,600
(@20% of Rs. 1,37,600) 27,5203
1,10,080
Depreciation till 31.07.04 (12,8434)
(@20% of Rs. 1,10,080) 97,237
Insurance claim (50,000)
Loss on disposal 47,2375
7.10 Effect of any Addition or Extension to the Existing Asset

An existing asset may require some additions or extensions for being suitable
for operations. Such additions/extensions may or may not become an integral
part of the asset. The amount incurred on such additions/extensions is
capitalised and written off as depreciation over the life of the asset. It is
important to mention here that the amount so incurred is in addition to usual
repair and maintenance expenses. AS-6 (Revised) mentions that
• Any addition or extension, which becomes an integral part of the existing
asset should be depreciated over the useful life of that asset;
• The depreciation on such addition or extension may also be provided
at the rate applied to the existing asset;
• Where an addition or extension retains a separate identity and is capable
of being used after the existing asset is disposed off, depreciation, should
be provided independently on the basis of its own useful life.
Illustration 10
M/s Digital Studio bought a machine for Rs. 8,00,000 on April 01, 2000. Depreciation
was provided on straight-line basis at the rate of 20% on original cost. On April 01,2002
a substantial modification was made in the machine to make it more efficient at a cost of
Rs. 80,000. This amount is to be depreciated @ 20% on straight line basis. Routine
maintenance expenses during the year 2003-04 were Rs. 2,000.
Draw up the Machine account, Provision for depreciation account and charge to profit
and loss account in respect of the accounting year ended on March 31,2003.
262 Accountancy
Solution
Books of Digital Studio
Machine Account
Dr. Cr.
Rs. Rs.
2002 2003
Apr 01 Balance b/d 800,000 Mar 31 Balance c/d 8,80,000
Bank 80,000
8,80,000 8,80,000

Dr. Cr.
Rs. Rs.
2003 2003
Mar 31 Balance c/d 4,96,000 April 01 Balance b/d 3,20,0001
2003
Mar 31 Depreciation 1,76,0002
4,96,000 4,96,000
Working Notes
1. Cost of modification is capitalised but routine repair expenses are treated as
revenue expenditure.
2. Calculation of balance of provision for depreciation account on 01.04.2002.
Original Cost on 01.04.2000 = Rs. 8,00,000
Depreciation for the years 2000-01 and 2001-02 = Rs 3,20,0001
(@ 20% of Rs. 8,00,000 )
3. Depreciation for the year 2002-03 is calculated as under:
20% of 8,00,000 = Rs. 1,60,000
20% of Rs. 80,000 = Rs. 16,000
Total Depreciation for 2002-03 = Rs. 1,76,0002
4. Amount to be charged to profit and loss account
Depreciation Rs. 1,76,000
Repair and maintenance Rs. 2,000
Illustration 11
M/s Nishit Printing Press bought a printing machine for Rs. 6,80,000 on April 01, 2001.
Depreciation was provided on straight line basis at the rate of 20% on original cost. On
April 01,2003 a modification was made in the machine to increase its technical reliability,
at a cost of Rs. 70,000. However this modification is not expected to increase the useful
life of the machine. At the same time an important component of the machine was replaced
at a cost of Rs. 20,000 due to excessive wear and tear. Routine maintenance expenses
during the year 2003-04 were Rs. 5,000.
Show the Machinery account, Provision for depreciation account and charge to profit and
loss account in respect of the accounting year ended on March 31, 2004.
Solution
Machinery Account
Dr. Cr.
Rs. Rs.
2003 2004
Apr.01 Balance b/d 6,80,000 Mar. 31 Balance c/d 7,70,000
Bank 70,000
Bank 20,000
7,70,000 7,70,000

Dr. Cr.
Rs. Rs.
2004 2003
Mar.31 Balance c/d 4,38,000 Apr.01 Balance b/d 2,72,0001
2004
Mar.31 Depreciation 1,66,0002
4,38,000 4,38,000
Working Notes
1. Cost of modification and cost of component replaced are capitalised but routine
repair expenses are revenue expenditure.
2. Calculation of balance of Provision for depreciation account on 01. 04. 2003.
Original cost on 01.04.2001 = Rs. 6,80,000
Depreciation for the years 2001-02 and 2002-03
⎡ 20 ⎤
2
⎢⎣100 × 6,80,000⎥⎦ = Rs 2,72,0001
3. Depreciation for the year 2003-04 is calculated as under.

20% of Rs. 6,80,000 = Rs. 1,36,000
1/3 of Rs. 90,000* = Rs. 30,000
Total depreciation for 2003-04 = Rs. 1,66,0002
264 Accountancy
4. Amount to be charged to profit and loss account

Rs.
Depreciation 1,66,000
Repair and Maintenance 5,000
* Computation of depreciation on addition
(Rs. 70,000 + Rs. 20,000) − 0 90,000

= = Rs.
(5 − 2) years 3
SECTION – II
Provisions and Reserve
7.11 Provisions
There are certain expenses/losses which are related to the current accounting
period but amount of which is not known with certainty because they are not
yet incurred. It is necessary to make provision for such items for ascertaining
true net profit. For example, a trader who sells on credit basis knows that
some of the debtors of the current period would default and would not pay or
would pay only partially. It is necessary to take into account such an expected
loss while calculating true and fair profit/loss according to the principle of
Prudence or Conservatism. Therefore, the trader creates a Provision for Doubtful
Debts to take care of expected loss at the time of realisation from debtors. In
a similar way, Provision for repairs and renewals may also be created to provide
for expected repair and renewal of the fixed assets. Examples of provisions
are :
• Provision for depreciation;
• Provision for bad and doubtful debts;
• Provision for taxation;
• Provision for discount on debtors; and
• Provision for repairs and renewals.
It must be noted that the amount of provision for expense and loss is a
charge against the revenue of the current period. Creation of provision ensures
proper matching of revenue and expenses and hence the calculation of true
profits. Provisions are created by debiting the profit and loss account. In the
balance sheet, the amount of provision may be shown either:
• By way of deduction from the concerned asset on the assets side. For
example, provision for doubtful debts is shown as deduction from the
amount of sundry debtors and provision for depreciation as a deduction
from the concerned fixed assets;
• On the liabilities side of the balance sheet alongwith current liabilities, for
example provision for taxes and provision for repairs and renewals.
7.11.1 Accounting Treatment for Provisions

The accounting treatment of all types of provisions is almost similar. Therefore,
the accounting treatment is explained here taking up the case of provision for
doubtful debts.
As already stated that when business transaction takes place on credit
basis, debtors account is created and its balance is shown on the asset-side
of the balance sheet. These debtors may be of three types:
• Good Debtors are those from where collection of debt is certain.
• Bad Debts are those debtors from where collection of money is not
possible and the amount of credit given is a certain loss.
• Doubtful Debts are those debtors who may pay but business firm is not
sure about the collection of full amount from them. In fact, as a matter
of business experience, some percentage of such debtors are not likely
to pay, hence treated as doubtful debts. To consider this possible loss
on account of non-payment by some debtors, it is a common practice
(and necessary also) to make a suitable provision for doubtful debts at
the time of ascertaining true profit or loss. The provision for doubtful
debts is usually calculated as a certain percentage of the total amount
due from sundry debtors after deducting/writing-off all known bad
debts. Provision for doubtful debts is also called ‘Provision for bad and
doubtful debts’. It is created by debiting the amount of required provision
to the profit and loss account and crediting it to provision for doubtful
debts account.
For creating a provision for doubtful debts the following journal entry
is recorded:
Profit and Loss A/c Dr. (with the amount of provision)
To Provision for doubtful debts A/c
This is explained with the help of the following example
Observe an extract of the trial balance from the books of Trehan Traders
on March 31, 2005 is given below:
Date Account title L.F. Debit Credit

Amount Amount
Rs. Rs.
Sundry Debtors 68,000
266 Accountancy
Additional Information
• Bad debts proved bad but not recorded amounted to Rs. 8,000
• Provision is to be maintained at 10% of debtors.
In order to create the provision for doubtful debts, the following journal
entries will be recorded:
Journal
Date Particulars L. F. Amount Amount
Rs. Rs.
2005
Mar. 31 Bad debts A/c Dr. 8,000
To Sundry debtors A/c 8,000
(Bad debts written off)
Mar. 31 Profit & Loss A/c Dr. 8,000
To Bad debts A/c 8,000
(Bad debts debited to profit and
loss account)
To Provision for doubtful debts a/c 6,0001
(For creating provision for doubtful debts)
Working Notes
Provision for doubtful debts @10% of sundry debtors i.e.
(Rs. 68,000 – 8000) = Rs. 60001
7.12 Reserves
A part of the profit may be set aside and retained in the business to provide
for certain future needs like growth and expansion or to meet future
contingencies such as workmen compensation. Unlike provisions, reserves
are the appropriations of profit to strengthen the financial position of the
business. Reserve is not a charge against profit as it is not meant to cover any
known liability or expected loss in future. However, retention of profits in the
form of reserves reduces the amount of profits available for distribution among
the owners of the business. It is shown under the head Reserves and Surpluses
on the liabilities side of the balance sheet after capital.Examples of reserves
are:
• General reserve;
• Workmen compensation fund;
• Investment fluctuation fund;
• Capital reserve;
• Dividend equalisation reserve;

• Reserve for redemption of debenture.
7.12.1 Difference between Reserve and Provision

The points of difference between reserve and provision are explained below:
1. Basic nature : A provision is a charge against profit whereas reserve is an
appropriation of profit. Hence, net profit cannot be calculated unless all
provisions have been debited to profit and loss account, while a reserve is
created after the calculation of net profit.
2. Purpose : Provision is made for a known liability or expense pertaining to
current accounting period, the amount of which is not certain. On the
other hand reserve is created for strengthening the financial position of
the business. Some reserves are also mandatory under the law.
3. Presentation in balance sheet: Provision is shown either (i) by way of
deduction from the item on the asset side for which it is created, or (ii) on
the liabilities side along with current liabilities. On the other hand, reserve
is shown on the liabilities side after capital.
4. Effect on taxable profits : Provision is deducted before calculating taxable
profits. Hence, it reduces taxable profits. A reserve is created from profit
after tax and therefore it has no effect on taxable profit.
5. Element of compulsion : Creation of provision is necessary to ascertain
true and fair profit or loss in compliance with ‘Prudence’ or ‘Conservatism’
concept. It has to be made even if there are no profits. Whereas creation of
a reserve is generally at the discretion of the management. However, in
certain cases law has stipulated for the creation of specific reserves such
as Debenture Redemption Reserve. Reserve cannot be created unless there
are profits.
6. Use for the payment of dividend : Provision cannot be used for distribution
as dividends while general reserve can be used for dividend distribution.
Basis of Difference Provision Reserve

1. Basic nature Charge against profit. Appropriation of profit.
2. Purpose It is created for a known It is made for strengthening
liability or expense pertaining the financial position of
to current accounting period, the business.Some reserves
the amount of which is not are also mandatory under law.
certain.
3. Effect on taxable It reduces taxable profits. It has no effect on taxable
profits. profit.
268 Accountancy
4. Presentations in It is shown either (i) by way It is shown on the liabilities.

Balance sheet of deduction from the item on side after capital amount.
the asset side for which it is
created, or (ii) In the liabilities
side along with current
liabilities.
5. Element of Creation of provision is Generally, creation of a Reserve
compulsion necessary to ascertain true is at the discretion of the mana-
and fair profit or loss in gement. Reserve cannot be
compliance ‘Prudence’ or created unless there are profits.
‘Conservatism’ concept. However, in certain cases law
It must be made even has stipulated for the creation
if there are no profits. of specific reserves such as
‘Debenture’ ‘Redemption ’
reserve.
6. Use for the payment It can not be used for It can be used for divided
of dividend dividend distribution. distribution.
Fig. 7.4 : Showing comparison between provisions and reserves
7.12.2 Types of Reserves

A reserve is created by retention of profit of the business can be for either a
general or a specific purpose.
1. General reserve : When the purpose for which reserve is created is not
specified, it is called General Reserve . It is also termed as free reserve
because the management can freely utilise it for any purpose. General
reserve strengthens the financial position of the business.
2. Specific reserve : Specific reserve is the reserve, which is created for some
specific purpose and can be utilised only for that purpose. Examples of
specific reserves are given below :
(i) Dividend equalisation reserve: This reserve is created to stabilise or
maintain dividend rate. In the year of high profit, amount is transferred
to Dividend Equalisation reserve. In the year of low profit, this reserve
amount is used to maintain the rate of dividend.
(ii) Workmen compensation fund: It is created to provide for claims of the
workers due to accident, etc.
(iii) Investment fluctuation fund: It is created to make for decline in the
value of investment due to market fluctuations.
(iv) Debenture redemption reserve: It is created to provide funds for
redemption of debentures.
Reserves are also classified as revenue and capital reserves according to
the nature of the profit out of which they are created.
(a) Revenue reserves : Revenue reserves are created from revenue profits
which arise out of the normal operating activities of the business and are
otherwise freely available for distribution as dividend. Examples of revenue
reserves are:
• General reserve;
• Workmen compensation fund;
• Investment fluctuation fund;
• Dividend equalisation reserve;
• Debenture redemption reserve;
(b) Capital reserves: Capital reserves are created out of capital profits which
do not arise from the normal operating activities. Such reserves are not
available for distribution as dividend. These reserves can be used for
writing off capital losses or issue of bonus shares in case of a company.
Examples of capital profits, which are treated as capital reserves, whether
transferred as such or not, are :
• Premium on issue of shares or debenture.
• Profit on sale of fixed assets.
• Profit on redemption of debentures.
• Profit on revaluation of fixed asset & liabilities.
• Profits prior to incorporation.
• Profit on reissue of forfeited shares
7.12.3 Difference between Revenue and Capital Reserve

Revenue reserves and capital reserves are differentiated on the following
grounds:
1. Source of creation : Revenue reserve is created out of revenue profits, which
arise out of the normal operating activities of the business and are
otherwise available for dividend distribution. On the other hand capital
reserve is created primarily out of capital profit, which do not arise from
the normal operating activities of the business and are not available for
distribution as dividend. But revenue profits may also be used for creation
of capital reserves.
2. Purpose : Revenue reserve is created to strengthen the financial position, to
meet unforeseen contingencies or for some specific purposes. Whereas capital
reserve is created for compliance of legal requirements or accounting practices.
3. Usage : A specific revenue reserve can be utilised only for the earmarked
purpose while a general reserve can be utilised for any purpose including
distribution of dividend. Whereas a capital reserve can be utilised for specific
purposes as provided in the law in force, e.g. to write off capital losses or
issue of bonus shares.
270 Accountancy
Basic of Difference Revenue Reserve Capital Reserve

1. Source of creation It is created out of revenue It is created primarily out of
profits which arise out of capital profit which do not arise
normal operating activities out of the nor mal operating
of the business and are activities of the business and not
otherwise available for available for dividend distribution.
dividend distribution. But revenue profits may also be
used for this purpose.
2. Purpose It is created to strengthen It is created for compliance of
the financial position, to legal requirements or accounting
meet unforeseen practices.
contingencies or for some
specific purposes.
3. Usage A specific revenue reserve It can be utilised for specific
can be utilised only for the purposes as provided in the law
earmarked purpose while a in force e.g. to write off capital
general reserve can be losses or issue of bonus shares.
utilised for any purpose
including distribution of
dividend.
Fig. 7.5 : Difference between capital reserve and revenue reserve
7.12.4 Importance of Reserves

A business firm may consider it proper to set up some mechanism to protect
itself from the consequences of unknown expenses and losses, it may be
required to bear in future. It may also regard it as more appropriate in certain
cases to reduce the amount that can be drawn by the proprietors as profit in
order to conserve business resource to meet certain significant demands in
future. An example of such a demand is the much needed expansion in the
scale of business operations. This is presented as the justification for reserves
in business activities and in accounting. The amount so set aside may be
meant for the purpose of :
• Meeting a future contingency
• Strengthening the general financial position of the business;
• Redeeming a long-term liability like debentures, etc.
7.13 Secret Reserve

Secret reserve is a reserve which does not appear in the balance sheet. It may
also help to reduce the disclosed profits and also the tax liability . The secret
reserve can be merged with the profits during the lean periods to show improved
profits. Management may resort to creation of secret reserve by charging higher

depreciation than required. It is termed as ‘Secret Reserve’, as it is not known
to outside stakeholders. Secret reserve can also be created by way of :
• Undervaluation of inventories/stock
• Charging capital expenditure to profit and loss account
• Making excessive provision for doubtful debts
• Showing contingent liabilities as actual liabilities
Creation of secret reserves within reasonable limits is justifiable on grounds
of expediency, prudence and preventing competition from other firms.
I State with reasons whether the following statements are True or False ;
(i) Making excessive provision for doubtful debits builds up the secret reserve in
the business.
(ii) Capital reserves are normally created out of free or distributable profits.
(iii) Dividend equalisation reserve is an example of general reserve.
(iv) General reserve can be used only for some specific purposes.
(v) ‘Provision’ is a charge against profit.
(vi) Reserves are created to meet future expenses or losses the amount of which is
not certain.
(vii) Creation of reserve reduces taxable profits of the business.
II Fill in the correct words :
(i) Depreciation is decline in the value of ...........
(ii) Installation, freight and transport expenses are a part of ...........
(iii) Provision is a ........... against profit.
(iv) Reserve created for maintaining a stable rate of dividend is termed as...........

• Depreciation, Depreciable cost, original cost, useful life;
• Depletion, Obsolescence, Amortisation;
• Salvage value/Residual value/Scrap value;
• Written down value/Reducing balance value/Diminishing value;
• Straight Line/Fixed Installment Method;
• Asset Disposal Account;
• Accumulated Depreciation/Provision for Depreciation Account, Reserve,
Provision, Capital Reserve, Revenue Reserve, General Reserve, Specific
Reserve, Secret Reserve, Provision for Doubtful Debts.
Summary With Reference to Learning Objectives
1. Meaning of depreciation : Depreciation is decline in the value of a tangible

fixed asset. In accounting, depreciation is the process of allocating depreciable
cost over useful life of a fixed asset.
272 Accountancy
2. Depreciation and similar terms : Depreciation term is used in the context of

tangible fixed assts. Depletion (in the context of extractive industries), and
amortisation (in the context of intangible assets) are other related terms.
Factors Affecting Depreciation :
• Wear and Tear due to use and/or passage of time
• Expiration of Legal Rights
• Obsolescence
3. Importance of depreciation :
• Depreciation must be charged to ascertain true and fair profit or loss.
• Depreciation is a non-cash operating expense.
4. Methods of charging depreciation : Depreciation amount can be calculated using :
• Straight line method, or
• Written down value method
5. Factors affecting the amount of depreciation :
Depreciation amount is determined by —
• Original cost
• Salvage value, and
• Useful life of the asset
6. Provisions and Reserves : A provision is a charge against profit. It is created
for a known current liability the amount of which is uncertain. Reserve on
the other hand, is an appropriation of profit. It is created to strengthen the
financial position of the business.
7. Types of Reserves : Reserves may be —
• General reserve and specific reserve;
• Revenue reserve and capital reserve.
8. Secret Reserve : When total depreciation charged is higher than the total
depreciable cost, Secret reserve’ is created. Secret reserve is not explicitly
shown in the balance sheet.
Short Answers
1. What is ‘Depreciation’?
2. State briefly the need for providing depreciation.
3. What are the causes of depreciation?
4. Explain basic factors affecting the amount of depreciation.
5. Distinguish between straight line method and written down value method
of calculating depreciation.
6. “In case of a long term asset, repair and maintenance expenses are expected
to rise in later years than in earlier year”. Which method is suitable for
charging depreciation if the management does not want to increase burden
on profits and loss account on account of depreciation and repair.
7. What are the effects of depreciation on profit and loss account and balance
sheet?
8. Distinguish between ‘provision’ and ‘reserve’ .
9. Give four examples each of ‘provision’ and ‘reserves’.
10. Distinguish between ‘revenue reserve’ and ‘capital reserve’.
11. Give four examples each of ‘revenue reserve’ and ‘capital reserves’.
12. Distinguish between ‘general reserve’ and ‘specific reserve’.
13. Explain the concept of ‘secret reserve’.
Long Answers
1. Explain the concept of depreciation. What is the need for charging
depreciation and what are the causes of depreciation?
2. Discuss in detail the straight line method and written down value method
of depreciation. Distinguish between the two and also give situations where
they are useful.
3. Describe in detail two methods of recording depreciation. Also give the
necessary journal entries.
4. Explain determinants of the amount of depreciation.
5. Name and explain different types of reserves in details.
6. What are ‘provisions’. How are they created? Give accounting treatment in
case of provision for doubtful Debts.
Numerical Problems
1. On April 01, 2000, Bajrang Marbles purchased a Machine for Rs. 2,80,000
and spent Rs. 10,000 on its carriage and Rs. 10,000 on its installation. It is
estimated that its working life is 10 years and after 10 years its scrap value
will be Rs. 20,000.
(a) Prepare Machine account and Depreciation account for the first four
years by providing depreciation on straight line method. Accounts are
closed on March 31st every year.
(b) Prepare Machine account, Depreciation account and Provision for
depreciation account (or accumulated depreciation account) for the first
four years by providing depreciation using straight line method accounts
are closed on March 31 every year.
(Ans:[a] Balance of Machine account on April 1, 2004 Rs.1,28,000.
[b] Balance of Provision for depreciation account as on 1.04.2004
Rs.72,000.)
2. On July 01, 2000, Ashok Ltd. Purchased a Machine for Rs. 1,08,000 and
spent Rs. 12,000 on its installation. At the time of purchase it was estimated
that the effective commercial life of the machine will be 12 years and after 12
years its salvage value will be Rs. 12,000.
Prepare machine account and depreciation Account in the books of Ashok
Ltd. For first three years, if depreciation is written off according to straight
line method. The account are closed on December 31st, every year.
(Ans: Balance of Machine account as on 1.01.2003 Rs.97,500).
3. Reliance Ltd. Purchased a second hand machine for Rs. 56,000 on October
01, 2001 and spent Rs. 28,000 on its overhaul and installation before putting
it to operation. It is expected that the machine can be sold for Rs. 6,000 at
the end of its useful life of 15 years. Moreover an estimated cost of Rs. 1,000
is expected to be incurred to recover the salvage value of Rs. 6,000. Prepare
machine account and Provision for depreciation account for the first three
274 Accountancy
years charging depreciation by fixed installment Method. Accounts are closed

on December 31, every year.
(Ans: Balance of provision for depreciation account as on 1.01.04 Rs.18,200).
4. Berlia Ltd. Purchased a second hand machine for Rs. 56,000 on July 01,
2001 and spent Rs. 24,000 on its repair and installation and Rs. 5,000 for
its carriage. On September 01, 2002, it purchased another machine for
Rs. 2,50,000 and spent Rs. 10,000 on its installation.
(a) Depreciation is provided on machinery @10% p.a on original cost method
annually on December 31. Prepare machinery account and depreciation
account from the year 2001 to 2004.
(b) Prepare machinery account and depreciation account from the year
2001 to 2004, if depreciation is provided on machinery @10% p.a. on
written down value method annually on December 31.
(Ans:[a] Balance of Machine account as on 1.01.05 Rs.2,54,583.
[b] Balance of Machine account as on 1.01.05 Rs.2,62,448).
5. Ganga Ltd. purchased a machinery on January 01, 2001 for Rs. 5,50,000
and spent Rs. 50,000 on its installation. On September 01, 2001 it purchased
another machine for Rs. 3,70,000. On May 01, 2002 it purchased another
machine for Rs. 8,40,000 (including installation expenses).
Depreciation was provided on machinery @10% p.a. on original cost method
annually on December 31. Prepare:
(a) Machinery account and depreciation account for the years 2001, 2002,
2003 and 2004.
(b) If depreciation is accumulated in provision for Depreciation account
then prepare machine account and provision for depreciation account
for the years 2001, 2002, 2003 and 2004.
(Ans:[a] Balance of machine account as on 01.01.05 Rs. 12,22,666.
[b] Balance of provision for dep. account as on 01.01.05 Rs. 5,87,334).
6. Azad Ltd. purchased furniture on October 01, 2002 for Rs. 4,50,000. On
March 01, 2003 it purchased another furniture for Rs. 3,00,000. On July
01, 2004 it sold off the first furniture purchased in 2002 for Rs. 2,25,000.
Depreciation is provided at 15% p.a. on written down value method each
year. Accounts are closed each year on March 31. Prepare furniture account,
and accumulated depreciation account for the years ended on March 31,2003,
March 31,2004 and March 31,2005. Also give the above two accounts if
furniture disposal account is opened.
(Ans.Loss on sale of furniture Rs.1,14,915,
Balance of provision for depreciation account as on 31.03.05 Rs. 85,959.)
7. M/s Lokesh Fabrics purchased a Textile Machine on April 01, 2001 for
Rs. 1,00,000. On July 01, 2002 another machine costing Rs. 2,50,000 was
purchased . The machine purchased on April 01, 2001 was sold for Rs.
25,000 on October 01, 2005. The company charges depreciation @15% p.a.
on straight line method. Prepare machinery account and machinery disposal
account for the year ended March 31, 2006.
(Ans. Loss on sale of Machine account Rs.7,500.
Balance of machine account as on 1.04.05 Rs.1,09,375).
8. The following balances appear in the books of Crystal Ltd, on Jan 01, 2005
Rs.
Machinery account on 15,00,000
Provision for depreciation account 5,50,000
On April 01, 2005 a machinery which was purchased on January 01, 2002
for Rs. 2,00,000 was sold for Rs. 75,000. A new machine was purchased on
July 01, 2005 for Rs. 6,00,000. Depreciation is provided on machinery at
20% p.a. on Straight line method and books are closed on December 31
every year. Prepare the machinery account and provision for depreciation
account for the year ending December 31, 2005.
(Ans. Profit on sale of Machine Rs. 5,000.
Balance of machine account as on 31.03.05 Rs. 19,00,000.
Balance of Provision for depreciation account as on 31.03.05 Rs. 4,80,000).
9. M/s. Excel Computers has a debit balance of Rs. 50,000 (original cost
Rs. 1,20,000) in computers account on April 01, 2000. On July 01, 2000 it
purchased another computer costing Rs. 2,50,000. One more computer was
purchased on January 01, 2001 for Rs. 30,000. On April 01, 2004 the
computer which has purchased on July 01, 2000 became obselete and was
sold for
Rs. 20,000. A new version of the IBM computer was purchased on August
01, 2004 for Rs. 80,000. Show Computers account in the books of Excel
Computers for the years ended on March 31, 2001, 2002, 2003 ,2004 and
2005. The computer is depreciated @10 p.a. on straight line method basis.
(Ans: Loss on sale of computer Rs. 1,36,250.
Balance of computers account as on 31.03.05 Rs. 80,583).
10. Carriage Transport Company purchased 5 trucks at the cost of Rs. 2,00,000
each on April 01, 2001. The company writes off depreciation @ 20% p.a. on
original cost and closes its books on December 31, every year. On October 01,
2003, one of the trucks is involved in an accident and is completely destroyed.
Insurance company has agreed to pay Rs. 70,000 in full settlement of the
claim. On the same date the company purchased a second hand truck for Rs.
1,00,000 and spent Rs. 20,000 on its overhauling. Prepare truck account and
provision for depreciation account for the three years ended on December 31,
2003. Also give truck account if truck disposal account is prepared.
(Ans: Loss of settlement of Truck Insurance Rs.30,000.
Balance of Provision for depreciation A/c as on 31.12.03 Rs.4,46,000.
Balance of Trucks account as on 31.12.03 Rs.9,20,000).
11. Saraswati Ltd. purchased a machinery costing Rs. 10,00,000 on January 01,
2001. A new machinery was purchased on 01 May, 2002 for Rs. 15,00,000 and
another on July 01, 2004 for Rs. 12,00,000. A part of the machinery which
originally cost Rs. 2,00,000 in 2001 was sold for Rs. 75,000 on October 31,
2004. Show the machinery account, provision for depreciation account and
machinery disposal account from 2001 to 2005 if depreciation is provided at
10% p.a. on original cost and account are closed on December 31, every year.
(Ans: Loss on sale of Machine Rs.58,333.
Balance of Provision for dep. A/c as on 31.12.05 Rs. 11,30,000.
Balance of Machine A/c as on 31.12.05 Rs.35,00,000).
276 Accountancy
12. On July 01, 2001 Ashwani purchased a machine for Rs. 2,00,000 on credit.
Installation expenses Rs. 25,000 are paid by cheque. The estimated life is 5
years and its scrap value after 5 years will be Rs. 20,000. Depreciation is to
be charged on straight line basis. Show the journal entry for the year 2001
and prepare necessary ledger accounts for first three years.
(Ans: Balance of Machine A/c as on 31.12.03 Rs.1,22,500).
13. On October 01, 2000, a Truck was purchased for Rs. 8,00,000 by Laxmi
Transport Ltd. Depreciation was provided at 15% p.a. on the diminishing
balance basis on this truck. On December 31, 2003 this Truck was sold for
Rs. 5,00,000. Accounts are closed on 31st March every year. Prepare a
Truck Account for the four years.
(Ans: Profit on Sale of Truck Rs.55,548).
14. Kapil Ltd. purchased a machinery on July 01, 2001 for Rs. 3,50,000. It
purchased two additional machines, on April 01, 2002 costing Rs. 1,50,000
and on October 01, 2002 costing Rs. 1,00,000. Depreciation is provided
@10% p.a. on straight line basis. On January 01, 2003, first machinery
become useless due to technical changes. This machinery was sold for Rs.
1,00,000. prepare machinery account for 4 years on the basis of calendar
year.
(Ans: Loss on sale of machine Rs. 1,97,500.
Balance of Machine account as on 1.01.05 Rs. 1,86,250).
15. On January 01, 2001, Satkar Transport Ltd, purchased 3 buses for
Rs. 10,00,000 each. On July 01, 2003, one bus was involved in an accident
and was completely destroyed and Rs. 7,00,000 were received from the
Insurance Company in full settlement. Depreciation is writen off @15% p.a.
on diminishing balance method. Prepare bus account from 2001 to 2004.
Books are closed on December 31 every year.
(Ans: Profit on insurance claim Rs. 31,687.
Balance of Bus account as on 1.01.05 Rs. 10,44,013).
16. On October 01, 2001 Juneja Transport Company purchased 2 Trucks for
Rs. 10,00,000 each. On July 01, 2003, One Truck was involved in an accident
and was completely destroyed and Rs. 6,00,000 were received from the
insurance company in full settlement. On December 31, 2003 another truck
was involved in an accident and destroyed partially, which was not insured.
It was sold off for Rs. 1,50,000. On January 31, 2004 company purchased a
fresh truck for Rs. 12,00,000. Depreciation is to be provided at 10% p.a. on
the written down value every year. The books are closed every year on March
31. Give the truck account from 2001 to 2004.
(Ans: Loss on Ist Truck Insurance claim Rs. 1,41,000.
Loss on IInd Truck Rs. 5,53,000.
Balance of Truck account as on 31.03.04 Rs. 11,80,000).
17. A Noida based Construction Company owns 5 cranes and the value of this
asset in its books on April 01, 2001 is Rs. 40,00,000. On October 01, 2001
it sold one of its cranes whose value was Rs. 5,00,000 on April 01, 2001 at
a 10% profit. On the same day it purchased 2 cranes for Rs. 4,50,000 each.
Prepare cranes account. It closes the books on December 31 and provides

for depreciation on 10% written down value.
(Ans: Profit on sale of crane Rs. 47,500.
Balance of Cranes account as on 31.12.01 Rs. 41,15000).
18. Shri Krishan Manufacturing Company purchased 10 machines for Rs. 75,000
each on July 01, 2000. On October 01, 2002, one of the machines got
destroyed by fire and an insurance claim of Rs. 45,000 was admitted by the
company. On the same date another machine is purchased by the company
for Rs. 1,25,000.
The company writes off 15% p.a. depreciation on written down value basis.
The company maintains the calendar year as its financial year. Prepare the
machinery account from 2000 to 2003.
(Ans: Loss on settle of insurance claim Rs. 7,735.
Balance of Machine account as on 31.12.03 Rs. 6,30,393).
19. On January 01, 2000, a Limited Company purchased machinery for
Rs. 20,00,000. Depreciation is provided @15% p.a. on diminishing balance
method. On March 01, 2002, one fourth of machinery was damaged by fire
and Rs. 40,000 were received from the insurance company in full settlement.
On September 01, 2002 another machinery was purchased by the company
for Rs. 15,00,000.
Write up the machinery account from 2002 to 2003. Books are closed on
December 31, every year.
(Ans: Loss on settle of insurance claim Rs. 12,219.
Balance of Machine account as on 01.01.04 Rs 19,94,260).
20. A Plant was purchased on 1st July, 2000 at a cost of Rs. 3,00,000 and
Rs. 50,000 were spent on its installation. The depreciation is written off at
15% p.a. on the straight line method. The plant was sold for Rs. 1,50,000 on
October 01, 2002 and on the same date a new Plant was installed at the cost
of Rs. 4,00,000 including purchasing value. The accounts are closed on
December 31 every year.
Show the machinery account and provision for depreciation account for 3 years.
(Ans: Loss on sale of Plant Rs. 81,875.
Balance of Machine account as on 01.01.03 Rs. 15,000.
Balance of Provision for Depreciation account as on 01.01.03 Rs. 15,000.).
21. An extract of Trial balance from the books of Tahiliani and Sons Enterprises
on December 31 2005 is given below:
Name of the Account Debit Amount Credit Amount
Rs. Rs.
Sundry debtors. 50,000
Bad debts 6,000
Provision for doubtful debts 4,000
Additional Information:
• Bad Debts proved bad but not recorded amounted to Rs. 2,000.
• Provision is to be maintained at 8% of Debtors.
278 Accountancy
Give necessary accounting entries for writing off the bad debts and creating
the provision for doubtful debts account. Also show the necessary accounts.
(Ans: New provision for Bad debts Rs. 3,840, profit and loss account [Dr.]
Rs. 7,840.)
22. The following information are extract from the Trial Balance of M/s Nisha
traders on 31 December 2005.
Bad debts 1,000
Provision for bad debts 5,000
Additional Information
Bad Debts Rs. 500
Provision is to be maintained at 2% of Debtors.
Prepare bad debts accound, Provision for bad debts account and profit and
loss account.
(Ans: New provision Rs. 1,600 Profit and loss account [Cr.] Rs. 1,900).

1. Fixed assets, exhaustion of natural resources, specific contracted business.
2. Amortisation
1. T, 2. F, 3. F. 4. T, 5. T 6. F, 7. T, (viii) F, 8. F, 9. F,
Written down value method is more appropriate because this method is suitable
for those assets which are affected by technological changes. Moreover, this method
is recognised by income tax hand.
1. (i) T, (ii) F, (iii) F, (iv) F,
(v) T, (vi) F, (vii) F,
2. (i) Assets (ii) Acquisition cost

(iii) Charge (iv) Dividend equilisation fund.
Bill of Exchange 8
G oods can be sold or bought for cash or on

credit. When goods are sold or bought for
cash, payment is received immediately. On the
other hand, when goods are sold/bought on credit
the payment is deferred to a future date. In such a
LEARNING OBJECTIVES
situation, normally the firm relies on the party to
make payment on the due date. But in some cases,
After studying this chapter, to avoid any possibility of delay or default, an
you will be able to :
instrument of credit is used through which the
• state the meaning of buyer assures the seller that the payment shall be
bill of exchange and a
made according to the agreed conditions. In India,
promissory note;
instruments of credit have been in use since time
• distinguish between a
bill of exchange and a
immemorial and are popularly known as Hundies.
promissory note; The hundies are written in Indian languages and
• state the advantages have a large variety (refer box1).
of bill of exchange;
• explain the meaning of Box 1
different terms involved in
Hundies and its Types
the bill transaction,
There are a variety of hundies used in our country.
• record bill of exchange
Let us discuss some of the most common ones.
transactions in journal;
Shahjog Hundi: This is drawn by one merchant on
• record transactions another, asking the latter to pay the amount to a
relating to dishonour, Shah. Shah is a respectable and responsible person,
retirement and renewal a man of worth and known in the bazaar. A shah-jog
of bill; hundi passes from one hand to another till it reaches
• describe the uses of a shah, who, after reasonable enquiries, presents it
bill receivable and bill to the drawee for acceptance of the payment.
payable book; Darshani Hundi: This is hundi payable at sight. It
• state the meaning and must be presented for payment within a reasonable
use of accommodation time after its receipt by the holder. It is similar to a
bill. demand bill.
Dev Prakash Sharma/VIII Proof/22/02/2006

280 Accountancy
Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time.
This is similar to a time bill.
There are few other varieties of hundies like Nam-jog hundi, Dhani-jog hundi, Jawabee
hundi, Hokhami hundi, Firman-jog hundi, and so on.
Now a days these instruments of credit are called bills of exchange or

promissory notes. The bill of exchange contains an unconditional order to pay
a certain amount on an agreed date while the promissory note contains an
unconditional promise to pay a certain sum of money on a certain date. In
India these instruments are governed by the Indian Negotiable Instruments
Act 1881.
8.1 Meaning of Bill of Exchange

According to the Negotiable Instruments Act 1881, a bill of exchange is defined
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 following
features of a bill of exchange emerge out of this definition.
• A bill of exchange must be in writing.
• It is an order to make payment.
• The order to make payment is unconditional.
• The maker of the bill of exchange must sign it.
• The payment to be made must be certain.
• The date on which payment is made must also be certain.
• The bill of exchange must be payable to a certain person.
• The amount mentioned in the bill of exchange is payable either on
demand or on the expiry of a fixed period of time.
• It must be stamped as per the requirement of law.
A bill of exchange is generally drawn by the creditor upon his debtor. It has to
be accepted by the drawee (debtor) or someone on his behalf. It is just a draft
till its acceptance is made.
For example, Amit sold goods to Rohit on credit for Rs. 10,000 for three months.
To ensure payment on due date Amit draws a bill of exchange upon Rohit for
Rs. 10,000 payable after three months. Before it is accepted by Rohit it will be
called a draft. It will become a bill of exchange only when Rohit writes the word
“accepted” on it and append his signature thereto communicate his acceptance.
Bill of Exchange 281
8.1.1 Parties to a Bill of Exchange

There are three parties to a bill of exchange:
(1) Drawer is the maker of the bill of exchange. A seller/creditor who is entitled
to receive money from the debtor can draw a bill of exchange upon the
buyer/debtor. The drawer after writing the bill of exchange has to sign it
as maker of the bill of exchange.
(2) Drawee is the person upon whom the bill of exchange is drawn. Drawee is
the purchaser or debtor of the goods upon whom the bill of exchange is
drawn.
(3) Payee is the person to whom the payment is to be made. The drawer of
the bill himself will be the payee if he keeps the bill with him till the date
of its payment. The payee may change in the following situations:
(a) In case the drawer has got the bill discounted, the person who has
discounted the bill will become the payee;
(b) In case the bill is endorsed in favour of a creditor of the drawer, the
creditor will become the payee.
Normally, the drawer and the payee is the same person. Similarly, the drawee
and the acceptor is normally the person. For example, Mamta sold goods worth
Rs.10,000 to Jyoti and drew a bill of exchange upon her for the same amount payable
after three months. Here, Mamta is the drawer of the bill and Jyoti is the drawee. If
the bill is retained by Mamta for three months and the amount of
Rs. 10,000 is received by her on the due date then Mamta will be the payee. If Mamta
gives away this bill to her creditor Ruchi, then Ruchi will be the payee. If Mamta gets
this bill discounted from the bank then the bankers will become the payee.
In the above mentioned bill of exchange, Mamta is the drawer and Jyoti is
the drawee. Since Jyoti has accepted the bill, she is the acceptor. Suppose in
place of Jyoti the bill is accepted by Ashok then Ashok will become the acceptor.
Mamta New Delhi
Rs.10,000 April 01, 2006
Three months after date pay to me or my order, the sum of Rupees Ten Thousand
only, for value received.
Stamp
Accepted
(signed) (Signed)
Jyoti Mamta
1.4.2006 196, Karol Bagh
73-B, Mahipalpur New Delhi
New Delhi 110 037
To
Jyoti
73-B, Mahipalpur
New Delhi 110 037
Figure 8.1 : Showing specimen of bills of exchange

282 Accountancy

Write ‘Ture’ or ‘False’ against each statement regarding a bill of exchange:
(i) A bill of exchange must be accepted by the payee.
(ii) A bill of exchange is drawn by the creditor.
(iii) A bill of exchange is drawn for all cash transaction.
(iv) A bill payable on demand is called Time bill;
(v) The person to whom payment is to be made in a bill or exchange is called
payee.
(vi) A negotiable instrument does not require the signature of its maker.
(vii) The hundi Payable at sight is called Darshani hundi.
(viii) A negotiable instrument is not freely transferable.
(ix) Stamping of promissory note is not mandatory.
(x) The time of payment of a negotiable instrument need not be certain.
8.2 Promissory Note

According to the Negotiable Instruments Act 1881, a promissory note is defined
as an instrument in writing (not being a bank note or a currency note),
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. However, according to the Reserve Bank of India Act, a promissory
note payable to bearer is illegal. Therefore, a promissory note cannot be made
payable to the bearer.
This definition suggests that when a person gives a promise in writing to
pay a certain sum of money unconditionally to a certain person or according
to his order the document is called is a promissory note.
Following features of a promissory note emerge out of the above definition:
• It must be in writing
• It must contain an unconditional promise to pay.
• The sum payable must be certain.
• It must be signed by the maker.
• The maker must sign it.
• It must be payable to a certain person.
• It should be properly stamped.
A promissory note does not require any acceptance because the maker of the
promissory note himself promises to make the payment.
Ashok Kumar New Delhi

Rs. 30,000 01 April, 2006
Three months after date I promise to pay Sh. Harish Chander or order
a sum of Rupees Thirty Thousand only for value received.
Stamp
To
Harish Chander Ashok Kumar
24, Ansari Road 2, Dariba Kalan
Darya Ganj Candani Chowk
New Delhi 110 002 Delhi 110 006
Fig. 8.2 : Showing specimen of promissory note
8.2.1 Parties to a Promissory Note

There are two parties to a promissory note.
• Maker or Drawer is the person who makes or draws the promissory
note to pay a certain amount as specified in the promissory note. He is
also called the promisor.
• Drawee or Payee is the person in whose favour the promissory note is
drawn. He is called the promisee.
Generally, the drawee is also the payee, unless, it is otherwise mentioned in
the promissory note. In the specimen of promissory note(refer figure 8.2),
Ashok Kumar is the drawer or maker who promises to pay Rs.30,000 and
Harish Chander is the drawee or payee to whom payment is to made. If Harish
Chander endorses this promissory note in favour of Rohit then Rohit will
become the payee. Similarly, if Harish Chander gets this promissory note
discounted from the bank then the bank will become the payee.
Box 2
Distinction between a Bill of Exchange and Promissory Note
Both a bill of exchange and a promissory note are instruments of credit and are similar
in many ways. However, there are certain basic differences between the two.
S. No Basis Bill of Exchange Promissory Note
1 Drawer It is drawn by the creditor It is drawn by the debtor
2 Order or Promise It contains an order to make It contains a promise to make
and Parties payment. There can be three payment. There are only two
parties to it, viz. the drawer, parties to it, viz. the drawer
the drawee and the payee. and the payee.
284 Accountancy
3 Acceptance It requires acceptance by the It does not require any

drawee or someone else on his acceptance.
behalf.
4. Payee Drawer and payee can be the Drawer cannot be the payee
same party. of it.
5. Notice In case of its dishonour due No notice needs to be givenin
notice of dishonour is to be case of its dishonour.
given by the holder to the drawer
Fig. 8.3 Distinction between bills of exchange and promissory note
8.3 Advantages of Bill of Exchange

The bills of exchange as instruments of credit are used frequently in business
because of the following advantages:
• Framework for relationships: A bill of exchange represents a device, which
provides a framework for enabling the credit transaction between the seller/
creditor and buyer/debtor on an agreed basis.
• Certainty of terms and conditions: The creditor knows the time when he
would receive the money so also debtor is fully aware of the date by which
he has to pay the money. This is due to the fact that terms and conditions
of the relationships between debtor and creditor such as amount required
to be paid; date of payment; interest to be paid, if any, place of payment
are clearly mentioned in the bill of exchange.
• Convenient means of credit: A bill of exchange enables the buyer to buy the
goods on credit and pay after the period of credit. However, the seller of goods
even after extension of credit can get payment immediately either by
discounting the bill with the bank or by endorsing it in favour of a third party.
• Conclusive proof: The bill of exchange is a legal evidence of a credit
transaction implying thereby that during the course of trade buyer has
obtained credit from the seller of the goods, therefore, he is liable to pay to
the seller. In the event of refusal of making the payment, the law requires
the creditor to obtain a certificate from the Notary to make it a conclusive
evidence of the happening.
• Easy transferability: A debt can be settled by transferring a bill of
exchange through endorsement and delivery.

Fill in the blanks with suitable word(s)
(i) The person to whom the amount mentioned in the promissory note is
payable is known as _____________.
(ii) Transfer of a negotiable instrument to another person by signing on it, is
known as _____________.
(iii) In a promissory note, the person who makes the promise to pay is called
as ____________.
(iv) A person who endorses the promissory note in favour of another is known
as____________.
8.4 Maturity of Bill
The term maturity refers the date on which a bill of exchange or a promissory
note becomes due for payment. In arriving at the maturity date three days,
known as days of grace, must be added to the date on which the period of
credit expires instrument is payable. Thus, if a bill dated March 05 is payable
30 days after date it, falls due on April 07, i.e. 33 days after March 05 If it
were payable one month after date, the due date would be April 08, i.e. one
month and 3 days after March 05. However, where the date of maturity is a
public holiday, the instrument will become due on the preceding business
day. In this case if April 08, falls on a public holiday then the April 07 will be
the maturity date. But when an emergent holiday is declared under the
Negotiable Instruments Act 1881, by the Government of India which may
happen to be the date of maturity of a bill of exchange, then the date of
maturity will be the next working day immediately after the holiday. For
example, the Government declared a holiday on April 08 which happened to
be the day on which a bill of exchange drawn by Gupta upon Verma for
Rs.20,000 became due for payment, Since April 08, has been declared a
holiday under the Negotiable Instruments Act, therefore, April 08, will be the
date of maturity for this bill.
8.5 Discounting of Bill

If the holder of the bill needs funds, he can approach the bank for encashment
of the bill before the due date. The bank shall makes the payment of the bill
after deducting some interest (called discount in this case). This process of
encashing the bill with the bank is called discounting the bill. The bank gets
the amount from the drawee on the due date.
286 Accountancy
8.6 Endorsement of Bill

Any holder may transfer a bill unless its transfer is restricted, i.e. the bill has
been negotiated containing words prohibiting its transfer. The bill can be
initially endorsed by the drawer by putting his signatures at the back of the
bill along with the name of the party to whom it is being transferred. The act
of signing and transferring the bill is called endorsement.
8.7 Accounting Treatment

For the person who draws the bill of exchange and gets it back after its due
acceptance, it is a bill receivable. For the person who accepts the bill, same,
it is a bills payable. In case of a promissory note for the maker it is a bills
payable and for the person in whose favour the promissory note is drawn it is
a bills receivable. Bills receivables are assets and Bills payable are liabilities.
Bills and Notes are used interchangeably.
8.7.1 In the Books of Drawer/Promissor

A bill receivable can be treated in the following four ways by its receiver.
1. He can retain it till the date of maturity, and
(a) get it collected on date of maturity directly, or
(b) get it collected through the banker.
2. He can get the bill discounted from the bank.
3. He can endorse the bill in favour of his Creditor.
The accounting treatment in the books of receiver under all the four
alternatives is given below under the assumption that the bill is duly honoured
on maturity by the acceptor.
(1) When the bill of exchange is retained by the receiver with him till date of
its maturity:
On receiving the bill
Bills Receivable A/c Dr.
To Debtors A/c
On maturity of the bill
Cash/Bank A/c Dr.
To Bills Receivable A/c
However, when the bill of exchange is retained by the receiver with him
and sent to bank for collection a few days before maturity, the following
two entries are recorded:
On sending the bill for collection
Bills Sent for Collection A/c Dr.
On receiving the advice from the bank that the bill has been collected
Bank A/c Dr.
To Bills Sent for Collection A/c
(2) When the receiver gets the bill discounted from the bank:
To Debtors A/c
On discounting the bill
Bank A/c Dr.
Discount A/c Dr.
On Maturity
No entry is recorded because the bill becomes the property of the bank,
therefore, the bank collects the amount of the bill from the acceptor and
no journal entry is recorded in the books of the drawer.
(3) When the bill is endorsed by the receiver in favour of his creditor:
To Debtor’s A/c
On endorsing the bill
Creditor’s A/c Dr.
On Maturity
No entry is recorded because the bill has been transferred in favour of the
creditor, therefore the creditor becomes its owner and will receive the
payment on maturity. Hence, no entry is recorded in the books of drawer
or endorser.
8.7.2 In the Books of Acceptor/Promissor

The following journal entries are recorded in the books of the acceptor or
promisesor under all the four alternatives. It makes no difference whether the
bill is retained discounted, endorsed or pledged.
On accepting the bill
Creditor’s A/c Dr.
To Bills Payable A/c
On Maturity of the bill
Bills Payable A/c Dr.
To Bank A/c
288 Accountancy
Box 3
1. When the drawer retains the bill with him till the date of its maturity and
gets the same collected directly
Transaction Books of Creditor/Drawer Books of Debtor/
Acceptor
Sale/Purchase of goods Debtor’s A/c Dr. Purchases A/c Dr.
To Sales A/c To Creditor’s A/c
Receiving/Accepting the bill Bills Receivable A/c Dr. Creditor’s A/c Dr.
To Debtor’s A/c To Bills Payable A/c
Collection of the bill Cash/Bank A/c Dr. Bills Payable A/c Dr.
To Bills Receivable A/c To Cash/Bank A/c
2. When the bill is retained by the drawer with him and sent to bank for collection
a few days before maturity
Acceptor
Receiving /Accepting the bill Bills Receivable A/c Dr. Creditor’s A/c Dr.
To Debtor’s A/c To Bills Payable A/c
Sending the bill for collection Bills sent for
collection A/c Dr. No entry
To Bill Receivable A/c
On Receiving from the bank Bank A/c Dr. Bills Payable A/c Dr.
advice that the bill has been To Bill Sent for To Bank A/c
collected Collection A/c
3. When the drawer gets the bill discounted from the bank
Acceptor
To Debtor’s A/c To Bills payable A/c
Discounting the bill Bank A/c Dr. No entry
Discount A/c Dr.
On maturity of the bill No entry Bills payable A/c Dr.
To Bank A/c
4. When the bill is endorsed by the drawer in favour of his creditor

Acceptor
Sale/Purchase of goods Debtor’s A/c Dr. Purchase A/c Dr.
To Debtor’s A/c To Bills payable A/c
Endorsing the bill Creditor’s A/c Dr. No entry
On maturity of the bill No entry Bills payable A/c Dr.
To Bank A/c
The journal entries to be recoded in the books of the drawer and the acceptor
under all the four cases have been summarised below.
Illustration 1
Amit sold goods for Rs.20,000 to Sumit on credit on Jan 01, 2006. Amit drew a bill of
exchange upon Sumit for the same amount for three months. Sumit accepted the bill and
returned it to Amit. Sumit met his acceptance on maturity. Record the necessary journal
entries under the following circumstances:
(i) Amit retained the bill till the date of its maturity and collected directly
(ii) Amit discounted the bill @ 12% p.a from his bank
(iii) Amit endorsed the bill to his creditor Ankit
(iv) Amit retained the bill and on March, 31 2006 Amit sent the bill for collection to
its bank. On April 05, 2006 bank advice was received.
Solution
Books of Amit
Journal
(i) When the bill was retained till its maturity.

Amount Amount
Rs. Rs.
2006
Jan 01 Sumit’s A/c Dr. 20,000
To Sales A/c 20,000
(Sold goods to Sumit’s on credit)
Jan 01 Bills Receivable A/c Dr. 20,000
To Sumit’s A/c 20,000
(Received Sumit’s acceptance payable
after three months)
290 Accountancy

To Bills Receivable A/c 20,000
(Sumit met his acceptance on maturity)
(ii) When the bill was discounted from the book.

Journal

Amount Amount
Rs. Rs.
2006
Jan 01 Sumit’s A/c Dr. 20,000
To Sales A/c 20,000
(Sold goods to Sumit’s)
Jan 01 Bills Receivable A/c Dr. 20,000
(Received Sumit’s acceptance three months)
Jan 01 Bank A/c Dr. 19,400
(Sumit’s acceptance discounted with the bank)
(iii) When Amit endorsed the bill in favour of his creditor Ankit.
Journal
Amount Amount
Rs. Rs.
2006
Jan. 01 Sumit’s A/c Dr. 20,000
To Sales A/c 20,000
Jan. 01 Bills Receivable A/c Dr. 20,000
(Received Sumit’s acceptance for
three months)
Jan. 01 Ankit’s A/c Dr. 20,000
(Sumit acceptance endorsed in favour of Ankit)
(iv) When the bill was sent for collection by Amit to the bank.
Journal
Amount Amount
Rs. Rs.
2006
Jan. 01 Sumit’s A/c Dr. 20,000
To Sales A/c 20,000
(Received Sumit’s acceptance payable
after three months)
Mar. 31 Bills Sent for Collection A/c Dr. 20,000
(Bills sent for collection)
Apr. 05 Bank A/c Dr. 20,000
To Bills sent for collection A/c 20,000
(Bills sent for collection collected by the bank)
The following journal entries will be made in the books of Sumit under all the four
circumstances:
In the books of Sumit

Journal

Amount Amount
Rs. Rs.
2006
Jan. 01 Purchases A/c Dr. 20,000
To Amit’s A/c 20,000
(Purchases goods from Amit on credit)
Jan. 01 Amit’s A/c Dr. 20,000
To Bill’s Payable A/c 20,000
(Accepted bill drawn by Amit payable after
three months)
Apr. 04 Bills payable A/c Dr. 20,000
To Bank A/c 20,000
(Met acceptance maturity)
292 Accountancy
Illustration 2
On March 15, 2006 Ramesh sold goods for Rs. 8,000 to Deepak on credit. Deepak accepted
a bill of exchange drawn upon him by Ramesh payable after three months. On April, 15
Ramesh endorsed the bill in favour of his creditor Poonam in full settlement of her debt of
Rs. 8,250. On May 15, Poonam discounted the bill with her bank @ 12% p.a. On the due
date Deepak met the bill. Record the necessary journal entries in the books of Ramesh,
Deepak, Poonam.
Books of Ramesh
Journal

Amount Amount
Rs. Rs.
2006
Mar.15 Deepak A/c Dr. 8,000
To Sales A/c 8,000
(Sold goods to Deepak on credit)
Mar.15 Bills Receivable A/c Dr. 8,000
To Deepak A/c 8,000
(Received Deepak’s acceptance for three months)
Apr.15 Poonam’s A/c Dr. 8,250
To Discount Received A/c 250
(Bill endorsed in favour of Poonam in full
settlement of her debt of Rs. 8,250)
Book of Deepak
Journal

Amount Amount
Rs. Rs.
2006
Mar.05 Purchases A/c Dr. 8,000
To Ramesh A/c 8,000
(Sold goods to Deepak on credit)
Mar.05 Ramesh’s A/c Dr. 8,000
To Bills Payable A/c 8,000
(Accepted Ramesh’s draft payable
after three months)
Jun.18 Bills Payable A/c Dr. 8,000
To Bank A/c 8,000
(Met the acceptance in favour of Ramesh
on maturity)
Books of Poonam
Journal

Amount Amount
Rs. Rs.
2006
Mar.15 Bills Receivable A/c Dr. 8,000
Discount Allowed A/c Dr. 250
To Ramesh’s A/c 8,250
(Ramesh endorsed Deepak’s acceptance in
our favour for discharge his dept of
Rs. 8,250 in full settlement)
Mar.15 Bank A/c Dr. 7,920
Discount Allowed A/c Dr. 80
(Biils receivable encashed on maturity)
8.8 Dishonour of a Bill

A bill is said to have been dishonoured when the drawee fails to make the
payment on the date of maturity. In this situation, liability of the acceptor is
restored. Therefore, the entries made on the receipt of the bill should be
reversed. For example, Anju received bill of exchange duly accepted by Manju,
which was dishonoured. The entries of dishonour will be as follows in the
books of Anju (receiver):
When the bill was kept by Anju with her till maturity
Manju’s A/c Dr.
To Bill Receivables A/c
When the bill had been endorsed by Anju in favour of Sandhya
Manju’s A/c Dr.
To Sandhaya’s A/c
When the bill was discounted by Anju with his bank
Manju’s A/c Dr.
To Bank A/c
When the bill was sent for collection by Anju
Manju’s A/c Dr.
To Bill Sent for Collection A/c
Illustration 3
On Jan 01,2006 Shieba sold goods to Vishal for Rs. 10,000 and drew upon him a bill of
exchange for 2 months. Vishal accepted the bill and returned it to Shieba. On the date of
maturity the bill was dishonoured by Vishal. Record the necessary entries in all the cases
listed below in the books of Shieba and Vishal:
294 Accountancy
(i) When the bill kept by Shieba till its maturity;

(ii) When the bill is discounted by Shieba for Rs. 200;
(iii) When the bill is endorsed to Lal Chand by Shieba.
Solution
(i) When the bill was kept by Shieba till its maturity.
Books of Shieba
Journal
Amount Amount
Rs. Rs.
2006
Jan.01 Vishal’s A/c Dr. 10,000
To Sales A/c 10,000
(Sold goods to Vishal)
To Vishal’s A/c 10,000
(Received Vishal’s acceptance)
Mar. 04 Vishal’s A/c Dr. 10,000
(Vishal dishonoured his acceptance)
(ii) When the bill was discounted by shieba
Journal

Amount Amount
Rs. Rs.
2006
To Sales A/c 10,000
Jan. 01 Bank A/c Dr. 9,800
(Vishal’s Bill dishonoured his acceptance)
Mar.04 Vishal’s A/c Dr. 10,000
To Bank A/c 10,000
(Discounted bill dishonoured by Vishal)
(iii) When the bill was endorsed by Shieba to Lal Chand

Journal

Amount Amount
Rs. Rs.
2006
To Sales A/c 10,000
Jan. 01 Lal Chand A/c Dr. 10,000
(Vishal’s acceptance endorsed
in favour of Lal Chand)
Mar.04 Vishal’s A/c Dr. 10,000
To Lal Chand A/c 10,000
(Endorsed bill dishonoured by Vishal)
Whereas, in the book of Vishal, the following entries will be recorded
Books of Vishal
Journal

Amount Amount
Rs. Rs.
2006
Jan.01 Purchases A/c Dr. 10,000
To Shieba’s A/c 10,000
(Purchased good from shieba)
Jan. 01 Shieba’s A/c Dr. 10,000
(Accepted Shieba’s draft)
Jan. 04 Bills Payable A/c Dr. 10,000
To Shieba’s A/c 10,000
(Acceptance in favour of shieba dishonoured)
8.8.1 Noting Charges

A bill of exchange should be duly presented for payment on the date of its
maturity. The drawee is absolved of his liability if the bill is not duly presented.
296 Accountancy
Proper presentation of the bill means that it should be presented on the date
of maturity to the acceptor during business working hours. To establish beyond
doubt that the bill was dishonoured, despite its due presentation, it may
preferably to be got noted by Notary Public. Noting authenticates the fact of
dishonour. For providing this service, a fees is charged by the Notary Public
which is called Noting Charges.
The following facts are generally noted by the Notary:
• Date, fact and reasons of dishonour;
• If the bill is not expressly dishonoured, the reasons why he treats it
as dishonoured and;
• The amount of noting charges.
The entries recorded for noting charges in the drawers book are as follows:
When Drawer himself pays
Drawee’s A/c Dr.
To Cash A/c
Where endorsee pays
Drawee’s A/c Dr.
To Endorsee A/c
When the bank pays on discounted bill
Drawee’s A/c Dr.
To Bank A/c
When the bank pays in the event of sending the bill for collection to the bank
Drawee’s A/c Dr.
To Bank A/c
It may be noticed that whosoever pays the noting charges, ultimately these
have to be borne by the drawee. That is why the drawee is invariably debited
in the drawer’s books. This is because he is responsible for the dishonour of
the bill and, hence, he has to bear these expenses. For recording the noting
charges in his book the drawee opens Noting Charges Acccount. He debits
the Noting Charges Account and credits the Drawer’s Account. For example,
Azad sold goods for Rs. 15,000 to Bunty and immediately drew a bill upon
him on Jan. 01, 2006 payable after 3 months. On maturity the bill was
dishonoured and Rs. 50 were paid by the holder of the bill as noting charges.
The journal entries will be recorded in the books of Azad and Bunty as given
below under the following circumstances:
(a) When the bill was kept by Azad till maturity.
(b) When the bill was discounted by Azad with his bank immediately
@ 12% p.a.
(c) When the bill was endorsed by Azad in favour of his creditor Chitra.
In the books of Azad, entries will be recorded as:
(i) When the bill was retained till its maturity
Books of Azad
Journal

Amount Amount
Rs. Rs.
2006
Jan.01 Bunty’s A/c Dr. 15,000
To Sales A/c 15,000
(Sold goods to Bunty)
To Bunty’s A/c 15,000
(Received Bunty’s acceptance)
Apr. 04 Bunty’s A/c Dr. 15,050
To Bills Receivable A/c Dr. 15,000
To Cash A/c 50
(Bunty dishonoured his acceptance and
paid Rs. 50 as noting charges)
(ii) When the bill was discounted with the bank.
Journal

Amount Amount
Rs. Rs.
2006
Jan.01 Bunty’s A/c Dr. 15,000
To Sales A/c 15,000
(Received Bunty’s acceptance payable
after three months)
(Bunty’s acceptance discounted)
To Bank A/c 15,050
(Bunty dishonoured his acceptance on maturity
and bank paid noting charges)
298 Accountancy
(iii) When the bill was endorsed to Chitra

Journal

Amount Amount
Rs. Rs.
2006
Jan. 01 Bunty’s A/c Dr. 15,000
To Sales A/c 15,000
Jan.01 Bill’s Receivable A/c Dr. 15,000
Jan. 01 Chitra’s A/c Dr. 15,000
(Bunty’s acceptance endorsed in favour
of Chitra)
To Chitra’s A/c 15,050
(Bunty dishonoured his acceptance on
maturity and chitra paid Rs. 50 as
noting charges)
The following journal entries will be made in the books of Bunty in all the three cases.
Book of Bunty
Journal

Amount Amount
Rs. Rs.
2006
Jan.01 Purchases A/c Dr. 15,000
To Azad’s A/c 15,000
(Purchase goods from Azad)
Jan. 01 Azad’s A/c Dr. 15,000
(Accepted Azad’s draft)
Apr. 04 Bills Payable A/c Dr. 15,000
Noting charges A/c Dr. 50
To Azad’s A/c 15,050
(Acceptance in favour of Azed dishonoured)
8.9 Renewal of the Bill

Sometimes, the acceptor of the bill foresees that it may be difficult to meet the
obligation of the bill on maturity and may, therefore, approach the drawer
with the request for extension of time for payment. If it is so, the old bill is
cancelled and the fresh bill with new terms of payment is drawn and duly
accepted and delivered. This is called renewal of the bill. Since the cancellation
of bill is mutually agreed upon noting of the bill is not required.
The dreawee may have to pay interest to the drawer for the extended
period of credit. The interest is paid in cash or may be included in the amount
of the new bill. Sometimes, a part of the amount due may be paid and the new
bill may be drawn only for the balance. For example, a bill of Rs. 10,000 is
cancelled on a cash payment of Rs. 3,000 and acceptance of a new bill for the
balance of Rs. 7,000 plus interest as agreed between the parties. The journal
entries in the books of the drawer and the drawee will be the same as that of
dishonour of bill. As for the interest invalued, if it is not paid in cash, the
drawer debits the drawee’s account and credits the interest account, and the
drawee debits the interest and credits the drawer’s account in his books.
The journal entries recorded in case of renewal for the cancellation of the
old bill, for interest and for the acceptance of the new bill in the books of the
drawer and drawee are given below:
Transaction Books of Drawer Books of Drawee
Cancellation of old bill Drawee’s A/c Dr. Bills Payable A/c Dr.
To Bills Receivable A/c To Drawer’s A/c
Interest Drawee’s A/c Dr. Interest A/c Dr.
To Interest A/c To Drawer’s A/c
New bill Bill Receivable A/c Dr. Drawer’s A/c Dr.
To Drawee’s A/c To Bills Payable A/c
For example on February 01, 2006 Ravi sold goods to Mohan for Rs.18,000;
Rs. 3,000 were paid by Mohan immediately and for the balance he accepted
three months bill drawn upon him by Ravi. On the date of maturity of the bill
Mohan requested Ravi to cancel the old bill and a new bill upon him for a
period of 2 months. He further agreed to pay interest in cash to Ravi @ 12%
p.a. Ravi agreed to Mohan’s request and cancelled the old bill and drew a new
bill. The new bill was met on maturity by Mohan. In this case, the following
entries will be recorded in the books of Ravi and Mohan.
Books of Ravi
Journal
Amount Amount
Rs. Rs.
2006
Feb. 01 Mohan’s A/c Dr. 18,000
To Sales A/c 18,000
(Sold goods to Mohan)
300 Accountancy
Feb. 01 Cash A/c Dr. 3,000

Bills Receivable A/c Dr. 15,000
(Received Rs. 3,000 in cash from Ravi and
an acceptance for the balance)
May 01 Mohan’s Account Dr. 15,300
To Interest A/c 300
(Cancelled old bill on renewal
Rs. 300 as interest)
May 04 Bill’s Receivable A/c Dr. 15,000
Cash A/c Dr. 300
(Received new acceptance from Mohan)
Jul. 07 Bank A/c Dr. 15,000
(Mohan met his new acceptance)
Book of Mohan
Journal
Amount Amount
Rs. Rs.
2006
Feb. 01 Purchases A/c Dr. 18,000
To Ravi A/c 18,000
(Purchased goods from Ravi)
Feb.01 Ravi’s A/c Dr. 18,000
To Cash’s A/c 3,000
Bills Payable A/c 15,000
(Received cash from Ravi and his acceptance)
May 04 Bill Payable A/c Dr. 15,000
Interest A/c Dr. 300
To Ravi A/c 15,300
(Old bill cancelled on renewal,
Rs. 300 charged as interest)
May 04 Ravi’s A/c Dr. 15,300
To Cash A/c 300
(Accepted new bill and paid cash for interest)
Jul. 07 Bill Payable A/c Dr. 15,000
Bank A/c 15,000
(Met acceptance of the new bill on maturity)
8.10 Retiring of the Bill

There are instances when a bill of exchange is arranged to be retired before
the due date by mutual understanding between the drawer and the drawee.
This happens when the drawee of the bill has funds at his disposal and makes
a request to the drawer or holder to accept the payment of the bill before its
maturity. If the holder agrees to do so, the bill is said to have been retired.
The retiring of a bill draws a curtain on the bill transactions before the
expiry of its normal term. To encourage the retirement of the bill, the holder
allows some discount called Rebate on bills for the period between date of
retirement and maturity. The rebate is calculated at a certain rate of interest.
The accounting treatment on the retirement of a bill is similar to the
accounting treatment when a bill is honoured by the acceptor on the due date
in the ordinary course. The only difference between the two relates to the
granting of rebate. The following journal entries are recorded:
In the books of the holder
On retiring the acceptance and rebate allowed
Cash A/c Dr.
Rebate on bills A/c Dr.
To Bills Receivables A/c
In the books of the drawee
Bills Payable A/c Dr.
Cash A/c Dr.
To Rebate on Bills A/c
Amit sold goods Rs. 10,000 to Babli on Jan. 01, 2006 and immediately drew
a bill on Babli for three month for the same amount, Babli accepted the bill
and returned it to Amit. On March 04, 2006 Babli retired her acceptance
under rebate of 6% per annum.
In the books of Amit
Journal
Amount Amount
Rs. Rs.
2006
Jan. 01 Babli’s A/c Dr. 10,000
To Sales A/c 10,000
(Sold goods to Babli)
To Babli’s A/c 10,000
(Received Babli’s acceptance for three months)
Mar. 04 Bank A/c Dr. 9,950
Rebate on bills A/c Dr. 50
(Babli retired her acceptance and rebate
allowed to him)
302 Accountancy
The recorded entries will be posted to the following ledger acounts

Babli’s Account
Dr. Cr.
Date Particulars J. F. Amount Date Particulars J.F. Amount
Rs. Rs.
2006 2006
Jan. 01 Sales 10,000 Jan 06 Bills Receivable 10,000
10,000 10,000
Bill Receivable Account

Dr. Cr.
Rs. Rs.
2006 2006
Jan. 01 Sales 10,000 Mar 04 Cash 9,950
Rebate on bill 50
10,000 10,000
Book of Babli
Journal

Amount Amount
Rs. Rs.
2006
To Amit A/c 10,000
(Purchased goods from Amit)
Jan.01 Amit’s A/c Dr. 10,000
(Accepted Amit’s draft payable after
three months)
Mar. 04 Bill Payable A/c Dr. 10,000
To Cash A/c 9,950
To Rebate on bills A/c 50
(Acceptance in favour of Amit retired
and rebate received)
Amit’s Account
Dr. Cr.
Rs. Rs.
2006 2006
Jan. 01 Bills Payable 10,000 Jan. 04 Purchases 10,000
10,000 10,000
Bills Payable Account

Dr. Cr.
Rs. Rs.
2006 2006
Jan. 01 Cash 9950 Jan. 01 Amit 10,000
Rebate on bills 50
10,000 10,000
8.11 Bills Receivable and Bills Payable Books

When large number of bills are drawn and accepted, their recording by means
of journal entry for every transaction relating to the bills become a very
cumbersome and time consuming exercise. It is then advisable to record them
separately in special subsidiary books, the bills receivables in the Bills
Receivable Book and the bills payable in the Bills Payable Book. The reason
for the use of subsidiary books for recording bill transactions is the same as
that in the case of other subsidiary books for cash, purchases, etc. An important
point in connection with bill receivables and bills payable books is that they
only record the transactions relating to drawing and acceptance of bills, all
other transactions do not record the entire range of transactions relating to
the bills, e.g. relating to bills discounted, endorsement, retirement, renewal
etc.; simply have a passing reference in these books and the entries relating
thereto are recorded as usual in the journal. It may be noted that the entry
relating to honouring of bills appear in cash book.
8.11.1 Bills Receivable Book

It has been designed as a summary of information regarding a duly accepted
bill received by a drawer. All the details of the bill-date, acceptor’s name,
amount, term, place of payment, etc. are entered in the bills receivable book
for presentation and further reference.
The performa of a bills receivable book is given in Figure 8.3:
BillsReceivable Book
No. Date Date From Drawer Acceptor Where Term Due Ledger Amount Cash Remarks
of Received of Whom payable Date Folio Book
Bill Bill received Folio
Fig. 8.3: Showing Format of Bills Receivable Book

304 Accountancy
The bills receivable book, like any other subsidiary book, is totaled periodically.
This total is debited to the “Bills Receivable Account” whereas the account of
every individual debtor whom the bills received is credited in the ledger. The
Bills Receivable Account is the account of an asset and would always have a
debit balance. This balance on any date would represent the amount of bills
receivable unmatured and on hand.
8.11.2 Bills Payable Book

It is maintained like a bills receivable book. It is meant to record all the details,
relating to the bills accepted by a person or a party, which are retained for
being use in the future, in case of need.
The proforma of a bills payable book is given in Fig.8.4
Bills Payable Book
No. Date To Drawer Payee Where Term Due Ledger Amount Date Cash Remarks
of of Whom payable date Folio paid Book
Bill Bill given Folio
Fig. 8.4: Showing specimen Bills Payable Book

The posting from this books are made to the debit of the account of every
creditor to whom acceptance has been given and the periodical total of the
books is credited to the ‘Bills Payable Account’ in the ledger. The bills payable
account representing the liability of the acceptor in respect of bills accepted
by him, always has a credit balance, if any. The credit balance of this account
on any particular date must be the same as the total amount worth of bills
payable yet to be presented for payment as ascertained from the bills payable
book. For example, consider the following transactions and observe how these
are recorded in bill receivable and bills payable book along with postings in
the ledger accounts.
2006
(i) Jan. 07
Received from S. Mitra bill duly accepted for Rs. 1,32,500 dated
January 04, payable three months after date.
(ii) Jan. 09
Accepted S. Warden’s draft for Rs. 9,70,000 at two months.
(iii) Jan. 13
Pradhan drew on his trader at three months date and the same was accepted for
Rs. 39,000.
Bills Receivable Book
Bill of Exchange
No. Date Date From Whom Drawer Acceptor Where Term Due Ledger Amount Cash Re-marks
of Received of Bill Whom payable Date Folio Rs. Book
Bill received Folio
2006 2006 2006
01 Jan.07 Jan.04 S.Mitra Self S.Mitra Bombay 3 month Apr.17 1,32,500
02 Jan.15 Jan.14 R.Rakesh Do R.Rakesh Amritsar 1 month Feb.17 25,500
03 Jan.21 Jan.21 G.Ghosh Do G.Ghosh Calcutta 2 month Mar.24 31,000
04 Jan.22 Jan.17 D.Dhiman D.Dhiman A.vakil Bombay 3 month Apr.20 20,000
05 Jan.23 Jan.23 D.Kanga Self K.Kanga Bangalore1 month Feb.26 30,000
06 Jan.27 Jan.20 C.Shah M.Meyers P.Parson Madras 2 month Mar.23 35,000
Total Rs. 2,73,500
Bills Payable Book
No. Date To Whom Drawer Payee Where Term Due Ledger Amount Date Cash Remarks
of of Bill given payable Date Paid Book
Bill Folio
2006 2006
01 Jan.09 S.Warden S.Warden - 2 month Mar.31 97,000
02 Jan.13 Pradhan Pradhan - 3 month Apr.16 39,000
03 Jan.18 S.Parkar S.Parker - 2 month Mar.21 42,000
04 Jan.31 A.Roberts A.Robert - 1 month Mar.03 21,000
Total Rs. 1,99,500
305
306 Accountancy
(iv) Jan. 14
Drew on R. Rakesh at one month for Rs.25,000 and he accepted the next day.
(v) Jan. 18
Gave acceptance at two months for Rs.42,000 to S. Parkar.
(vi) Jan. 21
Received from G.Ghosh his acceptance for Rs.31,000 at two months.
(vii) Jan. 22
Received from D.Dhiman, A.Vakil’s acceptance for Rs.20,000 at three months from
Jan. 17.
(viii) Jan. 23
K. Kanga accepted my draft at one month for Rs.30,000.
(ix) Jan. 27
Received from C.Shah bill for Rs. 35,000 dated January 20, accepted by
P. Parson and drawn by M.Meyers., payable two months after date.
(x) Jan. 31
Gave acceptance for Rs. 21,500 at one month to A. Roberts.
Posting of recorded entries are as follow:
S. Mitra’s Account
Dr. Cr.
Rs. Rs.
2006 2006
Jan. 01 Sales 1,32,500 Jan. 07 Bills Receovable 1,32,500
1,32,500 1,32,500
R. Rakesh’s Account
Dr. Cr.
Rs. Rs.
2006 2006
Jan. 14 Sales 25,000 Jan. 15 Bill Receivable 25,000
25,000 25,000
G. Ghosh’s Account
Dr. Cr.
Rs. Rs.
2006 2006
Jan. 21 Sales 31,000 Jan. 21 Bills Receivable 31,000
31,000 31,000
D. Dhiman’s Account
Dr. Cr.
Rs. Rs.
2006 2006
20,000 20,000
K. Kanga’s Account
Dr. Cr.
Rs. Rs.
2006 2006
30,000 30,000
C. Shah’s Account
Dr. Cr.
Rs. Rs.
2006 2006
Jan. 20 Sales 35,000 Jan. 27 Bill Receivable 35,000
35,000 35,000
Bill Receivables Account

Dr. Cr.
Rs. Rs.
2006 2006
Jan. 31 Sundries 2,73,500 Jan. 31 Balance c/f 2,73,500
2,73,500 2,73,500
S. Warden’s Account
Dr. Cr.
Rs. Rs.
2006 2006
Jan. 09 Bills payable 97,000 Jan. 09 Purchases 97,000
97,000 97,000
308 Accountancy
Pradhan’s Account
Dr. Cr.
Rs. Rs.
2006 2006
39,000 39,000
S. Parkar’s Account
Dr. Cr.
Rs. Rs.
2006 2006
42,000 42,000
A. Robert’s Account
Dr. Cr.
Rs. Rs.
2006 2006
21,500 21,500
Bill Payables Account

Dr. Cr.
Rs. Rs.
2006 2006
Jan. 01 Balance c/d 1,99,500 Jan. 04 Sundries
Receivable 1,99,500
1,99,500 1,99,5000
Note: The drawing and acceptance of a bill always pre-supposes some background of sale
or purchase transaction. Therefore, in posting bill transactions from the two books to the
accounts of debtors and creditors, it is supposed that the necessary sales and purchases
entries have been duly recorded.
Illustration 4
On Jan. 15, 2006 Sachin sold goods Rs.30,000 to Narain and drew upon the later a bill
for the same amount payable after 3 months. The bill was accepted by Narain. The bill
was discounted by Sachin from his bank for Rs.29,250 on Jan. 31, 2006. on maturity the
bill was dishonoured. He further agreed to pay Rs.10,500 in cash including Rs. 500 interest
and accept a new bill for two months for the remaining Rs.20,000. the new bill was
creditor Kapil for settling a debt of Rs. 20,800. The new bill was endorsed by sachin in
favour of his creditor Kapil for settling a debt of Rs. 20,800. The new bill was duly met by
Narain on maturity.
Record the necessary journal entries in the books of Sachin and Narain.
Solution
Books of Sachin
Journal
Amount Amount
Rs. Rs.
2006
Jan. 15 Narain A/c Dr. 30,000
To Sales A/c 30,000
(Sold goods to Narain)
Jan.15 Bill’s Receivable A/c Dr. 30,000
To Narain’s A/c 30,000
Discount A/c 750
To Bill receivable A/c 30,000
(Narains’ acceptance discounted with bank)
Apr. 19 Narain’s A/c Dr. 30,500
To Bank A/c 30,000
To Interest A/c 500
(Narain’s acceptance cancelled)
Bills Receivavble A/c Dr. 20,000
To Narain A/c 30,500
(Received cash from Narain and a new
acceptance for the balace)
Apr.19 Kapil A/c Dr. 20,800
To Bill Receivable A/c 20,000
To Discount Receivable A/c 800
(Narain’s acceptance endorsed in favour of
kapil and he allowed discount)
Books of Narain
Journal
Amount Amount
Rs. Rs.
2006
To Sachin A/c 30,000
(Purchased goods from sachin)
310 Accountancy
Jan.15 Sachin A/c Dr. 30,000

(Accepted Sachin’s draft)
Jan.19 Bill Payable A/c Dr. 30,000
Interest A/c 500
To Sachin A/c 30,500
(Cancelled old bill & Sachin charged interest)
Apr. 19 Sachin’s A/c Dr. 30,500
To Bank A/c 10,500
To Bill Payable A/c 20,000
(Paid Sachin and accepted a new draft
for the balance)
Apr.22 Bills Receivavble A/c Dr. 20,000
To Bank A/c 20,000
(Met new acceptance on Maturity)
Illustration 5.
Ashok sold goods Rs.14,000 to Bishan on October 30, 2005 and drew three bills for
Rs.2,000, Rs.4,000 & Rs.8,000 payable after two, three, and four months respectively.
The first bill was kept by Ashok with him till maturity. He endorsed the second bill in
favour of his creditor Chetan. The third bill was discounted on December 03, 2005 at 12%
p.a. The first and second bills were duly met on maturity but the third bill was dishonoured
and the bank paid Rs.50 as noting charges. On March 03, 2006 Bishan paid Rs.4,000
and noting charges in cash and accepted a new bill at two months after date for the
balance plus interest Rs.100. The new bill was met on maturity by Bishan.
You are required to give the journal entries in the books of both Ashok ans Bishan and
prepare Bishan’s account in Ashok’s books and Ashok’s account in Bishan’s books.
Solution
Books of Ashok
Journal
Amount Amount
Rs. Rs.
2005
Oct. 30 Bishan’s A/c Dr. 14,000
To Sales A/c 14,000
(sold goods to Bishan on credit)
Oct. 30 Bills Receivable A/c Dr. 14,000
To Bishan’s A/c 14,000
(Received three acceptances from Bishan.
First for Rs. 2,000 payable after two months,
second for Rs. 4,000 payable after three months
and the third for Rs. 8,000 payable after
four months)
Oct. 30 Chetan’s A/c Dr. 4,000

To Bills receivable A/c 4,000
(Endorsed second bills in favour of
creditor Chetan)
Discount A/c 240
To Bill receivable A/c 8,000
(Third bill discounted at 12% p.a.)
2006
Bills receivable A/c 2,000
(Bishan met his first acceptance on due date)
Mar. 03 Bishan A/c Dr. 8,050
To Bank A/c 8,050
(Bishan dishonoured his third acceptance
and bank paid Rs.50 as noting charges)
Mar. 03 Cash A/c Dr. 4,050
(Cash received from Bishan)
Mar. 03 Bishan’s A/c Dr. 100
To Interest A/c 100
(Interest charged from Bishan for the
extended period)
Mar. 03 Bills Receivable A/c Dr. 4,100
(Received new acceptance from Bishan for
two months)
May 12 Bank A/c Dr. 4,100
To bills Receivable A/c 4,100
(Bishan met his new acceptance on maturity)
Bishan’s Account
Dr. Cr.
Rs. Rs.
2005 2005
Oct. 30 Sales 14,000 Oct. 30 Bills 14,000
2006 2006
Mar. 03 Bank 8,050 Mar. 03 Cash 4,050
Mar. 09 Interest 100 Mar. 03 Bills Receivable 4,100
22,150 22,150
312 Accountancy
Books of Bishan
Journal

Amount Amount
Rs. Rs.
2005
To Ashok’s A/c 14,000
(Purchases goods on credit from Ashok)
Jan.30 Ashok’s A/c Dr. 14,000
(Accepted three drafts of Ashok, the first for
Rs. 2,000 payable after 2 months, second for
Rs. 4,000 Payable after 3 months and the third
for Rs. 8,000 Payable after 4 months)
2006
Jan. 02 Bills Payable A/c Dr. 2,000
To Bank A/c 2,000
(Met first acceptance for Rs. 2,000 in
favour of Ashok.)
Feb.02 Bill Payabale A/c Dr. 4,000
To Bank A/c 4,000
(Met second acceptance for Rs. 4,000 in
favour of Ashok on maturity)
Mar. 03 Bill Payable A/c Dr. 8,050
To Ashok A/c 8,050
(Third acceptance in favour of Ashok
dishonoured and noting charges Rs. 50)
Mar. 09 Ashok’s A/c Dr. 4,050
To Cash A/c 4,050
(Paid to Ashok Rs. 4,000 plus noting charges)
Mar. 09 Interest A/c Dr. 100
To Ashok’s A/c 100
(Interest allowed to Ashok)
Mar. 09 Ashok’s A/c Dr. 4,100
(New draft of Ashok for two months accepted)
May 12 Bills Payable A/c Dr. 4,100
To Bank A/c 4,100
(Met new acceptance for Rs. 4,100 in favour
of Ashok on maturity)
Ashok’s Account
Dr. Cr.
Rs. Rs.
2005 2005
Oct. 30 Bills payable 14,000 Oct. 30 Purchases 14,000
2006 2006
Mar. 03 Cash 4,050 Mar. 03 Bills Payable 8,000
Noting charges 50
Mar. 09 Bills Payable 4,100 Mar. 09 Interest 100
22,150 22,150
Illustration 6.
Aashirwad draws on Aakarshak a Bill of exchange for 3 months for Rs.10,000 which
Aakarshak accepts on January 01, 2006. Aashirwad endorses the bill in favour of Aakarti.
Before maturity Aakarshak approaches Aashirwad with the request that the bill be renewed
for a further period of 3 months at 18 per cent per annum interest. Aashirwad pays the
sum to Prateek on the due date and agrees to the proposal of Aakarshak. Record journal
entries in the books of Aashirwad, assuming that the second bill is duly met.
Solution
Book of Ashirwad
Journal

Amount Amount
Rs. Rs.
2006
To Aakarshak’s A/c 10,000
(The Bill of exchange received from Aakarshak)
Jan.01 Aakarati’s A/c Dr. 10,000
To Bills payable A/c 10,000
(The bill of exchange received from Aakarshak,
endorsed to Aakarati)
Apr. 04 Aakarshak’s A/c Dr. 10,000
To Aakarati’s A/c 10,000
(Cancellation of the bill of exchange received
from Aakarshak now with Aakarati)
Apr. 04 Aakarati’s A/c Dr. 10,000
To Bank A/c 10,000
(Payment of the amount due to Aakarati)
Apr. 04 Aakarshak’s A/c Dr. 450
To Interest A/c 450
(Interest due from Aakarshak on Rs.10,000
for 3 months at 18% p.a.)
314 Accountancy
Apr. 04 Bills Receivable A/c Dr. 10,450

To Aakarshak’s A/c 10,450
(The new bill received from Aakarshak for
the amountdue for him)
July 07 Bank A/c Dr. 10,450
(The amount received from Aakarshak in
respect of the renewed bill)
Illustration 7.
Ankit owes Nikita a sum of Rs.6,000. On April 01, 2006 Ankit gives a promissory note for
the amount for 3 months to Nikita who gets it discounted with her bankers for Rs.5,760.
on the due date the bill is dishonoured, the bank paid Rs.15 as noting charges. Ankit
then pays Rs.2,000 in cash and accepts a bill of exchange drawn on him for the balance
together with Rs.100 as interest. This bill of exchange is for 2 months and on the due date
the bill is again dishonoured, Nikita paid Rs.15 as noting charges.
Draft the journal entries to be recorded in Nikita’s books.
Solution
Books of Nikita
Journal
Amount Amount
Rs. Rs.
2005
To Ankit’s A/c 6,000
(Ankit’s promissory note received in
settlement of his account)
(Ankit’s Promissory note discounted for Rs.5,760)
July 04 Ankit A/c Dr. 6,015
To Bank A/c 6,015
(The promissory note dishonoured by Ankit
the amount of the bill and the noting charges
recoverable from Ankit and payable to bank)
July 04 Cash A/c Dr. 2,000
(The amount received from Ankit)
July 04 Ankit’s A/c Dr. 100
To Interest A/c 100
(Interest due from Ankit for the second bill)
July 04 Bills Receivable A/c Dr. 4,115

(Ankit’s acceptance for 2 monthsin
settlement of amount due)
Sept.07 Ankit’s A/c Dr. 4,115
(The dishonour by Ankit of his acceptance)
Sept.07 Ankit’s A/c Dr. 15
To Cash A/c 15
(Payment of noting charges, recoverable
from Ankit)
Illustraion 8.
On May 2005 Mohit sends his promissory note of Rs. 6000 for 3 months to Rohit. Rohit
gets it discounted with his bankers at 18 percent per annum on May 04. On the due date
the bill is dishonoured, the bank paying Rs.10 as noting charges. Rohit agrees to accept
Rs.2,130 in cash (including Rs.130 for noting charges and interest) and another promissory
note for Rs.4,000 at 2 months. On the due date, Mohit approaches Rohit again and asks
for renewal of the bill for a further period of 3 months. Rohit agrees to the request, provided
Mohit pays Rs.200 as interest in cash. This last bill is paid on maturity.
Draft journal entries in the books of Mohit and Rohit.
Solution
Books of Mohit
Journal

Amount Amount
Rs. Rs.
2005
May 01 Rohit’s A/c Dr. 6,000
(The amount of the promissory note sent
to Rohit)
Aug.04 Bills Payable A/c Dr. 6,000
To Rohit’s A/c 6,010
(The dishonour of the promissory note and
Rs.10 being payable as noting charges to Rohit)
Aug. 04 Interest A/c Dr. 120
Rohit’s A/c 120
(Interest due to Rohit from part renewal of
the promissory)
316 Accountancy
Aug.04 Rohit’s A/c Dr. 6,130

To Cash A/c 2,130
(Payment of Rs. 2,130 in cash and a new
promissory note for Rs. 4,000 sent to Rohit to
settle his account)
Oct.07 Bill Payable A/c Dr. 4,000
(Cancellation of the bill due today)
Oct.07 Interest A/c Dr. 200
To Rohit’s A/c 200
(The amount due as interest ot Rohit on the
renewed bill)
Oct.07 Rohit’s A/c Dr. 4,200
To Cash A/c 200
(The new acceptance and cash sent to Rohit)
2001
Jan.09 Bills Payable A/c Dr. 4,000
To Cash A/c 4,000
(Payment made to meet the bill due this day)
Book of Rohit
Journal
Amount Amount
Rs. Rs.
2005
May 01 Bills Receivable A/c Dr. 6,000
(Mohit’s promissory note received this day)
May 04 Bank’s A/c Dr. 5,730
(The discounting of the promissory note by
Mohit at 18% on Rs. 6,000 for 3 months)
Aug.04 Mohit’s A/c Dr. 6,000
To Bank A/c 6,010
(The dishonour of the promissory not by Mohit
Rs. 10 being charged by bank for noting charges)
Aug.04 Mohit’s A/c Dr. 120
Interest A/c 120
(The amount agreed to be paid as interest
by Mohit)
Aug.04 Cash A/c Dr. 2,130

Bills Receivable A/c 4,000
(Cash and promissory note received from
Mohit for the amount due from him)
Oct.07 Mohit’s A/c Dr. 4,000
(Cancellation of the bill due today)
Oct.07 Mohit’s A/c Dr. 200
To Interest A/c 200
(The amount due from Mohit as interest)
Oct.07 Cash A/c Dr. 200
Bills Receivable A/c Dr. 4,000
(Cash and promissory not received from Mohit)
2006
Jan. 10 Cash/Bank A/c Dr. 4,000
(Mohit met his acceptance on maturity)

Fill in the blanks:
(i) A bill of exchange is a ___________________________________instrument.

(ii) A bill of exchange is drawn by the ________________upon his___________.
(iii) A promissory note is drawn by ______________in favour of his__________.
(iv) There are ____________________parties to a bill of exchange.
(v) There are ____________________parties to a promissory note.
(vi) Drawer and ______________can not be the same parties in case of a bill of
exchange.
(vii) Bill of exchange in India languages is called _____________
(viii) __________days of grace are added in terms of the bill to calculate the date
of its__________.
8.12 Accommodation Bills

Normally, bills of exchange or promissory notes are drawn to finance the
actual transactions in goods, i.e., an acceptance is made to settle a trade debt
owing to the drawer by the drawee in case of a bill of exchange and the bill is
called a trade bill. As it originates from genuine trade transaction it is for
value received and is enforceable. For example, Ankit buys goods from Bishan,
he may postpone the payment by accepting a draft drawn by Bindu upon
him. Bindu can if he wants, get the money immediately by getting Ankit’s
318 Accountancy
acceptance discounted with his bank. But, apart from financing transaction in
goods, bills of exchange promissory notes may also be used for raising funds
temporarily. Such a bill is called an ‘accommodation bill’ as it is accepted by the
drawee to accommodate the drawer. Hence, the drawee is called the
‘accommodating party’ and the drawer is called the ‘accommodation party’.
For example, Raj draws upon Pal a bill for Rs.10,000 on April 01, 2006 for three
months and the latter accepts the same to accommodate Raj. Raj discounts it
with his bank at 6% per annum on the same date. Raj remitted the amount one
day before the maturity of the bill to Pal. Pal met the bill on the date of its maturity.
The journal entries in the books of Raj and Pal will be recorded as follows:
Book of Raj
Journal
Amount Amount
Rs. Rs.
2006
To Pal’s A/c 10,000
(Received Pal’s acceptance)
To Bills Receivables A/c 10,000
(Discount Pal acceptance)
Jul. 03 Pal’s A/c Dr. 10,000
To Bank A/c 10,010
(Remittance to Pal for paying off
accommodation bill)
Books of Pal
Journal

Amount Amount
Rs. Rs.
2005
Apr.01 Raj’s A/c Dr. 10,000
To Bill Payable A/c 10,000
(Acceptance of accommodation bill drawn by Raj)
Jul.03 Bank A/c Dr. 10,000
To Raj’s A/c 10,000
(Received Raj’s remittance)
Jul.03 Bill Payable A/c Dr. 10,000
To Bank A/c 10,000
(Discharge of accommodation)
Sometimes, the accommodation parties agree to raise the funds through an

accommodation bill for mutual benefits. It can be done in any of the following
two ways:
(a) The drawer and the drawee share the proceeds in an agreed ratio
(b) Each draws a bill and each accepts a bill
In the case (a) the discounting changes are shared by drawer and drewee in the
ratio in which they share the proceeds. But in the case (b) the discount is not
shared as each party retains the entire proceeds of the bill drawn and discounted
by him. On maturity, each party meets his acceptance out of his own resources
if everyone draws and accepts bills of the same denomination and tenure. But
where they share the proceeds of the same bill, the drawer should remit, just
before maturity, the balance due to the drawee, so that the latter could duly
meet his acceptance. Based upon the above discussion, it can be stated that an
accommodation bill helps both the parties to the instrument to temporarily
raise the necessary funds from discounting institutions.
Illustaration 9
Ashu and Mudit were in need of funds. On October 01, 2005 Ashu drew upon a bill for
Rs. 9,000 for 2 months. Mudit accepted the bill and returned to Ashu. Ashu got it
discounted at 5% from Bank same day. Half of the amount were remitted to Mudit. On the
due date Ashu sent the required sum to Mudit, who met the bill. Journalise the transactions
in the books of Ashu and Mudit.
Books of Ashu
Journal
Amount Amount
Rs. Rs.
2005
Oct. 01 Raj’s A/c Dr. 9,000
(Mutual accommodation bill receipts
from Mudit)
Oct. 03 Bank A/c Dr. 8,925
Discount A/c Dr. 75
(Bill discounted from bank)
Oct. 03 Mudit’s A/c Dr. 4,500
To Cash A/c 4,462.50
To Discount A/c 37.50
(Half the proceeds remitted to Mudit)
Oct. 01 Mudit’s A/c Dr. 4,500
To Cash A/c 4,500
(Half amount of the bill sent to Mudit to
enable him to meet it)
320 Accountancy
Books of Mudit
Journal
Amount Amount
Rs. Rs.
2005
Oct. 01 Ashu’s A/c Dr. 9,000
(Mutual Accommodation bill accepted)
Oct. 01 Cash A/c Dr. 4,462.50
Discount A/c Dr. 37.50
To Ashu’s A/c 4,500
(half amount of Discounted Bill received
from Ashu)
Dec. 04 Cash A/c Dr. 4,500
To Auhu’s A/c 4,500
(Amount retained by Ashu now received from him)
Dec. 05 Bill Payable A/c Dr. 9,000
To Bank A/c 9,000
(Acceptance honoured)
Illustration 10
Rohan and Rohit were both in need to temporary accommodation. On November 01,
2005, Rohan accepted Rohit draft for Rs. 5,000 for 3 months and Rohit accepted Rohan
draft for Rs. 4,000 for 3 months. The both bills were discounted at the respected banks
for Rs 4,800 and Rs. 3,850. Before maturity of the bill Rohit sent Rs. 1,000 to Rohan for
difference in accommodation bill. Rohan and Rohit met his acceptance on the due date.
Records the transaction in the journal of Rohan and Rohit.
Books of Rohan
Journal
Amount Amount
Rs. Rs.
2005
Nov. 01 Rohit’s A/c Dr. 5,000
(Rohan accepted bill accommodation)
Nov. 01 Bill Receivable A/c Dr. 4,000
(Accommodated bill received)
Nov. 01 Bank A/c Dr. 3,850
(Bill discounted by bank)
Feb. 04 Cash A/c Dr. 1,000

(Cash received for meet the bill)
Feb. 04 Bill Payable A/c Dr. 5,000
To Bank A/c 5,000
(Bill met on maturity)
Books of Rohit
Journal
Amount Amount
Rs. Rs.
2005
Nov. 01 Rohan’s A/c Dr. 4,000
(Rohit accepted bill accommodation)
Nov. 01 Bill Receivable A/c Dr. 5,000
To Rohan’s A/c 5,000
(Accommodated bill received)
Nov. 01 Bank A/c Dr. 4,800
(Bill discounted by bank)
Feb. 04 Rohan’s A/c Dr. 1,000
To cash A/c 1,000
(Sent cash to Rohan)
Feb. 04 Bill Payable A/c Dr. 4,000
To Bank A/c 4,000
(Bill met on due date)
(a) Drawer
(b) Drawee
(c) Payee
(d) Bill Receivable
(e) Bill Payable
(f) Drawing of a Bill
(g) Acceptance of a Bill
(h) Payment of a bill

1. Bill of exchange as an Instrument : A bill of exchange is a device by
which the purchaser or debtor in a credit transaction is not required to
322 Accountancy
make immediate payment but satisfies the seller or creditor by accepting

in writing the liability to pay the amount due from him.
2. Meaning of bill of exchange and promissory note: A bill of exchange is an
acknowledgement of debt given by one person to another, incorporating
all the terms and conditions of payments. A promissory note is an
undertaking in writing given by the debtor to the creditor to pay the
latter a certain sum of money in accordance with the conditions stated
therein.
3. Difference between a bill and a note.
(a) A bill is prepared by the creditor and accepted by the debtor; a note
is prepared by the debtor.
(b) There are three parties to a bill; there are only two parties to a note.
(c) A bill requires acceptance to acquire financial status; a note in
itself has financial status.
4. Features and advantages of a bill : A bill is a written unconditional
order; it is signed by the creditor and accepted by the debtor; the amount
of the bill is payable either on demand or at a fixed or 5. Briefly explain
the purpose and benefits of retiring a bill of exchange to the debtor and
the creditor.
Short Answers
1. Name any two types of commonly used negotiable instruments.
2. Write two points of distinction between bills of exchange and promissory
note.
3. State any four essential features of bill of exchange.
4. State the three parties involved in a bill of exchange.
5. What is meant by maturity of a bill of exchange?
6. What is meant by dishonour of a bill of exchange?
7. Name the parties to a promissory note
8. What is meant by acceptance of a bill of exchange?
9. What is Noting of a bill of exchange.
10. What is meant by renewal of a bill of exchange?
11. Give the performa of a Bills Receivable Book.
12. Give the performa of a Bills Payable Book.
13. What is retirement of a bill of exchange?
14. What is meant by insolvency?
15. Give the meaning of rebate.
16. Give the performa of a Bill of Exchange.
Long Answers
1. A bill of exchange must contain “an unconditional promise to pay” Do
you agree with a statement?
2. Briefly explain the effects of dishonour and noting of a bill of exchange.

3. Explain briefly the procedure of calculating the date of maturity of a bill
of exchange? Give example.
4. Distinguish between bill of exchange and promissory note.
5. Briefly explain the purpose and benefits of retiring a bill of exchange to
the debtor and the creditor.
6. Explain briefly the purpose and advantages of maintaining of a Bills
Receivable Book.
7. Briefly explain the benefits of maintaining a Bills Payable Book and
state how is its posting is done in the ledger?
Numerical Questions
1. On Jan 01, 2006 Rao sold goods Rs.10,000 to Reddy. Half of the payment
was made immediately and for the remaining half Rao drew a bill of
exchange upon Reddy payable after 30 days. Reddy accepted the bill
and returned it to Rao. On the due date Rao presented the bill to Reddy
and received the payment.
Journalise the above transactions in the books Rao and prepare of
Rao’s account in the books of Reddy.
2. On Jan 01,2006, Shankar purchased goods from Parvati for Rs.8,000

and immediately drew a promissory note in favour of Parvati payable
after 3 months. On the date of maturity of the promissory note, the
Government of India declared holiday under the Negotiable Instrument
Act 1881. Since, Parvati was unaware about the provision of the law
regarding the date of maturity of the bill, she handed over the bill to
her lawyer, who duly presented the bill and received the payment. The
amount of the bill was handed over by the lawyer to Parvati immediately.
Recore the necessary Journal entries in the books of Parvati and
Shankar.
3. Vishal sold goods for Rs.7,000 to Manju on Jan 05, 2006 and drew
upon her a bill of exchange payable after 2 months. Manju accepted
Vishal’s draft and handed over the same to Vishal after acceptance.
Vishal immediately discounted the bill with his bank@12% p.a. On the
due date Manju met her acceptance.
Journalise the above transactions in the books of Vishal and Manju.
4. On Feb 01, 2006, John purchased goods for Rs.15,000 from Jimmi. He
immediately made a payment of Rs.5,000 by cheque and for the balance
accepted the bill of exchange drawn upon him by Jimmi. The bill of
exchange was payable after 40 days. Five days before the maturity of
the bill, Jimmi sent the same to his bank for collection. The bank duly
presented the bill to John on the due date who met the bill. The bank
informed the same to Jimmi.
Prepare John’s account in the books of Jimmi and Jimmi account in
the books of John.
324 Accountancy
5. On Jan 15, 2006, Kartar Sold goods for Rs.30,000 to Bhagwan and
drew upon him three bills of exchanges of Rs.10,000 each payable after
one month, two month, and three months respectively. The first bill
was retained by Kartar till its maturity. The second bill was endorsed
by him in favour of his creditor Ratna and the third bill was discounted
by him immediately @ 6% p.a. All the bills were met by Bhagwan.
Journalise the above transactions in the books of Kartar and Bhagwan.
Also prepare ledger accounts in books of Kartar and Bhagwan.
6. On Jan. 01, 2006 Arun sold goods for Rs.30,000 to Sunil. 50% of the
payment was made immediately by Sunil on which Arun allowed a cash
discount of 2%. For the balance Sunil drew a promissory note in favour
of Arun payable after 20 days. Since, the date of maturity of bill was a
public holiday, Arun presented the bill on a day, as per the provisions
of Negotiable Instrument Act which was met by Sunil. State the date on
which the bill was presented by Arun for payment and Jounalise the
above transactions in the books of Arun and Sunil.
7. Darshan sold goods for Rs. 40,000 to Varun on 8.1.2006 and drew
upon him a bill of exchange payable after two months. Varun accepted
the bill and returned the same to Darshan. On the due date the bill was
met by Varun. Record the necessary Journal entries in the books of
Darshan and Varun in the following circumstances.
• When the bill was retained by Darshan till the date of its maturity.
• When Darshan immediately discounted the bill @ 6% p.a. with
his bank.
• When the bill was endorsed immediately by Darshan in favour of
his creditor Suresh.
• When three days before its maturity, the bill was sent by Darshan
to his bank for collection.
8. Bansal Traders allow a trade discount of 10% on the list price of the
goods purchased from them. Mohan traders, who runs a retail shop
made the following purchases from Bansal Traders.
Date Amount
(Rs.)
Dec. 21, 2005 1,000
Dec. 26, 2005 1,200
Dec. 18, 2005 2,000
Dec. 31, 2005 5,000
For all the purchases Mohan Traders drew promissory note in favour of
Bansal Traders payable after 30 days. The promissory note for the sale
of Dec. 21, 2005 was retained by Bansal Traders with them till the date
of its maturity. The promissory note drawn on 26.12.2005 was
discounted by Bansal Traders from their bank at 12% p.a. The
promissory note drawn on Dec. 28, 2005 was endorsed by Bansal
Traders in favour of their creditor Dream Soaps in full settlement of a
purchase amounting to Rs. 1,900. On 25.1.2006 Bansal Traders sent
the promissory note drawn on Dec. 31, 2005 to their bank for collection.
All the promissory notes were met by Mohan Traders. Record the
necessary journal entries for the above transactions in the books of
Bansal Traders and Mohan Traders and prepare Mohan Traders account
in the books of Bansal Traders and Bansal Traders account in the books
of Mohan Traders.
9. Narayanan purchased goods for Rs.25,000 from Ravinderan on Feb.
01, 2006. Ravinderan drew upon Narayanan a bill of exchange for the
same amount payable after 30 days. On the due date Narayanan
dishonoured his acceptance.
Pass the necessary journal entries in the books of Ravinderan and
Narayanan in following cases:
• When the bill was retained by Ravinderan with him till the date of
its maturity.
• When the bill was discounted by Ravinderan immediately with his
bank @ 6% p.a.
• When the bill was endorsed to his creditor Ganeshan.
• When the bill was sent by Ravinderan to his bank for collection a
few days before it maturity.
10. Ravi sold goods for Rs.40,000 to Sudershan on Feb 13, 2006. He drew
four bills of exchange upon Sudershan. The first bill was for Rs.5,000
payable after one month. The second bill was for Rs.10,000 payable after
40 days; the third bill was for Rs.12,000 payable after three months and
fourth bill was for the balance amount payable after 19 days. Sudershan
accepted all the bills and returned the same to Ravi. Ravi discounted the
first bill with his bank at 6% p.a. He endorsed the second bill to his
creditor Mustaq for the full settlement of a debt of Rs.10,200. The third
bill was kept by Ravi with him till the date of maturity. Five days before
the maturity of the fourth bill, Ravi sent the bill to his bank for collection.
All the four bills were dishounoured by Sudarshan on maturity. Sudershan
settled Ravi’s claim in cash three days after the dishonour of each bill
along with interest @ 12% p.a. for the terms of the bills.
You are requested to record the necessary journal entries in the books
to Ravi, Sudershan, Mustaq and bank for the above transaction. Also
prepare Sudershan’s account and Mustaq’s account in the books
of Ravi.
11. On Jan 01, 2006 Neha sold goods for Rs.20,000 to Muskan and drew
upon her a bill of exchange payable after two months. One month before
the maturity of the bill Muskan approached Neha to accept the payment
against the bill at a rebate @ 12% p.a. Neha agreed to the request of
Muskan and Muskan retired the bill under the agreed rate of rebate.
Journalise the above transaction in the books of Neha and Muskan.
12. On Jan 15, 2006 Raghu sold goods worth Rs. 35,000 to Devendra and
drew upto the latter three bills of exchanges. The first bill was for
Rs.5,000 payable after one month, the second bill was for Rs.20,000
payable after three months and third bill for balance amount for 4
months. Raghu endorsed the first bill in favour of his creditor Dewan in
full settlement of a debt of Rs.5,200. The second bill was discounted by
326 Accountancy
Raghu @ 6 % p.a. and the third bill was retained by Raghu till the date
of maturity. Devendra dishonoured the bill on maturity and the bank
paid Rs. 30 as noting charges. Four days before the maturity of the
third bill Raghu, sent the same for collection to his bank. The third bill
was also dishonored by Devendra and the bank paid Rs.200 as noting
charges. Five days after the dishonour of the bill Devendra paid the
entire amount due to Raghu along with interest Rs.1,000 for this purpose
Devendra obtained a short term loan from his bank.
You are requested to record the necessary journal entries in the books
of Raghu Devendra and Dewan and also prepare Devendra’s account in
Raghu’s books and Raghu’s account in Devendra’s account.
13. Viaml purchased goods Rs.25,000 from Kamal on Jan 15, 2006 and
accepted a bill of exchange drawn upon him by Kamal payable after
two months. On the date of the maturity the bill was duly presented for
payment. Vimal dishonoured the bill.
record the necessary journal entries in the books of Kamal and Vimal
when.
• The bill was retained by Kamal till the date of its maturity.
• The bill was immediately discounted by Kamal with his bank @ 6% p.a.
• The bill was endorsed by Kamal in favour of his creditor Sharad.
• Five days before its maturity the bill was sent by Kamal to his bank
for collection.
14. Abdula sold goods to Tahir on Jan 17, 2006 for Rs.18,000. He drew a
bill of exchange for the same amount on Tahir for 45 days. On the same
date Tahir accepted the bill and returned it to Abdulla. On the due
date Abdulla presented the bill to Tahir which was dishonoured. Abdulla
paid Rs.40 as noting charges. Five days after the dishonour of his
acceptance Tahir settled his debt by making a payment of Rs.18,700
including interest and noting charges.
Record the necessary journal entries in the books of Abdulla and Tahir.
Also prepare Tahir’s account in the books of Abdulla and Abdulla’s
account in the books of Tahir.
15. Asha sold goods worth Rs.19,000 to Nisha on March 02, 2006. Rs.4,000
were paid by Nisha immediately and for the balance she accepted a bill
of exchange drawn upon her by Asha payable after three months. Asha
discounted the bill immediately with her bank. On the due date Nisha
dishonoured the bill and the bank paid Rs.30 as noting charges.
Record the necessary journal entries in the books of Asha and Nisha.
16. On Feb. 02, 2006, Verma purchased from Sharma goods for Rs.17,500.
Verma paid Rs.2,500 immediately and for the balance gave a promissory
note to Sharma payable after 60 days. Sharma immediately endorsed
the promissory note in favour of his creditor.
Gupta for the full settlement of a debt of Rs.15,400. On the due date of
the bill Gupta presented the bill to Verma which the latter dishonoured
and Gupta paid Rs.5,000 noting charges. On the same date Gupta
informed Sharma about the dishonour of the bill. Sharma settled his
debt to Gupta by cheque for Rs.15,500 which includes noting charges

and interest. Verma settled Sharma’s claim by cheque for the same
amount.
Record the necessary journal entries is the books of Sharma, Gupta

and Verma for the above transaction and prepare Verma’s and Gupta’s
accounts in the books of Sharma. Sharma’s account in the books of
Verma. And also Sharma’s account in the books of Gupta.
17. Lilly sold goods to Methew on 1.3.2006 for Rs.12,000 and drew upon
Methew a bill of exchange for the same amount payable after two months.
Lilly immediately discounted the bill with her bank at 9% p.a. The
maturity date of the bill was a non business day (holiday), therefore,
Lilly had to present the bill as per the provisions of the Indian
Instruments Act.1881. The bill was dishonoured by Methew and Lilly
paid Rs.45 as noting charges. Methew settled the claim of Lilly five
days after the disonour of the bill by a cheque, whch includes interest
@ 12% for the term of the bill.
Journalise the above transactions in the books of Lilly and Methew
and prepare Mathew’s account in the books of Lilly and Lilly’s account
in the books of Mathew.
18. Kapil purchased goods for Rs.21,000 from Gaurav on 1.2.2006 and
accepted a bill of exchange drawn by Gaurav for the same amount. The
bill was payable after one month. On 25.2.2002 Gaurav sent the bill to
his bank for collection. The bill was duly presented by the bank. Kapil
dishonoured the bill and the bank paid Rs.100 as noting charges.
Record the necessary journal entries for the above transactions in the
books of Kapil and Gourav.
19. On Feb. 14, 2006 Rashmi sold good Rs.7,500 to Alka. Alka paid Rs.500
in cash and for the bank balance accepted a bill of exchange drawn
upon her by Rashmi payable after two months. On Apr.10, 2006 Alka
approached Rashmi to cancel the bill since she was short of funds. She
further requested Rashmi to accept Rs.2,000 in cash and draw a new
bill for the balance including interest Rs.500. Rashmi accepted Alka’s
request and drew a new bill for the amount due payable after 2 months.
The bill was accepted by Alka. The new bill was duly met by Alka on
maturity.
Record the necessary journal entries in the books of Rashmi and Alka
and prepared Alka’s account in the books of Rashmi’s and Rashmi’s
account in the books of Alka’s
20. Nikhil sold goods for Rs.23,000 to Akhil on Dec. 01, 2005. He drew
upon Akhil a bill of exchange for the same amount payable after 2
months. Akhil accepted the bill and sent it back to Nikhil. Nikhil
discounted the bill immediately with his bank @12 p.a. On the due
date Akhil dishonoured the bill of exchange and the bank paid Rs.100
as noting charges. Akhil requested Nikhil to draw a new bill upon him
with interest @10% p.a. which he agreed. The new bill was payable
after two months. A week before the maturity of the second bill Akhil
328 Accountancy
requested Nikhil to cancel the second bill. He further requested to accept

Rs.10,000 in cash immediately and drew a third bill upon him including
interest of Rs.500. Nikhil agreed to Akhil’s request. The third bill was
payable after one month. Akhil met the third bill on its maturity. record
the necessary journal entries in the books of Nikhil and Akhil and also
prepare Akhil’s account in the books of Nikhil and Nikhil’s account in
the books of Akhil.
21. On Jan 01, 2006 Vibha sold goods worth Rs.18,000 to Sudha and drew
upon the latter a bill of exchange for the same amount payable after
two months. Sudha accepted Vibha’s draft and returned the same to
Vibha after acceptance. Vibha endorsed the bill immediately in favour
of her creditor Geeta. Five days before the maturity of the bill Sudha
requested Vibha to cancel the bill since she was short of funds. She
further requested to draw a new bill upon her including interest of
Rs.200. Vibha accepted Sudha’s request. Vibha took the bill from Geeta
by making the payment to her in cash and cancelled the same. Then
she drew a new bill upon Sudha as agreed. The new bill was payable
after one month. The new bill was duly met by Sudha on maturity.
Record the necessary journal entries in the books of Vibha.
22. Following was the position of debtor and creditor of Gautam as
on 1.1.2006.
Debtors Creditors
Rs. Rs.
Babu 5,000 -
Chanderkala 8,000 -
Kiran 13,500 -
Anita 14,000 -
Anju - 5,000
Sheiba - 12,000
Manju - 6,000
The following transactions took place in the month of Jan 2006:
Jan 2
Drew on Babu at two months after date at full settlement for Rs.4,800.
Babu accepted the bill and returned it on 5.1.2006.
Jan. 04
Babu’s bill discounted for Rs.4,750.
Jan. 08
Chanderkala sent a promissory note for Rs.8,000 payable three months
after date.
Jan. 10
Promissory note received from Chanderkala discounted for Rs.7,900.
Jan. 12
Accepted Sheiba draft for the amount due payable two months after
date.
Jan. 22
Anita sent his promissory note payable after two months.

Jan. 23
Anita’s promissory note endorsed in favour of Manju.
Jan. 25
Accepted Anju’s draft payable after three months.
Jan. 29
Kiran sent Rs.2,000 in cash and a promissory note for the balance
payable after three months.
Record the above transactions in the proper subsidiary books.
23. On Jan. 01, 2006 Harsh accepted a months bill for Rs. 10,000 drawn
on him by tanu for latter’s benefit. Tanu discounted the bill on same
day @ 8% p.a On the due date tanu sent a cheque to Harsh for honour
the bill. Harsh duly honoured his acceptance.
Record the journal entries in the Books of Tanu and Harsh.
24. Ritesh and Naina were in need of funds temporarily. On August 01
2005 Ritesh drew upon Naina a bill for Rs. 12,000 for 4 months. Naina
Accepted the bill and returned to Ritesh. Ritesh discounted the Bill @
8% p.a. Half amount of the discounted bill remitted to Naina. On due
date, Ritesh sent the required sum to Naina, who met the bill. Journalise
the transaction in the books of both the parties.
25. On Jan. 01, 2006, bhanu and Naman drew on each other a bill for Rs.
8,000 payable 3 months after the due date for their Mutual benefit. On
January 02 they discounted with their bank each other’s bill at 5% p.a.
on the due date each met his Own’s acceptance. Give journal entry in
the books of Bhanu and Naman.
26. On Nov. 01, 2005 Sonia drawn a bill on sunny for Rs. 15,000 for 3
months for mutual accommodation. Sunny accepts the bill and return
it to sonia. Sonia discounted the same with his bankers @ 6% p.a. The
proceeds are shared between sonia and sunny in proportion of 2/3rd,
1/3rd respectively. On the due date sonia remits his proportion to sunny
who fails to met the bill and as a result sonia has to meet it. Sunny Give
a fresh acceptance for the amount due to sonia plus interest of Rs. 100
sunny meet his second acceptance on due date. Record the necessary
journal entries in the books of sonia and sunny.
Checklist to test Your Understanding

Test your understanding-I
(i) False (ii) True (iii) False (iv) False (v) True
(vi) False (vii) True (viii) False (ix) False (x) False
Test Your Understanding-II
(i)Promise (ii) Endorsement (iii) Promissor (iv) Endorser
Test Your Understanding-III
(i) Negotiable, (ii) Drawer, Drawee (iii) Debtor, Creditor (iv) Three
(v) Two. (vi) Drawee (vii) Hundi (viii) Maturity
330 Accountancy
CONTENTS
FOREWORD iii
Chapter 9 Financial Statements - I 331
9.1 Stakeholders and Their Information Requirements 331
9.2 Distinction between Capital and Revenue 333
9.3 Financial Statements 335
9.4 Trading and Profit and Loss Account 337
9.5 Operating Profit (EBIT) 351
9.6 Balance Sheet 353
9.7 Opening Entry 362
Chapter 10 Financial Statements 372

10.1 Need for Adjustments 372
10.2 Closing Stock 374
10.3 Outstanding Expenses 376
10.4 Prepaid Expenses 377
10.5 Accrued Income 379
10.6 Income Received in Advance 381
10.7 Depreciation 382
10.8 Bad Debts 383
10.9 Provision for Bad and Doubtful Debts 384
10.10 Provision for Discount on Debtors 387
10.11 Manager’s Commission 389
10.12 Interest on Capital 392
10.13 Methods of Presenting the Financial Statements 416
Chapter 11 Accounts from Incomplete Records 437

11.1 Meaning of Incomplete Records 437
11.2 Reasons of Incompleteness and its Limitations 438
x
11.3 Ascertainment of Profit and Loss 439

11.4 Preparing Trading and Profit and Loss Account and
the Balance Sheet 444
Chapter 12 Applications of Computers in Accounting 475

12.1 Meaning and Elements of Computer System 475
12.2 Capabilities of Computer System 477
12.3 Limitations of a Computer System 478
12.4 Components of Computer 479
12.5 Evolution of Computerised Accounting 480
12.6 Features of Computerised Accounting System 483
12.7 Management Information System and Accounting
Information System 485
Chapter 13 Computerised Accounting System 492

13.1 Concept of Computerised Accounting System 492
13.2 Comparison between Manual and Computerised Accounting494
13.3 Advantages of Computerised Accounting System 495
13.4 Limitations of Computerised Accounting System 497
13.5 Sourcing of Accounting Software 498
13.6 Generic Considerations before Sourcing an
Accounting Software 501
Chapter 14 Structuring Database for Accounting 504

14.1 Data Processing Cycle 506
14.2 Designing Database for Accounting 507
14.3 Entity Relationship (ER) Model 508
14.4 Database Technology 518
14.5 An Illustration of Accounting Database 520
14.6 Relational Data Model 523
14.7 Relational Databases and Schemas 524
14.8 Constraints and Database Schemas 525
14.9 Operations and Constraint Violations 527
xi
14.10 Designing Relational Database Schema 528
14.11 llustrating the Database Structure for Example Realities 531
14.12 Interacting with Databases 539
Chapter 15 Accounting System Using Database 555

Management System
15.1 MS Access and its Components 555
15.2 Creating Tables and Relationships for
Accounting Database 560
15.3 Vouchers Using Forms 566
15.4 Information Using Queries 588
15.5 Generating Accounting Reports 622
Financial Statements - I 9
Y ou have learnt that financial accounting is a

well-defined sequential activity which begins
with Journal (Journalising), Ledger (Posting), and
LEARNING OBJECTIVES preparation of T rial Balance (Balancing and
After studying this chapter, Summarisation at the first stage). In the present
you will be able to : chapter, we will take up the next step, namely,
• state the nature of the preparation of financial statements, and discuss the
financial statements;
types of information requirements of various
• identify the various
stakeholders and their stakeholders, the distinction between capital and
infor mation require- revenue items and its importance and the nature
ments; of financial statements and the preparation thereof.
• distinguish between
the capital and reve- 9.1 Stakeholders and Their
nue expenditure and
receipts; Information Requirements
• explain the concept of Recall from chapter I (Financial Accounting Part I)
trading and profit and
loss account and its
that the objective of business is to communicate
preparation; the meaningful information to various stakeholders
• State the nature of in the business so that they can make informed
gross profit, net profit decisions. A stakeholder is any person associated
and operating profit;
with the business. The stakes of various
• describe the concept of
balance sheet and its stakeholders can be monetary or non-monetary. The
preparation; stakes can be active or passive; or can be direct or
• explain grouping and indirect. The owner and persons advancing loan to
marshalling of assets the business would have monetary stake. The
and liabilities;
government, consumer or a researcher will have
• prepare profit and loss
account and balance non-monetary stake in the business. The
sheet of a sole prop- stakeholders are also called users who are normally
rietory firm; and classified as internal and external depending upon
• make an opening whether they are inside the business or outside the
entry.
business. All users have different objectives for
332 Accountancy
joining business and consequently different types of information requirements

from it. In nutshell, the various users have diverse financial information
requirements from the business.
For example we have classified the following into the category of internal
and external users specifying their objectives and consequent information
requirements.
Name Internal/ Objective for participating Accounting Information requirements

External in business
users
Current Internal To make investment in the Likes to know extent of profit in the
owners business and wealth grow. last accounting period, current
position of the assets/liabilities of the
business.
Manager Internal For a career. They essenti- Accounting information in the form
ally act as the agent of of financial statements is like their
owners (their employers). report card and they are interested
in information about both profits and
financial position.
Government External Its role is regulatory and Its concerns are that the rights of all
tries to lay down the rules stakeholders are protected. Since the
in the best public interest. gover nment levies taxes on the
business, they are interested in
information about profitability in
particular besides lot of other
information.
Prospective External He is expecting to make He is interested in information about
owner investments in the business past profits and financial position as
with a view to make his indicative of likely future performance.
investment and wealth grow.
Bank External Bank is interested in safty Bank is interested in adequacy of
of the principal as well as profits only as an assurance of the
the periodic return return of principal and interest back
(interest). in time. Bank is equally concerned
about the form in which the assets
are held by the business. When more
assets are held in cash or near cash
for m, the aspect is knnown as
liquidity.
Fig. 9.1 : Analysis of various users of accounting information

Box 1
Accounting Process (up to Trial balance) :

1. Identify the transactions, which that are recorded.
2. Record transactions in journal. Only those transactions are recorded which are
measured in money terms. The system followed for recording is called double entry
system whereby two aspects (debit and credit) of every transaction are recorded.
Repeated transactions of same nature are recorded in subsidiary books, also called
special journals. Instead of recording all transactions in journal, they are recorded in
subsidiary books and the journal proper. For example, the business would record all
credit sales in sales book and all credit purchases in purchases book. The other
examples of subsidiary books are return inwards book, return outwards book. An
other important special book is cash book, in which all cash and bank transactions
are recorded. The entries, which are not recorded in any of these books, are recorded
in a residual journal called journal proper.
3. The entries appearing in the above books are posted in the respective accounts in the ledger.
4. The accounts are balanced and listed in a statement called trial balance. If the total
amounts of debit and credit balances agree, accounts are taken as free from
arithmetical errors.
5. The trial balance forms the basis for making the financial statements, i.e. trading
and profit and loss account and balance sheet.
9.2 Distinction between Capital and Revenue

A very important distinction in accounting is between capital and revenue
items. The distinction has important implications for making of the trading
and profit and loss account and balance sheet. The revenue items form part
of the trading and profit and loss account, the capital items help in the
preparation of a balance sheet.
9.2.1 Expenditure
Whenever payment and/or incurrence of an outlay are made for a purpose
other than the settlement of an existing liability, it is called expenditure. The
expenditures are incurred with a viewpoint they would give benefits to the
business. The benefit of an expenditure may extend up to one accounting
year or more than one year. If the benefit of expenditure extends up to one
accounting period, it is termed as revenue expenditure. Normally, they are
incurred for the day-to-day conduct of the business. An example can be
payment of salaries, rent, etc. The salaries paid in the current period will not
benefit the business in the next accounting period, as the workers have put
in their efforts in the current accounting period. They will have to be paid the
salaries in the next accounting period as well if they are made to work. If the
benefit of expenditure extends to more than one accounting period, it is termed
334 Accountancy
as capital expenditure. An example can be payment to acquire furniture for

use in the business. Furniture acquired in the current accounting period will
give benefits for many accounting periods to come. The usual examples of
capital expenditure can be payment to acquire fixed assets and/or to make
additions/extensions in the fixed assets.
Following points of distinction between capital expenditure and revenue
expenditure are worth noting :
(a) Capital expenditure increases earning capacity of business whereas
revenue expenditure is incurred to maintain the earning capacity.
(b) Capital expenditure is incurred to acquire fixed assets for operation of
business whereas revenue expenditure is incurred on day-to-day conduct
of business.
(c) Revenue expenditure is generally recurring expenditure and capital
expenditure is non-recurring by nature.
(d) Capital expenditure benefits more than one accounting year whereas
revenue expenditure normally benefits one accounting year.
(e) Capital expenditure (subject to depreciation) is recorded in balance sheet
whereas revenue expenditure (subject to adjustment for outstanding
and prepaid amount) is transferred to trading and profit and loss account.
Sometimes, it becomes difficult to correctly demarcate the expenditures
into revenue and capital category. In normal usage, the advertising expenditure
is termed as revenue expenditure. However, a heavy expenditure on advertising
on launching a product is likely to give benefit for more than one accounting
period, as people are likely to remember the advertisement for a slightly longer
period. Such revenue expenditures, which are likely to give benefit for more
than one accounting period, are termed as deferred revenue expenditure.
It must be understood that expenditure is a wider term and includes
expenses as well as assets. There is a difference between expenditure and
expense. Expenditure is any outlay made/incurred by the business firm. The
part of the expenditure, which is perceived to have been used or consumed in
the current year, is termed as expense of the current year.
Revenue expenditure is treated as expenses of the current year and is
shown in trading and profit and loss account. Hence, salary paid by the
business firm is treated as an expense of the current year. Capital expenditures
are also ultimately charged to income statement and are spread over to more
than one accounting period. Hence, furniture of Rs. 50,000 if expected to be
used for 5 years will be treated as expense @ Rs. 10,000 per year. The name
given for the expense is depreciation. The treatment of deferred revenue
expenditure is same as of capital expenditure. They are also written-off over
their expected period of benefit.
9.2.2 Receipts
The similar treatment is given the receipts of the business. If the receipts
imply an obligation to return the money, these are capital receipts. The example
can be an additional capital brought in by the owner or a loan taken from the
bank. Both receipts are leading to obligations, the first to the owner (called
equity) and the other to the outsiders (called liabilities). Another example on a
capital receipt can be the sale of a fixed asset like old machinery or furniture.
However, if a receipt does not incur an obligation to return the money or is
not in the form of a sale of fixed asset, it is termed as revenue receipt. The
examples of such receipts sales made by the firm and interest on investment
received by the firm.
9.2.3 Importance of Distinction between Capital and Revenue

As stated earlier, the distinction between capital and revenue items has
important implications for the preparation of trading and profit and loss
account and the balance sheet as all items of revenue value are to the shown
in the trading and profit and loss account and the items of capital nature in
the balance sheet. If any item is wrongly classified, i.e. if any item of revenue
nature is treated as capital item or vice-versa, the ascertainment of profit or
loss will be incorrect. For example, the revenues earned during an accounting
period are Rs. 10,00,000 and the expenses shown are Rs. 8,00,000, the profit
shall work out as Rs. 2,00,000. On scrutiny of the details, you find that a
revenue item of Rs. 20,000 (an expenditure on repairs of machinery) has been
treated as capital expenditure (added to the cost of machinery and debited to
machinery account, not to repairs account), and hence, does not form part of
the expenses for the period. It means the actual expenses for the period are
Rs. 8,20,000 and not Rs. 8,00,000. So, the correct profit is Rs. 1,80,000, not
Rs. 2,00,000. In other words, the profit has been over stated. Similarly, if any
capital expenditure is wrongly shown as revenue expenditure (for example,
purchase of furniture shown as purchases), it will result in under statement
of profits, and also an under statement of assets. Thus, the financial statements
will not reflect the true and fair view of the affairs of the business. Hence, it is
necessary to identify the correct nature of each item and treat it accordingly
in the book of accounts. It is also important from taxation point of view because
capital profits are taxed differently from revenue profits.
9.3 Financial Statements

It has been emphasised that various users have diverse informational
requirements. Instead of generating particular information useful for specific
users, the business prepares a set of financial statements, which in general
satisfies the informational needs of the users.
336 Accountancy
The basic objectives of preparing financial statements are :

(a) To present a true and fair view of the financial performance of the
business;
(b) To present a true and fair view of the financial position of the business;
and
For this purpose, the firm usually prepares the following financial statements:
1. Trading and Profit and Loss Account
2. Balance Sheet
Trading and Profit and Loss account, also known as Income statement,
shows the financial performance in the form of profit earned or loss sustained
by the business. Balance Sheet shows financial position in the form of assets,
liabilities and capital. These are prepared on the basis of trial balance and
additional information, if any.
Example 1
Observe the following trial balance of Ankit and signify correctly the various elements of
accounts and you will notice that the debit balances represent either assets or expenses/
losses and the credit balance represent either equity/liabilities or revenue/gains.
[This trial balance of Ankit will be used throughout the chapter to understand the process of
preparation of financial statements]
Trial Balance of Ankit as on March 31, 2005
Account Title L.F. Debit Credit

Amount Amount
Rs. Rs.
Cash 1,000
Capital 12,000
Bank 5,000
Sales 1,25,000
Wages 8,000
Creditors 15,000
Salaries 25,000
10% Long term loan (raised on April 01, 2004) 5,000
Furniture 15,000
Commission received 5,000
Rent of building 13,000
Debtors 15,500
Bad debts 4,500
Purchases 75,000
1,62,000 1,62,000
Analysis of Trial Balance of Ankit as on March 31, 2005
Account Title Elements L.F. Debit Credit

Amount Amount
Rs. Rs.
Cash Asset 1,000
Capital Equity 12,000
Bank Asset 5,000
Sales Revenue 1,25,000
Wages Expense 8,000
Creditors Liability 15,000
Salaries Expense 25,000
10% Long-term loan Liability 5,000
(raised on April 01, 2004)
Furniture Asset 15,000
Commission received Revenue 5,000
Rent of building Expense 13,000
Debtors Asset 15,500
Bad debts Expense 4,500
Purchases Expense 75,000
1,62,000 1,62,000
9.4 Trading and Profit and Loss Account

Trading and Profit and Loss account is prepared to determine the profit earned
or loss sustained by the business enterprise during the accounting period. It
is basically a summary of revenues and expenses of the business and calculates
the net figure termed as profit or loss. Profit is revenue less expenses. If
expenses are more than revenues, the figure is termed as loss. Trading and
Profit and Loss account summarises the performance for an accounting period.
It is achieved by transferring the balances of revenues and expenses to the
trading and profit and loss account from the trial balance. Trading and Profit
and Loss account is also an account with Debit and Credit sides. It can be
observed that debit balances (representing expenses) and losses are transferred
to the debit side of the Trading and a Profit and Loss account and credit
balance (representing revenues/gains) are transfered to its credit side.
9.4.1 Relevant Items in Trading and Profit and Loss Account

The different items appearing in the trading and profit and loss account are
explained hereunder:
Items on the debit side
(i) Opening stock : It is the stock of goods in hand at the beginning of the
accounting year. This is the stock of goods which has been carried forward
338 Accountancy
from the previous year and remains unchanged during the year and
appears in the trial balance. In the trading account it appears on the
debit side because it forms the part of cost of goods sold for the current
accounting year.
(ii) Purchases less returns : Goods, which have been bought for resale
appears as purchases on the debit side of the trading account. They
include both cash as well as credit purchases. Goods which are returned
to suppliers are termed as purchases return. It is shown by way of
deduction from purchases and the computed amount is known as Net
purchases.
(iii) Wages : Wages refer to renumeration paid to workers who are directly
engaged in factory for loading, unloading and production of goods and
are debited to trading account.
(iv) Carriage inwards/Freight inwards: These expenses are the items of
transport expenses, which are incurred on bringing materials/goods
purchased to the place of business. These items are paid in respect of
purchases made during the year and are debited to the trading account.
(v) Fuel/Water/Power/Gas : These items are used in the production process
and hence are part of expenses.
(vi) Packaging material and Packing charges : Cost of packaging material
used in the product are direct expenses as it refers to small containers
which form part of goods sold. However, the packing refers to the big
containers that are used for transporting the goods and is regarded as
an indirect expense debited to profit and loss account.
(vii) Salaries : These include salaries paid to the administration, godown
and warehouse staff for the services rendered by them for running the
business. If salaries are paid in kind by providing certain facilities (called
perks) to the employees such as rent free accommodation, meals,
uniform, medical facilities should also be regarded as salaries and
debited to the profit and loss account.
(viii) Rent paid : These include office and godown rent, municipal rates and
taxes, factory rent, rates and taxes. The amount of rent paid is shown
on the debit side of the profit and loss account.
(ix) Interest paid : Interest paid on loans, bank overdraft, renewal of bills of
exchange, etc. is an expense and is debited to profit and loss account.
(x) Commission paid: Commission paid or payable on business transactions
undertaken through the agents is an item of expense and is debited to
profit and loss account.
(xi) Repairs : Repairs and small renewals/ replacements relating to plant

and machinery, furniture, fixtures, fittings, etc. for keeping them in
working condition are included under this head. Such expenditure is
debited to profit and loss account.
(xii) Miscellaneous expenses : Though expenses are classified and booked
under different heads, but certain expenses being of small amount
clubbed together and are called miscellaneous expenses. In normal
usage these expenses are called Sundry expenses or Trade expenses.
Items on the credit side

(i) Sales less returns : Sales account in trial balance shows gross total
sales(cash as well as credit) made during the year. It is shown on the
credit side of the trading account. Goods returned by customers are
called return inwards and are shown as deduction from total sales and
the computed amount is known as net sales.
(ii) Other incomes : Besides salaries and other gains and incomes are also
recorded in the profit and loss account. Examples of such incomes are
rent received, dividend received, interest received, discount received,
commission received, etc.
9.4.2 Closing Entries

The preparation of trading and profit and loss account requires that the
balances of accounts of all concerned items are transferred to it for its
compilation.
• Opening stock account, Purchases account, Wages account, Carriage
inwards account and direct expenses account are closed by transferring
to the debit side of the trading and profit and loss account.
This is done by recording the following entry :
Trading A/c Dr.
To Opening stock A/c
To Purchases A/c
To Wages A/c
To Carriage inwards A/c
To All other direct expenses A/c
• The purchases returns or return outwards are closed by transferring its
balance to the purchases account. The following entry is recorded for this
purpose :
Purchases return A/c Dr.
Purchases A/c
340 Accountancy
• Similarly, the sales returns or returns inwards account is closed by

transferring its balance to the sales account as :
Sales A/c Dr.
To Sales return A/c
• The sales account is closed by transferring its balance to the credit side of
the trading and profit and loss account by recording the following entry:
Sales A/c Dr.
To Trading A/c
Items of expenses, losses, etc. are closed by recording the following entries:
To Expenses (individually) A/c
To Losses (individually) A/c
Items of incomes, gains, etc. are closed by recording the following entry:
Incomes (individually) A/c Dr.
Gains (individually) A/c Dr.
The posting for closing the seven accounts of expenses and revenues as they
appear in the trial balance (in our example 1) are given below:
(i) For closing the accounts of expenses
Trading A/c Dr. 83,000
To Wages A/c 8,000
(ii) Profit and Loss A/c Dr. 43,500
To Salaries 25,000
To Rent of building 13,000
To Bad debts 4,500
(i) For closing the accounts of revenues
Sales A/c Dr. 1,25,000
To Trading A/c 1,25,000
(ii) Commission received A/c Dr. 5,000
To Profit and Loss A/c 5,000
The posting done in ledger will appear as follows :
Purchases Account
Dr. Cr.
Rs. Rs.
Balance b/d 75,000 Trading 75,000
75,000 75,000
Wages Account
Dr. Cr.
Rs. Rs.
Balance b/d 8,000 Trading 8,000
8,000 8,000
Salaries Account
Dr. Cr.
Rs. Rs.
Balance b/d 25,000 Profit and Loss 25,000
25,000 25,000
Rent of Building Account

Dr. Cr.
Rs. Rs.
13,000 13,000
Bad Debts Account

Dr. Cr.
Rs. Rs.
4,500 4,500
Sales Account
Dr. Cr.
Rs. Rs.
Trading 1,25,000 Balance b/d 1,25,000
1,25,000 1,25,000
Commission Received Account

Dr. Cr.
Rs. Rs.
Profit and Loss 5,000 Balance b/d 5,000
5,000 5,000
342 Accountancy
As the result of the foregoing discussion, we will now learn how the trading
and profit and loss account can be prepared from the trial balance, the format
of which is shown in figure 9.2. However, this list is not exhaustive.
In real sense, there can be many more of other items, which we will be dealing
at the later stage and there you will notice how this format undergoes a change
with respect to each one of them.
Trading and Profit and Loss Account of ABC

for the year ended March 31, 2005
Dr. Cr.
Expenses/Losses Amount Revenues/Gains Amount
Rs. Rs.
Opening stock ..... Sales .....
Purchases .....
Wages .....
Carriage inwards/ .....
Freight inwards/cartage
Gross profit c/d1
Gross loss b/d2
xxx xxx
Gross loss c/d1 .....
Gross profit b/d .....
Rent/rates and taxes ..... Inerest received .....
Salaries ..... .....
Repairs and renewals ..... Net loss2
Bad debts .....
Net profit2 (transfered to .....
capital account)
xxx xxx
1,2
only one item will be shown
Fig. 9.2 : A format trading and profit and loss account
9.4.3 Concept of Gross Profit and Net Profit

The trading and profit and loss can be seen as combination of two accounts,
viz. Trading account and Profit and Loss account. The trading account or the
first part ascertains the gross profit and profit and loss account or the second
part ascertains net profit.
Trading Account
The trading account ascertains the result from basic operational activities of
the business. The basic operational activity involves the manufacturing,
purchasing and selling of goods. It is prepared to ascertain whether the selling
of goods and/or rendering of services to customers have proved profitable for

the business or not. Purchases is one of the main constituents of expenses in
business organisation. Besides purchases, the remaining expenses are divided
into two categories, viz. direct expenses and indirect expenses.
Direct expenses means all expenses directly connected with the manufacture,
purchase of goods and bringing them to the point of sale. Direct expenses
include carriage inwards, freight inwards, wages, factory lighting, coal, water
and feul, royalty on production, etc. In our example-1, besides purchases,
four more items of expenses are listed. These are wages, salaries, rent of
building and bad debts. Out of these items, wages is treated as direct expense
while the other three are treated as indirect expenses.
Similarly, sales constitute the main item of revenue for the business. The
excess of sales over purchases and direct expenses is called gross profit. If
the amount of purchases including direct expenses is more than the sales
revenue, the resultant figure is gross loss. The computation of gross profit
can be shown in the form of equation as :
Gross Profit = Sales – (Purchases + Direct Expenses)
The gross profit or the gross loss is transferred to profit and loss account.
The indirect expenses are transferred to the debit side of the second part,
viz. profit and loss account. All revenue/gains other than sales are transferred
to the credit side of the profit and loss account. If the total of the credit side of
the profit and loss account is more than the total of the debit side, the difference
is the net profit for the period of which it is being prepared. On the other hand,
if the total of the debit side is more than the total of the credit side, the
difference is the net loss incurred by the business firm. In an equation form,
it is shown as follows :
Net Profit = Gross Profit + Other Incomes – Indirect Expenses
Net profit or net loss so computed is transferred to the capital account in
the balance sheet by way of the following entry :
(i) For transfer of net profit
To Capital A/c
(ii) For transfer of net loss
Capital A/c Dr.
We are now redrafting the trading and profit and loss account to show gross
profit and net profit of Ankit for the year ended March 31, 2005. The redrafted
trading and profit and loss account will look like as shown is shown in figure 9.3.
344 Accountancy
Trading and Profit and Loss Account of Ankit

Dr. Cr.
Rs. Rs.
Purchases 75,000 Sales 1,25,000
Wages 8,000
Gross profit c/d 42,000
1,25,000 1,25,000
Salaries 25,000 Gross profit b/d 42,000
Rent of building 13,000 Commission received 5,000
Bad debts 4,500
Net Profit (transfered to 4,500
capital account)
47,000 47,000
Fig. 9.3 : Showing the computation of gross profit and net profit of Ankit
Gross profit, which represents the basic operational activity of the business
is computed as Rs. 42,000. The gross profit is transferred from trading account
to profit and loss account. Besides gross profit, business has earned an income
of Rs. 5,000 as commission received and has spent Rs. 42,500 (Rs. 25,000 +
Rs.13,000 + Rs.4,500) on expenses/losses including salaries, rent and bad
debts. Therefore, the net profit is calculated as Rs. 4,500.
Illustration 1
Prepare a trading account from the following particulars for the year ended March 31, 2006:
Rs.
Opening stock 37,500
Purchases 1, 05000
Sales 2,70,000
Wages 30,000
Solution
Trading Account
Dr. Cr.
Rs. Rs.
Opening stock 37,500 Sales 2,70,000
Purchases 1,05,000
Wages 30,000
Gross profit 97,500
2,70,000 2,70,000
Illustration 2
Prepare a trading account of M/s Prime Products from the following particulars pertaining
to the year 2005-06.
Rs.
Purchases 1,10,000
Return inwards 5,000
Sales 3,00,000
Return outwards 7,000
Factory rent 30,000
Wages 40,000
Solution
Books of Prime Products
Trading Account
Dr. Cr.
Rs. Rs.

Purchases 1,10,000 Less : Return (5,000) 2,95,000
Less : Return (7,000) 1,03,000 inwards
outwards
Factory rent 30,000
Wages 40,000
Gross profit 72,000
2,95,000 2,95,000
Illustration 3.
Prepare a trading account of M/s Anjali from the following information related to 2005-06.
Rs.

Purchases 3, 00,000
Sales 7, 50,000
Sales return 30,000
Carriage on purchases 12,000
Carriage on sales 15,000
Factory rent 18,000
Office rent 18,000
Dock and Clearing charges 48,000
Freight and Octroi 6,500
Coal, Gas and Water 10,000
346 Accountancy
Solution
Books of Anjali
Trading Account
for the year ended 2005-06
Dr. Cr.
Rs. Rs.
Purchases 3,00,000 Less : Sales return (30,000) 7,20,000
Less : Purchases return (18,000) 2,82,000
Factory rent 18,000
Freight and Octroi 6,500
Gross profit 2,83,500
7,20,000 7,20,000
Illustration 4
From the following information, prepare a profit and loss account for the year ending March
31, 2005.
Rs.
Gross profit 60,000
Rent 5,000
Salary 15,000
Commission paid 7,000
Interest paid on loan 5,000
Advertising 4,000
Discount received 3,000
Printing and stationery 2,000
Legal charges 5,000
Bad debts 1,000
Depreciation 2,000
Interest received 4,000
Loss by fire 3,000
Profit and Loss Account
Dr. Cr.
Rs. Rs.
Rent 5,000 Gross profit 60,000
Salary 15,000 Discount received 3,000
Commission 7,000 Interest received 4,000
Interest paid on loan 5,000
Advertising 4,000
Printing and Stationery 2,000
Legal charges 5,000
Bad debts 1,000

Depreciation 2,000
Loss by fire 3,000
Net profit (transferred to the 18,000
capital account)
67,000 67,000
I State True or False :

(i) Gross profit is total revenue.
(ii) In trading and profit and loss account, opening stock appears on the debit side
because it forms the part of the cost of sales for the current accounting year.
(iii) Rent, rates and taxes is an example of direct expenses.
(iv) If the total of the credit side of the profit and loss account is more than the total
of the debit side, the difference is the net profit.
II Match the items given under ‘A’ with the correct items under ‘B’
(i) Closing stock is credited to (a) Trial balance
(ii) Accuracy of book of account is tested by (b) Trading account
(iii) On returning the goods to seller, the buyer sends (c) Credit note
(iv) The financial position is determined by (d) Balance sheet
(v) On receiving the returned goods from the (e) Debit note
buyer, the seller sends
9.4.4 Cost of Goods Sold and Closing Stock–Trading Account Revisited

The trading and profit and loss account prepared in figure 9.3 presents useful
information as to the profitability from the basic operations of the business
enterprise. It is reproduced for further perusal.
Trading Account of Ankit

Dr. Cr.
Rs. Rs.

Wages 8,000
Gross profit 42,000
1,25,000 1,25,000
Fig. 9.4 : An illutrative trading account of Ankit

348 Accountancy
If there is no opening or closing stock, the total of purchases and direct

expenses is taken as Cost of goods sold. In our example, notice that purchases
amount to Rs. 75,000 and wages amounts to Rs. 8,000. Hence, the cost of
goods sold will be computed using the following formula :
Cost of Goods Sold = Purchases + Direct Expenses
= Rs.75, 000 + Rs. 8,000
= Rs. 83,000
As there is no unsold stock,the presumption here is that all the goods
purchased have been sold. But in practice, there is some unsold goods at the
end of the accounting period.
In our example, let us assume that out of the goods purchased amounting
to Rs. 75,000 in the current year, Ankit is able to sell goods costing Rs. 60,000
only. In such a situation, the business will have an unsold stock of goods
costing Rs. 15,000 in hand, also called closing stock. The amount of cost of
goods sold will be computed as per the following equation :
Cost of Goods Sold = Purchases + Direct Expenses – Closing Stock
= Rs. 75,000 + Rs. 8,000 – Rs. 15,000
As a result, the amount of gross profit will also change with the existence
of closing stock in business from Rs. 42,000 (as computed in figure 9.4) to
Rs. 57,000 ( refer figure 9.5).
Trading Account of Ankit


Rs. Rs.

Wages 8,000 Closing stock 15,000
1,40,000 1,40,000

Bad debts 4,500
capital account)
62,000 62,000
Fig. 9.5 : The trading account of Ankit

It may be noted that closing stock does not normally form part of trial
balance, and is brought into books with the help of the following journal
entry :
Closing stock A/c Dr.
To Trading A/c
This entry opens a new account of asset, i.e. closing stock Rs. 15,000
which is transferred to the balance sheet. The closing stock shall be an opening
stock for the next year and shall be sold during the year. In most cases,
therefore, the business shall have opening stock as well as closing stock every
year, and the cost of goods sold should be worked as per the following equation:
Cost of Goods Sold = Opening Stock+Purchases Direct Expenses–Closing Stock
Look at Illustration 5 and see how it has been computed.
Illustration 5
Compute cost of goods sold for the years 2005 with the help of the following information
and prepare trading account
Rs.
Sales 20, 00,000
Purchases 15, 00,000
Wages 1, 00,000
Stock (Apr. 01, 2004) 3, 00,000
Stock (March 31, 2005) 4,00,000
Freight inwards 1,00,000
Solution
Computation of Cost of Goods Sold
Particulars Amount
Rs.
Opening stock 3,00,000

Add Purchases 15,00,000
Direct expenses :
Wages 1,00,000
20,00,000
Less Closing stock (4,00,000)
Cost of goods sold 16,00,000
350 Accountancy
Trading Account
Dr. Cr.
Rs. Rs.
Opening stock 3,00,000 Sales 20,00,000
Purchases 15,00,000 Closing stock 4,00,000
Wages 1,00,000
Gross profit 4,00,000
24,00,000 24,00,000
Illustration 6
From the following balances obtained from the few accounts of Mr. H. Balaram. Prepare the
Trading and Profit and Loss Account.
Rs. Rs.
Stock on Apr. 01, 2004 8,000 Bad debts 1,200
Purchases for the year 22,000 Rent 1,200
Sales for the year 42,000 Discount allowed 600
Purchase expenses 2,500 Commission paid 1,100
Salaries and wages 3,500 Sales expenses 600
Advertisement 1,000 Repairs 600
Closing stock on March 31, 2005 is Rs. 4,500
Books of H. Balaram
Trading Account
Dr. Cr.
Rs. Rs.
Opening stock 8,000 Sales 42,000
Purchases 22,000 Closing stock 4,500
Purchase expenses 2,500
46,500 46,500
Salaries and Wages 3,500 Gross profit b/d 14,000
Rent 1,200
Advertisement 1,000
Commission 1,100
Bad debts 1,200
Sales expenses 600
Repairs 600
Net profit 4,200
(transferred to capital account)
14,000 14,000
9.5 Operating Profit (EBIT)

It is the profit earned through the normal operations and activities of
the business. Operating profit is the excess of operating revenue over
operating expenses. While calculating operating profit, the incomes and
expenses of a purely financial nature are not taken into account. Thus,
operating profit is profit before interest and tax (EBIT). Similarly,
abnormal items such as loss by fire, etc. are also not taken into account.
It is calculated as follows :
Operating profit = Net Profit + Non Operating Expenses – Non Operating Incomes
Refer to the trial balance of Ankit in example 1, you will notice that it
depicts an item relating to 10 % interest on long-term loan raised on
April 01, 2004. The amount of interest works out to Rs. 500 (Rs. 5,000
× 10/100), which has been shown on the debit side of the trading and profit
and loss account (figure 9.6).

Dr. Cr.

Rs. Rs.

1,40,000 1,40,000
Bad debts 4,500
Interest 500
capital account)
62,000 62,000
Fig. 9.6 : Showing the treatment of interest on profit

The operating profit will be :
Operating profit = Net profit + Non-operating expenses – Non-operating incomes
Operating profit = Rs. 19,000 + 500 – nil
= Rs. 19,500
352 Accountancy
Choose the correct option in the following questions :

1. The financial statements consist of:
(i) Trial balance
(ii) Profit and loss account
(iii) Balance sheet
(iv) (i) & (iii)
(v) (ii) & (iv)
2. Choose the correct chronological order of ascertainment of the following profits from
the profit and loss account :
(i) Operating Profit, Net Profit, Gross Profit
(ii) Operating Profit, Gross Profit, Net Profit
(iii) Gross Profit, Operating Profit, Net Profit
(iv) Gross Profit, Net Profit, Operating Profit
3. While calculating operating profit, the following are not taken into account.
(i) Normal transactions
(ii) Abnormal items
(iii) Expenses of a purely financial nature
(iv) (ii) & (iii)
(v) (i) & (iii)
4. Which of the following is correct :
(i) Operating Profit = Operating profit – Non-operating expenses – Non-operating
incomes
(ii) Operating profit = Net profit + Non-operating Expenses + Non-operating incomes
(iii) Operating profit = Net profit + Non-operating Expenses – Non-operating incomes
(iv) Operating profit = Net profit – Non-operating Expenses + Non-operating incomes
Illustration 7
Following balance is extracted from the books of a trader ascertain gross profit, operating
profit and net profit for the year ended March 31, 2005.
Particulars Amount
Rs.
Sales 75,250
Purchases 32,250
Opening stock 7,600
Sales return 1,250
Purchases return 250
Rent 300
Stationary and printing 250
Salaries 3,000
Misc. expenses 200
Travelling expenses 500
Advertisement 1,800
Commission paid 150

Office expenses 1,600
Wages 2,600
Profit on sale of investment 500
Depreciation 800
Dividend on investment 2,500
Loss on sale of old furniture 300
Closing stock (March 31, 2005) valued at Rs. 8,000
Trading and Profit and Loss Account

Dr. Cr.
Rs. Rs.
Purchases 32,250 Less : Sales return (1,250) 74,000
Less: Purchases return (250) 32,000 Closing stock 8,000
Wages 2,600
82,000 82,000
Rent 300 Gross profit b/d 39,800
Stationary and printing 250
Salaries 3,000
Misc. expenses 200
Advertisement expenses 1,800
Commission paid 150
Depreciation 800
Operating profit c/d 31,200
39,800 39,800
Loss on sale of old furniture 300 Operating profit b/d 31,200
Net Profit (transferred to capital 33,900 Profit on sale of investment 500
account) Dividend on investment 2,500
34,200 34,200
9.6 Balance Sheet

The balance sheet is a statement prepared for showing the financial position
of the business summarising its assets and liabilities at a given date. The
assets reflect debit balances and liabilities (including capital) reflect credit
balances. It is prepared at the end of the accounting period after the trading
354 Accountancy
and profit and loss account have been prepared. It is called balance sheet
because it is a statement of balances of ledger accounts that have not been
transferred to trading and profit and loss account and are to be carried forward
to the next year with the help of an opening entry made in the journal at the
beginning of the next year.
9.6.1 Preparing Balance Sheet

All the account of assets, liabilities and capital are shown in the balance
sheet. Accounts of capital and liabilities are shown on the left hand
side, known as Liabilities. Assets and other debit balances are shown
on the right hand side, known as Assets. There is no prescribed form of
Balance sheet, for a proprietary and partnership firms. However, Schedule
VI Part I of the Companies Act 1956 prescribes the format and the order
in which the assets and liabilities of a company should be shown. The
normal format in which the balance sheet is prepared is shown in the
figure 9.7.
Balance Sheet of ...........as at March 31, 2005

Rs. Rs.
Capital ..... Furniture .....
Add Profit ..... ..... Cash .....
Long-term loan ..... Bank .....
Short-term loan Goodwill .....
Sundry creditors ..... Sundry debtors .....
Bills payable Closing stock
Bank overdraft Land and Buildings
xxxx xxxx
Fig. 9.7 : Format of a balance sheet
Refer to our example -1 you will observe that the trial balance of Ankit
depicts 14 accounts, out of which 7 accounts have been transferred to the
trading and profit and loss account (refer figure 9.3). These are the accounts
of revenues and expenses. The analysis of figure 9.3 shows that the business
has incurred total expenses of Rs. 1, 25,500 and revenues generated are
Rs. 1, 30,000 making a profit of Rs. 4,500. The remaining seven items in the
trial balance reflects the capital, assets and liabilities. We are reproducing the
trial balance (example -1) to show how the accounts of assets and liabilities of
Ankit would be presented in the balance sheet.

Amount Amount
Rs. Rs.
Cash 1,000
Capital 12,000
Bank 5,000
Sales 1,25,000
Wages 8,000
Creditors 15,000
Salaries 25,000
10% Long-term loan 5,000
(raised on April 01, 2004)
Furniture 15,000
Rent of building 13,000
Debtors 15,500
Bad debts 4,500
Purchases 75,000
1,62,000 1,62,000
Fig. 9.8 : Showing the accounts of assets and liabilities in the trial balance of Ankit
Balance Sheet of Ankit as at March 31, 2005

Rs. Rs.
Capital 12,000 Furniture 15,000
Add Profit 4,500 16,500 Cash 1,000
10 % Long-term loan 5,000 Bank 5,000
Creditors 15,000 Debtors 15,500
36,500 36,500
Fig. 9.9 : Showing the balance sheet of Ankit
9.6.2 Relevant Items in the Balance Sheet

Items which are generally included in a balance sheet are explained below :
(1) Current Assets: Current assets are those which are either in the form of
cash or a can be converted into cash within a year. The examples of
such assets are cash in hand/bank, bills receivable, stock of raw
materials, semi-finished goods and finished goods, sundry debtors, short
term investments, prepaid expenses, etc.
356 Accountancy
(2) Current Liabilities: Current liabilities are those liabilities which are
expected to be paid within a year and which are usually to be paid out of
current assets. The examples of such liabilities are bank overdraft, bills
payable, sundry creditors, short-term loans, outstanding expenses, etc.
(3) Fixed Assets: Fixed assets are those assets, which are held on a long-term
basis in the business. Such assets are not acquired for the purpose of resale,
e.g. land, building, plant and machinery, furniture and fixtures, etc. Some
times the term ‘Fixed Block’ or ‘Block Capital’ is also used for them.
(4) Intangible Assets : These are such assets which cannot be seen or touched.
Goodwill, Patents, Trademarks are some of the examples of intangible assets.
(5) Investments: Investments represent the funds invested in government
securities, shares of a company, etc. They are shown at cost price. If, on
the date of preparation the balance sheet, the market price of investments
is lower than the cost price, a footnote to that effect may be appended to
the balance sheet.
(6) Long-term Liabilities : All liabilities other than the current liabilities are
known as long-term liabilities. Such liabilities are usually payable after
one year of the date of the balance sheet. The important items of long
term liabilities are long-term loans from bank and other financial
institutions.
(7) Capital: It is the excess of assets over liabilities due to outsiders. It
represents the amount originally contributed by the proprietor/ partners
as increased by profits and interest on capital and decreased by losses
drawings and intrest on drawings.
(8) Drawings : Amount withdrawn by the proprietor is termed as drawings
and has the effect of reducing the balance on his capital account.
Therefore, the drawings account is closed by transferring its balance to
his capital account. However it is shown by way of deduction from capital
in the balance sheet.
9.6.3 Marshalling and Grouping of Assets and Liabilities

A major concern of accounting is about preparing and presenting the financial
statement. The information so provided should be decision useful for the users.
Therefore, it becomes necessary that the items appearing in the balance sheet
should be properly grouped and presented in a particular order.
Marshalling of Assets and Liabilities
In a balance sheet, the assets and liabilities are arranged either in the
order of liquidity or permanence. Arrangement of assets and liabilities in a
particular order is known as Marshalling.
In case of permanence, the most permanent asset or liability is put on the
top in the balance sheet and thereafter the assets are arranged in their reducing
level of permanence.
In the balance sheet of Ankit you will find that furniture is the most
permanent of all the assets. Out of debtors, bank and cash, debtors will take
maximum time to convert back into cash. Bank is less liquid than cash. Cash
is the most liquid of all the assets. Similarly, on the liabilities side, the capital,
being the most important source of finance will tend to remain in the business
for a longer period than the long-term loan. Creditors being a liquid liability
will be discharged in the near future. The balance sheet of Ankit in the order
of permanence is shown in figure 9.10(a).
Balance Sheet of Ankit as on March 31, 2005 (in order of permanence)

Rs. Rs.

Add Profit 4,500 16,500 Debtors 15,500
Creditors 15,000 Cash 1,000
36,500 36,500
Fig. 9.10 (a) : Items of balance sheet shown in the order of permanance
In case of liquidity, the order is reversed. The information presented in

this manner would enable the user to have a good idea about the life of the
various accounts. The assets account of the relatively permanent nature would
continue in the business for a longer time whereas the less permanent or
more liquid accounts will change their forms in the near future and are likely
to become cash or cash equivalent.
The balance sheet of Ankit in the order of liquidity is shown in figure 9.10(b)
Balance Sheet of Ankit as at March31,2005

(in order of liquidity)

Rs. Rs.

Capital 12,000 Debtors 15,500
Add Profit 4,500 16,500 Furniture 15,000
36,500 36,500
Fig. 9.10 (b) : Items of balance sheet shown in the order of liquidity
358 Accountancy
Grouping of Assets and Liabilities

The items appearing in the balance sheet can also be properly grouped. The
term grouping means putting together items of similar nature under a common
heading. For example, the balance of accounts of cash, bank, debtors, etc.
can be grouped and shown under the heading of ‘current assets’ and the
balances of all fixed assets and long-term investment under the heading of
‘non-current assets’.

(in order of permanence)

Rs. Rs.
Owners Funds Non Current Assets
Add Profit 4,500 16,500 Current Assets
Non-Current Liabilities Debtors 15,500
Long-term loan 5,000 Bank 5,000
Current Liabilities Cash 1,000
Creditors 15,000
36,500 36,500
Fig. 9.10 (c): Showing assets and liabilities arranged in logical groups
Do it Yourself
Arrange the following items in the order of both permanence
and liquidity. Also group them under logical heads :
Liabilities Assets
Long-term loans Building
Bank overdraft Cash in hand
Bills payable Cash at bank
Owner’s equity Bills receivable
Short-term loans Sundry debtors
Sundry creditors Land
Finished goods
Work in progress
Raw material
Illustration 8
From the following balances prepare a trading and profit and loss account and balance
sheet for the year ended March 31, 2006
Account Title Amount Account Title Amount

Rs. Rs.
Carriage on goods 8,000 Cash in hand 2,500

purchased Bank overdraft 30,000
Carriage on goods sold 3,500 Motor car 60,000
Manufacturing expenses 42,000 Drawings 8,000
Advertisement 7,000 Audit fees 2,700
Excise duty 6,000 Plant 1,53,900
Factory lighting 4,400 Repairs to plant 2,200
Debtors 80,000 Stock at the end 76,000
Creditors 61,000 Purchases less return 1,60,000
Dock and Clearing charges 5,200 Commission on purchases 2,000
Postage and Telegram 800 Incidental trade expenses 3,200
Fire Insurance Premium 3,600 Investment 30,000
Patents 12,000 Interest on investment 4,500
Income tax 24,000 Capital 1,00,000
Office expenses 7,200 Sales less return 5,20,000
Salest tax paid 12,000
Discount on purchases 3,400
360 Accountancy

Dr. Cr.
Rs. Rs.
Purchases less return 1,60,000 Sales less return 5,20,000
Commission on purchases 2,000
Carriage on goods purchasesd 8,000
Manufacturing expenses 42,000
Factory lighting 4,400
Gross profit c/d 2,98,400
5,20,000 5,20,000
Carriage on sales 3,500 Gross profit b/d 2,98,400
Advertisement 7,000 Interest on investment 4,500
Excise duty 6,000 Discount on purchases 3,400
Postage and telegram 800
Fire Insurance premium 3,600
Audit fees 2,700
Repairs to plant 2,200
Incidental trading expenses 3,200
Sales tax paid 12,000
Net profit 2,55,400
(transferred to capital
account)
3,06,300 3,06,300
Balance Sheet as at March 31, 2006

Rs. Rs.
Bank overdraft 30,000 Cash in hand 2,500

Capital 1,00,000 Closing stock 76,000
Add Net profit 2,55,400 Investment 30,000
3,55,400 Motor car 60,000
Less Drawings (8,000) Plant 1,53,900
3,47400 Patents 12,000
Less Income tax (24,000) 3,23,400
4,14,400 4,14,400
Illustration 9
From the following balances prepare trading and profit and loss account and balance sheet

Rs. Rs.
Opening stock 15,310 Capital 2,50,000
Purchases 82,400 Drawings 48,000
Sales 256,000 Sundry debtors 57,000
Returns (Dr.) 4,000 Sundry creditors 12,000
Returns (Cr.) 2,400 Depreciation 4,200
Factory rent 18,000 Charity 500
Custom duty 11,500 Cash balance 4,460
Coal, gas & power 6,000 Bank balance 4,000
Wages and salary 36,600 Bank charges 180
Discount (Dr.) 7,500 Establishment expenses 3,600
Commission (Cr.) 1,200 Plant 42,000
Bad debts 5,850 Leasehold building 1,50,000
Bad debts recovered 2,000 Sales tax collected 2,000
Apprenticeship premium 4,800 Goodwill 20,000
Production expenses 2,600 Patents 10,000
Adminstrative expenses 5,000 Trademark 5,000
Carriage 8,700 Loan (Cr.) 25,000
Interest on loan 3,000
The value of closing stock on March 31, 2006 was Rs. 25,400
Solution
Dr. Cr.

Rs. Rs.
Opening stock 15,310 Sales: 2,56,000
Purchases: 82,400 Less Returns (4,000) 2,52,000
Less Returns : (2,400) 80,000
Factory rent 18,000 Closing stock 25,400
Custom duty 11,500
Coal, gas, power 6,000
Wages and salary 36,600
Production expenses 2,600
Carriage 8,700
2,77,400 2,77,400
362 Accountancy
Discount (Dr.) 7,500 Gross profit b/d 98,690

Bad debts 5,850 Commission 1,200
Administrative expenses 5,000 Bad debts recovered 2,000
Depreciation 4,200 Apprenticeship premium 4,800
Charity 500
Bank charges 180
Establishment expenses 3,600
Net profit 76,860
1,06,690 1,06,690

Rs. Rs.
Sales tax collected 2,000 Cash balance 4,460

Sundry creditors 12,000 Bank balance 4,000
Loan 25,000 Sundry debtors 57,000
Capital 2,50,000 Closing stock 25,400
Add Net profit 76,860 Leasehold building 1,50,000
3,26,860 Plant 42,000
Patents 10,000
Less Drawings (48,000) 2,78,860 Goodwill 5,000
Trade mark 20,000
3,17,860 3,17,860
9.7 Opening Entry

The balances of various accounts in balance sheet are carried forward from
one accounting period to another accounting period. In fact, the balance sheet
of an accounting period becomes the opening trial balance of the next
accounting period. Next year an opening entry is made which opens these
accounts contained in the balance sheet.
Refer the balance sheet shown in figure 9.10(c). The opening entry with
regard to it will be recorded as follows :
Debtors A/c Dr. 15,500
Bank’s A/c Dr. 5,000
Cash A/c Dr. 1,000
To Capital A/c 16,500
To 10 % Long-term loan A/c 5,000
To Creditors A/c 15,000

• Balance sheet • Bank overdraft
• Bills payable • Bills receivable
• Capital • Capital expenditure
• Capital receipts • Carriage inwards
• Carriage outwards • Cash at bank
• Closing entries • Closing stock
• Current assets • Currents liabilities
• Purchases return • Rent
• Return inwards • Return outwards
• Revenue expenditure • Depreciation
• Discount allowed • Discount received
• Cash • Trade expenses
• Factory expenses • Financial statements
• Fixed assets • Freight
• Gross Profit • Gross Loss
• Income tax • Interest on capital
• Interest on drawings • Net loss
• Net profit • Order of liquidity
• Order of performance • Revenue expenditure
• Revenue receipt • Salaries
• Sales • Sales return
• Grouping and Marshalling

1 Meaning, usefulness and types of financial statements : After the agreement of
the trial balance, a business enterprise proceeds to prepare financial statements.
Financial statements are the statements, which present periodic reports on the
process of business enterprises and the results achieved during a given period.
Financial statements includs trading and profit and loss account, balance sheet
and other statements and explanatory notes, which form part thereof.
Information provided by financial statements is useful to management to plan
and control the business operations. Financial statement are also useful to
creditors, shareholders and employees of the enterprise.
2 Meaning need and preparation of trading and profit and loss account : The profit
and loss account highlights the profit earned or loss sustained by the business
entity in the course of business operation during a given period.
The need for preparing the trading and profit and loss account is to ascertain
the net result of business operations during a given period. The profit and loss
account shows the items of revenue expenses and losses on the debit side,
while items of gain and gross profit are shown on the credit side. For the
preparation of the trading and profit and loss account, closing entries are
recorded to transfer balances of account of items of expenses and revenues.
Net profit or net loss shown by the profit and loss account is transferred to the
capital account.
364 Accountancy
3 Meaning, characteristic, need and structure of the balance sheet : The balance
sheet is a statement of assets and liabilities of a business enterprise and shows
the financial position at a given date Informations contained in a balance sheet
is true only on that date. The balance sheet is a part of the final account. But it
is not an account, it is only a statement. In a balance sheet the totals of assets
and liabilities are always equal. It portrays the accounting equation.
A balance sheet has to be prepared to know the financial position of the
business, and the nature and values of its assets and liabilities. All the accounts
which have not been closed till the preparation of the profit and loss account
are shown in the balance sheet. Assets and liabilities shown in the balance
sheet are marshalled in order of liquidity or in order of permanence.

Short Answers
1. What are the objectives of preparing financial statements ?
2. What is the purpose of preparing trading and profit and loss account?
3. Explain the concept of cost of goods sold?
4. What is a balance sheet. What are its characteristics?
5. Distinguish between capital and revenue expenditure and state whether the
following statements are items of capital or revenue expenditure :
(a) Expenditure incurred on repairs and whitewashing at the time of
purchase of an old building in order to make it usable.
(b) Expenditure incurred to provide one more exit in a cinema hall in
compliance with a government order.
(a) Registration fees paid at the time of purchase of a building
(b) Expenditure incurred in the maintenance of a tea garden which will
produce tea after four years.
(c) Depreciation charged on a plant.
(d) The expenditure incurred in erecting a platform on which a machine will
be fixed.
(e) Advertising expenditure, the benefits of which will last for four years.
6. What is an operating profit?
Long Answars
1. What are financial statements? What information do they provide.
2. What are closing entries? Give four examples of closing entries.
3. Discuss the need of preparing a balance sheet.
4. What is meant by Grouping and Marshalling of assets and liabilities. Explain
the ways in which a balance sheet may be marshalled.
Numerical Questions
1. From the following balances taken from the books of Simmi and Vimmi Ltd.
for the year ending March 31, 2003, calculate the gross profit.
(Rs.)
Closing stock 2,50,000
Net sales during the year 40,00,000
Net purchases during the year 15,00,000

Direct expenses 80,000
(Ans. Gross profit Rs.11,70,000)
2. From the following balances extracted from the books of M/s Ahuja and
Nanda. Calculate the amount of :
(a) Cost of goods available for sale
(b) Cost of goods sold during the year
(c) Gross Profit
Rs.
Credit purchases 7,50,000
Cash purchases 3,00,000
Credit sales 12,00,000
Cash sales 4,00,000
Wages 1,00,000
Salaries 1,40,000
Closing stock 30,000
Sales return 50,000
(Ans. (a) Rs. 11,65,000 ; (b) Rs.11,35,000 ; (c) Rs.4,15,000
3. Calculate the amount of gross profit and operating profit on the basis of the
following balances extracted from the books of M/s Rajiv & Sons for the year
ended March 31, 2005.
Rs.
Net sales 11,00,000
Net purchases 6,00,000
Direct expenses 60,000
Administration expenses 45,000
Selling and distribution expenses 65,000
Loss due to fire 20,000
(Ans. Gross profit Rs.4,60,000, Operating profit Rs.3,50,000)
4. Operating profit earned by M/s Arora & Sachdeva in 2005-06 was
Rs.17,00,000. Its non-operating incomes were Rs.1,50,000 and non-operating
expenses were Rs.3,75,000. Calculate the amount of net profit earned by the
firm.
(Ans. Net profit Rs.14,75,000)
5. The following are the extracts from the trial balance of M/s Bhola & Sons as
on March 31, 2005
Account title Debit Credit
Rs. Rs.
Purchases 8,10,000
Sales 10,10,000
10,10,000 10,10,000
(only relevant items)

Closing Stock as on date was valued at Rs.3,00,000.
366 Accountancy
You are required to record the necessary journal entries and show how the
above items will appear in the trading and profit and loss account and balance
sheet of M/s Bhola & Sons.
6. Prepare trading and profit and loss account and balance sheet as on
March 31, 2005 :

Rs. Rs.
Machinery 27,000 Capital 60,000
Sundry debtors 21,600 Bills payable 2,800
Drawings 2,700 Sundry creditors 1,400
Purchases 58,500 Sales 73,500
Wages 15,000
Sundry expenses 600
Rent & taxes 1,350
Carriage inwards 450
Bank 4,500
Openings stock 6,000
Closing stock as on March 31, 2005 Rs.22,400

[Ans. Gross profit Rs.15,950, Net profit Rs.14,000, Total balance sheet
Rs.75,500]
7. The following trial balance is extracted from the books of M/s Ram on March
31, 2005. You are required to prepare trading and profit and loss account
and the balance sheet as on date :
Account title Amount Account title Amount

Rs. Rs.
Debtors 12,000 Apprenticeship premium 5,000
Purchases 50,000 Loan 10,000
Coal, gas and water 6,000 Bank overdraft 1,000
Factory wages 11,000 Sales 80,000
Salaries 9,000 Creditors 13,000
Rent 4,000 Capital 20,000
Discount 3,000
Advertisement 500
Drawings 1,000
Loan 6,000
Petty cash 500
Sales return 1,000
Machinery 5,000
Land and building 10,000
Income tax 100
Furniture 9,900
(Ans. Gross profit: Rs. 12,000, Net profit: Rs. 500, Total balance sheet:
Rs. 43,400)
8. The following is the trial balance of Manju Chawla on March 31, 2005. You
are required to prepare trading and profit and loss account and a balance
sheet as on date :
Account title Debit Credit

Amount Amount
Rs. Rs.
Purchases and sales 40,000 80,000
Returns 200 600
Productive wages 6,000
Donation and charity 600
Delivery van expenses 6,000
Lighting 500
Sales tax collected 1,000
Bad debts 600
Misc. incomes 6,000
Rent from tenants 2,000
Royalty 4,000
Capital 40,000
Drawings 2,000
Debtors and Creditors 6,0000 7,000
Cash 3,000
Investment 6,000
Patents 4,000
Land and Machinery 43,000
Closing stock Rs. 2,000.

(Ans. Gross Profit: Rs. 18,400, Net profit: Rs. 18,700, Total balance sheet:
Rs. 64,700)
9. The following is the trial balance of Mr. Deepak as on March 31, 2005. You
are required to prepare trading account, profit and loss account and a balance
sheet as on date :
Account title Debit Account title Credit

Amount Amount
Rs. Rs.
Drawings 36,000 Capital 2,50000
Insurance 3,000 Bills payable 3,600
General expenses 29,000 Creditors 50,000
Rent and taxes 14,400 Discount recived 10,400
Lighting (factory) 2,800 Purchases return 8,000
Travelling expenses 7,400 Sales 4,40,000
Cash in hand 12,600
368 Accountancy
Sundry debtors 1,04,000

Furniture 16,000
Plant and Machinery 1,80,000
Purchases 1,60,000
Sales return 6,000
Carriage inwards 7,200
Carriage outwards 1,600
Wages 84,000
Salaries 53,000

(Ans. Gross profit: Rs.1,83,000, Net profit : Rs. 85,000, Total balance sheet:
Rs. 3,52,600)
10. Prepare trading and profit and loss account and balance sheet from the
following particulars as on March 31, 2005.
Account T itle Debit Credit

Amount Amount
Rs. Rs.
Purchases and Sales 3,52,000 5,60,000

Return inwards and Return outwards 9,600 12,000
Fuel and power 24,800
Bad debts 9,950
Debtors and Creditors 1,31,200 48,000
Capital 3,48,000
Investment 32,000
Interest on investment 3,200
Loan 16,000
Repairs 2,400
General expenses 17,000
Wages and salaries 28,800
Land and buildings 2,88,000
Cash in hand 32,000
Miscellaneous receipts 160

(Ans. Gross profit: Rs. 1,22,200, Net profit : Rs.92,850, Total balance sheet:
Rs.5,13,200)
11. From the following trial balance of Mr. A. Lal, prepare trading, profit and loss
account and balance sheet as on March 31, 2005

Amount Amount
Rs. Rs.
Stock as on April 01, 2005 16,000
Purchases and Sales 67,600 1,12,000
Returns inwards and outwards 4,600 3,200
Bad debts 600
Bank over draft 10,000
Interest on bank overdraft 600
Insurance and taxes 4,000
Scooter expenses 200
Salaries 8,800
Cash in hand 4,000
Scooter 8,000
Furniture 5,200
Building 65,000
Capital 50,000

(Ans. Gross profit : Rs. 40,600, Net profit: Rs. 27,200, Total balance sheet:
Rs. 1,03,200)
12. Prepare trading and profit and loss account and balance sheet of M/s Royal
Traders from the following balances as on March 31, 2005.
Debit balances Amount Credit balances Amount

Rs. Rs.
Stock 20,000 Sales 2,45,000
Cash 5,000 Creditors 10,000
Bank 10,000 Bills payable 4,000
Carriage on purchases 1,500 Capital 2,00,000
Purchases 1,90,000
Drawings 9,000
Wages 55,000
Machinery 1,00,000
Debtors 27,000
Postage 300
Sundry expenses 1,700
Rent 4,500
Furniture 35,000
Closing stock Rs.8,000

(Ans. Gross loss Rs. 13,500, Net loss Rs. 20,000, Total balance sheet
Rs. 1,85,000)
370 Accountancy
13. Prepare trading and profit and loss account from the following particulars of
M/s Neema Traders as on March 31, 2005.
Account Title Debit Account Title Credit

Amount Amount
Rs. Rs.
Buildings 23,000 Sales 1,80,000
Plant 16,930 Loan 8,000
Carriage inwards 1,000 Bills payable 2,520
Wages 3,300 Bank overdraft 4,720
Purchases 1,64,000 Creditors 8,000
Sales return 1,820 Capital 2,36,000
Opening stock 9,000 Purchases return 1,910
Machinery 2,10,940
Insurance 1,610
Interest 1,100
Bad debts 250
Postage 300
Discount 1,000
Salaries 3,000
Debtors 3,900
Stock on March 31, 2005 Rs.16,000.

(Ans. Gross profit Rs.17,850, Net profit Rs. 10,590, Total of balance
sheet Rs.2,69,830)
14. From the following balances of M/s Nilu Sarees as on March 31, 2005. Prepare
trading and profit and loss account and balance sheet as on date.
Amount Amount
Rs. Rs.
Purchases 78,000 Capital 70,000
Carriage inwards 2,500 Interest 7,000
Salaries 30,000 Commission 8,000
Commission 10,000 Creditors 28,000
Wages 11,000 Bills payable 2,370
Rent & taxes 2,800
Repairs 5,000
Telephone expenses 1,400
Legal charges 1,500
Sundry expenses 2,500
cash in hand 12,000
Debtors 30,000
Machinery 60,000
Investments 90,000
Drawings 18,000
Closing stock as on March 31, 2005 Rs.22,000.

(Ans. Gross profit Rs. 1,56,500, Net profit Rs. 1,10,300, Total balance
sheet Rs.2,14,000)
15. Prepare trading and profit and loss account of M/s Sports Equipments for
the year ended March 31, 2006 and balance sheet as on that date :

Amount Amount
Rs. Rs.
Purchases and sales 3,50,000 4,21,000
Sales returns 5,000
Capital 3,00,000
Commission 4,000
Creditors 1,00,000
Cash in hand 32,000
Furniture 1,28,000
Debtors 1,40,000
Plants 60,000
Wages 8,000
Rent 15,000
Bad debts 7,000
Drawings 24,000
Stationery 6,000
Travelling expenses 2,000
Insurance 7,000
Discount 5,000
Closing stock as on March 31, 2006 Rs.2,500

(Ans. Gross loss Rs. 1,500, Net loss Rs. 41,500 , Total balance sheet
Rs.3,62,500)

1. Test Your Understanding - I
I (i) T (ii) T (iii) F (iv) T
II (i) b (ii) a (iii) e (iv) c (v) d
2. Test Your Understanding - II
1. (v) 2. (iii) 3. (iii) 4. (iii)
372 Accountancy
Financial Statements - II 10
I n chapter 9, you learnt about the preparation of

simple final accounts in the format of trading and
profit and loss account and balance sheet. The
preparation of simple final accounts pre-supposes
LEARNING OBJECTIVES
the absence of any accounting complexities which
After studying this chapter, are nor mal to business operations. These
you will be able to : complexities arise due to the fact that the process
• describe the need for of determining income and financial position is
adjustments while
based on the accrual basis of accounting. This
preparing the financial
statements; emphasises that while ascertaining the profitability,
• explain the accounting the revenues be considered on earned basis and
treatment of adjust- not on receipt basis, and the expenses be considered
ments for outstanding on incurred basis and not on paid basis. Hence,
and prepaid expenses, many items need some adjustment while preparing
accrued and advance the financial statements. In this chapter we shall
receipts of incomes;
discuss all items which require adjustments and
• discuss the adjust-
the way these are brought into the books of account
ments to be made
regarding deprecia- and incorporated in the final accounts.
tion, bad debts, provi-
sion for doubtful debts, 10.1 Need for Adjustments
provision for discount
on debtors; According to accrual concept of accounting, the
• explain the concepts profit or loss for an accounting year is not based on
and adjustment of the revenues realised in cash and the expenses paid
manager’s commission in cash during that year because there may be some
and interest on capital; receipts of incomes and payments of expenses
• prepare profit and loss during the current year which may partially relate
account and balance to the previous year or to the next year. Also, there
sheet with adjust-
may be some incomes and expenses relating to the
ments; and
current year that are still to be brought into books
• make vertical present-
ation of financial of account. So, unless such items duly adjusted,
statements. the final accounts will not reflect the true and fair
view of the state of affairs of the business.
Let us take an example of an amount of Rs. 1,000 paid on July 01, 2005
towards insurance premium. You understand that any general insurance
premium paid usually covers a period of 12 months. Suppose the accounting
year ends on March 31, 2006, it would mean that one fourth of the insurance
premium is paid on July 01, 2005 relate to the next accounting year 2006-07.
Therefore, while preparing the financial statements for 2005-06, the expense
on insurance premium that should be debited to the profit and loss account
is Rs. 900 (Rs. 1,200 – Rs. 300).
Let us take another example. The salaries for the month of March, 2005
were paid on April 07, 2005. This means that the salaries account of 2004-05
does not include the salaries for the month of March 2005. Such unpaid
salaries is termed as salaries outstanding which have to be brought into books
of account and is debited to profit and loss account along with the salaries
already paid for the month of April, 2004 up to Feburary, 2005.
Similarly, adjustments may also become necessary in respect of certain
incomes received in advance or those which have accrued but are still to be
received. Apart from these, there are certain items which are not recorded on
day-to-day basis such as depreciation on fixed assets, interest on capital, etc.
These are adjusted at the time of preparing financial statements. The purpose
of making various adjustments is to ensure that the final accounts reveal the
true profit or loss and the true financial position of the business. The items
which usually need adjustments are :
1. Closing stock
2. Outstanding/expenses
3. Prepaid/Unexpired expenses
4. Accrued income
5. Income received in advance
6. Depreciation
7. Bad debts
8. Provision for doubtful debts
9. Provision for discount on debtors
10. Manager’s commission
11. Interest on capital
It may be noted that when we prepare the financial statements, we are
provided with the trial balance and some other additional information in respect
of the adjustments to be made. All adjustments are reflected in the final
accounts at two places to complete the double entry. Our earlier example in
chapter 9 which represents the trial balance of Ankit is reproduced in
figure 10.1:
374 Accountancy
Account Title Elements L.F. Debit Credit

Amount Amount
Rs. Rs.
Cash Assets 1,000

Bank Assets 5,000
Wages Expense 8,000
Salaries Expense 25,000
Furniture Assets 15,000
Rent of building Expense 13,000
Debtors Assets 15,500
Bad debts Expense 4,500
Purchases Expense 75,000
Capital 12,000
Equity
Sales Revenue 1,25,000
Creditors Liabilities 15,000
Long-term loan (raised on 1.4.2004) Liabilities 5,000
Commission received Revenue 5,000
Total 1,62,000 1,62,000
Additional Information : The stock on March 31, 2005 was Rs. 15,000.
Figure 10.1 : Showing the trial balance of Ankit
We will now study about the items of adjustments and you will observe
how these adjustments are helpful in the preparation of financial statements
in order to reflect the true profit and loss and financial position of the firm.
10.2 Closing Stock

As already discussed in chapter 9, the closing stock represents the cost of
unsold goods lying in the stores at the end of the accounting period. The
adjustment with regard to the closing stock is done by (i) by crediting it to the
trading and profit and loss account, and (ii) by showing it on the asset side of
the balance sheet. The adjustment entry to be recorded in this regard is :
To Trading A/c
The closing stock of the year becomes the opening stock of the next year
and is reflected in the trial balance of the next year. The trading and profit
and loss account of Ankit for the year ended March 31, 2005 and his balance
sheet as on that date shall appear as follows :

Dr. Cr.
Rs. Rs.
1,40,000 1,40,000
Bad debts 4,500
Net profit (transferred to 19,500
Ankit’s capital account)
62,000 62,000
Sometimes the opening and closing stock are adjusted through purchases
account. In that case, the entry recorded is as follows :
To Purchases A/c
This entry reduces the amount in the purchases account and is also
known as adjusted purchases which is shown on the debit side of the trading
and profit and loss account. In this context, it may be noted, that the closing
stock will not be shown on the credit side of the trading and profit and loss as
it has been already been adjusted through the purchases account. Not only,
in such a situation, even the opening stock will not be separately reflected in
the trading and profit and loss account, as it is also adjusted in purchases by
recording the following entry:
Purchases A/c Dr.
To Opening stock A/c
Another important point to be noted in this context is that when the opening
and closing stocks are adjusted through purchases, the trial balance does
not show any opening stock. Instead, the closing stock shall appear in the
trial balance (not as additional information or as an adjustment item) and so
also the adjusted purchases. In such a situation, you should remember that
the adjusted purchases shall be debited to the trading and profit and loss
account.
376 Accountancy
The closing stock shall be shown on the assets side of the balance sheet as
shown below:
Rs. Rs.
Owners funds Non-Current Assets
Add Net profit 19,500 31,500 Current Assets
Creditors 15,000 Closing stock 15,000
51,500 51,500
10.3 Outstanding Expenses

It is quite common for a business enterprise to have some unpaid expenses in
the normal course of business operations at the end of an accounting year.
Such items usually are wages, salaries, interest on loan, etc.
When expenses of an accounting period remain unpaid at the end of an
accounting period, they are termed as outstanding expenses. As they relate
to the earning of revenue during the current accounting year, it is logical that
they should be duly charged against revenue for computation of the correct
amount of profit or loss. The entry to bring such expenses into account is :
Concerned expense A/c Dr.
To Outstanding expense A/c
The above entry opens a new account called Outstanding Expenses which
is shown on the liabilities side of the balance sheet. The amount of outstanding
expenses is added to the total of expenses under a particular head for the
purpose of preparing trading and profit and loss account.
For example, refer to Ankit’s trial balance (refer figure 10.1). You will notice
that wages are shown at Rs. 8,000. Let us assume that Ankit owes Rs.500 as
wages relating to the year 2004-05 to one of his employees. In that case, the
correct expense on wages amounts to Rs. 8,500 instead of Rs. 8,000. Ankit
must show Rs. 8,500 as expense on account of wages in the trading and
profit and loss account and recognise a current liability of Rs. 500 towards
the sum owed to his staff. It will be referred to as wages outstanding and it
will be adjusted to wages account by recording the following journal entry:
Wages A/c Dr. 500
To Wages outstanding A/c 500
The amount of outstanding wages will be added to wages account for the
preparation of the trading and profit and loss account as follows :

Dr. Cr.
Rs. Rs.
Wages 8,000
Add Outstanding wages 500 8,500 Closing stock 15,000
1,40,000 1,40,000
Bad debts 4,500
61,500 61,500
Observe carefully the trading and profit and loss account of Ankit. Did
you notice the amount of net profit is reduced to Rs. 19,000 on account of
outstanding wages. The item relating to outstanding wages will be shown in
balance sheet as follows :

Rs. Rs.
Owners Funds Non-Current Assets
Outstanding wages 500
51,500 51,500
10.4 Prepaid Expenses

There are several items of expense which are paid in advance in the normal
course of business operations. At the end of the accounting year, it is found
that the benefits of such expenses have not yet been fully received; a portion
378 Accountancy
of its benefit would be received in the next accounting year. This portion of
expense, is carried forward to the next year and is termed as prepaid expenses.
The necessary adjustment in respect of prepaid expenses is made by recording
the following entry:
Prepaid expense A/c Dr.
To concerned expense A/c
The effect of the above adjustment entry is that the amount of prepaid
part is deducted from the total of the particular expense, and the new account
of prepaid expense is shown on the liabilities side of the balance sheet. For
example, in Ankit’s trial balance, let us assume that the amount of salary
paid by him to the employees includes an amount of Rs. 5,000 which was
paid in advance to one of his employees upon his joining the office. This
implies that Ankit has overpaid his staff by Rs. 5,000 on account of his salary.
Hence, correct expense on account of salary during the current period will be
Rs. 20,000 instead of Rs. 25,000. Ankit must show Rs. 20,000 expense on
account of salary in the profit and loss account and recognise a current asset
of Rs. 5,000 as an advance salary to the employee. It will be termed as prepaid
salary account and will be recorded by the following journal entry :
Prepaid salary A/c Dr. 5,000
To salary A/c 5,000
The account of prepaid salary will be shown in the trading and profit and
loss account as follows:

Dr. Cr.
Rs Rs.
Add Outstanding wages 500 8,500
1,40,000 1,40,000
Less Prepaid salary (5,000) 20,000
Bad debts 4,500
Net profit (transferred to Ankit 24,000
capital account)
61,500 61,500
Observe how the prepaid salary has resulted in an increase of net profit by
Rs. 5,000 making it as Rs. 24,000 Further, the item relating to prepaid salary
will be shown in the balance sheet on the assets side as follows :
Balance Sheet of Ankit as at March 31,2005

Rs. Rs.

Long-term loan 5,000 Prepaid salary 5,000
Current Liabilities Bank 5,000
Cash 1,000
Outstanding wages 500
56,500 56,500
10.5 Accrued Income

It may also happen that certain items of income such as interest on loan,
commission, rent, etc. are earned during the current accounting year but
have not been actually received by the end of the same year. Such incomes
are known as accrued income. The adjusting entry for accrued income is :
Accrued income A/c Dr.
To Concerned income A/c
The amount of accrued income will be added to the related income in the
profit and loss account and the new account of accrued income will appear
on the asset side of the balance sheet.
Let us, for example, assume that Ankit was giving a little help to a fellow
businessman by introducing few parties to him on commission for this service.
In the trial balance of Ankit you will notice an item of commission received
amounting to Rs. 5,000. Assume that the commission amounting to
Rs.1, 500 was still receivable from the fellow businessman. This implies that
income from commission earned during 2004-05 is Rs. 6, 500 (Rs.5, 000 +
Rs. 1,500) Ankit needs to record an adjustment entry to give effect to the
accrued commission as follows :
Accrued Commission A/c Dr. 1,500
380 Accountancy
The account of accrued income will be recorded in trading and profit and
loss account as follows :

Dr. Cr.
Rs. Rs.

Add Outstanding 500 8,500
1,40,000 1,40,000

Add Accrued 1,500 6,500
Bad debts 4,500 commission
63,000 63,000
Observe that the accrued income has resulted in an increase in the net
profit by Rs. 1,500 making it as Rs. 25,500. Further, it will be shown in the
balance sheet of Ankit on the assets side under the head current asset.

Rs. Rs.

Current Liabilities Accrued commission 1,500
Creditors 15,000 Bank 5,000
Outstanding wages 500 Cash 1,000
58,000 58,000
10.6 Income Received in Advance

Sometimes, a certain income is received but the whole amount of it does not
belong to the current period. The portion of the income which belongs to the
next accounting period is termed as income received in advance or an Unearned
Income. Income received in advance is adjusted by recording the following
entry:
Concerned income A/c Dr.
To Income received in advance A/c
The effect of this entry will be that the balance in the income account will
be equal to the amount of income earned for the current accounting period,
and the new account of income received in advance will be shown as a liability
in the balance sheet.
For example, let us assume Ankit has agreed in March 31, 2005 to sublet
a part of the building to a fellow shopkeeper @ Rs. 1,000 per month. The
person gives him rent in advance for the next three months of April, May and
June. The amount received had been credited to the profit and loss account.
However, this income does not pertain to current year and hence will not be
credited to profit and loss account. It is income received in advance and will
be recognised as a liability amounting to Rs. 3,000. Ankit needs to record an
adjustment entry to give effect to income received in advance by way of following
journal entry:
Rent received A/c Dr. 3,000
To Rent received in advance A/c 3,000
This will lead a new account of rent received in advance of Rs. 3,000 which
will appear as follows :

Rs. Rs.
Owners Funds Non Current Assets
Add Net profit 25,500 37,500 Current Assets
Non Current Liabilities Debtors 15,500
Current Liabilities Accrued commission 1,500
Creditors 15,000 Bank 5,000
Rent received in advance 3,000 Closing stock 15,000
61,000 61,000
382 Accountancy
10.7 Depreciation
Recall from chapter 7, that depreciation is the decline in the value of assets
on account of wear and tear and passage of time. It is treated as a business
expense and is debited to profit and loss account. This, in effect, amounts to
writing-off a portion of the cost of an asset which has been used in the business
for the purpose of earning profits. The entry for providing depreciation is :
Depreciation A/c Dr.
To Concerned asset A/c
In the balance sheet, the asset will be shown at cost minus the amount of
depreciation. For example, the trial balance in our example shows that Ankit
has a furniture account with a balance of Rs. 15,000. Let us assume that
furniture is subject to a depreciation of 10% per annum. This implies that
Ankit must recognise that at the end of the year the value attached to furniture
is to be reduced by Rs. 1,500 (Rs. 15,000 × 10%). Ankit needs to record an
adjustment entry to give effect to depreciation on furniture as follows :
Depreciation will be shown in the profit and loss account and balance
sheet as follows :
Dr. Cr.
Rs. Rs.

Add Outstanding wages (500) 8,500
Gross Profit c/d 56,500
1,40,000 1,40,000

Rent of building 13,000 Commission received 5,000 6,500
Add Accrued 1,500
Depreciation-Furniture 1,500 Commission
Bad debts 4,500
63,000 63,000
Notice that the amount of net profit declines with the adjustment of depreciation.
Let us now see how depreciation as an expense will be shown in balance sheet.
Balance Sheet of Ankit

as at March 31, 2005

Rs. Rs.

Add Profit 24,000 36,000 Less Depreciation (1,500) 13,500
Non-Current Liabilities Current Assets
Long-term loan 5,000 Debtors 15,500
Current Liabilities Prepaid salary 5,000
Creditors 15,000 Accrued commission 1,500
Outstanding wages 500 Bank 5,000
Rent received in advance 3,000 Cash 4,000
59,500 59,500
10.8 Bad Debts

Bad debts refer to the amount that the firm has not been able to realise from
its debtors. It is regarded as a loss and is termed as bad debt. The entry for
recording bad debt is:
Bad debts A/c Dr.
To Debtors A/c
You will notice in Ankit’s trial balance, that it contains bad debts amounting
to Rs. 4,500. Whereas, the sundry debtors of Ankit are reported as Rs. 15,500.
The existence of bad debts in the trial balance signifies that Ankit has incurred
a loss arising out of bad debts during the year and which has been already
recorded in the books of account.
However, assuming one of his debtors who owed him Rs. 2,500 had become
insolvent, and nothing is receivable from him. But the amount of bad debts
related to the current year is still to be account for. This fact appears as
additional information and is termed as further bad debts. The adjustment
entry to be recorded for the amount will be as follows. For this purpose, Ankit
needs to record an adjustment entry as under :
Bad debts A/c Dr. 2,500
To Debtors A/c 2,500
This entry will reduce the value of debtors to Rs. 13,000( Rs. 15,500 –
Rs. 2,500) and increases the amount of bad debts to Rs. 7,000 (Rs. 4,500 +
Rs. 2,500).
384 Accountancy
The treatment of further bad debts in profit and loss account and balance
sheet is shown below :
Dr. Cr.
Rs. Rs.
1,40,000 1,40,000
commission
Depreciation – Furniture 1,500
Bad Debts 4,500
Add Further bad debts 2,500 7,000
63,000 63,000

Rs. Rs.
Add Profit 21,500 33,500 Less Depreciation (1,500) 13,500
Less Further bad debts (2,500) 13,000
Current Liabilities and Provisions Prepaid salary 5,000
Bank 5,000
Outstanding Wages 500 Cash 4,000
Rent received in advance 3,000
57,000 57,000
10.9 Provision for Bad and Doubtful Debts

In the above balance sheet, debtors now appears at Rs. 13,000, which is their
estimated realisable value during next year. It is quite possible that the whole
of this amount may not be realised in future. However, it is not possible to

accurately know the amount of such bad debts. Hence, we make a reasonable
estimate of such loss and provide the same. Such provision is called provision
for bad debts and is created by debiting profit and loss account. The following
journal entry is recorded in this context :
To Provision for doubtful debts A/c
Provision for doubtful debts is also shown as a deduction from the debtors
on the asset side of the balance sheet.
Let us assume, Ankit feels that 5% of his debtors on March 31, 2005 are
likely to default on their payments next year. This implies he expects bad
debts of Rs. 650 (Rs. 13,000 × 5%). Ankit needs to record the adjustment
entry as :
Profit and loss A/c Dr. 650
To Provision for doubtful debts A/c 650
This implies that Rs. 650 will reduce the current year’s profit on account
of doubtful debts. In the balance sheet, it will be shown as a deduction from
sundry debtors.

Dr. Cr.

Rs. Rs.

1,40,000 1,40,000
Depreciation – Furniture 1,500 Add Accrued 1,500 6,500
Bad debts 4,500 commission
Provision for doubtful debts 650
Net profit (transferred to Ankit’s 20,850
capital account)
63,000 63,000
386 Accountancy

Rs. Rs.

Add Net profit 20,850 32,850 Less Depreciation (1,500) 13,500
Less Furtherbad debts 2,500
13,000
Less Provision for 650 12,350
doubtful debts
Current Liabilities & Provisions Prepaid salary 5,000
Outstanding wages 500 Bank 5,000
56,350 56,350
It may be noted that the provision created for doubtful debts at the end of
a particular year will be carried forward to the next year and it will be used for
meeting the loss due to bad debts incurred during the next year. The provision
for doubtful debts brought forward from the previous year is called the opening
provision or old provision. When such a provision already exists, the loss due
to bad debts during the current year are adjusted against the same and while
making provision for doubtful debts required at the end of the current year is
called new provision. The balance of old provision as given in trial balance
should also be taken into account.
Let us take an example to understand how bad debts and provision for
doubtful debts are recorded. An extract from a trial balance on March 31,
2005 is given below :
Rs.
Sundry debtors 32,000
Bad debts 2,000
Provision for doubtful debts 3,500
Additional Information :
Write-off further bad debts Rs. 1,000 and create a provision for doubtful debts
@ 5% on debtors.
In this case, the following journal entries will be recorded :
Debit Credit
Date Particulars L.F. Amount Amount
Rs. Rs.
(a) Bad debts A/c Dr. 1,000

To Sundry debtors 1,000
(Futher bad debts)
(b) Provision for doubtful debts A/c Dr. 3,000

To Bad debts A/c 3,000
(Bad debts adjusted against the provision)
Profit and Loss A/c Dr. 1,050

To Provision for doubtful debts A/c 1,050
(Amount charges from profit and loss account)

Rs. Rs.
Provision for doubtful debts:
Bad debts 2,000
Further bad debts 1,000
New provision 1,550
4,550
Less Old provision 3,500 1,050
*Only relevant items.
Rs.
Less Further (1,000)
bad debts 31,000
Less Provision (1,550)
for doubtful debts 29,450
*Only relevant items.

Note : The amount of new provision for doubtful debts has been calculated as follows:
Rs. 31,000 1 × 5/100 = Rs. 1,550.
10.10 Provision for Discount on Debtors

A business enterprise allows discount to its debtors to encourage prompt
payments. Discount likely to be allowed to customers in an accounting year
388 Accountancy
can be estimated and provided for by creating a provision for discount on

debtors. Provision for discount is made on good debtors which are arrived at
by deducting further bad debts and the provision for doubtful debts. The
following journal entry is recorded to create provision for discount on debtors:
Profit and loss A/c Dr.
To Provision for discount on debtors A/c
As stated above, the provision for discount on debtors will be created only
on good debtors. It will be calculated on the amount of debtors arrived at after
deducting the doubtful debts, i.e. Rs. 12,350 (Rs. 13,000 – Rs. 650).
Ankit needs to record the adjustment entry as :
Profit and loss A/c Dr. 227
To Provision for discount on debtors A/c 227
This will reduce the current year profit by Rs. 227 on account of probable
discount on prompt payment. In the balance sheet, it will be shown as a
deduction from the debtors account to portray correctly the expected realiable
value of debtors as Rs. 12,123.

Dr. Cr.

Rs. Rs.

Add Outstanding wages (500) 8,500
1,40,000 1,40,000
Depreciation–Furniture 1,500 commission
Bad debts 4,500
Provision for discount on debtors 227
63,000 63,000
Balance Sheet of Ankit as on March 31, 2005

Rs. Rs.

Less Further 2,500
bad debts 13,000
Less Provision
for bad and 650
doubtful debts
12,350
Less Provision
for discount
on debtors (227) 12,123
Current Liabilities & Provisions Prepaid salary 5,000
Bank 5,000
Rent received in advance 3,000
56,123 56,123
In the subsequent year, the discount will be transferred to the provision

for discount on debtors account. The account will be treated in the same
manner as the provision for doubtful debts.
10.11 Manager’s Commission

The manager of the business is sometimes given the commission on the net
profit of the company. The percentage of the commission is applied on the
profit either before charging such commission or after charging such commission.
In the absence of any such information, it is assumed that commission is
allowed as a percentage of the net profit before charging such commission.
Suppose the net profit of a business is Rs. 110 before charging commission.
If the manager is entitled to 10% of the profit before charging such commission,
the commission will be calculated as :
= Rs. 110 × 10/100
= Rs. 11
390 Accountancy
In case the commission is 10% of the profit after charging such commission,
it will be calculated as :
= Profit before commission × Rate of commission/ (100 + commission)
10
= Rs. 110 × = Rs. 10.
110
The managers commission will be adjusted in the books of account by

recording the following entry :
Profit and loss A/c Dr.
To Manager’s commission A/c
Let us recall our example and assume that Ankit’s manager is entitled to a
commission @ 10%. Observe the following profit and loss account if it is based
on :
(i) amount of net profit before charging such commission
(ii) amount of profit after charging such commission.
(i) Trading and Profit and Loss Account of Ankit

Dr. Cr.

Rs. Rs.

1,40,000 1,40,000
Salaries 25,000 Gross profit 56,500

Depreciation – Furniture 1,500 commission
Bad debts 4,500
Provision for discount on debtors 227
Manager’s commission 2,062
63,000 63,000
Rs. Rs.
Less Further bad debts(2,500)
13,000
Less Provision for bad
Current Liabilities and Provisions and doubtful (650)
Creditors 15,000 debts 12,350
Less Provision for
discount on debtors (227) 12,123
Outstanding wages 500 Prepaid salary 5,000
Rent received in advance 3,000 Accrued commission 1,500
Bank 5,000
Cash 4,000
Manager’s commission 2,062 Closing stock 15,000
outstanding
56,123 56,123
(ii) Trading and Profit and Loss Account of Ankit

Dr. Cr.
Rs. Rs.
1,40,000 1,40,000
Depreciation–Furniture 1,500 commission
Bad debts 4,500
Provision for bad and
doubtful debts 650
Provision for discount on
debtors 227
Manager’s commission 1,875
Net profit (transferred to
Ankit’s capital account) 18,748
63,000 63,000
392 Accountancy

Rs. Rs.
Non-Current Liabilities
Long-term loan 5,000 Current Assets
Debtors 15,500
Less Further bad debts (2,500)
13,000
Less Provision
for bad & doubtful (650)
debts 12,350
Less Provision for
Current Liabilities and Provisions discount on debtors(227) 12,123
Creditors 15,000 Prepaid salary 5,000
Outstanding wages 500 Accrued commission 1,500
Bank 5,000
Manager commission
outstanding 1,875 Closing stock 15,000
56,123 56,123
10.12 Interest on Capital

Sometimes, the proprietor may like to know the profit made by the business
after providing for interest on capital. In such a situation, interest is calculated
at a given rate of interest on capital as at the beginning of the accounting
year. If however, any additional capital is brought during the year, the interest
may also be computed on such amount from the date on which it was brought
into the business. Such interest is treated as expense for the business and
the following journal entry is recorded in the books of account:
Interest on capital A/c Dr.
To Capital A/c
In the final accounts, it is shown as an expense on the debit side of the
profit and loss account and added to capital in the balance sheet.
Let us assume, Ankit decides to provide 5% interest on his capital. This
shall amount to Rs. 600 for which the following journal entry will be recorded:
Interest on capital A/c Dr. 600
To Capital A/c 600
This implies that net profit shall be reduced by Rs. 600. As a result, the
reduced amount of profit shall be added to the capital in the balance sheet.
But, when interest on capital shall be added to the capital, this effect shall be
neutralised. As shown below :
Rs.
Capital 12,000
Add Profit 17,961
29,961
Add Interest on capital 600
30,561
Test Your Understanding
Tick the correct answer :

1. Rahul’s trial balance provide you the following information :
Debtors Rs. 80,000
Bad debts Rs. 2,000
Provision for bad debts Rs. 4,000
It is desired to maintain a provision for bad debts of Rs. 1,000
State the amount to be debited/credited in profit and loss account :
(a) Rs. 5,000 (Debit) (b) Rs. 3,000 (Debit)
(c) Rs. 1,000 (Credit) (d) none of these.
2. If the rent of one month is still to be paid the adjustment entry will be :
(a) Debit outstanding rent account and Credit rent account
(b) Debit profit and loss account and Credit rent account
(c) Debit rent account and Credit profit and loss account
(d) Debit rent account and Credit outstanding rent account.
3. If the rent received in advance Rs. 2,000. The adjustment entry will be :
(a) Debit profit and loss account and Credit rent account
(b) Debit rent account Credit rent received in advance account
(c) Debit rent received in advance account and Credit rent account
(d) None of these.
4. If the opening capital is Rs. 50,000 as on April 01, 2005 and additional capital
introduced Rs. 10,000 on January 01, 2006. Interest charge on capital 10% p.a.
The amount of interest on capital shown in profit and loss account as on March 31,
2005 will be :
(a) Rs. 5,250 (b) Rs. 6,000
(c) Rs. 4,000 (d) Rs, 3,000.
5. If the insurance premium paid Rs. 1,000 and pre-paid insurance Rs. 300. The amount
of insurance premium shown in profit and loss account will be :
(a) Rs. 1,300 (b) Rs. 1,000
(c) Rs. 300 (d) Rs. 700.
394 Accountancy
Adjustment Adjustment Entry Treatment in Trading Treatment in

and Profit and Loss Balance Sheet
Account
1. Closing stock Closing stock A/c Dr. Shown on the credit Shown on the
To Trading A/c assets side and profit assets side
and loss account
2. Outstanding Expense A/c Dr. Added to the Shown on the

expenses To outstanding respective expense liabilities side
expense A/c on the debit side
3. Prepaid/ Prepaid expense A/c Dr. Deducted from the Shown on the
Unexpired To Expenses A/c respective expense on assets side
expenses the debit side
4. Income earned Accured income A/c Dr. Added to the Shown on the
but not received To Income A/c respective income assets side
on the credit side
5. Income received Income A/c Dr. Deducted from the Shown on the
in advance To Income received respective income liabilities
in advence A/c on the credit side sides
6. Depreciation Depreciaton A/c Dr. Shown on the debit Deducted from

To Assets A/c side the value of
asset
7. Provision for Profit and Loss A/c Dr. Shown on the debit Shown as
bad and To Provision for side deduction
doubtful debts doubtful debts from debtors
8. Provision for Profit and Loss A/c Dr. Shown on the debit Shown as
discount on To Provision for side deductoin
debtors discount debtors form debtors
9. Manager’s Manager’s Dr. Shown on the debit Shown on the

commission commission A/c side liabilities side
To outstanding
commission A/c
10. Interest on Interest on capital A/c Dr. Shown on the debit Shown as
capital To capital A/c side addition to
capital
11. Further bad Bad debts A/c Dr. Shown on the debit Deducted from
debts To Sundry Debtors A/c side debtors
Fig. 10.2 : Showing treatment of various types of adjustments

Illustration 1
From the following balances, prepare the trading and profit and loss account and balance
sheet as on March 31, 2005.
Debit Balances Amount Credit Balances Amount
Rs. Rs.
Drawings 6,300 Capital 1,50,000
Cash at bank 13,870 Discount received 2,980
Bills receivable 1,860 Loans 15,000
Loan and Building 42,580 Purchases return 1,450
Furniture 5,130 Sales 2,81,500
Discount allowed 3,960 Reserve for bad debts 4,650
Bank charges 100 Creditors 18,670
Salaries 6,420
Purchases 1,99,080
Stock (opening) 60,220
Sales return 1,870
Carriage 5,170
Rent and Taxes 7,680
Plant and Machinery 31,640
Book debts 82,740
Bad debts 1,250
Insurance 750
4,74,250 4,74,250
Adjustments
1. Closing stock Rs. 70,000
2. Create a reserve for bad and doubtful debts @ 10% on book debts
3. Insurance prepaid Rs. 50
4. Rent outstanding Rs. 150
5. Interest on loan is due @ 6% p.a.
Solution
Dr. Cr.
Rs. Rs.
Purchase 1,99,080 Less : Sales return (1,870) 2,79,630
Less Purchases return (1,450) 1,97,630 Closing stock 70,000
Carriage 5,170
3,49,630 3,49,630
396 Accountancy
Discount allowed 3,960 Gross profit b/d 86,610

Bank charges 100 Discount received 2,980
Salaries 6,420
Add Rent outstanding 150 7,830
Insurance 750
Less Insurance prepaid (50) 700
Bad debts 1,250
Add New provision 8,274
for bad debts 9,524
Less Old provision (4,650)
for bad debts 4,874
Interest on loan outstanding 900
capital account)
89,590 89,590

Rs. Rs.
Creditors 18,670 Cash at bank 13,870

Loan 15,000
Add Interest on loan 900 15,900 Book debts 82,740
outstanding
Rent outstanding 150 Less Reserve (8,274) 74,466
for bad debts
Capital 1,50,000 Bills receivable 1,860
Add Net profit 61,176 Land and Building 42,580
2,11,176 Furniture 5,130
Less Drawings (6,300) 2,04,876 Plant and Machinery 31,640
Insurance (prepaid) 50
2,39,596 2,39,596
Illustration 2
The following were the balances extracted from the books of Yogita as on March 31, 2005
:

Rs. Rs.
Cash in hand 540 Sales 98,780

Cash at bank 2,630 Return outwards 500
Purchases 40,675 Capital 62,000
Return inwards 680 Sundry creditors 6,300
Wages 8,480 Rent 9,000
Fuel and Power 4,730
Carriage on sales 3200
Carriage on purchases 2040
Opening stock 5,760
Building 32,000
Freehold land 10,000
Machinery 20,000
Salaries 15,000
Patents 7,500
Insurance 600
Drawings 5,245
Taking into account the following adjustments prepare trading and profit and loss account
and balance sheet as on March 31, 2005 :
(a) Stock in hand on March 31, 2005,was Rs. 6,800.
(b) Machinery is to be depreciated at the rate of 10% and patents @ 20%.
(c) Salaries for the month of March, 2005 amounting to Rs. 1,500 were outstanding.
(d) Insurance includes a premium of Rs. 170 on a policy expiring on September 30,
2006.
(e) Further bad debts are Rs. 725. Create a provision @ 5% on debtors.
398 Accountancy
(f) Rent receivable Rs. 1,000.
Solution:
Books of Yogita
Dr. Cr.
Rs. Rs.
Opening stock 5,760
Purchases 40,675 Sales 98,780
Less Return outwards (500) 40,175 Less Return inwards (680) 98,100
1,04,900 1,04,900
Add Outstanding salaries 1,500 16,500 Rent 9,000
Carriage 3,200 Add Accrued rent 1,000 10,000
Insurance 600
Less Prepaid insurance (85) 515
Further bad debts 725
Add Provision for bad debts 689 1,414
Depreciation : machinery 2,000
Patent 1,500 3,500
Net profit 25,586
53,715 53,715

Dr. Cr.
Rs. Rs.
Sundry creditors 6,300 Cash in hand 540
Cash in bank 2,630
Salaries outstanding 1,500 Sundry debtors 14,500
Capital 62,000 Less Further (725)
bad debts 13,775
Less Provision (689) 13,086
for bad debts
Add Net profit 25,586 Insurance prepaid 85
87,586 Stock 6,800
Rent accrued 1,000
Less Drawings (5,245) 82,341 Freehold land 10,000
Building 32,000
Machinery 20,000
Less Depreciation (2,000) 18,000
Patents 7,500
90,141 90,141
Illustration 3
The following balances were extracted from the books of Shri R. Lal on March 31, 2005

Rs. Rs.
Capital 1,00,000 Rent (Cr.) 2,100

Drawings 17,600 Railway freight on sales 16,940
Purchases 80,000 Carriage inwards 2,310
Sales 1,40,370 Office expenses 1,340
Purchases return 2,820 Printing and Stationery 660
Stock on April 01, 2004 11,460 Postage and Telegram 820
Bad debts 1,400 Sundry debtors 62,070

Bad debts reserve 3,240 Sundry creditors 18,920
April 01, 2004
Cash in bank 12,400
Rates and Insurance 1,300 Cash in hand 2,210
Discount (Cr.) 190 Office furniture 3,500
Bills receivable 1,240 Salaries and Commission 9,870
Sales returns 4,240 Addition to buildings 7,000
Wages 6,280
Buildings 25,000
Prepare the trading and profit and loss account and a balance sheet as on March 31,
2005 after keeping in view the following adjustments :
(i) Depreciate old building by Rs. 625 and addition to building at 2% and office furniture
at 5%.
(ii) Write-off further bad debts Rs. 570.
(iii) Increase the bad debts reserve to 6% of debtors.
(iv) On March 31, 2005 Rs. 570 are outstanding for salary.
(v) Rent receivable Rs. 200 on March 31, 2005.
(vi) Interest on capital at 5% to be charged.
(vii) Unexpired insurance Rs. 240.
(viii) Stock was valued at Rs. 14,290 on March 31, 2005.
400 Accountancy
Solution
Books of Shri R. Lal
Dr. Cr.

Rs. Rs.

Purchases 80,000 Less Sales Return (4,240) 1,36,130
Less Purchase return (2,820) 77,180
1,50,420 1,50,420
Railway freight on sales 16,940 Gross profit c/d 53,190

Rent 2,100
Office expenses 1,340 Add Accrued rent 200 2,300
Postage and Telegram 820 Discount 190
Printing and Stationery 660
Salary and Commission 9,870
Add Outstanding salary 570 10,440
Rates and Insurance 1,300
Less unexpired insurance (240) 1,060
Bad debts 1,400
Add Further bad debts 570
Add New bad debts 3,690
provision 5660
Less Old provision (3,240) 2,420
for bad debts
Interest on capital 5,000
Depreciation on building 625
Depreciation on addition 140
to building
Depreciation on furniture 175
capital account)
55,680 55,680
Rs. Rs.
Sundry creditors 18,920 Cash at bank 12,400
Outstanding salaries 570 Cash in hand 2,210
Capital 1,00,000 Bills receivable 1,240
Add Net profit 16,060
Add Interest on capital 5,000
1,21,060 Debtors 62,070
Less Further bad debts (570)
Less Drawings (17,600) 1,03,460 61,500
Less New provision (3,690) 57,810
for bad debts
Accrued rent 200
Unexpired insurance 240
Building 25,000
Less Depreciation (625) 24,375
Addition to building 7,000
Office furniture 3,500
1,22,950 1,22,950
Illustration 4
Prepare the trading profit and loss account of M/s Mohit Traders as on 31 March
2006 and draw necessary Journal entries and balance sheet as on that date :

Rs. Rs.
Purchases 1,60,000 Return outwards 2,000
Cash in hand 16,000 Capital 1,50,000
Cash at bank 32,000 Creditors 64,000
Return inwards 4,000 Bills payable 20,000
Wages 22,000 Commission received 4,000
Insurance 8,000
Buildings 1,00,000
Plant 80,000
Patents 30,000
Salaries 28,000
Furniture 12,000
Drawings 18,000
Rent 2,000
Debtors 80,000
6,40,000 6,40,000
402 Accountancy
Adjustments
Rs.
(a) Salaries outstanding 12,000
(b) Wages outstanding 6,000
(c) Commission is accrued 2,400
(d) Depreciation on building 5% and plant 3%
(e) Insurance paid in advance 700
(f) Closing stock 12,000
Solution
Books of Mohit Traders
Journal

Amount Amount
Rs. Rs.
2005
March 31 Salary A/c Dr. 12,000
Wages A/c Dr. 6,000
To Salary outstanding A/c 12,000
To Wages outstanding A/c 6,000
(Amount of salary and wages outstanding
as on March 31, 2006)
March 31 Prepaid Insurance A/c Dr. 1,400

To Insurance A/c 1,400
(Insurance paid in advance]
March 31 Commission accrued A/c Dr. 2,400

(Commission accrued but not received)
March 31 Depreciation A/c Dr. 7,400

To Building A/c 5,000
To Plant A/c 2,400
(Depreciation charged on plant and building)
March 31 Profit and Loss A/c Dr. 1,23,700

(Profit transferred to capital account)
Books of Mohit Traders

Dr. Cr.
Expenses /Losses Amount Revenue/Gains Amount
Rs. Rs.
Purchases 1,60,000 Less Returns (4,000) 3,96,000
Less returns (2,000) 1,58,000 Closing stock 12,000
Wages 22,000
Add Outstanding wages 6,000 28,000
4,08,000 4,08,000
Salary 28,000 Gross Profit b/d 1,74,000

Add Outstanding salary 12,000 40,000 Commission received(4,000)
Insurances 8,000 Add Accrued 2,400 6,400
Less Prepaid (700) 7,300 commission
Rent 2,000
Depreciation on building 5,000
Plants 2,400
Net Profit (transferred to capital 1,23,700
account)
1,80,400 1,80,400

Rs. Rs.
Creditors 64,000 Cash in hand 16,000
Bills payable 20,000 Cash at bank 32,000
Capital 1,50.000 Building 95,000
Add Net profit 1,23,700 Plant 77,600
2,73,700 Patents 30,000
Less Drawings (18,000) 2,55,700 Debtors 80,000
Outstanding salaries 12,000 Insurance prepaid 700
Outstanding wages 6,000 Commission accrued 2,400
Furniture 12,000
3,57,700 3,57,700
404 Accountancy
Illustration 5
The following information has been extracted from the trial balance of M/s Randhir
Transport Corporation.

Rs. Rs.

Rent 2,000 Creditors 50,000
Plant and Machinery 1,20,000 Bills payable 50,000
Land and Buildings 2,55,000 Loan 1,10,000
Power 3,500 Discount 1,500
Sales return 2,500 Provision for bad debts 1,000
Telegram and Postage 400 General reserves 50,000
Wages 4,500
Salary 2,500
Insurance 3,200
Discount 1,000
Repair and Renewals 2,000
Legal charges 700
Trade taxes 1,200
Debtors 75,000
Investment 65,000
Bad debts 2,000
Trade expenses 4,500
Commission 1,250
Drawings 20,020
6,82,500 6,82,500
Adjustments
1. Closing stock for the year was Rs. 35,500.
2. Depreciation charged on plant and machinery 5% and land and building 6%.
3. Interest on drawing @ 6% and Interest on loan @ 5%.
4. Interest on investments @ 4%.
5. Further bad debts 2,500 and make provision for bad debts on debtors 5%.
6. Discount on debtors @ 2%.
7. Salary outstanding Rs. 200.
8. Wages outstanding Rs. 100.
9. Insurance prepaid Rs. 500.
You are required to make trading and profit and loss account and a balance sheet on
March 31, 2005.
Solution
Books of Randhir Transport Corporation
Expenses/Losses Amount Revenue/Gains Amount

Rs. Rs.

Purchases 75,000 Less Sales return (2,500) 1,47,500
Power 3,500
1,83,000 1,83,000
Rent 2,000 Gross profit b/d 59,900

Telegram and Postage 400 Outstanding interest 2,600
on investment
Salary 2,500 Discount 1,500
Add Outstanding salary 200 2,700 Interest on drawings 1,200
Insurance 3,200
Less Prepaid (500) 2,700
Discount 1,000
Repair and Renewals 2,000
Legal charges 700
Trade taxes 1,200
Outstanding interest on loan 5,500
Commission 1,250
Discount on debtors 1,450
Depreciation on Plant and 6,000
Machinery
Depreciation on Land and 15,300
Building
Bad debts 2,000
Add Further bad debts 2,500
8,053
Net Profit (transferred to 10,217
capital account)
65,200 65,200
406 Accountancy
Rs. Rs.
Bills payable 50,000 Less Further (2,500)
Loan 1,10,000 bad debts 72,500
Add Outstanding interest 5,500 1,15,500 Less Discount (1,450)
General reserve 50,000 71,050
Capital 2,70,000 Less New Provision (3,553) 67,497
Add Net Profit 10,217 Investment 65,000
2,80,217 Outstanding interest 2,600
on investment
Less Drawings (20,020) Insurance pre-paid 500
2,60,197
Less Interest on drawings 1,200 2,58,997 Plant and Machinery 1,14,000
Outstanding salary 200 Land and Building 2,39,700
Outstanding wages 100 Closing stock 35,500
5,24,797 5,24,797
Illustration 6
From the following balances of M/s Keshav Bros. You are required to prepare trading and
profit and loss account and a balance sheet of March 31, 2005.
Rs. Rs.
Plant and Machinery 1,30,000 Sales 3,00,000
Debtors 50,000 Return outwards 2,500
Interest 2,000 Creditors 2,50,000
Wages 1,200 Bills payable 70,000
Salary 2,500 Provision for bad debts 1,550
Carriage inwards 500 Capital 2,20,000
Carriage outwards 700 Rent received 10,380
Return inwards 2,000 Commission received 16,000
Factory rent 1,450
Office rent 2,300
Insurance 780
Furniture 22,500
Buildings 2,80,000
Cash in hand 22,500
Cash at bank 35,000
Commission 500
Purchases 2,50,000
Bad debts 3,500
8,70,430 8,70,430
Adjustment
(i) Provision for bad debts @ 5% and further bad debts Rs. 2,000.
(ii) Rent received in advance Rs. 6,000.
(iii) Prepaid insurance Rs. 200.
(iv) Depreciation on furniture @ 5%, plant and machinery @ 6%, building @ 7%.
Solution
Books of Keshav Bros.

Dr. Cr.
Rs. Rs.

Purchases 2,50,000 Less Return (2,000) 2,98,000
Less Returns (2,500) 2,47,500 Closing stock 70,000
Wages 1,200
Carriage inwards 500
Factory rent 1,450
3,68,000 3,68,000
Interest 2,000 Gross profit b/d 57,350

Salary 2,500 Rent received 10,380
Carriage outwards 700 Less Advance rent (6,000) 4,380
Office Rent 2,300 Commission received 16,000
Insurance 780
Less Prepaid insurance (200) 580
Depreciation on furniture 1,125
Depreciation on Plant and 7,800
Machinery
Depreciation on building 19,600
Commission 500
Bad debts 3,500
Add Further bad debts 2,000
7,900
Net Profit (transferred to 34,275
capital account)
77,730 77,730
408 Accountancy
Liabilities Amount Liabilities Amount

Rs. Rs.
Creditors 2,50,000 Cash In hand 22,500

Advance rent 6,000 Bills receivable 3,000
Capital 2,20,000
Add Net profit 34,275 2,54,275 Prepaid insurance 200
Debtors 50,000
Less Further (2,000)
bad debts 48,000
Less New provision (2400) 45,600
Furniture 21,375
Buildings 2,60,400
5,80,275 5,80,275
Illustration 7
The following information have been taken from the trial balance of M/s Fair Brothers Ltd.
You are required to prepare the trading and profit and loss account and a balance sheet as
at March 31, 2006.
Debit Balances Amount Credit balances Amount

Rs. Rs.
Cash 20,000 Sales 3,61,000

Wages 45,050 Loan 12% (1.7.2005) 40,000
Return outwards 4,800 Discount received 1,060
Bad debts 4,620 Return (Purchase) 390
Salaries 16,000 Creditors 60,610
Octroi 1,000 Capital 75,000
Charity 250
Machinery 32,000
Debtors (Including a 60,000
dishonoured bill of Rs.1,600)
Stock 81,600
Purchases 2,60,590
Repairs 3,350
Sales tax 1,600
Insurance 2,000
Rent 4,000
5,38,060 5,38,060
Adjustments
1. Wages include Rs. 4,000 for erection of new machinery on April 01, 2005.
2. Provide 5% depreciation on furniture.
3. Salaried unpaid Rs.1,600.
4. Closing stock Rs. 81,850.
5. Create a provision at 5% on debtors.
6. Half the amount of bill is recoverable.
7. Rent is paid up to July 30, 2006.
8. Insurance unexpired Rs. 600.
Books of Fair Brothers Ltd.

Dr. Cr.
Rs. Rs.
Purchases 2,60,590 Less Sales return (4,800) 3,56,200
Less Purchases return (390) 2,60,200 Closing stock 81,850
Wages 45,050
Less Prepaid wages (4,000) 41,050
including erection of
machines
Octroi 1,000
4,38,050 4,38,050

Add Outstanding salary 1,600 17,600 Discount received 1,060
Repairs 3,350
Bad debts 4,620
Add New provision 2,960 8,380
Add Outstanding interest 2,400 3,600
Sales tax 1,600
Insurance 2,000
Less Prepaid insurance (600) 1,400
Charity 250
Rent 4,000
Less Prepaid rent 1,000 3,000
Depreciation on machinery 1,800
capital account)
55,260 55,260
410 Accountancy

Rs. Rs.
Outstanding salaries 1,600 Debtors 60,000
Loan 40,000 Less Bad debts (800)
Outstanding interest 2,400 Less Provision 2,960 56,240
Capital 75,000 Prepaid rent 1,000
Add Net profit 14,280 89,280 Unexpired insurance 600
Machinery 32,000
Add Erection 4,000
Wages 36,000
1,93,890 1,93,890
Illustration 8
From the following balance extracted from the books of of M/s Hariharan Brother, you are
require to prepare the trading and profit and loss account and a balance sheet as on December
31, 2005.
Debit balance Amount Credit balance Amount
Rs. Rs.
Return inwards 3,000 Return outwards 800
Carriage inwards 2,400 Apprenticeship premium 3,000
Carriage outwards 5,000 Bills payable 5,000
Wages 6,600 Creditors 31,600
Salaries 11,000
Rent 2,200
Freight and Dock 4,800
Fire Insurance premium 1,800
Bad debts 4,200
Discount 1,000
Printing and Stationery 500
Rates and Taxes 700
Trade expenses 400
Business premises 1,10,000
Furniture 5,000
Debtors 40,000
Machine 9,000
Loan 10,000
Investment 6,000
Cash in hand 500
Cash at bank 7,000
Proprietor’s withdrawals 6,000
3,00,400 3,00,400
Adjustments
2. Wages outstanding Rs. 600, Salaries Outstanding Rs. 1,000, Rent outstanding Rs. 200.
3. Fire Insurance premium includes Rs. 1,200 paid in July 01, 2005 to run for one year
from July 01, 2005 to June 30, 2006.
4. Apprenticeship Premium is for three years paid in advance on January 01, 2005.
5. Stationery bill for Rs. 60 remain unpaid.
6. Depreciation on Premises @ 5%, furniture @ 10%, Machinery @ 10%.
7. Interest on loan given accrued for one year @ 7%.
8. Interest on investment @ 5% for half year to December 31, 2005 has accrued.
9. Interest on capital to be allowed at 5% for one year.
10. Interest on drawings to be charged to him ascertained for the year Rs. 160.
Solution
Books of Hariharan Bros.
Trading and Profit and Loss Account for the year ended December 31, 2005
Dr. Cr.
Rs. Rs.
Purchases 40,000 Less Sales return (3,000) 1,57,000
Less purchases return (800) 39,200 Closing stock 14,000
Wages 6,600
Add Outstanding Wages 600 7,200
Freight and Dock 4,800
1,71,000 1,71,000
Salaries 11,000 Gross profit b/d 1,01,400
Add Outstanding salary 1,000 12,000 Apprenticeship 3,000
Carriage outwords 5,000 premium
Rates and Taxes 700 Less Advance premium (2,000) 1,000
Printing and Stationery 500 Accrued interest on loan 700
Add Outstanding bill 60 560 Interest on drawings 160
Trade expenses 400 Accrued interest on 150
Travelling expenses 300 investment
Fire insurance 1,800
Bad debts 4,200
Rent 2,200
Add Outstanding rent 200 2,400
Interest on capital 5,000
Depreciation on Premises 5,500
Depreciation on machinery 900
Discount 1,000
capital account)
1,03,410 1,03,410
412 Accountancy
Balance Sheet as at December 31, 2005

Rs. Rs.
Capital 1,00,000 Premises 1,10,000
Add Interest on capital 5,000 Less Depreciation (5,500) 1,04,500
1,68,750 Furniture 4,500
Less drawings (6,000)
1,62,750 Machinery 8,100
Less Interest on drawings (160) 1,62,590
Bills payable 5,000 Bills receivable 7,000
Outstanding wages 600 Cash in hand 500
Outstanding salaries 1,000 Cash at bank 7,000
Outstanding rent 200 Loan 10,000
Outstanding stationery 60 Add accrued interest 700 10,700
Apprenticeship premium (advance) 2,000 Investments 6,000
Add accrued interest 150 6,150
Pre-paid insurance 600
2,03,050 2,03,050
Illustration 9
The following balances have been extracted from the trial balance of M/s Kolkata Ltd. You
are required to prepare the trading and profit and loss account on dated March 31, 2006.
Also prepare balance sheet on that date.
Rs. Rs.
Opening stock 6,000 Capital 20,000
Furniture 1,200 Sales 41,300
Drawings 2,800 Purchases return 4,000
Cash in hand 3,000 Bank overdraft 4,000
Purchases 24,000 Bad debts provision 400
Sales return 2,000 Creditors 5,000
Establishment expenses 4,400 Commission 100
Bad debts 1,000 Bills payable 5,000
Debtors 10,000 Apprenticeship premium 500
Carriage 1,000
Bank deposits 8,000
Wages 1,000
Trade expenses 500
Bank charges 400
Salaries 2,000
Insurance 1,500
Postage and Telegram 500
Rent, Rates and Taxes 2,000
Coal, Gas, Water 2,000
80,300 80,300
Adjustments
1. Outstanding salaries Rs. 100. Rent and taxes Rs. 200, Wages Rs. 100.
2. Unexpired insurance Rs. 500.
3. Commission is received in advances Rs. 50.
4. Interest Rs. 500 is to be received on bank deposits.
5. Interest on bank overdraft Rs. 750.
6. Depreciation on furniture @ 10%.
8. Further bad debts Rs. 200 New provision @ 5% on debtors.
9. Apprenticeship premium received in advance Rs. 100.
10. Interest on drawings @ 6%.
Solution
Books of Kolkata Ltd.
Trading and Profit and Loss Account for the year ended as at March 31, 2006
Dr. Cr.
Expenses /Losses Amount Revenue/Gains Amount
Rs. Rs.
Opening stock 6,000 Sales 41300
Purchases 24,000 Less sales return (2,000) 39,300
Less purchases return (4,000) 20,000 Closing stock 9,000
Wages 1,000
Coal, Gas, Water 2,000
48,300 48,300
Establishment expenses 4,400 Gross profit b/d 19,200
Carriage 1,000 Commission 100
Trade expenses 500 Less Advance commission (50) 50
Bank charges 400 Accrued interest on 500
deposits
General expenses 1,000 Apprenticeship premium 500
Salaries 2,000 Less Advance received 100 400
Add Outstanding salary 100 2,100 Interest on drawings 168
Insurance 1,500
Postage and Telegram 500
Rent, rates and Taxes 2,200
Interest on bank overdraft 750
Bad debts 1,000
Add New provision 490
1,690
Less Old provision (400) 1,290
capital account)
20,318 20,318
414 Accountancy

Rs. Rs.
Capital 2,00,00 Insurance prepaid 500
Net profit 5,058 Bank deposits 8,000
25,058
Less Drawings (2,800) Add outstanding interest 500 8,500
22,258
Less Interest on drawings (168) 22,090 Furniture 1,080
Creditors 5,000 Cash in hand 3,000
Commission received in advance 50 Debtors 10,000
Apprenticeship premium 100 Less Further (200)
bad debts 9,800
Outstanding wages 100 Less Provision for (490) 9,310
bad debts
Outstanding salaries 100 Bills receivable 6,000
Outstanding rent, 200
rates, taxes Closing stock 9,000
Add Outstanding interest 750 4,750
Bills payable 5,000
37,390 37,390
Illustration 10
Prepare the trading and profit and loss account of M/s Roni Plastic Ltd. from the following
trial balance and a balance sheet as at March 31, 2006.
Rs. Rs.
Drawings 6,000 Creditors 16,802
Sundry debtors 38,200 Capital 60,000
Carriage outwards 2,808 Loan on mortgage 17,000
Establishment expenses 16,194 Bad debts provision 1,420
Interest on loan 400 Sales 2,22,486
Cash in hand 6,100 Purchases return 2,692
Stock 11,678 Discount 880
Motor car 18,000 Bills payable 5,428
Cash at bank 9,110 Rent received 500
Land and Buildings 24,000
Bad debts 1,250
Purchases 1,34,916
Sales return 15,642
Advertisement 4,528
Carriage inward 7,858
Rates, taxes, insurance 7,782
3,27,208 3,27,208
Adjustments
1. Depreciation on land and building at @ 5% and Motor vehicle at @ 15%.
2. Interest on loan is @ 5% taken on April 01, 2005.
3. Goods costing Rs1,200 were sent to a customer on sale on return basis for Rs. 1,400
on March 30, 2006 and has been recorded in the books as actual sales.
4. Salaries amounting to Rs. 1,400 and Rates amounting to Rs. 800 are due.
5. The bad debts provision is to be brought up to @ 5% on sundry debtors.
6. Closing stock was Rs. 13,700.
7. Goods costing Rs. 1,000 were taken away by the proprietor for his personal use but
not entry has been made in the books of account.
8. Insurance pre-paid Rs. 350.
9. Provide the manager’s commission at @ 5% on Net profit after charging such commission.
Solution
Books of Roni’s Plastic Ltd.
Trading and Profit and Loss Account for the year ended March 31, 2006
Dr. Cr.
Rs. Rs.
Purchases 1,34,916 Less Sales 15,642
return 2,06,844
Less Purchases return 2,692 Less Return basis (1,400) 2,05,444
1,32,224
Less Goods withdrawn (1,000) 1,31,224 Closing stock 13,700
2,19,144 2,19,144
Outstanding salaries 1,400 Gross profit b/d 68,384
Carriage outwards 2,808 Discount 880
Establishment expenses 16,194 Rent 500
Bad debts 1,250
3,090
Rates and Taxes 7,782
Less Prepaid (350)
7,432
Advertisement 4,528
Interest on loan 400
Add Outstanding Interest 450 850
Depreciation on :
Land and Building 1,200
Motor car 2,700 3,900
Manager commission 1,010
capital account) 69,764 69,764
416 Accountancy

Rs. Rs.
Capital 60,000 Cash in hand 6,100

80,194 Cash at bank 9,110
Less Drawings (6,000)
(74,194) Bills receivable 13,764
Less Goods withdrawn 1,000 73,194 Debtors 38,200
loan 17,000 Less sales (1,400)
return basis 36,800
Add interest 450 17,450 Less New provisions (1,840) 34,960
Bills payable 5,428 Land and Building 24,000
Creditors 16,802 Motor car 18,000
Outstanding Salaries 1,400 Prepaid insurance 350
Outstanding Rates Taxes 800 Closing stock 13,700
Manager commission 1,010
1,16,084 1,16,084
10.13 Methods of Presenting the Financial Statements

The financial statements, i.e. trading and profit and loss account and balance
sheet can be presented in two ways:
(1) Horizontal form
(2) Vertical form
Under horizontal form of presentation, items are shown side by side in the
trading and profit and loss account and also in the balance sheet as we are
doing so far. This format is rather technical in nature and is not easily
comprehensible for many users. Hence, now-a-days, most firms present them
in a simpler and more intelligible form called a narrative style or vertical
presentation. Under vertical presentation, the final accounts are prepared in
a form of statement with different items being shown on below the other in a
purposeful sequence. Under vertical presentation, the trading and profit and
loss account will appear as shown in figure 10.3.
Income Statement for the period ended ......

Rs.
Sales (Gross) ...
Less Returns ... ...
Net sales
Cost of goods sold ...
Opening stock ...
Purchases ... ...
Less Returns ... ... ...
Carriage Inwards ...
Wages ...
Cost of goods available for sale ...
Less Closing stock ...
Gross Profit ...
Operaing Expenses
(a) Selling expenses
Advertising ...
Discount ...
Allowances ...
Bad debts and Provisions ...
Carriage outwards ...
Total selling expenses ...
(b) General and Administration expenses ...
Salaries ...
Rent and Rates ...
Insurance ...
Depreciation ...
Postage ...
Repairs ...
General expenses ... ...
Total operating expenses ... ...
Net Income from operations (Operating profit) ...
Other Income (Non-operating gains)
Interest earned ...
Commission earned ...
Profit on sale of fixed assets ... ...
Less Deductions (Non-operating expenses)
Interest paid ...
Loss by fire ...
Net non-operating gains ... ...
Net income (Net profit) ...
418 Accountancy
Under the vertical presentation, the Balance Sheet will appear as follows :
Balance Sheet as on ........

Rs.
Current Assets
Cash in hand ...
Cash at bank ...
Bills receivable ...
Accrued income ...
Debtors ...
Stock ...
Prepaid expenses ...
Total current assets ...
Less Current Liabilities
Bank overdraft
Outstanding expenses ...
Bills payable ...
Trade creditors ...
Income received in advance ...
Total current liabilities ... ...
Net working capital
(Current assets and Current liabilities) ...
Fixed Assets
Furniture and Fixtures
Patents ...
Plants and Machhinery ...
Building ...
Land ...
Goodwill ...
Total fixed assets ...
Total assets (After paying current liabilities) ...
Capital Employed ...
Long-term liabilities
Loan
Mortgage ...
Total long-term liabilities ...
Net assets (being the difference between
total assets and long-term liabilities) ...
Capital (Proprietor)
Capital in the begining ...
Add Capital introduced during the current year ...
Interest on capital, salary, etc. ...
Profit for the current year ...
Less Drawings during the current year ...
Interest on drawing ...
Loss for the current year ...
Total capital of the proprietor at the end of the year ...
Fig. 10.3 : Showing vertical presentation of financial statements

Illustration 11
From the following balances extracted from the books of M/s Rohit Traders, prepare the
profit and loss account and balance sheet in the vertical form as on March 31, 2006.

Rs. Rs.

Purchases 81,000 Return outwards 400
Debtors 28,000 Creditors 12,600
Discounts 2,000 Commission 5,000
Drawings 10,500 Sales 1,98,000
Insurance 1,200 Long-terms loan 12,000
Salaries 30,000
Investments 20,000
Motor car 15,000
Plants 40,000
Land and Building 80,000
Legal charges 3,200
Audit fee 3,200
Wages 10,960
Cash at bank 5,200
Cash in hand 2,000
Interest 2,000
Bad debts 1,320
3,68,000 3,68,000
Adjustments
Closing stock Rs. 4,000
Depreciation on Plant and Buildings @ 10%.
420 Accountancy
Solution
Books of Rohit Traders

Rs. Rs.
A Net Sales 1,98,000

Less Sales return [1,360] 1,96,640
B Cost of goods sold

Purchase 81,000
Less Purchases return (400) 80,600
Carriage Inwards 4,080
Wages 10,960
Cost of goods available for sale 1,16,620
Less Closing stock (4,000) 1,12,620
C Gross Profit {A-B} 84,020
D Operating expenses
(a) Administrative Expenses
Insurance 1,200
Salaries 30,000
Legal charges 3,200
Audit fee 3,200
Depreciation (Rs. 4,000 + Rs. 8,000) 12,000
49,600
(b) Selling and Distribution Expenses
Discount 2,000
Bad debts 1,320
Total operating expenses [a+b] 58,920
E Net operating profit [C-D] 25,100
F Non-operating incomes
Commission earned 5,000
Less Interest paid (2,000) 3,000
G Net profit transferred to capital account 28,100

Balance sheet of Rohit Traders as at March 31,2006

Rs. Rs.
Sources of firm’s funds
a Proprietors fund
Opening capital 1,40,000
1,68100
Less Drawings (10,500) 1,57,600
b Long -term loan 12,000
1,69,600
Application of Funds
(i) Cash In hand 2,000

Cash at bank 5,200
Closing stock 4,000
Debtors 28,000 39,200
(ii) Less Creditors 12,600 26,600
(a) Investments 20,000
(b) Fixed assets :
Motor car 15,000
Plants 36,000
Land and Buildings 72,000 1,23,000
1,69,600

• Outstanding /Accrued expenses • Prepaid/Unexpired expenses
• Accrued Incomes • Income received in advance
• Depreciation • Bad Debts
• Provision for doubtful debts • Provision for discount on debtors
• Managers commission • Interest on capital
• Horizontal form • Vertical form

1 Need for adjustments : For the preparation of financial statements, it is
necessary that all the adjustments arising out of the accrual basis of accounting
are made at the end of the accounting period. Another important consideration
in the preparation of final accounts with adjustments, is the distinction
between capital and revenue items. Entries which are recorded to give effect to
these adjustments are known as adjusting entries.
2 Outstanding expenses : At the end of the accounting period sometimes a business
enterprises is left with some unpaid expenses due to one reason or another.
Such expenses are termed as outstanding expenses.
422 Accountancy
3. Prepaid expenses : At the end of the accounting year, it is found that the
benefits of some expenses have not been fully received; a portion of total
benefits would be received in the next accounting year. That portion of the
expense, the benefit of which will be received during the next accounting
period is known as ‘prepaid expenses’.
4. Accrued Income : These are certain items is received by a business enterprise
but the whole amount of it does not belong to the next period. Such portion of
income which belongs to the next accounting period is income received in advance
and is known as “unearned income”.
5. Depreciation : Depreciation is the decline in the value of an asset an account of
wear and tear or passage of time or with. It actually amounts to writing off a
portion of the cost of an asset which has been used in the business for the
purpose of earning profits. In the balance sheet, the asset is shown at loss
minus the amount of depreciation.
6 Provisions for bad and doubtful debts : It is a normal feature of business
operations that some debts prove irrecoverable which means that the amount
to the realised from them becomes had to view of this. An attempt is made to
bring in a certain element of certainty in the amount in respect of bad debts
charged every year against incomes.

Short Answers
1. Why is it necessary to record the adjusting entries in the preparation of final
accounts?
2. What is meant by closing stock? Show its treatment in final accounts?
3. State the meaning of:
(a) Outstanding expenses
(b) Prepaid expenses
(c) Income received in advance
(d) Accrued income
4. Give the Performa of income statement and balance in vertical form.
5. Why is it necessary to create a provision for doubtful debts at the time of
preparation of final accounts?
6. What adjusting entries would you record for the following :
(a) Depreciation
(b) Discount on debtors
(c) Interest on capital
(d) Manager’s commission
7. What is meant by provision for discount on debtors?
8. Give the journal entries for the following adjustments :
(a) Outstanding salary Rs. 3,500.
(b) Rent unpaid for one month at Rs. 6,000 per annum.
(c) Insurance prepaid for a quarter at Rs. 16,000 per annum.
(d) Purchase of furniture costing Rs. 7,000 entered in the purchases book.
Long Answers
1. What are adjusting entries? Why are they necessary for preparing final
accounts?
2. What is meant by provision for doubtful debts? How are the relevant accounts
prepared and what journal entries are recorded in final accounts? How is the
amount for provision for doubtful debts calculated?
3. Show the treatment of prepaid expenses depreciation, closing stock at the
time of preparation of final accounts when:
(a) When given inside the trial balance?
(b) When given outside the trial balance?
Numerical Questions
1. Prepare a trading and profit and loss account for the year ending December
31, 2005. from the balances extracted of M/s Rahul Sons. Also prepare a
balance sheet at the end of the year.

Rs. Rs.
Stock 50,000 Sales 1,80,000

Wages 3,000 Purchases return 2,000
Salary 8,000 Discount received 500
Purchases 1,75,000 Provision for bad debts 2,500
Sales return 3,000 Capital 3,00,000
Sundry Debtors 82,000 Bills payable 22,000
Discount allowed 1,000 Commission received 4,000
Insurance 3,200 Rent 6,000
Rent Rates and Taxes 4,300 Loan 34,800
Fixtures and fittings 20,000
Bad debts 2,000
Drawings 32,000
Repair and renewals 1,600
Postage 300
Telegram expenses 200
Legal fees 500
Building 1,10,000
5,51,800 5,51,800
Adjustments
1. Commission received in advance Rs.1,000.
2. Rent receivable Rs. 2,000.
3. Salary outstanding Rs. 1,000 and insurance prepaid Rs. 800.
424 Accountancy
4. Further bad debts Rs. 1,000 and provision for bad debts @ 5% on debtors
and discount on debtors @ 2%.
6. Depreciation on building @ 6% p.a.
(Ans : Gross loss Rs.17,000 ; Net loss Rs.43,189 ; Total balance sheet
Rs.2,83,611)
2. Prepare a trading and profit and loss account of M/s Green Club Ltd. for the
year ending December 31, 2005. from the following figures taken from his
trial balance :

Rs. Rs.
Purchases 1,25,000 Purchase return 6,000
Return inwards 25,000 Creditors 10,000
Postage and Telegram 600 Bills payable 20,000
Salary 12,300 Discount 1,000
Wages 3,000 Provision for bad debts 4,500
Rent and Rates 1,000 Interest received 5,400
Packing and Transport 500 Capital 75,000
General expense 400
Insurance 4,000
Debtors 50,000
Cash in hand 20,000
Cash at bank 40,000
Machinery 20,000
Lighting and Heating 5,000
Discount 3,500
Bad debts 3,500
Investment 23,100
3,71,900 3,71,900
Adjustments
1. Depreciation charged on machinery @ 5% p.a.
2. Further bad debts Rs.1,500, discount on debtors @ 5% and make a
provision on debtors @ 6%.
3. Wages prepaid Rs.1,000.
4. Interest on investment @ 5% p.a.
5. Closing stock 10,000.
(Ans. : Gross Profit Rs.79.000 ; Net Profit Rs.52,565 ; Total Balance Sheet
Rs.1,57,565).
3 The following balances has been extracted from the trial of M/s Runway
Shine Ltd. Prepare a trading and profit and loss account and a balance sheet
as on December 31, 2005.

Rs. Rs.
Purchases 1,50,000 Sales 2,50,000

Opening stock 50,000 Return outwards 4,500
Return inwards 2,000 Interest received 3,500
Carriage inwards 4,500 Discount received 400
Cash in hand 77,800 Creditors 1,25,000
Cash at bank 60,800 Bill payable 6,040
Wages 2,400 Capital 1,00,000
Printing and Stationery 4,500
Discount 400
Bad debts 1,500
Insurance 2,500
Investment 32,000
Debtors 53,000
Postage and Telegraph 400
Commission 200
Interest 1,000
Repair 440
Lighting Charges 500
Telephone charges 100
Carriage outward 400
Motor car 25,000
4,89,440 4,89,440
Adjustments
1. Further bad debts Rs. 1,000. Discount on debtors Rs. 500 and make a
provision on debtors @ 5%.
2. Interest received on investment @ 5%.
3. Wages and interest outstanding Rs. 100 and Rs. 200 respectely.
4. Depreciation charged on motor car @ 5% p.a.
5. Closing Stock Rs. 32,500.
(Ans. : Gross profit Rs. 78,000 ; Net profit Rs. 66,060, Total balance sheet
Rs. 2,97,400)
426 Accountancy
4. The following balances have been extracted from the trial of M/s Haryana
Chemical Ltd. You are required to prepare a trading and profit and loss account
and balance sheet as on December 31, 2005 from the given information.

Rs. Rs.

Purchases 1,25,500 Purchases return 2,500
Sales return 2,000 Creditors 25,000
Cash in hand 21,200 Rent 5,000
Cash at bank 12,000 Interest 2,000
Carriage 100 Bills payable 1,71,700
Free hold land 3,20,000 Capital 3,00,000
Patents 1,20,000
General Expenses 2,000
Building 86,000
Machinery 34,500
Insurance 12,400
Drawings 10,000
Motor vehicle 10,500
Bad debts 2,000
Light and Water 1,200
Power 3,900
Salary and Wages 5,400
Loan a 15% (01.09.2005) 3,000
8,56,200 8,56,200
Adjustments
1. Closing stock was valued at the end of the year Rs. 40,000.
2. Salary amounting Rs. 500 and trade expense Rs. 300 are due.
3. Depreciation charged on building and machinery are @ 4% and @ 5%
respectively.
4. Make a provision of @ 5% on sundry debtors.
(Ans. : Gross profit Rs. 2,11,000 ; Net profit Rs.1,85,560 ; Total balance
sheet Rs.6,73,060)
5. From the following information prepare trading and profit and loss account
of M/s Indian sports house for the year ending December 31, 2005.

Rs. Rs.
Drawings 20,000 Capital 2,00,000

Sundry debtors 80,000 Return outwards 2,000
Bad debts 1,000 Bank overdraft 12,000
Trade Expenses 2,400 Provision for bad debts 4,000
Printing and Stationery 2,000 Sundry creditors 60,000
Rent Rates and Taxes 5,000 Bills payable 15,400
Feright 4,000 Sales 2,76,000
Purchases 1,80,000
Furniture and Fixture 20,000
Wages 10,000
Cash in hand 6,000
Investments 40,000
Motor car 51,000
5,69,400 5,69,400
Adjustments
1. Closing stock was Rs.45,000.
2. Provision for bad debts is to be maintained @ 2% on debtors.
3. Depreciation charged on : furniture and fixture @ 5%, plant and
Machinery @ 6% and motor car @ 10%.
4. A Machine of Rs.30,000 was purchased on July 01, 2005.
5. The manager is entitle to a commission of @ 10% of the net profit after
charging such commission.
(Ans. : Gross profit Rs.1,01,000 ; Net profit Rs.68,909 ; Total balance sheet
Rs. 3,43,200 ; Manager’s commission Rs.6,891)
428 Accountancy
6. Prepare the trading and profit and loss account and a balance sheet of M/s
Shine Ltd. from the following particulars.

Rs. Rs.
Sundry debtors 1,00,000 Bills payable 85,550

Bad debts 3,000 Sundry creditors 25,000
Trade expenses 2,500 Provision for bad debts 1,500
Printing and Stationary 5,000 Return outwards 4,500
Rent, Rates and Taxes 3,450 Capital 2,50,000
Freight 2,250 Discount received 3,500
Sales return 6,000 Interest received 11,260
Motor car 25,000 Sales 1,00,000
Furniture and Fixture 15,500
Purchases 75,000
Drawings 13,560
Investments 65,500
Cash in hand 36,000
Cash in bank 53,000
4,81,310 4,81,310
Adjustments
1. Closing stock was valued Rs. 35,000.

2. Depreciation charged on furniture and fixture @ 5%.
3. Further bad debts Rs. 1,000. Make a provision for bad debts @ 5% on
sundry debtors.
4. Depreciation charged on motor car @ 10%.
5. Interest on drawing @ 6%.
6. Rent, rates and taxes was outstanding Rs.200.
7. Discount on debtors 2%.
(Ans. : Gross loss Rs,17,050 ; Net loss Rs.27,344 ; Total balance sheet
Rs. 3,19,032).
7. Following balances have been extracted from the trial balance of M/s Keshav
Electronics Ltd. You are required to prepare the trading and profit and loss
account and a balance sheet as on December 31, 2005.

Rs. Rs.
Opening stock 2,26,000 Sales 6,80,000

Purchases 4,40,000 Return outwards 15,000
Drawings 75,000 Creditors 50,000
Buildings 1,00,000 Bills payable 63,700
Motor van 30,000 Interest receivced 20,000
Freight inwards 3,400 Capital 3,50,000
Sales return 10,000
Trade expense 3,300
Heat and Power 8,000
Salary and Wages 5,000
Legal expense 3,000
Postage and Telegram 1,000
Bad debts 6,500
Cash in hand 79,000
Cash at bank 98,000
Investments 40,000
Insurance 3,500
Machinery 22,000
11,78,700 11,78,700
The following additional information is available :

1. Stock on December 31, 2005 was Rs. 30,000.
2. Depreciation is to be charged on building at 5% and motor van at 10%.
3. Provision for doubtful debts is to be maintained at 5% on Sundry
Debtors.
4. Unexpired insurance was Rs. 600.
5. The Manager is entitled to a commissiion @ 5% on net profit before
charging such commission.
430 Accountancy
(Ans. : Gross profit Rs,37,600 ; Net profit Rs.25,381 ; Total balance sheet
Rs.4,15,350 ; Manager’s commission Rs.1,269)
8. From the following balances extracted from the books of Raga Ltd. prepare
a trading and profit and loss account for the year ended December 31, 2005
and a balance sheet as on that date.

Rs. Rs.
Drawings 20,000 Sales 2,20,000

Land and Buildings 12,000 Capital 1,01,110
Plant and Machinery 40,000 Discount 1,260
Carriage inwards 100 Apprentice premium 5,230
Wages 500 Bills payable 1,28,870
Salary 2,000 Purchases return 10,000
Sales return 200
Bank charges 200
purchases 1,50,000
Trade Expenses 3,800
Stock (Opening) 76,800
Cash at bank 50,000
Rates and Taxes 870
Cash in hand 30,000
4,66,470 4,66,470
The additional information is as under :

1. Closing stock was valued at the end of the year Rs, 20,000.
2. Depreciation on plant and machinery charged at 5% and land and
building at 10%.
3. Discount on debtors at 3%.
4. Make a provision at 5% on debtors for bad debts.
5. Salary outstanding was Rs.100 and Wages prepaid was Rs. 40.
6. The manager is entitled a commission of 5% on net profit after charging
such commission.
(Ans. : Gross profit Rs,21,240 ; Net profit Rs.12,664 ; Total balance sheet
Rs.2,23,377 ; Manager’s commission Rs.633)
9. From the following balances of M/s Jyoti Exports, prepare trading and
profit and loss account for the year ended March 31, 2006 and balance
sheet as on this date.

Amount Amount
Rs. Rs.
Sundry debtors 9,600 Sundry creditors 2,500

Purchases 34,800 Purchases returns 2,430
Carriage inwards 450 Bills payable 15,600
Wages 1,770 Capital 42,000
Office rent 820
Insurance 1,440
Factory rent 390
Cleaning charges 940
Salary 1,590
Building 24,000
Cash in hand 2,160
Gas and Water 240
Octroi 60
Furniture 20,540
Patents 10,000
1,35,200 1,35,200
Closing stock Rs.10,000.

1. To provision for bad debts is to be maintained at 5 per cent on sundry debtors.
2. Wages amounting to Rs.500 and salary amounting to Rs. 350 are outstanding.
3. Factory rent prepaid Rs. 100.
4. Depreciation charged on Plant and Machinery @ 5% and Building @ 10%.
432 Accountancy
5. Outstanding insurance Rs.100.

(Ans : Gross profit Rs.23,250 ; Net profit Rs.16,370 ; Total balance Sheet 63,530)
10. The following balances have been extracted from the books of M/s Green
House for the year ended December 31, 2005, prepare trading and profit and
loss account and balance sheet as on this date.
Account T itle Amount Account Title Amount

Rs. Rs.
Purchases 80,000 Capital 2,10,000

Bank balance 11,000 Bills payable 6,500
Wages 34,000 Sales 2,00,000
Debtors 70,300 Creditors 50,000
Cash in hand 1,200 Return outwards 4,000
Legal expenses 4,000
Building 60,000
Machinery 120,000
Gas and fuel 2,700
Freight and Carriage 3,500
Factory lighting 5,000
Office furniture 5,000
Patent right 18,800
4,70,500 4,70,500
adjustments :
(a) Machinery is depreciated at 10% and buildings depreciated at 6%.
(b) Interest on capital @ 4%.
(c) Outstanding wages Rs. 50.
(d) Closing stock Rs.50,000.
(Ans : Gross profit Rs.83,750 ; Net Profit Rs.52,750 ; Total balance sheet
Rs.3,19,250).
11. From the following balances extracted from the book of M/s Manju Chawla
on March 31, 2005. You are requested to prepare the trading and profit and
loss account and a balance sheet as on this date.
Account Title Amount Amount

Rs. Rs.

Purchases and Sales 40,000 80,000
Returns 200 600
Wages 6,000
Dock and cleaning charges 4,000
Lighting 500
Misc. Income 6,000
Rent 2,000
Capital 40,000
Drawings 2,000
Cash 3,000
Investment 6,000
Patent 4,000
Land and Machinery 43,000
Donations and Charity 600
Furniture 11,300
1,36,600 1,36,600
Closing stock was Rs.2,000.

(a) Interest on drawings @ 7% and interest on capital @ 5%.
(b) Land and Machinery is depreciated at 5%.
(c) Interest on investment @ 6%.
(d) Unexpired rent Rs.100.
(e) Charge 5% depreciation on furniture.
434 Accountancy
(Ans. : Gross profit Rs.30,900 ; Net profit Rs.26,185 ; Total balance sheet
Rs.71,185).
12. The following balances were extracted from the books of M/s Panchsheel
Garments on December 31, 2005.

Amount Amount
Rs. Rs.

Purchases 67,600 Return outwards 3,200
Return Inwards 4,600 Discount 1,400
Carriage inwards 1,400 Bank overdraft 10,000
General expenses 2,400 Commission 1,800
Insurance 4,000 Creditors 16,000
Scooter expenses 200 Capital 50,000
Salary 8,800
Cash in hand 4,000
Scooter 8,000
Furniture 5,200
Buildings 65,000
Debtors 6,000
Wages 1,200
1,94,400 1,94,400
Prepare the trading and profit and loss account for the year ended December, 31
and a balance sheet as on that date.
(a) Unexpired insurance Rs 1,000.
(b) Salary due but not paid Rs. 1800.
(c) Wages outstanding Rs. 200.
(d) Interest on capital 5%.
(e) Scooter is depreciated @ 5%.
(f) Furniture is depreciated Rs.@ 10%.
(Ans. : Gross profit Rs.39,200 ; Net profit Rs.22,780 ; Total balance sheet
Rs.98,780}.
13. Prepare the trading and profit and loss account and balance sheet of M/s
Control Device India on December 31, 2006 from the following balance as
on that date.
Account Title Debit Credit

Amount Amount
Rs. Rs.
Drawings and Capital 19,530 67,500

Purchase and Sales 45,000 1,12,500
Salary and Commission 25,470 1,575
Carriage 2,700
Furniture 6,750
Insurnace premium 2,700
Interest 7,425
Wages 11,215
Returns 2,385 1,440
Octroi 530
Investment 41,400
2,73,600 2,73,600
Closing stock was valued Rs. 20,000.

(a) Interest on capital @ 10%.
(b) Interest on drawings @ 5%.
(c) Wages outstanding Rs.50.
(d) Outstanding salary Rs.20.
(e) Provide a depreciation @ 5% on plant and machinery.
436 Accountancy
(f) Make a 5% provision on debtors.

(Ans. : Gross profit Rs.29,760 ; Net loss Rs.8,973 ; Total balance sheet Rs.1,28,000)
14. The following balances apperead in the trial balance of M/s Kapil Traders
as on March 31, 2006
Rs.
Bad debts 500
The partners of the firm agreed to records the following adjustments in the
books of the Firm: Further bad debts Rs.300. Maintain provision for bad
debts 10%. Show the following adjustments in the bad debts account,
provision account, debtors account, profit and loss account and balance
sheet.
(Ans ; Dr. Profit and Loss account Rs.1,820)
15. Prepare the bad debts account, provision for account, profit and loss account
and balance sheet from the following information as on December 31, 2005
Rs.
Debtors 80,000
Bad debts 2,000
Adjustments :
Bad debts Rs.500 Provision on debtors @ 3%.
(Ans : Credit Profit and Loss account Rs.115)

1. (c), 2. (d), 3. (b), 4. (a), 5. (d)
Accounts from Incomplete Records 11
W e have so far studied accounting records of

firms, which follow the double entry system of
book keeping. This gives us an impression that all
business units follow this system. However, in practice,
all firms do not maintain accounting records strictly as
per the double entry system. Many small size enterprises
keep incomplete records of their transactions. But, they
also have to ascertain the profit or loss for the year
and the financial position of the firm as at the end of
the year. This chapter deals with the ascertainment of
profit or loss and financial position of the firm that have
LEARNING OBJECTIVES not been maintaining records as per double entry book-
keeping or whose records are otherwise incomplete.
After studying this
11.1 Meaning of Incomplete Records
to :
• state the meaning and Accounting records, which are not strictly kept
features of incomplete according to double entry system are known as
records;
incomplete records. Many authors describe it as single
• calculate profit or loss
using the statement of entry system. However, single entry system is a
affairs method; misnomer because there is no such system of
• distinguish between maintaining accounting records. It is also not a ‘short
balance sheet and cut’ method as an alternative to double entry system.
statement of affairs; It is rather a mechanism of maintaining records
• prepare trading and
whereby some transactions are recorded with proper
profit and loss account
and balance sheet from debits and credits while in case of others, either one
incomplete records; sided or no entry is made. Normally, under this system
and records of cash and personal accounts of debtors and
• detect the missing creditors are properly maintained, while the
figures/information by information relating to assets, liabilities, expenses
preparing relevant
and revenues is partially recorded. Hence, these are
accounts.
usually referred as incomplete records.
438 Accountancy
11.1.1 Features of Incomplete Records

In complete records may be due to partial recording of transactions as is the
case with small shopkeepers such as grocers and vendors. In case of large
sized organisations, the accounting records may be rendered to the state of
incompleteness due to natural calamity, theft or fire. The features of incomplete
records are as under :
(a) It is an unsystematic method of recording transactions.
(b) Generally, records for cash transactions and personal accounts are
properly maintained and there is no information regarding revenue and/
or gains, expenses and/or losses, assets and liabilities.
(c) Personal transactions of owners may also be recorded in the cash book.
(d) Different organisations maintain records according to their convenience
and needs, and their accounts are not comparable due to lack of
uniformity.
(e) To ascertain profit or loss or for obtaining any other information,
necessary figures can be collected only from the original vouchers such
as sales invoice or purchase invoice, etc. Thus, dependence on original
vouchers is inevitable.
(f) The profit or loss for the year cannot be ascertained under this system
with high degree of accuracy as only an estimate of the profit earned or
loss incurred can be made. The balance sheet also may not reflect the
complete and true position of assets and liabilities.
11.2 Reasons of Incompleteness and its Limitations

It is observed, that many businessmen keep incomplete records because of
the following reasons :
(a) This system can be adopted by people who do not have the proper
knowledge of accounting principles;
(b) It is an inexpensive mode of maintaining records. Cost involved is low
as specialised accountants are not appointed by the organisations;
(c) Time consumed in maintaining records is less as only a few books are
maintained;
(d) It is a convenient mode of maintaining records as the owner may record
only important transactions according to the need of the business.
However, the mechanism of incomplete records suffers from a number of
limitations. This is due to the basic nature of this mechanism. Broadly
speaking, unless a systematic approach to maintenance of records is followed,
reliable financial statements cannot be prepared.
The limitations of incomplete records are as follows :

(a) As double entry system is not followed, a trial balance cannot be prepared
and accuracy of accounts cannot be ensured.
(b) Correct ascertainment and evaluation of financial result of business
operations can not be made.
(c) Analysis of profitability, liquidity and solvency of the business cannot
be done. This may cause a problem in raising funds from outsiders and
planning future business activities.
(d) The owners face great difficulty in filing an insurance claim with an
insurance company in case of loss of inventory by fire or theft.
(e) It becomes difficult to convince the income tax authorities about the
reliability of the computed income.
11.3 Ascertainment of Profit and Loss

Every business firm wishes to ascertain the results of its operations to assess
its efficiency and success and failures. This gives rise to the need for preparing
the financial statements to disclose:
(a) the profit made or loss sustained by the firm during a given period; and
(b) the amount of assets and liabilities as at the closing date of the
accounting period.
Therefore, the problem faced in this situation is how to use the available
information in the incomplete records to ascertain the profit or loss for the
particular accounting year and to determine the financial position of a entity
as at the end of the year. This can be done in two ways :
1. Preparing the Statement of Affairs as at the beginning and as at the end
of the accounting period, called statement of affairs or net worth method.
2. Preparing Trading and Profit and Loss Account and the Balance Sheet
by putting the accounting records in proper order, called conversion
method.
11.3.1 Preparing Statement of Affairs

Under this method, statements of assets and liabilities as at the beginning and
at the end of the relevant accounting period are prepared to ascertain the amount
of change in the capital during the period. Such a statement is known as
statement of affairs, shows assets on one side and the liabilities on the other just
as in case of a balance sheet. The difference between the totals of the two sides
(balancing figure) is the capital (refer figure 11.1). Though statement of affairs
resembles balance sheet, it is not called a balance sheet because the data is not
wholly based on ledger balances. The amounts of items like fixed assets,
outstanding expenses, bank balances, etc. are ascertained from the relevant
documents and physical count.
440 Accountancy
Statement of Affairs as at ––

Rs. Rs.
Bills payable ´´´´ Land and Building ´´´´
Creditors ´´´´ Machinery ´´´´
Outstanding expenses ´´´´ Furniture ´´´´
Capital (balancing figure)* ´´´´ Stock ´´´´
Debtors ´´´´
Cash and Bank ´´´´
Prepaid expenses ´´´´
Capital (balancing figure)* ´´´´
xxx x xxxx
Note: * where the total of liabilities side is more than total of assets side, capital would be
shown in assets side and it represents debit balance of capital.
Fig. 11.1 : Format of statement of affairs
Once the amount of capital, both at the beginning and at the end is
computed with the help of statement of affairs, a statement of profit and loss
is prepared to ascertain the exact amount of profit or loss made during the
year. The difference between the opening and closing capital represents its
increase or decrease which is to be adjusted for withdrawals made by the
owner or any fresh capital introduced by him during the accounting period in
order to arrive at the amount of profit or loss made during the period.
The statement of profit and loss is prepared as shown in figure 11.2.
Statement of Profit or Loss for the year ended ........
Particulars Amount
Rs.
Capital as at the end of year (computed from statement of affairs .....
as at the end of year)
Add Drawings during the year .....
Less Additional capital introduced during the year ( .....)
Adjusted capital at the end of year .....
Less Capital as at the beginning of year (computed from statement of (.....)

affairs as at the beginning of year)
Profit or Loss made during the year .....
Fig. 11.2 : Format of statement of profit or loss

If the net result of above computation is a positive amount, it represents

the profit earned during the year. In case the net result is a negative amount,
it would represent the loss sustained during the year. The same computation
can be done in the form of an equation as follows :
Profit or Loss = Capital at end – Capital at beginning + Drawings during the
year – Capital introduced during the year.
For example, consider the following information extracted from the records of Ms. Sheetu :
Rs.
Capital at the beginning of year, i.e. April 01,2004 1,20,000
Capital at the end of year, i.e. on March 31,2005 2,00,000
Capital brought in by the proprietor during the year 50,000
Withdrawals by the proprietor during the year 30,000
The profit for the year will be calculated as follows :
The profit earned or loss incurred during a given period will be computed as follows :
Particulars Amount
Rs.
Capital as on March 31, 2005 2,00,000
Add Drawings during the year 30,000
2,30,000
Less Additional capital introduced during the year (50,000)
Adjusted capital at the end, i.e. March 31, 2005 1,80,000
Less Capital in the beginning, i.e. April 01, 2004 (1,20,000)
Profit made during the year 60,000
Illustration 1
Mr. Mehta started his readymade garments business on April 1, 2004 with a capital of
Rs. 50,000. He did not maintain his books according to double entry system. During the
year he introduced fresh capital of Rs. 15,000. He withdrew Rs. 10,000 for personal use.
On March 31, 2005, his assets and liabilities were as follows :
Total creditors Rs. 90,000 ; Total debtors Rs. 1,25,600 ; Stock Rs. 24,750 ; Cash at bank
Rs. 24,980.
Calculate profit or loss made by Mr. Mehta during the first year of his business using the
statement of affairs method.
Solution
Books of Mr. Mehta
Statement of Affairs as on March 31, 2005

Rs. Rs.
Creditors 90,000 Cash at bank 24,980
Capital 85,330 Debtors 1,25,600
(balancing figure) Stock 24,750
1,75,330 1,75,330
442 Accountancy
Statement of Profit or Loss for the year ended March 31,2005
Particulars Amount
Rs.
Capital as March 31, 2005 85,330
95,330

Adjusted capital at end of the year, i.e. March 31,2005 80,330
Less Actual capital at the beginning of year, i.e. April 01, 2004 (50,000)
Profit made during the year 30,330
Illustration 2
Mrs. Vandana runs a small printing fir m. She was maintaining only some records,
which she thought, were sufficient to run the business. On April 01, 2004, available
information from her records indicated that she had the following assets and liabilities:
Printing Press Rs. 5,00,000, Buildings Rs. 2,00,000, Stock Rs. 50,000, Cash at bank
Rs. 65,600, Cash in hand Rs. 7,980, Dues from customers Rs. 20,350, Dues to
creditors Rs. 75,340 and Outstanding wages Rs. 5,000. She withdrew Rs. 8,000 every
month for meeting her personal expenses. She had also introduced Rs. 15,000 during
the year as additional capital. On March 31, 2005 her position was as follows :
Press Rs. 5, 25,000, Buildings Rs. 2,00,000, Stock Rs. 55,000, Cash at bank
Rs. 40,380, Cash in hand Rs. 15,340, Dues from customers Rs. 17,210, Dues to
creditors Rs. 65,680.
Calculate the profit made by Mrs. Vandana during the year using statement of
affairs method.
Solution
Books of Mrs. Vandana
Statement of Affairs as on April 1, 2004
and as on March 31,2005
Liabilities Apr. 01, 04 Amount Assets Apr. 01, 04 Amount

Rs. Rs. Rs. Rs.
Creditors 75,340 65,680 Printing press 5,00,000 5,25,000
Wages outstanding 5,000 – Buildings 2,00,000 2,00,000
Capital 7,63,590 7,87,250 Debtors 20,350 17,210
(balancing figure) Stock 50,000 55,000
Cash at bank 65,600 40,380
Cash in hand 7,980 15,340
8,43,930 8,52,930 8,43,930 8,52,930

Statement of Profit or Loss for the year ended on March 31, 2005
Particulars Amount
Rs.
Capital as on March 31,2005 7,87,250
8,83,250
Adjusted capital at the end of the year (31.3.2005) 8,68,250
Less Capital as on April 01, 2004 (7,63,590)
Profit made during the year 1,04,660
11.3.2 Difference between Statement of Affairs and Balance Sheet

Both statement of affairs and balance sheet show the assets and liabilities of a
business entity on a particular date. However, there are some fundamental
differences between the two. A statement of affairs is prepared from incomplete
records where most of the assets are recorded on the basis of estimates as
compared to a balance sheet which is prepared from records maintained on the
basis of double entry book-keeping and all assets and liabilities can be verified
from the ledger accounts. Hence, a balance sheet is more reliable than a statement
of affairs. The objective of preparing a statement of affairs is to ascertain the
amount of capital account as on that date whereas a balance sheet is prepared
to know the financial position of the business at a particular date. In statement
of affairs, an item of assets or liabilities may get omitted and this omission may
remain unknown because the effect of this omission gets adjusted in the capital
account balance and the total of both sides of statement match. However, in case
of a balance sheet the possibility of omission of any item is remote because in
case of an omission, the balance sheet will not agree and the accountant will
trace the missing item from accounting records. These differences have been
shown in a tabular form as under :
Basis of difference Statement of affairs Balance sheet
Reliability It is less reliable as it is prepared It is more reliable as it is prepared
from incomplete records. from double entry records.
Objective The objective of preparing state- The objective of preparing balance
ment of affairs is to estimate the sheet is to show the true financial
balance in capital account on a position of an entity on a
particular date. particular date.
Omission Omission of assets or liabilities Omissions of assets or liabilities
cannot be discovered easily. can be discovered easily and can
be traced from accounting records.
Fig. 11.3 : Showing comparison between statement of affairs and balance sheet
444 Accountancy
Do It Yourself
Identify a small shopkeeper in your locality, ask him about the accounting
records maintained by him. If he is not maintaining the records as per
double entry system, list the reasons thereof and ask him how does he
compute profit or loss.
11.4 Preparing Trading and Profit and Loss Account and

the Balance Sheet
To prepare proper trading and profit and loss account and the balance sheet
one needs complete information regarding expenses, incomes, assets and
liabilities. In case of incomplete records, details of some items like creditors,
cash purchases, debtors, cash sales, other cash payments and such receipts
are easily available, but there are a number of items the details of which will
have to be ascertained in an indirect manner by using the logic of double
entry. The most common items that are missing and have to be worked out as
such are :
• Opening capital
• Credit purchases
• Credit sales
• Bills payable accepted
• Bills receivable received
• Payments to creditors
• Payments to debtors
• Any other cash/bank related items.
You know that opening capital can be worked out by preparing the
statement of affairs at the beginning of the year. For other items we have
explained as to how available information can be used to ascertain their missing
figures with the help of total debtors and total creditors, total bills receivable
and total bills payable accounts and summary of cash.
11.4.1 Ascertaining Credit Purchases

The credit purchases figure is not usually available from the incomplete records.
It is quite possible that some other information related to creditors may also
be missing. Therefore, by preparing the total creditors account, a proforma of
which is given in figure 11.4, credit purchases or any other missing figure
related to creditors, as the case may be, can be ascertained as the balancing
figure.
Total Creditors Account

Dr. Cr.
Rs. Rs.
Cash paid .... Balance b/d ....
Bank .... Bank (cheques ....
(cheques issued) dishonoured)
Bills payable .... Bills payable ....
(bills accepted) (bills dishonoured)
Discount received .... Credit purchases ....
Purchases return ....
Balance c/d ....
xxxxxxx xxxxxxx
Fig. 11.4 : Showing format of creditors account
For example, consider the following transactions relating to M/s Kisan Food Suppliers:
Rs.
Opening balance of creditors 40,000
Closing balance of creditors 50,000
Payment made in cash 85,000
The total creditors account will be prepared as follows :
Books of Kisan
Food Suppliers
Dr. Cr.
Rs. Rs.
Cash 85,000 Balance b/d 40,000
Discount 2,000 Credit purchases 97,000
(balancing figure)
Balance c/d 50,000
1,37,000 1,37,000
11.4.2 Ascertainment of Credit Sales

The figure of credit sales is also not usually available from incomplete records.
Some other information on related to debtors may also be missing. Therefore, if
the total debtors account is prepared as shown in figure 11.5, credit sales or any
other missing figure, as the case may be, can be traced out as the balancing
figure.
446 Accountancy
Total Debtors Account

Dr. Cr.
Rs. Rs.
Balance b/d .... Cash ....
(cash received)
Bank (cheque
received)
Bills receivable .... Discount allowed ....
(bills dishonoured)
Bank (cheque .... Bad debts ....
dishonoured)
Credit sales .... Sales return ....
(balancing figure)
Bills receivable ....
(bills received)
Balance c/d ....
xxx xxx
Fig. 11.5 : Showing format of debtors account

From the credit sales as ascertained from total debtors account, the sales returns should
be deducted from gross credit sales to get net credit sales. For example, the following
information is obtained from the books of Mohanlal Traders :
Rs.
Debtors on April 01, 2005 50,000
Debtors on March 31, 2005 70,000
Cash received from debtors 60,000
Bad debts 3,000
The total debtors account will be prepared as follows :
Mohan Lal Traders

Dr. Cr
Rs. Rs.
2005
Apr. 01 Balance b/d 50,000 Cash 60,000
Credit sales 1,14,000 Discount 1,000
(balancing figure) Bills receivable 30,000
Bad debts 3,000
Balance c/d 70,000
1,64,000 1,64,000
11.4.3 Ascertainment of Bills Receivable and Bills payable

Quite often, while all details relating to bills receivable and bills payable are
available but the figures of the bills received and bills accepted during the
year are not given. In such a situation, total bills receivable account and total
bills payable account can be prepared and the missing figures ascertained as
the balancing figures. The proforma of total bills receivable account and total
bills payable account is shown in figure 11.6 and figure 11.7.
Total Bills Receivable Account

Dr. Cr.
Rs. Rs.
Balance b/d .... Bank ....
(bills honoured)
Sundry debtors .... Sundry debtors ....
(bills received) (bills dishonoured)
Balance c/d ....
xxx xxx
Fig. 11.6 : Showing format of bills receivable account
Total Bills Payable Account

Dr. Cr.
Rs. Rs.
Bank .... Balance b/d ....
(bills matured)
Sundry creditors .... Sundry creditors ....
(bills dishonoured) (bills accepted)
Balance c/d ....
xxx xxx
Fig. 11.7 : Showing format of bills payable account

For example consider the following data available from the records of M/s S.S. Senapati
Rs.
Opening bills receivable 5,000
Opening bills payable 37,000
Bills receivable dishonoured 2,000
Bills payable dishonoured 66,750
Closing bills payable 52,000
Bills collected during the year 12,000
Closing bills receivable 4,000
448 Accountancy
The bills receivable and bills payable will be prepared as follows :

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F Amount
Rs. Rs.
Balance b/d 5,000 Sundry debtors 2,000

(bills dishonoured)
Sundry debtors 13,000 Bank 12,000
(bills received) (bills collected)
(balancing figure)
Balance c/d 4,000
18,000 18,000

Dr. Cr.
Rs. Rs.
Bill dishonoured 66,750 Balance b/d 37,500

Balance c/d 52,500 Sundry Creditors 81,750
(bills accepted)
(balancing figure)
1,19,250 1,19,250
Tick the correct answer :

1. Incomplete record mechanism of book keeping is :
(a) Scientific (b) Unscientific
(c) Unsystematic (d) both (b) and (c)
2. Opening capital is ascertained by preparing :
(a) Total debtors account (b) Total creditors account
(c) Cash account (d) Opening statement of affairs
3. Credit purchase, during the year is ascertained by preparing :
(a) Total creditors account (b) Total debtors account
(c) Cash account (d) Opening statement of affairs
4. If opening capital is Rs. 60,000, drawings Rs. 5,000, capital introduced during the
period Rs. 10,000, closing capital Rs. 90,000. The value of profit earned during the
period will be :
(a) Rs. 20,000 (b) Rs. 25,000
(c) Rs. 30,000 (d) Rs. 40,000
11.4.4 Ascertainment of Missing Information through Summary of Cash

Sometimes, the amount paid to creditors or the amount received from debtors
or the opening or closing cash or bank balance may be missing. To ascertain
any missing item of receipt or payment, we may prepare a cash book summary
showing all receipts and payments during the year and the balancing figure is
taken as the amount of missing item.
If however, both amount paid to creditors and that received from debtors
are missing, then any one of these may be obtained first through the total
creditors or total debtors account, as the case may be, and the other missing
information ascertained from the cash book summary in the same way as
stated earlier.
After the missing figures have been traced out, the final accounts may be
prepared straight away or after the preparation of the trial balance. The
components of the trial balance and their sources of information are
summarised below :
1. Closing assets (except stock) and Closing list
liabilities
2. Opening assets (including opening Opening list
stock) and liabilities
3. Purchases Credit purchases from total creditors account
and cash purchases from summary of cash
4. Sales Credit sales from total debtors account and cash
sales from summary of cash
5. Opening capital Opening statement of affairs
6. Expenses and Revenues As per cash summary of cash plus subsidiary
informatioon
7. Losses and Gains From all the accounts and scattered information
8. Bills receivable received Total bills receivable account
9. Bills payable accepted Total bills payable account
10. Cash/Bank balance Summary of cash
Fig. 11.7 : Detecting the missing information

Illustration 3
Compute the amount of total purchases and total sales of Mr. Amit from the following
information for the year ending on March 31,2005.
Amount
Rs.
Total debtors as on April 01, 2004 40,000
Total creditors as on April 01, 2004 50,000
Bills receivable as on April 01, 2004 30,000
Bills payable as on April 01, 2004 45,000
Bad debts 2,000
450 Accountancy
Cash sales 10,000

Cash purchases 8,000
Total debtors as on March 31, 2005 80,000
Cash received from debtors 1,00,000
Cash paid to creditors 80,000
Cash received against bills receivable 25,000
Payment made against bills receivable 40,000
Total creditors as on March 31, 2005 40,000
Bills payable as on March 31, 2005 50,000
Bills receivable as on March 31, 2005 35,000
Solution
Dr. Cr.
Rs. Rs.
Balance b/d 30,000 Cash 25,000
Total debtors 30,000 Balance c/d 35,000
(balancing figure)
60,000 60,000

Dr. Cr.
Rs. Rs.
Balance c/d 50,000 Total creditors 45,000
(balancing figure)
90,000 90,000

Dr. Cr.
Rs. Rs.
Balance b/d 40,000 Bad debts 2,000
Sales 1,79,000 Return inwards 4,000
(balancing figure)
Cash 1,00,000
(Transfer from bills
receivable account)
Balance c/d 80,000
2,19,000 2,19,000

Dr. Cr.
Rs. Rs.
Discount received 5,000 Balance b/d 50,000
Cash 80,000 Purchases (credit) 1,20,0002
(balancing figure)
Bills payable (transfer 45,000
from bills payable
account)
Balance c/d 40,000
1,70,000 1,70,000
Working Notes
(i) Credit purchases have been computed from total creditors account as Rs. 1,20,0002.
Cash purchases given are Rs. 8,000. Total purchases will be Rs. 1,20,000 + Rs. 8,000
= Rs. 1,28,000.
(ii) Credit sales have been computed from total debtors account as Rs. 1,79,000 and cash
sales are given as Rs. 10,000. Total sales will be Rs. 1,79,000 + Rs. 10,000
= Rs. 1,89,000.
Illustration 4
From the following information supplied by Ms. Sudha, calculate the amount of ‘Net Sales’
Rs.
Debtors on April 01, 2005 65,000
Debtors on March 31, 2006 50,000
Opening balance of bills receivable as on April 01, 2005 23,000
Closing balance of bills receivable as on March 03, 2006 29,000
Cash received against bills receivable 21,000
Bad debts 14,000
Bill receivalbes (dishonoured) 20,000
Cash sales 2,25,000
Sales return 17,000

Dr. Cr.
Rs. Rs.
Opening balance 23,000 Cash (bills honoured) 21,000
Bills receivable
Debtors (Bills receivable ) 47,000 dishonoured 20,000
(balancing figure) Closing balance 29,000
70,000 70,000
452 Accountancy

Dr. Cr.
Rs. Rs.
2005 2005
Apr. 01 Opening balance 65,000 Apr. 01 Cash received 3,02,000
Bills receivable 20,000 Discount allowed 8,000
(dishonoured)
Sales (balancing 3,53,000 Sales return 17,000
figure)
Bad debts 14,000
(transferred from
bills receivable
account)
Closing balance 50,000
4,38,000 4,38,000
(Working Notes)
With the preparation of total debtors account and total bills receivable account, the net sales
will be computed as follows :
Net Sales = Cash Sales + Credit Sales – Sales return
= Rs. 2,25,000 + Rs. 3,53,000 – Rs. 1,7000
= Rs. 5,61,000
Illustration 5
Mr. Om Prakash did not keep his books of accounts under double entry system. From the
following information available from his records, prepare profit and loss account for the
year ending on March 31, 2005 and a balance sheet as at that date, depreciating the washing
equipment @ 10%.
Summary of Cash
Dr. Cr.
Receipts Amount Payments Amount
Rs. Rs.
Balance b/d 8,000 Cash purchases 14,000

Cash sales 40,000 Paid to creditors 20,000
Received from debtors 30,000 Sundry expenses 6,000
Cartage 2,000
Drawings 8,000
Balance c/d 28,000
78,000 78,000
Other information :
March 31, 2004
March 31, 2004 March 31, 2005

Rs. Rs.
Debtors 9,000 12,000
Creditors 14,400 6,800
Stock of materials 10,000 16,000
Washing equipment 40,000 40,000
Furniture 3,000 3,000
Discount allowed during the year 1,400
Discount received during the year 1,700
Solution
Books of Om Prakash
for the year ended on March 31, 2005
Expenses/losses Amount Revenues/gains Amount

Rs. Rs.
Purchases 28,100 Closing stock 16,000
Cartage 2,000
90,400 90,400
Sundry expenses 6,000 Gross profit b/d 50,300
Discount allowed 1,400 Discount received 1,700
Depreciation 4,000
Net profit (transfered to 40,600
capital account)
52,000 52,000

Rs. Rs.
Capital 55,600 Washing equipment 40,000
Add Profit 40,600 Less Depreciation (4,000) 36,000
96,200
Less Drawings (8,000) 88,200 Furniture 3,000
Creditors 6,800 Stock of materials 16,000
Debtors 12,000
Cash 28,000
95,000 95,000
454 Accountancy
Working Notes :

Dr. Cr.
Rs. Rs.
Balance b/d 9,000 Cash 30,000

Sales (credit) 34,400 Discount allowed 1,400
(balancing figure)
Balance c/d 12,000
43,400 43,400

Dr. Cr.
Rs. Rs.

Discount received 1,700 Purchases (credit) 14,100
(balancing figure)
Balance c/d 6,800
28,500 28,500
Statement of Affairs as at March 31,2004

Rs. Rs.
Creditors 14,400 Washing equipment 40,000

(balancing figure) Stock of material 10,000
Debtors 9,000
Cash 8,000
70,000 70,000
Illustration 6
Mrs. Surabhi started business on Jan 01, 2005 with cash of Rs. 50,000, furniture of
Rs. 10,000, goods of 2,000 and machinery worth 20,000. During the year she further
introduced Rs. 20,000 in her business by opening a bank account. From the following
information extracted from her books, you are required to prepare final accounts for the
ended December 31, 2005.
Rs.
Receipt from debtors 57,500
Cash sales 45,000
Wages paid 5,000
Salaries to staff 17,500
Trade expanses 6,500
Electricity bill of factory 7,500
Drawings of Surabhi 3,000
Bad debts written-off 1,300
Cash balance at end of year 20,000
Mrs. Surabhi used goods worth 2,500 for private purposes, which is not recorded in the
books. Charge depreciation on furniture 10% and machinery 20% p.a. on Dec. 31, 2005 her
debtors were worth 70,000 and creditors Rs. 35,000, stock in trade was valued on that date
at Rs. 25,000.
Solution
Books of Mrs. Surabhi
for the year ended December 31, 2005

Rs. Rs.
Purchases :
Cash : 25,000 Credit 1,30,000 1,75,000
Credit : 80,0002 Closing stock 25,000
1,05,000
Less Goods used for (2,500) 1,02,500
private use
Wages 5,000
Electricity bill of factory 7,500
2,00,000 2,00,000
Trade expenses 6,500 Discount received 3,000
Bad debts 1,300
Depreciation
Furniture 1,000
Machinery 4,000 5,000
Net profit (transferred 36,500
to capital account)
68,000 68,000
456 Accountancy
Balance Sheet of Mrs. Surabhi as at December 31, 2005

Rs. Rs.

Bank 13,000
Capital 1,00,000 Stock 25,000
Add Net profit 36,500 Debtors 70,000
1,36,000 Furniture 10,000
Add Additional capital 20,000 Less Depreciation (1,000) 9,000
1,56,500 Machinery 20,000
Less Drawings
Cash 36,000
Goods 2,500 (38,500) 1,18,000
1,53,000 1,53,000
Working Notes :
(i) Total Debtors Account

Dr. Cr.

Rs. Rs.
Balance b/d NIL Cash 57,500

Sales (credit) 1,30,000 Discount allowed 1,200
(balancing figure)
Bad debts 1,300
Balance c/d 70,000
1,30,000 1,30,000
(ii) Total Creditors Account

Dr. Cr.

Rs. Rs.
Cash 42,000 Balance b/d NIL

Discount received 3,000 Purchase credit 80,000
(balancing figure)
Balance c/d 35,000
80,000 80,000
(iii) Statement of Affair as on Jan. 01, 2005
Liabilities Amount Assets Amounts

Rs. Rs.
Cash 50,000
Capital (balancing figure) 1,00,0003 Stock 20,000
Furniture 10,000
Machinery 20,000
1,00,000 1,00,000
(iv) Summary of Cash

Dr. Cr.
Rs. Rs.
Balance b/d 50,000 Purchases 25,000
Capital(bank) 20,000 Wages 5,000
Debtors 57,500 Salaries 17,500
Sales 45,000 Trade expenses 6,500
Electric bill 7,500
Drawings 36,000
Creditors 42,000
Balance c/d—cash 20,000
Closing bank(balancing figure) 13,000
1,72,500 1,72,500
Write the correct word(s) :

1. Credit sales can be ascertained as the balancing figure in the..........account.
2. Excess of ..........over.........represents loss sustained during the period.
3. To ascertain the profit, closing capital is to be adjusted by deducting ..........and
adding ..........
4. Incomplete records are generally used by ..........
Illustration 7
Mr. Bahadur does not know how to keep books of account. From his various records, the
following particulars have been made available prepare the final Accounts, after providing
for doubtful debts 5 per cent of debtors outstanding and depreciating the motor car @ 20
per cent.
458 Accountancy
(i) Balance Sheet as on April 1, 2005

Rs. Rs.
Capital 92,500 Motor Car 71,700
Bills payable 32,800 Stock 51,500
Cash in hand 12,400
2,09,500 2,09,500
(ii) Cash Transactions during the year
Particular Amount Particular Amount

Rs. Rs.
Balance b/d 12,400 Furniture 30,000
Receipt from debtors 1,15,000 Wages 9,400
Bills receivable 14,200 Purchases 40,500
Sales 1,03,000 Drawings 24,000
Bills payable 30,700
Payment to creditors 80,800
Balance c/d 8,500
2,44,600 2,44,600
(iii) Other Information
Particulars Amount
Rs.
Bills receivable drawn (received) 6,300
Discount to customers 2,300
Discount from suppliers 700
Credit purchases 29,600
Closing balance of debtor 55,000
Closing balance of bills payable 10,200
Solution
Cash sales and cash purchases are available from cash transactions. Credit purchase is
also given. But credit sale is to be ascertained by the opening debtors account. Though the
credit purchase is available, the closing balance of creditors is not known. That is why the
creditors account also has to be opened. As there are bills payable and bills receivable,
those accounts also have to be opened, otherwise the creditors and debtors accounts will
not be complete.
Books of Mr. Bahadur


Rs. Rs.
Opening stock 51,500 Sales
purchases
Cash 40,500 Cash 1,03,000
Credit 29,600 70,100 Credit 1,29,100 2,32,100
2,73,800 2,73,800
General expenses 20,700 Gross profit b/d 1,42,800
Discount allowed 2,300 Discount received 700
Depreciation on motor car 14,340
Reserve for bad debts 2,750
Net profit 1,03,410
1,43,500 1,43,500
Balance Sheet as March 31, 2006

Rs. Rs.
Capital 92,500 Motor car 71,700
Add Net profit 1,03,410 Less depreciation (14,340) 57,360
1,95,910 Furniture 30,000
Less Drawings (24,000) 1,71,910 Stock 41,700
Bills payable 10,200 Less Provision (2,750) 52,250
Cash 8,500
2,06,310 2,06,310
Working Notes:
(i) Total Bills Receivable Account

Dr. Cr.
Rs. Rs.
Balance b/d 24,400 Cash (receipt) 14,200
Debtors 6,300 Balance c/d 16,500
(bills drawn) (balancing figure)
30,700 30,700
460 Accountancy
(ii) Total Debtors Account

Dr. Cr.
Rs. Rs.
Balance b/d 49,500 Cash (receipt) 1,15,000
Credit sales 1,29,100 Bills (drawn) 6,300
(balancing figure)
Balance c/d 55,000
1,78,600 1,78,600
(iii) Total Bills payable Account

Dr. Cr.
Rs. Rs.
Cash (paid) 30,700 Balance b/d 32,800
Balance c/d 10,200 Creditors
(bills accepted)
(balancing figure) 8,100
40,900 40,900
(iv) Total Creditors Account

Dr. Cr.
Rs. Rs.
Bills payable 8,100 Credit purchases 29,600
Discount received 700
Balance c/d 24,200
(balancing figure)
1,13,800 1,13,800
Illustration 8
Dinesh does not keep systematic books of account due to lack of Knowledge about the
double entry system of accounting. He supplies you the following information :
(i) Assets and Liabilities

December 31, 2006
Rs. Rs.
Sundry debtors 45,000 48,600
Sundry creditors 24,000 ?
Cash 4,500 ?
Furniture and Fixtures 15,000 ?

Stock 25,000 ?
Motor Van 16,000 ?
(ii) Transaction during the year

Rs.
Cash received from debtors 80,000
Discount allowed to debtors 1,400
Bad debts written off 1,800
Discount allowed by creditors 1,000
Sales return 3,000
Expenses paid 6,000
Drawings 5,000
Rent paid 2,500
(iii) Other Information

Outstanding expenses Rs. 1,200. Charge 10 per cent depreciation on furniture and 5 per
cent on motor van.Dinesh informs that he sells goods at cost plus 40 per cent. A provision
of 5 per cent on debtors is to be created. Prepare his trading and profit and loss account and
balance sheet as on December 31, 2006
Books of Dinesh
for the year ending December 31, 2006
Dr. Cr.
Rs. Rs.
Purchases 69,000 Less Returns (3,000) 86,800
Less Returns (2,000) 67,000 Closing stock 30,000
1,16,800 1,16,800
Discount allowed 1,400 Gross profit b/d 24,800
Bad debts 1,800 Discount received 1,000
Expenses paid 6,000
Add Outstanding expenses 1,200 7,200
Rent paid 2,500
Depreciation on Furniture 1,500
Motor van 800 2,300
Net profit (transferred to capital 8,170
account)
25,800 25,800
462 Accountancy
Balance Sheet as on December 31, 2006

Rs. Rs.
Outstanding expenses 1,200 Cash 8,000
Capital 81,500 Less Provision (2,430) 46,170
Less Drawings (5,000) Closing stock 30,000
76,500 Furniture & Fixtures 15,000
Motor van 16,000
1,12,870 1,12,870
Working Notes :
(i) Total Debtors Account
Dr. Cr.
Rs. Rs.
Balance b/d 45,000 Cash received 80,000
Sales 89,800 Discount allowed 1,400
Bad debts 1,800
Sales return 3,000
Balance c/d 48,600
1,34,800 1,34,800
(ii) Total Creditors Account

Dr. Cr.
Rs. Rs.
Cash paid 63,000 Balance b/d 24,000
Discount received 1,000 Purchases 69,000
Balance c/d 27,000
93,000 93,000
(iii) Summary of Cash

Dr. Cr.
Rs. Rs.
Balance b/d 4,500 Creditors 63,000
Debtors 80,000 Expenses paid 6,000
Drawings 5,000
Rent paid 2,500
Balance c/d 8,000
84,500 84,500
(iv) Statement of Affairs as on December 31, 2005

Rs. Rs.
Cash 4,500
Stock 25,000
Capital in the beginning 81,500 Furniture and Fixtures 15,000
(Balancing figure)
Motor Van 16,000
1,05,500 1,05,500
(v) Calculation of Closing Stock

Rs.
Total sales 89,800
Less Sales return (3,000)
Net sales 86,800
Total purchases 69,000
Less Purchases returens (2,000)
(67,000)
Rate of gross profit on cost 40%
Suppose cost of goods sold is 100
Then, Gross profit equals to 40
Sales equals to 140
Hence, Cost of goods sold will be
100
Sale = Rs. 86,800 = × 86, 800 = 62, 000
140
The amount of closing stock will be calculated as :
Net Purchases 67,000
Add Closing stock 25,000
Cost of goods available for sale 92,000
Less Cost of goods sold (62,000)

• Incomplete records • Statement of affairs

1. Incomplete records : Incomplete records refer to, lack of accounting records
according to the double entry system. Degree of incompleteness may vary from
highly disorganised records to organised, but still not complete.
2. Difference between statement of affairs and balance sheet : A statement of affairs
is a statement showing various assets and liabilities of a firm on date, with
464 Accountancy
difference between the two sides denoting capital. Since, the records are
incomplete, the values of assets and liabilities are normally estimates based on
information available. They are not the balances taken from properly maintained
ledger like in case of balance sheet. The balance sheet is derived from a set of
books maintained on the basis of double entry system.
3. Computation of profit and loss from incomplete records : The statement of affairs
is used to compute capital when a firm has a highly disorganised set of incomplete
records. To the difference between the closing and opening capital, any sum
withdrawn from business are added back and any additional capital introduced
during the year are deducted to find out profit and loss made for the period.
4. Preparation of profit and loss account and balance sheet : When cash summary
of a firm is available along with information about personal accounts of creditors
and customers, an attempt can be made to prepare the profit and loss account
and balance sheet. Missing figures about purchases, sales, debtors and creditors
can be obtained by preparing proforma accounts of debtors, creditors, bills
receivable and bills payable using the logic of double entry system. Once a
profit and loss account and balance sheet are prepared, it will be possible for
the firm to start a complete accounting system for future.

Short Answers
1. State the meaning of incomplete records?
2. What are the possible reasons for keeping incomplete records?
3. Distinguish between statement of affairs and balance sheet.
4. What practical difficulties are encountered by a trader due to incompleteness
of accounting records?
Long Answers
1. What is meant by a ‘statement of affairs’? How can the profit or loss of a
trader be ascertained with the help of a statement of affairs?
2. ‘Is it possible to prepare the profit and loss account and the balance sheet
from the incomplete book of accounts kept by a trader’? Do you agree? Explain.
3. Explain how the following may be ascertained from incomplete records:
(a) Opening capital and closing capital
(b) Credit sales and credit purchases
(c) Payments to creditors and collection from debtors
(d) Closing balance of cash.
Numerical Questions
Ascertainment of profit or loss by statement of affairs method
1. Following information is given below prepare the statement of profit or loss:
Rs.
Capital at the end of the year 5,00,000
Capital in the beginning of the year 7,50,000
Drawings made during the period 3,75,000

Additional Capital introduced 50,000
[Ans : Profit : Rs. 75,000].
2. Manveer started his business on January 01, 2005 with a capital of
Rs. 4,50,000. On December 31, 2005 his position was as under:
Rs.
Cash 99,000
Plant 48,000
Land and Building 1,80,000
Furniture 50,000
He owned Rs. 45,000 from his friend Susheel on that date. He withdrew
Rs. 8,000 per month for his household purposes. Ascertain his profit or loss
for this year ended December 31, 2005
[Ans : Profit : Rs.53,000].
3. From the information given below ascertain the profit for the year :
Rs.
Capital at the beginning of the year 70,000
Additional capital introduced during the year 17,500
Stock 59,500
Business premises 8,600
Machinery 2,100
Sundry creditors 33,400
Drawings made during the year 26,400
4. From the following information, Calculate Capital at the beginning :
Rs.
Capital at the end of the year 4,00,000
Drawings made during the year 60,000
Fresh Capital introduce during the year 1,00,000
Profit of the current year 80,000
[Ans : Capital at thé beginning of the year : Rs.2,60,000].
5. Following information is given below : calculate the closing capital
Jan. 01, 2005 Dec. 31, 2005
Rs. Rs.
Creditors 5,000 30,000
Bills payable 10,000 —
Loan — 50,000
Bills receivable 30,000 50,000
Stock 5,000 30,000
Cash 2,000 20,000
[Ans : Closing capital : Rs.20,000].
Calculation of profit or loss and ascertainment of statement of affairs at the
end of the year (Opening Balance is given)
6. Mrs. Anu started firm with a capital of Rs. 4,00,000 on 1st July 2005. She
borrowed from her friends a sum of Rs. 1,00,000 @ 10% per annum (interest
466 Accountancy
paid) for business and brought a further amount to capital Rs. 75,000 on
Dec. 31, 2005, her position was :
Rs.
Cash 30,000
Stock 4,70,000
Debtors 3,50,000
Creditors 3,00,000
He withdrew Rs. 8,000 per month for the year. Calculate profit or loss for the
year and show your working clearly.
7. Mr. Arnav does not keep proper records of his business he provided following
information, you are required to prepare a statement showing the profit or
loss for the year.
Rs.
Capital at the beginning of the year 15,00,000
Cash in hand 80,000
Furniture 9,00,000
Building 10,00,000
Creditors 6,00,000
Stock in trade 2,00,000
Further capital introduced 3,20,000
Drawings made during the period 80,000
[Ans : Loss : Rs. 1,00,000].
Ascertainment of statement of affairs at the beginning and at the end of the
year and calculation of profit or loss.
8. Mr. Akshat keeps his books on incomplete records following information is
given below :
April 01, 2004 March 31, 2005
Rs. Rs.
Cash at bank 15,000 10,000
Stock 1,00,000 95,000
Debtors 42,500 70,000
Business premises 75,000 1,35,000
Creditors 66,000 87,000
Bills payable 44,000 58,000
During the year he withdrew Rs. 45,000 and introduced Rs. 25,000 as further
capital in the business compute the profit or loss of the business.
[Ans : Profit : Rs. 61,500].
9. Gopal does not keep proper books of account. Following information is given
below:
Jan. 01, 2005 Dec. 31, 2005
Rs. Rs.
Cash in hand 18,000 12,000
Cash at bank 1,500 2,000
Stock in trade 80,000 90,000

Sundry debtors 36,000 60,000
Sundry creditors 60,000 40,000
Loan 10,000 8,000
Office equipments 25,000 30,000
Land and Buildings 30,000 20,000
Furniture 10,000 10,000
During the year he introduced Rs. 20,000 and withdrew Rs. 12,000 from the
business. Prepare the statement of profit or loss on the basis of given
information
[Ans : Profit : Rs. 53,500].
10. Mr. Muneesh maintains his books of accounts from incomplete records. His
books provide the information :
Jan. 01, 2005 Dec. 31, 2005
Rs. Rs.
Cash 1,200 1,600
Bills receivable — 2,400
Debtors 16,800 27,200
Stock 22,400 24,400
Investment — 8,000
Creditors 14,000 15,200
He withdrew Rs. 300 per month for personal expenses. He sold his investment
of Rs. 16,000 at 2% premium and introduced that amount into business.
[Ans : Profit : Rs. 9,780].
11. Mr. Girdhari Lal does not keep full double entry records. His balance as on
January 01, 2006 is as.

Rs. Rs.
Sundry creditors 35,000 Cash in hand 5,000
Capital 40,000 Sundry debtors 18,000
Stock 22,000
Furniture 8,000
Plant 17,000
90,000 90,000
His position at the end of the year is :

Rs.
Cash in hand 7,000
Stock 8,600
Debtors 23,800
Furniture 15,000
468 Accountancy
Plant 20,350
Bills payable 20,200
Creditors 15,000
He withdrew Rs. 500 per month out of which to spent Rs. 1,500 for business
purpose. Prepare the statement of profit or loss.
[Ans : Profit : Rs. 4,050].
12. Mr. Ashok does not keep his books properly. Following information is available
from his books.
Jan. 01, 2005 Dec. 31, 2005
Rs. Rs.
Loan from wife 66,000 57,000
Sundry debtors 22,500 —
Land and Building 89,600 90,000
Bank overdraft 25,000 —
Stock 34,000 25,000
During the year Mr. Ashok sold his private car for Rs. 50,000 and invested
this amount into the business. He withdrew from the business Rs. 1,500 per
month upto July 31, 2005 and thereafter Rs. 4,500 per month as drawings.
You are required to prepare the statement of profit or loss and statement of
affair as on December 31, 2005.
[Ans : Loss : Rs. 57,900].
13. Krishna Kulkarni has not kept proper books of accounts prepare the
statement of profit or loss for the year ending December 31, 2005 from
the following information:
Jan. 01, 2005 Dec. 31, 2005
(Rs.) (Rs.)
Cash in hand 10,000 36,000
Debtors 20,000 80,000
Creditors 10,000 46,000
Car — 80,000
Stock 40,000 30,000
Investment 40,000 50,000
Bank balance 1,00,000 90,000
The following adjustments were made :
(a) Krishna withdrew cash Rs. 5,000 per month for private use.
(b) Depreciation @ 5% on car and furniture @10% .
(c) Outstanding Rent Rs. 6,000.
(d) Fresh Capital introduced during the year Rs.30,000.
[Ans : Profit : Rs. 1,41,200 ; Statement of affairs with adjusted : Rs. 4,29,200].
14. M/s Saniya Sports Equipment does not keep proper records. From the
following information find out profit or loss and also prepare balance sheet
for the year ended December 31, 2005
Dec. 31, 2004 Dec. 31, 2005
Rs. Rs.
Bank overdraft 30,000 —
Stock 50,000 80,000
Sundry debtors 60,000 1,40,000
Furniture 40,000 60,000
Machinery 50,000 1,00,000
Drawing Rs.10,000 p.m. for personal use, fresh capital introduce during
the year Rs.2,00,000. A bad debts of Rs.2,000 and a provision of 5% is
to be made on debtors. outstanding salary Rs.2,400, prepaid insurance
Rs.700, depreciation charged on furniture and machine @ 10% p.a.
[ Ans : Profit : Rs. 1,71,300 ; Statement of affairs with adjustment :
Rs. 4,87,700].
Ascertainment of Missing Figures
15. From the following information calculate the amount to be paid to creditors:
Rs.
Sundry creditors as on March 31, 2005 1,80,425
Return inward 32,200
Bills accepted 1,99,000
Bills endorsed to creditors 26,000
Creditors as on April 01, 2006 2,09,050
Total purchases 8,97,000
[Ans : Cash paid to creditors : Rs. 4,40,175].
16. Find out the credit purchases from the following:
Rs.
Balance of creditors April 01, 2004 45,000
Balance of creditors March 31, 2005 36,000
Cash paid to creditors 1,80,000
Cheque issued to creditors 60,000
Discount received from creditors 5,400
Bills payable given to creditors 12,750
470 Accountancy
Bills receivable endorsed to creditors 4,500

Bills receivable endorsed to creditors dishonoured 1,800
[Ans : Credit purchases : Rs. 2, 56,350].
17. From the following information calculate total purchases.
Rs.
Creditors Jan. 01, 2005 30,000
Creditors Dec. 31, 2005 20,000
Opening balance of Bills payable 25,000
Closing balance of Bills payable 35,000
Bills discharged 44,500
[Ans : Total purchases : Rs. 3,30,500].
18. The following information is given
Rs.
Opening creditors 60,000
Closing creditors 36,000
Returns Inward 13,000
Bill matured 27,000
Bill dishonoured 8,000
Calculate credit purchases during the year
[Ans : Credit purchases : Rs. 37,000].
19. From the following, calculate the amount of bills accepted during the year.
Rs.
Bills payable as on April 01, 2005 1,80,000
Bills payable as on March 31, 2006 2,20,000
Bills payable dishonoured during the year 28,000
Bills payable honoured during the year 50,000
[Ans : Bills accepted : Rs. 1,18,000].
20. Find out the amount of bills matured during the year on the basis of
information given below ;
Rs.
Closing balance of Bills payable 85,000
Opening balance of Bills payable 70,000
Bills payable accepted 90,000
Cheque dishonoured 23,000
[Ans : Bills matured : Rs. 38,000].
21. Prepare the bills payable account from the following and find out missing
figure if any :
Rs.
Bills accepted 1,05,000
Purchases returns 9,000
Cash paid to accounts payable 50,000
Bills receivable endorsed to creditor 45,000
Bills dishonoured 17,000
Bad debts 14,000
Balance of accounts payable (closing) 85,000
Credit purchases 2,15,000
[Ans : Opening balance of creditors : Rs. 79,000].
22. Calculate the amount of bills receivable during the year.
Rs.
Opening balance of bills receivable 75,000
Bill dishonoured 25,000
Bills collected (honoured) 1,30,000
Closing balance of bills receivable 65,000
[Ans : Rs. 1,60,000].
23. Calculate the amount of bills receivable dishonoured from the following
information.
Rs.
Opening balance of bills receivable 1,20,000
Bills collected (honoured) 1,85,000
Bills receivable endorsed 22,800
Closing balance of bills receivable 50,700
Bills receivable received 1,50,000
[Ans : Rs. 11,500].
24. From the details given below, find out the credit sales and total sales.
Rs.
Opening debtors 45,000
Closing debtors 56,000
Sales returns 8,500
Irrecoverable amount 4,000
Bills receivables received 12,000
Cash sales 80,000
Cheque received from debtors 25,000
[Ans : Total sales : Rs. 3,62,300].
25. From the following information, prepare the bills receivable account and
total debtors account for the year ended December 31, 2005.
472 Accountancy
Rs.
Opening balance of debtors 1,80,000
Opening balance of bills receivable 55,000
Cash sales made during the year 95,000
Credit sales made during the year 14,50,000
Discount allowed to debtors 55,000
Cash received (bills matured) 80,500
Closing balance of bills receivable on Dec. 31, 2005 75,500
[Ans : Bills received : Rs. 1,61,000 ; Closing balance of debtors : Rs. 3,01,000].
26. Prepare the suitable accounts and find out the missing figure if any.
Rs.
Opening balance of debtors 14,00,000
Opening balance of bills receivable 7,00,000
Closing balance of bills receivable 3,50,000
Cheque received and deposited in the bank 8,25,000
Returns inwards 28,000
Bills receivable received from customers 1,05,000
Bills receivable matured 2,80,000
Bills discounted 65,000
Bills endorsed to creditors 70,000
[Ans : Credit sales : Rs. 5,16,000].
27. From the following information ascertain the opening balance of sundry
debtors and closing balance of sundry creditors.
Rs.
Opening creditors 50,000
Closing debtors 75,000
Discount allowed by creditors 1,500
Discount allowed to customers 2,500
Bills payable accepted during the period 30,000
Bills receivable received during the period 75,000
Cash received from customers 2,20,000
Purchases 2,95,000
The rate of gross profit is 25% on selling price and out of the total sales
Rs. 85,000 was for cash sales.
100
(Hint : Total sales = 4,00,000 = 3, 00, 000 × )
75
[Ans : Opening balance of debtors : Rs. 54,000 ; Closing balance of creditors:
Rs. 1,78,500].
28 Mrs. Bhavana keeps his books by Single Entry System. You’re required to
prepare final accounts of her business for the year ended December 31, 2005.
Her records relating to cash receipts and cash payments for the above period
showed the following particulars :
Summary of Cash
Dr. Cr.

Rs. Rs.
Opening balance of cash 12,000 Paid to creditors 53,000
Further capital 20,000 Business expenses 12,000
Received from debtors 1,20,000 Wage paid 30,000
Bhavana’s drawings 15,000
Balance at bank on 35,000
Dec. 31,2005
Cash in hand 7,000
1,52,000 1,52,000
The following information is also available :

Jan. 01, 2005 Dec. 31, 2005
Rs. Rs.
Debtors 55,000 85,000
Creditors 22,000 29,000
Stock 35,000 70,000
Plant 10,00,000 1,00,000
Machinery 50,000 50,000
Land & Building 2,50,000 2,50,000
All her sales and purchases were on credit. Provide depreciation on plant
and building by 10% and machinery by 5%, make a provision for bad debts
by 5%.
[Ans : Gross profit ; Rs. 95,000 ; Net profit : Rs. 41,250 ; Total of balance
sheet : Rs. 5, 75,250].
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1. Test Your Understanding - I
1. (a) 2. (d) 3. (a) 4. (b)
2. Test Your Understanding - II

1. Total debtors 2. Opening capital, closing capital
3. Fresh capital introduced, drawings 4. Small traders
Applications of Computers in Accounting 12
C omputer technology and its usage have

registered a significant development during the
last three decades. Historically, computers have
been used effectively in science and technology to
solve the complex computational and logical
problems. They have also been used for carrying
out economic planning and forecasting processes.
Recently, modern day computers have made their
presence felt in business and industry. The most
important impact of computers has been on the
LEARNING OBJECTIVES manner in which data is stored and processed
After studying this within an organisation. Although manual data
chapter, you will be able processing for Management Information System
to : (MIS) has been quite common in the past, modern
• state the meaning, MIS would be nearly impossible without the use of
elements and capabilit-
computer systems. In this chapter we shall discuss
ies of computer system;
• explain the need for
the need for the use of computers in accounting,
computers in account- the nature of accounting information system and
ing; the types of accounting related MIS reports.
• describe the automa-
tion of accounting 12.1 Meaning and Elements of Computer System
process;
• explain design of A computer is an electronic device, which is capable
accounting reports of performing a variety of operations as directed by
from the accounting a set of instructions. This set of instructions is called
data; a computer programme. A computer system is a
• list the various
combination of six elements:
Management Informa-
tion System (MIS)
reports and their uses; 12.1.1 Hardware
• explain the data
Hardware of computer consists of physical components
interface between
information systems. such as keyboard, mouse, monitor and processor. These
are electronic and electromechanical components.
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12.1.2 Software
A set(s) of programmes, which is used to work with such hardware is called
its software. A coded set of instructions stored in the form of circuits is called
firmware. There are six types of software as follows:
(a) Operating System : An integrated set of specialised programmes that
are meant to manage the resources of a computer and also facilitate its
operation is called operating system. It creates a necessary interface
that is an interactive link, between the user and the computer hardware.
(b) Utility Programmes : These are a set of computer programmes, which are
designed to perform certain supporting operations: such as programme
to format a disk, duplicate a disk, physically reorganise stored data and
programmes.
(c) Application Software : These are user oriented programmes designed
and developed for performing certain specified tasks: such as payroll
accounting, inventory accounting, financial accounting, etc.
(d) Language Processors : These are the software, which check for language
syntax and eventually translate (or interpret) the source programme
(that is a programme written in a computer language) into machine
language (that is the language which the computer understands).
(e) System Software : These are a set of programmes which control such
internal functions as reading data from input devices, transmitting
processed data to output devices and also checking the system to ensure
that its components are functioning properly.
(f) Connectivity Software : These are a set of programmes which create and
control a connection between a computer and a server so that the
computer is able to communicate and share the resources of server
and other connected computers.
12.1.3 People
People interacting with the computers are also called live-ware of the computer
system. They constitute the most important part of the computer system :
• System Analysts are the people who design data processing systems.
• Programmers are the people who write programmes to implement the data
processing system design.
• Operators are the people who participate in operating the computers.
People who respond to the procedures instituted for executing the computer
programmes are also a part of live-ware.
12.1.4 Procedures
The procedure means a series of operations in a certain order or manner to
achieve desired results. There are three types of procedures which constitute
part of computer system: hardware-oriented, software-oriented and internal

procedure. Hardware–oriented procedure provide details about components
and their method of operation. The software-oriented procedure provides a
set of instructions required for using the software of computer system. Internal
procedure is instituted to ensure smooth flow of data to computers by
sequencing the operation of each sub-system of overall computer system.
12.1.5 Data
These are facts and may consist of numbers, text, etc. These are gathered
and entered into a computer system. The computer system in turn stores,
retrieves, classifies, organises and synthesises the data to produce information
according to a pre-determined set of instructions. The data is, therefore,
processed and organised to create information that is relevant and can be
used for decision-making.
12.1.6 Connectivity
It is being acknowledged as a sixth element of the computer system. The
manner in which a particular computer system is connected to others say
through telephone lines, microwave transmission, satellite link, etc. is the
element of connectivity.
12.2 Capabilities of Computer System

A computer system possesses some characteristics, which, in comparison to
human beings, turn out to be its capabilities. These are as follows ;
Speed : It refers to the amount of time computers takes in accomplishing a
task or completes an operation. Computers require far less time than human
beings in performing a task. Normally, human beings take into account a
second or minute as unit of time. But computers have such a fast operating
capability that the relevant unit of time is fraction of a second. Most of the
modern computers are capable of performing a 100 million calculations per
second and that is why the industry has developed Million Instructions per
Second (MIPS) as the criterion to classify different computers according to
speed.
Accuracy : It refers to the degree of exactness with which computations are
made and operations are performed. One might spend years in detecting errors
in computer calculations or updating a wrong record. Most of the errors in
Computer Based Information System(CBIS) occur because of bad programming,
erroneous data and deviation from procedures. These errors are caused by human
beings. Errors attributable to hardware are normally detected and corrected by
the computer system itself. The computers rarely commit errors and perform all
types of complex operations accurately.
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Reliability : It refers to the ability with which the computers remain functional to
serve the user. Computers systems are well-adapted to performing repetitive
operations. They are immune to tiredness, boredom or fatigue. Therefore, they are
more reliable than human beings. Yet there can be failures of computer system
due to internal and external reasons. Any failure of the computer in a highly
automated industry is unacceptable. Therefore, the companies in such situations
provide for back-up facility to swiftly take over operations without loss of time.
Versatility : It refers to the ability of computers to perform a variety of tasks: simple
as well as complex. Computers are usually versatile unless designed for a specific
application. A general purpose computer is capable of being used in any area of
application: business, industry, scientific, statistical, technological, communications
and so on. A general purpose computer, when installed in an organisation, can
take over the jobs of several specialists because of its versatility. computer system
when installed can take over the jobs of all these specialists because of being highly
versatile. This further ensures fuller utilisation of its capability.
Storage : It refers to the amount of data a computer system can store and
access. The computer systems, besides having instant access to data, have
huge capacity to store such data in a very small physical space. A CD-ROM
with 4.7” of diameter is capable of storing a large number of books, each
containing thousands of pages and yet leave enough space for storing more
such material. A typical mainframe computer system is capable of storing
and providing online billion of characters and thousands of graphic images.
It is clear from the above discussion that computer capabilities outperform
the human capabilities. As a result, a computer, when used properly, will
improve the efficiency of an organisation.
12.3 Limitations of a Computer System

In spite of possessing all the above capabilities, computers suffer from the
following limitations :
Lack of Commonsense : Computer systems as on date do not possess any
common sense because no full-proof algorithm has been designed to
programme common sense. Since computers work according to a stored
programme(s), they simply lack of commonsense.
Zero IQ : Computers are dumb devices with zero Intelligence Quotient (IQ).
They cannot visualise and think what exactly to do under a particular situation,
unless they have been programmed to tackle that situation. Computers must
be directed to perform each and every action, however, minute it may be.
Lack of Decision-making : Decision-making is a complex process involving
information, knowledge, intelligence, wisdom and ability to judge. Computers
cannot take decisions on their own because they do not possess all the
essentials of decision-making. They can be programmed to take such decisions,
which are purely procedure-oriented. If a computer has not been programmed

for a particular decision situation, it will not take decision due to lack of
wisdom and evaluating faculties. Human beings, on the other hand, possess
this great power of decision-making.
12.4 Components of Computer

The functional components of computer system consist of Input Unit, Central
Processing System and Output Unit. The way these components are embedded
in a computer may differ from one architectural design to another, yet all of
them constitute the essential building blocks of a computer system.
Diagrammatically, these components may be presented as follows:
Fig. 12.1 : Block diagram of main components of computer
12.4.1 Input Unit

It controls various input devices which are used for entering data into the
computer system. Keyboard and mouse, for instance, are the most commonly
used input device. Other such devices are magnetic tape, magnetic disk, light
pen, optical scanner, Magnetic Ink Character (MICR) Recognition, Optical
Character Recognition (OCR), bar code reader, smart card reader, etc. Besides,
there are other devices which respond to voice and physical touch. A menu
layout is displayed on a touch sensitive screen. Whenever user touches a menu
item on touch-screen, the computer senses which particular menu item has
been touched and accordingly performs the operation associated with that menu
item. Such touch screens have been installed at major railway stations for
obtaining the online information about arrival and departure of trains.
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12.4.2 Central Processing Unit (CPU)

This is the main part of computer hardware that actually processes data,
according to the instructions it receives. It controls the flow of data by directing
the data to enter the system, places the data into its memory, retrieves the
same as and when needed and directs the output of data according to a set of
stored instructions. It has three main units as described below :
(a) Arithmetic and Logic Unit (ALU) : It is responsible for performing all the
arithmetic computations such as addition, subtraction, division,
multiplication and exponentiation. In addition to this, it also performs
logical operations involving comparisons among variables and data items.
(b) Memory Unit : In this unit, data is stored before being actually processed.
The data so stored is accessed and processed according to a set of
instructions which are also stored in the memory of the computer well
before such data is transmitted to the memory from input devices.
(c) Control Unit : This unit is entrusted with the responsibility of controlling
and coordinating the activities of all other units of the computer system.
Specifically, it performs the following functions :
• Read instructions out of memory unit;
• Decode such instructions;
• Set up the routing of data, through internal circuitry/wiring, to the
desired place at right time; and
• Determine the input device from where to get next instruction after
the instruction in hand has been executed.
12.4.3 Output Unit

After processing the data, the information produced according to a set of
instruction need to be made available to user in a human readable and
understandable form. A computer system, therefore, needs an output device
to communicate such information to the user. Essentially, the output device
is assigned the task of translating the processed data from machine coded
form to a human readable form. The commonly used output devices include:
external devices like monitor also called Visual Display Unit (VDU), printer,
graphic plotter for producing graphs, technical drawings and charts and
internal devices like magnetic storage devices. Recently, a new device being
perfected is the speech synthesiser, which is capable of producing verbal output
that sounds like human speech. Information:
12.5 Evolution of Computerised Accounting

Manual system of accounting has been traditionally the most popular method
of keeping the records of financial transactions of an organisation.
Conventionally, the bookkeeper (or accountant) used to maintain books of

accounts such as cash book, journal and ledger so as to prepare a summary
of transactions and final accounts manually. The technological innovations
led to the development of various machines capable of performing a variety of
accounting functions. For example, the popular billing machine was designed
to typewrite description of the transaction along with names, addresses of
customers. This machine was capable of computing discounts; adding the
net total and posting the requisite data to the relevant accounts. The customer’s
bill was generated automatically once the operator has entered the necessary
information. These machines combined the features of a typewriter and various
kinds of calculators.
With substantial increase in the number of transactions, the technology
advanced further. With exponential increase in speed, storage and processing
capacity, newer versions of these machines evolved. A computer to which
they were connected operated these machines. The success of a growing
organisation with complexity of transactions tended to depend on resource
optimisation, quick decision-making and control. As a result, the maintenance
of accounting data on a real-time (or spontaneous) basis became almost
essential. Such a system of maintaining accounting records became convenient
with the computerised accounting system.
12.5.1 Information and Decisions

An organisation is a collection of interdependent decision-making units that
exist to pursue organisational objectives. As a system, every organisation
accepts inputs and transforms them into outputs. All organisational systems
pursue certain objectives through a process of resource allocation, which is
accomplished through the process of managerial decision-making. Information
facilitates decisions regarding allocation of resources and thereby assists an
organisation in pursuit of its objectives. Therefore, the information is the
most important organisational resource. Every medium sized to large
organisation has a well-established information system that is meant to
generate the information required for decision-making.
With the increasing use of information systems in organisations,
Transaction Processing Systems (TPS) have started playing a vital role in
supporting business operations. Every transaction processing system has
three components: Input, Processing and Output. Since Information
Technology (IT) follows the GIGO principle (Garbage in-Garbage out), it is
necessary that input to the IT-based information system is accurate, complete
and authorised. This is achieved by automating the input. A large number of
devices are now available to automate the input process for a TPS.
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12.5.2 Transaction Processing System

Transaction Processing Systems (TPS) are among the earliest computerised
systems catering to the requirements of large business enterprises. The purpose
of a typical TPS is to record, process, validate and store transactions that
occur in the various functional areas of a business for subsequent retrieval
and usage. A transaction could be internal or external. When a department
requisitions material supplies from stores, an internal transaction is said to
have occurred. However, when the purchase department purchases materials
from a supplier, an external transaction takes place. The scope of financial
accounting is confined to external transactions only. TPS involves following
steps in processing a transaction. In order to understand these steps, let us
consider a case wherein a customer withdraws money using the Automated
Teller Machine (ATM) facility, as described below :
• Data Entry : The action data must be entered into the system before it is
processed. There are a number of input devices to enter data: Keyboard,
mouse, etc. For example, a bank customer operates an ATM facility to make
a withdrawal. The actions taken by the customer constitute data, which is
processed after validation by the computerised personal banking system.
• Data Validation : It ensures the accuracy and reliability of input data by
comparing the same with some predetermined standards or known data.
This validation is performed by error detection and error correction
procedures. The control mechanism, wherein actual input is compared
with the standard, is meant to detect errors while error correction
procedures make suggestions for entering correct data input. The Personal
Identification Number (PIN) of the customer is validated with the known
data. If it is incorrect, a suggestion is made to indicate that the PIN is
invalid. After validating the PIN (which is also a part of processing by TPS),
the amount of withdrawal being made by the customer is also checked to
ensure that it does not exceed a certain limit.
• Processing and Revalidation : The processing of data, representing actions
of the ATM user, occurs almost instantaneously in case of the Online
Transaction Processing (OLTP) system provided a valid data representing
actions of the user has been encountered. This is called check input validity.
Revalidation occurs to ensure that the transaction in terms of delivery of
money by ATM has been completed. This is called check output validity.
• Storage : Processed actions, as described above, culminate into financial
transaction data, which describe the withdrawal of money by a particular
customer, are stored in transaction database of Computerised personal banking
system. This implies that only valid transactions are stored in the database.
• Information : The stored data is processed using the query facility to produce
desired information. A database supported by DBMS is bound to have
standard Structured Query Language (SQL) support.
• Reporting : Finally, reports can be prepared on the basis of the required

information content according to decision usefulness of report.
A simple computerised accounting system accepts the complete transaction
data as input; stores such data in computer storage media (say hard disk)
and retrieves the accounting data for processing as and when required for
generating an accounting report, as output. The input-process-output diagram
shown below indicates as to how accounting software translates data into
information. This processing of data is accomplished either through Batch
Processing or Real-time Processing.
Batch Processing applies to large and voluminous data that is accumulated
offline from various units: branches or departments. The entire accumulated
data is processed in one shot to generate the desired reports according to
decision requirement.
Real-Time Processing provides online outcome in the form of information
and reports without time lag between the transaction and its processing. The
accounting reports are generated by query language popularly called Structured
Query Language (SQL). It allows the user to retrieve report relevant information
that is capable of being laid out in pre-designed accounting report.
Accounting software may be structured with such components as provide for
storage and processing of data pertaining to purchase, sales, inventory, payroll
and other financial transactions (refer figure 12.2).
Do It Yourself
Go to a departmental store and an ATM of a Bank and identify the

accounting process there. Observe the Transaction Processing System (TPS).
12.6 Features of Computerised Accounting System

Accounting software is used to implement a computerised accounting system.
The computer accounting system is based on the concept of databases. It
does away with the concept of creating and maintaining journals, ledger, etc.
which are essential while working with manual accounting system. Typicaly
computerised accounting system offers the following features :
• Online input and storage of accounting data.
• Printout of purchase and sales invoices.
• Logical scheme for codification of accounts and transactions. Every account
and transaction is assigned a unique code.
• Grouping of accounts is done from the very beginning.
• Instant reports for management, for example – Aging Statement, Stock
Statement, Trial Balance, Trading and Profit and Loss Account, Balance Sheet,
Stock Valuation, Value Added Tax (VAT), Returns, Payroll Report, etc.
484 Accountancy
Fig. 12.2 : Components of computerised accounting software system
Fill in the correct words :

1. The user oriented programmes designed and developed for performing certain specific
tasks are called as ...........
2. Language syntax is checked by software called as ...........
3. The people who write programmes to implement the data processing system design
are called as ...........
4. ...........is the brain of the computer.
5. ...........and ...........are two of the important requirements of an accounting report.
6. An example of responsibility report is ...........
12.7 Management Information System and Accounting

Information System
In order to remain competitive, organisations depend heavily on Information
Systems. Management Information System (MIS) is used the most common
form of information system. A management information system (MIS) is a
system that provides the information necessary to take decisions and manage
an organisation effectively. MIS is supportive of the institution’s long-term
strategic goals and objectives. MIS is viewed and used at many levels by
management: Operational, Tactical and Strategic. Accounting Information
System (AIS) identifies, collects, processes, and communicates economic
information about an entity to a wide variety of users. Such information is
organised in a manner that correct decisions can be based on it.
Every accounting system is essentially a part of the Accounting Information
System (AIS) which, in turn is a part of the broader system, viz. the
organisation’s Management Information System.
The following diagram shows the relationship of the Accounting System
with the other functional management information systems.
Fig. 12.3 : Relationship of the accounting system with other

functional management information system
The diagram shown above entails the four widely recognised functional
areas of management. An organisation operates in a given environment
surrounded by the suppliers and customers. The informational needs
emerge from the business processes stratified into functional areas where
accounting is one of them. The accounting information system (AIS) receives
and provides information to the various sub-systems of the institutional/
integrated MIS.
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Accounting Information System (AIS) is a collection of resources (people

and equipment), designed to transform financial and other data into
information. This information is communicated to a wide variety of decision-
makers. Accepting information systems performs this transformation whether
they are essentially manual systems or thoroughly computerised.
Conventionally, MIS was also perceived as day-to-day financial accounting
systems that are used to ensure basic control is maintained over financial
record keeping activities, but now it is widely recognised as a broader concept
and accounting system is a sub component.
The reports generated by the accounting system are disseminated to
the various users – internal and external to the organisation. The external
parties include the proprietors, investors, creditors, financiers, government
suppliers and vendors and the society at large. The reports used by these
parties are more of routine nature. However, the internal parties – the
employees, managers, etc. use the accounting information for decision-
making and control.
Do It Yourself
Go to a shoe manufacturing unit/chemical-processing unit. Observe the

production process and the various selling activities. Visualise the need
for a MIS. Identify the various sub components of the MIS.
12.7.1 Designing of Accounting Reports

Data when processed becomes information. When the related information is
summarised to meet a particular need, it is called as a report. The content
and design of the report is expected to vary depending upon the level to which
it is submitted and decision to made on the basis of the report. A report must
be effective and efficient to the user and should substantiate the decision-
making process. Akin to any report, every accounting report must be able to
fulfil the following criterion :
(a) Relevance
(b) Timeliness
(c) Accuracy
(d) Completeness
(e) Summarisation
The accounting reports generated by the accounting software may be either
routine reports or on the specific requirements of the user. For example, the
ledger is a routine report while a report on supplies of a particular item by a
given party is an on-demand report. However, from a broader perspective, the
accounting related MIS reports may be of following reports :
(a) Summary Reports : Summarises all activities of the organisation and present
in the form of summary report. Profit and Loss account and Balance Sheet.
(b) Demand Reports : This report will be prepared only when the management
requests them, e.g. Bad Debts Report for a given product, Stock Valuation
Report.
(c) Customer/Supplier Reports : According to the specifications of the
management it will be prepared. For example, Top 10 Customers report,
Interest on Customer Account/Invoices, Statement of Account, Customer
Reminder Letters Outstanding/Open Delivery Order, Purchase Analysis,
Vendor Analysis report.
(d) Exception Reports : According to the conditions or exceptions the report
is prepared. For example, Inventory Report in short supplies, Stock Status
Query, Over stocked Status, etc.
(e) Responsibility Reports : The MIS structure specifies the premises of
management responsibilities. For example, the report on Cash Position,
to be submitted by the head of Finance and Accounts department.
The various steps involved in designing accounting reports from accounting
data are as follows :
(1) Definition of objectives : the objectives of the report must be clearly
defined, who are the users of the report and the decision to be taken on
the basis of report.
(2) Structure of the report : the information to be contained therein and the
style of presentation.
(3) Querying with the database : the accounting information queries must
be clearly defined and the methodology to be adopted while interacting
with the database.
(4) Finalising the report.
12.7.2 Data Interface between the Information System

Accounting information system is important component of the organisational
MIS in an organisation. It receives information and provides information to
the other functional MIS. The following examples illustrate the relationship
and data interface between the various sub-components of MIS.
I Accounting Information System, Manufacturing Information System and

Human Resource Information System
Look at figure 12.4. It depicts the relationship between the three information
systems, viz. manufacturing information system, accounting information
system and the human resource information system.
488 Accountancy
The manufacturing department receives the list of workers from the Human
Resource (HR) department. It sends the details of production achieved by the
workers on the basis of which the HR department to the finance and accounts
(F&A) department to pay the wages. The details of the wages paid and statutory
dues are also send by the F & A department to the production department
also to the HR department to monitor the performance of workers. The HR
department communicates to the other departments about the good/bad
performance on the basis decision on various operational matters may be
taken.
Fig. 12.4 : Relationship between AIS, manufacturing information

system and human resource information system
II AIS and Marketing Information System

Consider the business process in the Marketing and Sales department involving
the following activities :
• inquiry
• contact creation
• entry of orders
• dispatch of goods
• billing to customers
The accounting sub-system’s transaction cycle include the processing of
sales orders, credit authorisation, custody of the goods, inventory position,
shipping information, receivables, etc. It also keeps a track of the customer
accounts, e.g. Aging Report, which should be generated by the system.
III AIS and Manufacturing Information System

Similarly, business process in the production department may involve the
following activities :
• preparation of plans and schedules
• issue of material requisition forms and job cards
• issue of inventory
• issue of orders for procurement of raw materials
• handling of vendors invoices
• payments to vendors
The accounting sub-system transaction cycle would therefore include the
processing of purchase orders, advance to suppliers/vendors, inventory status
updation, account payable, etc. All of this information has to share with the
other MIS in the organisation.
Hence, the computerised accounting system as a sub component of the
accounting information system transforms the financial data into meaningful
information and communicates the information to the decision-makers. The
report demanded may be routine or specific ones.

• Operating system • Management information system
• Analysts • Transactions processing system
• Utility programme • Accounting information system
• Data • Data interface
• Application software • Report

1 Meaning of a Computer : Computer is an electronic device capable of performing
variety of operations as desired by a set of instructions.
2 Elements of a Computer System :
• Hardware
• Software
• People
• Procedure
• Data
• Connectivity
3 Capabilities of Computer :
• Speed
• Accuracy
• Reliability
• Versatility
• Storage
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4 Need of Computers in Accounting : The advent of globalisation has resulted in

the rise in business operations. Consequently, every medium and large sized
organisations require well-established information system in order to generate
information required for decision-making and achieving the organisational
objectives. This made information technology to play vital role in supporting
business operations.
5 MIS and Accounting Information System : A management information system
provides information necessary to take decisions and manage an organisation
effectively. Accounting information system on the other hand identifies, collects,
processes and communicates economic information about an entity to a wide
variety of users.
6 Accounting Reports : Information supplied to meet a particular need is called
report. An accounting report must fulfil the following conditions :
• Relevance
• Timeliness
• Accuracy
• Completeness
• Summarisation

Short Answers
1. State the different elements of a computer system.
2. List the distinctive advantages of a computer system over a manual system.
3. Draw block diagram showing the main components of a computer.
4. Give three examples of a transaction processing system.
5. State the relationship between information and decision.
6. What is Accounting Information System?
7. State the various essential features of an accounting report.
8. Name three components of a Transaction Processing System.
9. Give example of the relationship between a Human Resource Information
System and MIS.
Long Answers
1. ‘An organisation is a collection of interdependent decision-making units that
exists to pursue organisational objectives’. In the light of this statement,
explain the relationship between information and decisions. Also explain the
role of Transaction Processing System in facilitating the decision-making
process in business organisations.
2. Explain, using examples, the relationship between the organisational MIS
and the other functional information system in an organisation. Describe
how AIS receives and provides information to other functional MIS.
3. ‘An accounting report is essential a report which must be able to fulfil certain
basic criteria ‘ Explain? List the various types of accounting reports.
4. Describe the various elements of a computer system and explain the distinctive
features of a computer system and manual system.

1. Application software
2. Language processor
3. Programmer
4. CPU
5. Timliness, Relevance
6. Cash position, Management responsibility
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Computerised Accounting System 13
I n chapter 12, you have learnt about the need for

use of computers in accounting the nature and
use of accounting information system. In this
chapter, we shall discuss the nature of computrised
accounting system, its advantages, limitations and
sourcing.
13.1 Concept of Computerised

Accounting System
A computerised accounting system is an accounting
information system that processes the financial
transactions and events as per Generally Accepted
Accounting Principles (GAAP) to produce reports as
per user requirements. Every accounting system,
manual or computerised, has two aspects. First, it
LEARNING OBJECTIVES has to work under a set of well-defined concepts
called accounting principles. Another, that there is
After studying this
a user -defined framework for maintenance of
to : records and generation of reports.
• define a computerised In a computerised accounting system, the framework
accounting system; of storage and processing of data is called operating
• distinguish between a environment that consists of hardware as well as software
manual and computer- in which the accounting system, works. The type of the
ised accounting sys-
tem;
accounting system used determines the operating
• highlight the advanta- environment. Both hardware and software are
ges and limitations of interdependent. The type of software determines the
computerised account- structure of the hardware. Further, the selection of
ing system; and hardware is dependent upon various factors such as
• state the sourcing of a
the number of users, level of secrecy and the nature of
computerised account-
ing system. various activities of functional departments in an
organisation.
Take the case of a club, for example, where the number of transactions
and their variety is relatively small, a Personal Computer with standardised
software may be sufficient. However, for a large business organisation with a
number of geographically scattered factories and offices, more powerful
computer systems supported by sophisticated networks are required to handle
the voluminous data and the complex reporting requirements. In order to
handle such requirements, multi-user operating systems such as UNIX, Linux,
etc. are used.
Modern computerised accounting systems are based on the concept of
database. A database is implemented using a database management system,
which is define by a set of computer programmes (or software) that manage
and organise data effectively and provide access to the stored data by the
application programmes. The accounting database is well-organised with active
interface that uses accounting application programs and reporting system.
Every computerised accounting system has two basic requirements;
• Accounting Framework : It consists a set of principles, coding and grouping
structure of accounting.
• Operating Procedure : It is a well-defined operating procedure blended
suitably with the operating environment of the organisation.
The use of computers in any database oriented application has four basic
requirements as mentioned below ;
• Front-end Interface : It is an interactive link or a dialog between the user
and database-oriented software through which the user communicates to
the back-end database. For example, a transaction relating to purchase
of goods may be dealt with the accounting system through a purchase
voucher, which appears on the computer’s monitor of data entry operator
and when entered into the system is stored in the database. The same
data may be queried through reporting system say purchase analysis
software programme.
• Back-end Database : It is the data storage system that is hidden from the
user and responds to the requirement of the user to the extent the user is
authorised to access.
• Data Processing : It is a sequence of actions that are taken to transform
the data into decision useful information.
• Reporting System: It is an integrated set of objects that constitute the
report.
The computerised accounting is also one of the database-oriented
applications wherein the transaction data is stored in well-organised database.
The user operates on such database using the required and desired interface
and also takes the desired reports by suitable transformations of stored data
into information. Therefore, the fundamentals of computerised accounting
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embrace all the basic requirements of any database-oriented application in

computers. Accordingly, the computerised accounting system has the above
four additional requirements.
13.2 Comparison between Manual and Computerised Accounting

Accounting, by definition, is the process of identifying, recording, classifying
and summarising financial transactions to produce the financial reports for
their ultimate analysis. Let us understand these activities in the context of
manual and computerised accounting system.
• Identifying : The identification of transactions, based on application of
accounting principles is, common to both manual and computerised
accounting system.
• Recording : The recording of financial transactions, in manual accounting
system is through books of original entries while the data content of such
transactions is stored in a well-designed accounting database in
computerised accounting system.
• Classification : In a manual accounting system, transactions recorded in
the books of original entry are further classified by posting into ledger
accounts. This results in transaction data duplicity. In computerised
accounting, no such data duplication is made to cause classification of
transactions. In order to produce ledger accounts, the stored transaction
data is processed to appear as classified so that the same is presented in
the form of a report. Different forms of the same transaction data are
made available for being presented in various reports.
• Summarising : The transactions are summarised to produce trial balance
in manual accounting system by ascertaining the balances of various
accounts. As a result, preparation of ledger accounts becomes a pre-
requisite for preparing the trial balance. However, in computerised
accounting, the originally stored transactions data are processed to churn
out the list of balances of various accounts to be finally shown in the trial
balance report. The generation of ledger accounts is not a necessary
condition for producing trial balance in a computerised accounting system.
• Adjusting Entries : In a manual accounting system, these entries are made
to adhere to the principle of cost matching revenue. These entries are
recorded to match the expenses of the accounting period with the revenues
generated by them. Some other adjusting entries may be made as part of
errors and rectification. However, in computerised accounting, Journal
vouchers are prepared and stored to follow the principle of cost matching
revenue, but there is nothing like passing adjusting entries for errors and
rectification, except for rectifying an error of principle by having recorded
a wrong voucher such as using payment voucher for a receipt transaction.
• Financial Statements : In a manual system of accounting, the preparation

of financial statements pre-supposes the availability of trial balance.
However, in computerised accounting, there is no such requirement. The
generation of financial statements is independent of producing the trial
balance because such statements can be prepared by direct processing of
originally stored transaction data.
• Closing the Books : After the preparation of financial reports, the accountants
make preparations for the next accounting period. This is achieved by
posting of closing and reversing journal entries. In computerised accounting,
there is year-end processing to create and store opening balances of accounts
in database.
It may be observed that conceptually, the accounting process is identical
regardless of the technology used.
13.3 Advantages of Computerised Accounting System

Computerised accounting offers several advantages vis-a-vis manual accounting,
these are summarised as follows ;
• Speed : Accounting data is processed faster by using a computerised
accounting system than it is achieved through manual efforts. This is because
computers require far less time than human beings in performing a task.
• Accuracy : The possibility of error is eliminated in a computerised
accounting system because the primary accounting data is entered once
for all the subsequent usage and processes in preparing the accounting
reports. Normally, accounting errors in a manual accounting system occur
because of repeated posting of same set of original data by several times
while preparing different types of accounting reports.
• Reliability : The computer system is well-adapted to performing repetitive
operations. They are immune to tiredness, boredom or fatigue. As a result,
computers are highly reliable compared to human beings. Since computerised
accounting system relies heavily on computers, they are relatively more reliable
than manual accounting systems.
• Up-to-Date Information : The accounting records, in a computerised
accounting system are updated automatically as and when accounting
data is entered and stored. Therefore, latest information pertaining to
accounts get reflected when accounting reports are produced and printed.
For example, when accounting data pertaining to a transaction
regarding cash purchase of goods is entered and stored, the cash account,
purchase account and also the final accounts (trading and profit and loss
account) reflect the impact immediately.
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• Real Time User Interface : Most of the automated accounting systems are
inter-linked through a network of computers. This facilitates the availability
of information to various users at the same time on a real time basis (that
is spontaneously).
• Automated Document Production : Most of the computerised accounting
systems have standardised, user defined format of accounting reports that
are generated automatically. The accounting reports such as Cash book,
Trial balance, Statement of accounts are obtained just by click of a mouse
in a computerised accounting environment.
• Scalability : In a computerised accounting system, the requirement of
additional manpower is confined to data entry operators for storing
additional vouchers. The additional cost of processing additional transactions
is almost negligible. As a result the computerised accounting systems are
highly scalable.
• Legibility : The data displayed on computer monitor is legible. This is
because the characters (alphabets, numerals, etc.) are type written using
standard fonts. This helps in avoiding errors caused by untidy written
figures in a manual accounting system.
• Efficiency : The computer based accounting systems ensure better use of
resources and time. This brings about efficiency in generating decisions,
useful informations and reports.
• Quality Reports : The inbuilt checks and untouchable features of data
handling facilitate hygienic and true accounting reports that are highly
objective and can be relied upon.
• MIS Reports : The computerised accounting system facilitates the real time
production of management infor mation reports, which will help
management to monitor and control the business effectively. Debtors’
analysis would indicate the possibilities of defaults (or bad debts) and also
concentration of debt and its impact on the balance sheet. For example, if
the company has a policy of restricting the credit sales by a fixed amount
to a given party, the information is available on the computer system
immediately when every voucher is entered through the data entry form.
However, it takes time when it comes to a manual accounting system.
Besides, the results may not be accurate.
• Storage and Retrieval : The computerised accounting system allows the
users to store data in a manner that does not require a large amount of
physical space. This is because the accounting data is stored in
hard-disks, CD-ROMs, floppies that occupy a fraction of physical space
compared to books of accounts in the form of ledger, journal and other
accounting registers. Besides, the system permits fast and accurate
retrieval of data and information.
• Motivation and Employees Interest : The computer system requires a

specialised training of staff, which makes them feel more valued. This
motivates them to develop interest in the job. However, it may also cause
resistance when we switch over from a manual system to a computer
system.
1. The framework of storage and processing of data is called as ........

2. Database is implemented using ........
3. A sequence of actions taken to transform the data into decision useful
information is called.......
4. An appropriate accounting software for a small business organisation
having only one user and single office location would be ........
13.4 Limitations of Computerised Accounting System

The main limitations emerge out of the environment in which the computerised
accounting system is made to operate. These limitations are as given below ;
• Cost of Training : The sophisticated computerised accounting packages
generally require specialised staff personnel. As a result, a huge training
costs are incurred to understand the use of hardware and software on a
continuous basis because newer types of hardware and software are
acquired to ensure efficient and effective use of computerised accounting
systems.
• Staff Opposition : Whenever the accounting system is computerised, there
is a significant degree of resistance from the existing accounting staff,
partly because of the fear that they shall be made redundant and largely
because of the perception that they shall be less important to the
organisation.
• Disruption : The accounting processes suffer a significant loss of work
time when an organisation switches over to the computerised accounting
system. This is due to changes in the working environment that requires
accounting staff to adapt to new systems and procedures.
• System Failure : The danger of the system crashing due to hardware failures
and the subsequent loss of work is a serious limitation of computerised
accounting system. However, providing for back-up arrangements can
obviate this limitation. Software damage and failure may occur due to
attacks by viruses. This is of particular relevance to accounting systems
that extensively use Internet facility for their online operations. No full-
proof solutions are available as of now to tackle the menace of attacks on
software by viruses.
498 Accountancy
• Inability to Check Unanticipated Errors : Since the computers lack capability

to judge, they cannot detect unanticipated errors as human beings commit.
This is because the software to detect and check errors is a set of
programmes for known and anticipated errors.
• Breaches of Security : Computer related crimes are difficult to detect as
any alteration of data may go unnoticed. The alteration of records in a
manual accounting system is easily detected by first sight. Fraud and
embezzlement are usually committed on a computerised accounting system
by alteration of data or programmes. Hacking of passwords or user rights
may change the accounting records. This is achieved by tapping
telecommunications lines, wire-tapping or decoding of programmes. Also,
the people responsible for tampering of data cannot be located which in a
manual system is relatively easier to detect.
• Ill-effects on Health : The extensive use of computers systems may
lead to development of various health problems: bad backs, eyestrain,
muscular pains, etc. This affects adversely the working efficiency of
accounting staff on one hand and increased medical expenditure on
such staff on the other.
Do It Yourself
Visit a commercial organisation where the accounting is performed manually.

Observe the various accounting activities. Now list the advantages, which
would have accrued, had the accounting being performed through
computers.
13.5 Sourcing of Accounting Software

Accounting software is an integral part of the computerised accounting
system. An important factor to be considered before acquiring accounting
software is the accounting expertise of people responsible in organisation
for accounting work. People, not computers, are responsible for accounting.
The need for accounting software arises in two situations : (a) when the
computerised accounting system is implemented to replace the manual
system or (b) when the current computerised system needs to be replaced
with a new one in view of changing needs.
Box 1
Accounting Software
Variety of accounting software is available in the market. The most

popular software used in India are Tally and Ex. The basic features of
all accounting software are same on a global basis. The legal reporting
requirements in a given country and the business needs affect the
software contents. The other popular softwares are Sage, Wings 2000,
Best Books, Cash Manager, and Ace Pays, etc.
13.5.1 Accounting Packages

Every Computerised Accounting System is implemented to perform the
accounting activity (recording and storing of accounting data) and generate
reports as per the requirements of the user. From this perspective.
The accounting packages are classified into the following categories :
(a) Ready to use
(b) Customised
(c) Tailored
Each of these categories offers distinctive features. However, the choice of
the accounting software would depend upon the suitability to the organisation
especially in terms of accounting needs.
13.5.2 Ready-to-Use
Ready-to-Use accounting software is suited to organisations running small/
conventional business where the frequency or volume of accounting
transactions is very low. This is because the cost of installation is generally
low and number of users is limited. Ready-to-use software is relatively easier
to learn and people (accountant) adaptability is very high. This also implies
that level of secrecy is relatively low and the software is prone to data frauds.
The training needs are simple and sometimes the vendor (supplier of software)
offers the training on the software free. However, these software offer little
scope of linking to other information systems.
13.5.3 Customised
Accounting software may be customised to meet the special requirement of
the user. Standardised accounting software available in the market may not
suit or fulfil the user requirements. For example, standardised accounting
software may contain the sales voucher and inventory status as separate
options. However, when the user requires that inventory status to be updated
immediately upon entry of sales voucher and report be printed, the software
needs to be customised.
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Customised software is suited large and medium businesses and can be

linked to the other information systems. The cost of installation and
maintenance is relatively high because the high cost is to be paid to the vendor
for customisation. The customisation includes modification and addition to
the software contents, provision for the specified number of users and their
authentication, etc. Secrecy of data and software can be better maintained in
customised software. Since the need to train the software users is important,
the training costs are therefore high.
13.5.4 Tailored
The accounting software is generally tailored in large business organisations
with multi users and geographically scattered locations. These software
requires specialised training to the users. The tailored software is designed to
meet the specific requirements of the users and form an important part of the
organisational MIS. The secrecy and authenticity checks are robust in such
softwares and they offer high flexibility in terms of number of users.
To summarise, the following table represents the comparison between the
various categories of accounting software :
Basis Ready to use Customised Tailored

Nature of business Small, conventional Large, medium Large, typical
business business business
Cost of installation and Low Relatively high High
maintenance
Expected Level of secrecy Low Relatively high Relatively high
(Software and Data)
Number of users and Limited As per Unlimited
their interface specifications
Linkage to other Restricted yes Yes
information system
Adaptability High Relatively high Specific
Training Low Medium High
requirements
Do It Yourself
Visit a branch of a commercial bank and a big shopping complex. See the
various activities performed there and analyse the accounting needs. Identify
an appropriate type of accounting package for performing the accounting
activities.
13.6 Generic Considerations before Sourcing an Accounting Software

The following factors are usually taken in considerations before sourcing
an accounting software.
13.6.1 Flexibility
An important consideration before sourcing an accounting software is
flexibility, viz. data entry and the availability and design of various reports
expected from it. Also, it should offer some flexibility between the users of the
software, the switch over between the accountants (users), operating systems
and the hardware. The user should be able to run the software on variety of
platforms and machines, e.g. Windows 98/2000, Linux, etc.
13.6.2 Cost of Installation and Maintenance

The choice of the software obviously requires consideration of organisation ability
to afford the hardware and software. A simple guideline to take such a decision is
the cost benefit analysis of the available options and the financing opportunities
available to the firm. Some times, certain software which appears cheap to buy,
involve heavy maintenance and alteration costs, e.g. cost of addition of modules,
training of staff, updating of versions, data failure/restoring costs. Conversely, the
accounting software which appear initially expensive to buyers, may require least
maintenance and free upgrading and negligible alteration costs.
13.6.3 Size of Organisation

The size of organisation and the volume of business transactions do affect the
software choices. Small organisations, e.g. in non-profit organisations, where
the number of accounting transactions is not so large, may opt for a simple,
single user operated software. While, a large organisation may require
sophisticated software to meet the multi-user requirements, geographically
scattered and connected through complex networks.
13.6.4 Ease of Adaptation and Training needs

Some accounting software is user friendly requiring a simple training to the
users. However, some other complex software packages linked to other
information systems require intensive training on a continuous basis. The
software must be capable of attracting users and, if its requires simple training,
should be able to motivate its potential users.
13.6.5 Utilities/MIS Reports

The MIS reports and the degree to which they are used in the organisation
also determine the acquisition of software. For example, software that requires
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simply producing the final accounts or cash flow/ratio analysis may be ready-
to-use software. However, the software, which is expected to produce cost
records needs to be customised as per user requirements.
13.6.6 Expected Level of Secrecy (Software and Data)

Another consideration before buying accounting software is the security
features, which prevent unauthorised personnel from accessing and/or
manipulating data in the accounting system. In tailored software for large
businesses, the user rights may be restricted to purchase vouchers for the
purchase department, sales vouchers to the billing accountants and petty
cash module access with the cashier. The operating system also matters.
Unix environment allows multi-users compared to Windows. In Unix, the user
cannot make the computer system functional unless the user clicks with a
password, which is not a restriction in Windows.
13.6.7 Exporting/Importing Data Facility

The transfer of database to other systems or software is sometimes expected
from the accounting software. Organisations may need to transfer information
directly from the ledger into spreadsheet software such as Lotus or Excel for
more flexible reporting. The software should allow the hygienic, untouched
data transfer.
Accounting software may be required to be linked to MIS software in the
organisation. In some ready to use accounting softwares, the exporting,
importing facility is available but is limited to MS Office modules only, e.g. MS
Word, MS Excel, etc. However, tailored softwares are designed in manner that
they can interact and share information with the various sub components of
the organisational MIS.
13.6.8 Vendors Reputation and Capability

Another important consideration is the reputation and capability of about
the vendor. This depends upon how long has he been the vendor is in business
of software development, whether there are other users of the software and
extent of the availability of support mechanisms outside the premises of the
vendor.

• Computerised Accounting System • Mannual Accounting System
• Generally Accepted Accounting Principles • Operating Environment
• Accounting Software • Accounting Packages

1 Computerised Accounting System : A computerised accounting system is an
accounting information system that processes the financial transactions and
events to produce reports as per user requirements. It is based on the concept
of database and has two basic requirements: (a) Accounting framework and
(b) Operating Procedure.
2 Advantages of Computerised Accounting System :
• Speed • Accuracy
• Reliability • Up-to-date
• Scalability • Legibility
• Efficiency • Quality Report
• MIS Reports • Real time user interface
• Storage and Retrieval • Motivation and Employees interest
• Automated document production
3 Limitations of Computerised Accounting System :
• Cost of training • Staff Opposition
• Disruption • System failure
• Breaches of security • Ill-effects on health
• Inability to check
unanticipated errors
4 Categories of Accounting Packages :
• Ready-to-Use • Customised
• Tailored
Short Answers
1. State the four basic requirements of a database applications.
2. Name the various categories of accounting package.
3. Give examples of two types of operating systems.
4. List the various advantages of computerised accounting systems.
5. Give two examples each of the organisations where ‘ready-to-use’, ‘customised’,
and ‘tailored’ accounting packages respectively suitable to perform the
accounting activity.
6. Distinguish between a ‘ready-to-use’ and ‘tailored’ accounting software.
Long Answers
1. Define a computerised accounting system. Distinguish between a manual
and computerised accounting system.
2. Discuss the advantages of computerised accounting system over the manual
accounting system.
3. Describe the various types of accounting software along with their advantages
and limitations.
4. ‘Accounting software is an integral part of the computerised accounting system’
Explain. Briefly list the generic considerations before sourcing an accounting software.
5. ‘Computerised Accounting Systems are best form of accounting system’. Do
you agree? Comment.

1. Operating environment 2. DBMS 3. Data Processing 4. Ready to use
504 Accountancy
Structuring Database for Accounting 14
I n the earlier chapters, you have already learnt

that accounting of transactions are documented
with vouchers. Let us consider a few accounting
transaction to understand as to how these vouchers
are used.
On April 01, 05 M/s Kshipra Computers
commences business with initial capital of
Rs.5,00,000, which is deposited into bank. Recall the
journal entry that is recorded using manual
accounting system. This journal entry has data
LEARNING OBJECTIVES contents that are filled-up using a simple transaction
voucher, which is prepared by Smith and authorised
After studying this chapter,
you will be able to : by Aditya.
• identify the resources
of MS ACCESS as
DBMS;
• explain basic concepts M/s Kshipra Computers
of database system;
• express accounting TRANSACTION VOUCHER
reality in the context of Voucher No: 01 Date: Apr. 01, 2005
Entity Relationship
(ER) Model; Debit Account: 642001 Bank Account
• transform ER pre- Credit Account: 110001 Capital Account
sentation of accounting
Amount in Rs. : 5,00,000
reality into database;
• developdatabase Narration: Commenced business by depositing initial
design for computer- capital into bank
ised system using
Relational Data Model; Authorised By: Aditya Prepared By Smith
• formulate basic queries
for retrieving account-
ing data and informa-
tion. Fig. 14.1 : A sample transaction voucher to document simple
transactions involving one debit and one credit
The same transaction can also be documented using a credit voucher that
is capable of recording multiple credits against one debit, as shown below:
CREDIT VOUCHER
Voucher No: 01 Date: April 01,2005
Debit Account: 642001 Bank Account M/s Kshipra Computers
Credit Accounts
S.No Code Name of Account Amount Narration
1 110001 Capital Account 5,00,000 Commenced Business
Total Amount 5,00,000
Authorised By: Aditya Prepared By Smith
Fig. 14.2 : A sample voucher for multiple credits against one debit
Now consider the following transaction :

On April 03-20005 M/s Kshipra Computers bought goods costing Rs.50,000
from M/s R.S. and Sons, paying Rs.2,000 as cartage to M/s Saini Transports.
This transaction involves multiple debits of accounts with one account being
credited. The debit voucher that is used to document this transaction appears
as follows :
DEBIT VOUCHER
Voucher No: 05 Date: April 03, 2005
Credit Account: 642001 Bank Account M/s Kshipra Computers
Debit Accounts
S.No Code Name of Account Amount Narration
1 711001 Purchases 50,000 Purchases from R.S & Sons
2. 711003 Carriage Inwards 2,000 Paid to M/s Saini Transports
Total Amount 52,000
Authorised By: Aditya Prepared By Smith
Fig. 14.3 : A sample vouchers for multiple debits against one credit
506 Accountancy
The process of computerised accounting involves identifying, storing and

retrieving the data content of an accounting transaction. This requires a
mechanism to store such data content of vouchers in a manner that allows its
easy and convenient retrieval as and when required. This is achieved by designing
suitable database for accounting. Such a database consists of inter-related data
tables that are structured in a manner that ensures data consistency and
integrity. In this chapter we shall discuss the basic concepts of database system
of accounting.
14.1 Data Processing Cycle

In order to understand the dynamics of database design, let us understand the
data processing cycle in the context of accounting. Data processing involves the
technique of collecting, sorting, relating, interpreting and computing data items
in such a manner as to provide meaningful and useful information for decision-
making. The necessary steps involved in data processing cycle are data capturing,
inputing, processing and generating information available to the user. Data
processing cycle, when thought of in the context of accounting, requires a series
of steps that have been described below briefly :
(i) Source Documents : The first step is to capture accounting data from
transaction(s) so as to prepare a document, called voucher (as already
stated earlier), that expresses and documents an accounting transaction.
The relevant accounting data is set out in the voucher, the sample of which
is shown in figures 14.1 to 14.3. These documents are so designed as to
permit the recording of accounting data in a systematic manner.
(ii) Input of Data : The accounting data contained in vouchers is to be entered
in a computer’s storage device. This is achieved by using a pre-designed
Data Entry Form. This data entry form is designed in a manner that it is
similar to physical voucher document. The data entry form is designed
using software and it is made to appear on the computer monitor so that
the data is entered.
(iii) Data Storage : A suitable data storage structure is required to provide for
a blank data record as shown below:
Code Name Type

The above blank record that is used for storing the input of data pertaining
code of account, name of account and the category type to which it belongs
is shown below as :
Code Name Type

11001 Capital Account 4
711001 Purchases Account 1
Hypothetically, the category type 4 above refers to Liabilities and the

category type 1 indicates Expenses. The data storage structures (also called
data tables) are created as a part of structuring database for accounting.
(iv) Manipulation of Data : The stored data is manipulated for necessary
transformation to generate final reports. Such transformed data may be
stored separately and subsequently used for generating final reports.
Alternatively, the transformed data can be directly presented in the form
of a report.
(v) Output of Data : The accounting reports such as ledger, trial balance, etc.
are obtained in a pre-designed format by accessing the transformed data.
Now that you have understood the way data content is stored in structured
manner, we shall discuss how the data structures are designed in consonance
with the data content that emerges from accounting transactions.
14.2 Designing Database for Accounting

Both computerised and computer-based AIS require a definite data structure
for storing the accounting data. As already mentioned, the databases are used
for storing accounting data. The process of designing database (for accounting)
begins with a reality (or accounting reality) that is expressed using elements of a
conceptual data model. The process of designing a database for accounting is
best described through a flow chart (Figure : 14.4).
Reality : It refers to some aspect of real world situation, for which database is to
be designed. In the context of accounting, it is accounting reality that is to be
expressed with complete description.
ER Design : This is a formal blue print, with a pictorial presentation, in which
Entity Relationship (ER) Model concepts are used to represent description of
reality.
Relational Data Model : It is representational data model through which ER
design is transformed into inter-related data tables along with the restriction in
the form of rules that are specified to ensure the consistency and integrity of
stored data.
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Fig. 14.4 : Flow Chart depicting the process of designing a database for accounting
Normalisation : This is process of refining a database design (that consists of

inter-related data tables) through which the possibility of duplicate or redundant
data items is reduced or eliminated.
Refinement : This is the outcome of the process of normalisation as mentioned
above. The final database design is arrived at after the process of normalisation
is completed.
14.3 Entity Relationship (ER) Model

It is a popular conceptual data model, which is mostly used in database-oriented
applications. The major elements of ER Model are entities, attributes, identifiers
and relationships that are used to express a reality for which a database is to be
designed. The model is best depicted with the help of ER symbols, the list and
description of which is shown in figure 14.5. While preparing an ER Diagram,
the following symbols are used to represent different types of entities, attributes,
identifiers and relationships :
The elements of ER model that are meant to describe and display the reality are
discussed in the context of an accounting reality given below :
Meaning Symbols
Entity Type as Rectangular Box
Weak entity Type as double lined Rectangular Box
Relationship Type as diamond shaped Box
Identifying relationship Type as double

lined diamond shaped Box
Attribute names enclosed in ovals and

attached to their entity type by straight lines.
Key attribute names enclosed in ovals and

attached to their entity type by straight lines.
Multi-valued attributes by double ovals.
Derived attributes by dashed line Ovals
Total participation of E2 in R
E1 R E2
Cardinality Ratio 1 : N E1 R E2
for E1 : E2 in R
Fig. 14.5 : Symbols used for constructing an ER diagram

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Accounting Reality Describing the System of Accounting

Using a hypothetical example of accounting system of an organisation, following
statements of reality becomes the starting point of discussion in describing the ER
Model concepts.
Example Reality :
• Accounting Transactions of an organisation are documented using a voucher.
• Each vouchers is assigned a serial number, which begins with “01” indicating first
vouchers of the accounting period. There is only one simple transaction voucher used
for documenting the transactions (See Figure : 14.1).
• Each voucher documents date of transaction, account name along with its account
code for debit as well as credit entry.
• Each voucher indicates the amount and narration with respect to accounting
transaction.
• Support documents such as bills, receipts, contracts, etc. also may be attached to
an accounting voucher.
• Each Voucher is prepared by a particular Employee and authorised by another
employee.
• There is an exhaustive list of Accounts with respect to which the transactions are
documented. Each Account carries a unique numeric code with its width equal to six
digits.
• Each Account is classified as belonging to one of the Accounts Types: Expenditure,
Income, Assets and Liabilities.
Fig. 14.6 : Example reality on accounting system
14.3.1 Entities
Anything in the real world with independent existence is called entity such as
an object with physical existence (e.g. car, person, house) or conceptual
existence (e.g. a company, job, university course, account, voucher). In the
context of above accounting reality, there exist five entities: Accounts, Vouchers,
Employees, AccountsType and SupportDocuments. The accounting data is
captured through these entities.
14.3.2 Attributes
Attributes are some properties of interest (or characteristics) that further describe
the entity such as height, weight and date of birth in case of a person and code
and name in case of accounts. An entity has a value for each of its attributes,
which is the data stored in the database.
There are several types of attributes of an entity that have been described as
follows :
(i) Composite vs. Simple (or atomic) attributes : The composite attributes
can be divided into smaller sub-parts to represent some more basic
attributes with independent meanings. The simple attributes cannot be

further sub-divided. For example, Name of a person that is normally sub-
divided into First Name, Middle Name and Last Name is a composite
attribute. Height of a person is a simple attribute as it is devoid of further
sub-division.
(ii) Single-valued vs. Multi-valued Attributes : An attribute with a single value
for an entity is single-valued as opposed to those which multiple values.
For example, height of a person is single-valued attribute while
qualifications of that person are a multi-valued attribute.
(iii) Stored vs. Derived Attributes : Two or more attributes may be related in
such a way that one or more becomes basic while the other becomes
dependent on that basic attribute. For example, date of birth of a person
is a stored attribute while age of that person is derived attribute.
(iv) Null Values : Absence of a data item is represented by a special value
called null value. There are three situation which may require the use of
null values
• When a particular attribute does not apply to an entity;
• Value of an attribute is unknown, although it exists;
• Unknown because it does not exist.
(v) Complex Attributes : The composite and multi-valued attributes may be
nested (or grouped) to constitute complex ones. The parenthesis () are
used for showing grouping of components of composite attributes. The
braces {} are used for showing the multi-valued attributes
In the context of the example on accounting reality, the following attributes
specific to each entity types have been stated below as :
Entity Type List of Attributes

AccountsType CatId, Category
Accounts Code, Name, Type
Employees EmpId, Fname, Minit, Lname, SuperId
Vouchers Vno, Date, Debit, Credit, Amount, Narration, AuthBy, PrepBy
SupportDocuments Sno, dDate, Name
AccountsType is a conceptual entity that is meant to express the various

categories of accounts in accounting system. The CatId is an attribute of
AccountType entity, the value of which is used to identify the category of
accounts.
Accounts is a conceptual entity that is meant to express various accounts,
each one of which belongs to a particular category of accounts in Accounts
Type Entity. Every account is assigned a unique code by which it is
512 Accountancy
identified. The Name attribute specifies the name of account and Type
refers to the type of account (or category of account) as mentioned above.
Employees is a physical entity that is meant to express the various
employees who are in some way connected with the accounting system.
The EmpId (Employee ID) attribute is meant to identify an Employee;
Fname, Minit and Lname are respectively the first, middle and Last names
of an employee; and SuperId refers to EmpId of the immediate boss of an
employee.
Vouchers is an entity that expresses various transactions vouchers. It is
attributes together provide the structure of transaction data.
SupportDocuments is an entity, which expresses various support
documents that may be attached with a particular voucher of a transaction.
Sno attribute of this entity specifies the serial number of support document
attached, dDate specifies the document date and Name specifies the name
of document that is attached with the voucher.
(vi) Entity Types and Entity Sets : An Entity Type is defined as a collection
of entities, which share a common definition in terms of their attributes.
Each entity type is assigned a name for its subsequent identification. The
attributes of entity type are used to describe it in the database. The values
of attributes of an entity belonging to entity type are known as Entity
Instance. For example, (110001 Capital Account 4) is an entity instance
of an account whose code = 110001, Name = Capital Account and Type =
4. An Entity Set is a collection of all entity instances of a particular entity
type. An Entity Type is described by a set of attributes called “schema”.
The set of entities pertaining to a particular entity type share the same set
of attributes. The collection of entities of a particular entity type is grouped
into entity set, called the extension of the entity type. For example,
Entity Type : Accounts

Intension (or structure) of entity type
Code Name Type
Entity Set: Collection of entity instances of an entity type “Accounts”

Extension (or instances) of entity type

221019 Jain & Co. 4
221020 Jayram Bros. 4
Fig. 14.7 : Examples on entity type and entity set

(vii) Value Sets of Attributes : Each simple attribute is associated with a value
set, which specifies the set of possible values that may be assigned to a
particular attribute. For example, the value set of voucher date is all those
dates that fall within the dates valid for a given accounting period. Similarly,
if accounting reality states that each code of an account is numeric with
its width equal to six digits, its possible value set shall be 000001 to
999999. The value set as described above is called domain of values.
14.3.3 Identifier (or Key Attributes of an Entity Type)

Almost every entity type has one of its attributes, which contains unique values
for identifying the entity instance. For example, RollNo as attribute of Entity
type students has unique values through which a student instance can be
identified. Similarly, Code is a key attribute of entity type Accounts because its
data values are required to be unique.
Fig. 14.8 : Diagrammatic presentation of an entity

type accounts with code as key attribute
Some times two or more such attribute together (called composite key) may
constitute such distinct values. For example, the student entity type that has
entity instances across several sections of a class in a school shall require a
composite key of attributes (Sections and RollNo). But in any case, it is a
constraint that does not allow any two-entity instances from having the same
value for the key attribute at a point of time. Some entities may have more than
one Key attribute. The entity types, which do not have a key attribute at all are
called weak entities.
14.3.4 Relationships
Relationship among two or more entity types represents an interaction among
their respective entities. Whenever an attribute (say Debit) of one entity type
(say vouchers) refers to another entity type (say Accounts), there exists a
relationship between these entities (Vouchers and Account).
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For example, vouchers and accounts are related in two ways: vouchers contain
debit account(s) and vouchers contain credit account(s). In ER Model, these
references are represented as explicit relationships rather than attributes.
(i) Types of relationships : Whenever entities from different entity types are
related to one another in a particular manner, they constitute a relationship
type. The relationship prepared by between the two entity types vouchers
and employees associates each voucher with the employee who prepared
it. Similarly, the relationship authorised by between the two entity types
vouchers and employees associates each voucher with the employee who
authorises it. Each relationship instance of prepared by (short named as
PrepBy) associates one voucher entity with one employee entity. In ER
diagrams, relationship types are displayed as diamond shaped boxes,
connected by straight lines to the rectangular boxes, which represent the
participating entity types.
Fig. 14.9 : Diagram showing binary relationship between vouchers and employees
(ii) Degree : The degree of a relationship type is the number of participating

entity types. A relationship type of degree two is called binary and that of
degree three is called ternary. A VOUCHER (entity), Authorised_by
(relationship) and EMPLOYEES (entity) together signify a binary
relationship. A SUPPLIER (entity) SUPPLY (relationship) PARTS (entity) to
PROJECT (entity) signify a ternary relationship because three entities,
namely supplier, parts and projects are participating in supply relationship
in any transaction.
Fig. 14.10 : Diagram showing ternary relationship between suppliers, parts and projects
(iii) Role Names : Each entity type that participates in a relationship type plays
a particular role in the relationship. The role name signifies the role that a
participating entity of an entity type plays in each relationship instance.
In PREPARED BY relationship type, EMPLOYEE plays the role of document
creator and voucher plays the role of document created.
(iv) Structural Constraints : The reality may impose certain constraints (or
restrictions) that may limit the possible combinations of entities,
participating in a given relationship set. These are of two types : Cardinality
Ratio and participation.
• Cardinality Ratios for binary relationship specifies the number of
relationship instances that an entity can participate in. In PREP_BY
binary relationship type, VOUCHER:EMPLOYEE is of cardinality ratio
N:1 implying thereby that a set of vouchers can be created by a
particular employee. The possible cardinality ratios are one to one
(1:1),one to many(1:N),many to one(N:1), and many to many(N:M).
• Participation constraint specifies as to whether the existence of an entity
type depends on its being related to another entity via a relationship
type or not. The two types of such constraints are: total and partial.
Whenever semantics of reality require that every entity of an entity
type must relate to another entity type, such an entity can exist only if
it participates in that specific relationship. Such a participation is called
total participation. For example, the participation of ACCOUNTS in
CLASSIFY relationship is total participation. This is because every
account must refer to at least one of the accounts type or a category of
accounts. This participation is also called existence dependency. Since
every employee is not expected to prepare at least one of the vouchers,
the participation of employee in PREPARED BY relationship is partial,
implying that some of employee entities are related to the voucher
entity via PREPARED BY relationship. In ER diagram, total
participation is displayed as double line connecting the participating
entity type to the relationship, whereas partial participation is
represented by a single line.
14.3.5 Weak Entity Types

Entity Types, which do not have identifier (or key attributes) of their own are,
called weak entity types. Such entity types are identified by being related to
specific entities from another entity type in combination with some of their
attribute values. These other entity types are called identifying or owner entity
type. Accordingly, the relationship type that relates a weak entity type to its
owner is called identifying relationship of the weak entity.
516 Accountancy
A weak entity type always has a total participation constraint (existence

dependency) with respect to its identifying relationship because it cannot be
identified without its owner entity. For example, a voucher may be accompanied
by a set of support documents such as bills, issued by other parties to the
transaction, details of which need be stored. Such SUPPORT’ DOCUMENT entity
type which is used to keep track of support documents attached to each voucher
via 1:N relationship, is a weak entity. This is because they are identified as distinct
entities only after determining the particular voucher. A weak entity type normally
has a partial key, which is a set of attribute that can uniquely identify weak
entities that are related to the same owner entity. Assuming that two support
documents of a voucher do not have the same document Id, the said Id can be
a good partial key. Otherwise a composite attribute of all the weak entity’s
attributes will be the partial key.
Initial Conceptual Design for an Example Reality : Using a hypothetical example of an

accounting system, as already stated above in Fig: 14.6, following initial design based
on ER Model concepts becomes the starting point of illustration.
Conceptual Design : According to the requirements listed in example reality, there exist
five entities: Vouchers, Accounts, Employees, SupportDocuments and AccountsType·
• An entity type Vouchers with attributes Voucher No, Serial No, Voucher Date, Debit
Account, Credit Account, Amount, Narration, authorised by, prepared by are used
for storing accounting data of a transactions. Debit and amount are multi-valued
attributes for debit vouchers and credit and amount are multi-valued for credit
vouchers. Voucher No and Sno together constitutes the only key attribute of entity
type vouchers. Therefore, it is specified to be unique.
• A Conceptual entity type Accounts with attributes Code, Name and Type is used for
keeping and maintaining a record of all accounts. Both Code and Name qualify to
be the key attributes because of being specified as unique.
• An Entity Type Employee with attributes Employee ID (EmpId), Name, Address, Phone,
ID of immediate boss (SuperId) is used to maintain records of employees in the
organisation. Name is a composite attribute with its simple attributes as: First
Name (Fname), Middle Initial (Minit) and Last Name (Lname). The EmpId, specified
to be unique, is the key attribute. SuperId indicates the EmpId of the controlling
officer, the immediate boss.
• An entity type, Accounts Type with attributes CatId and Category is used to maintain
records of various categories of accounts so that each of the accounts as stored in
accounts entity are able to find their suitable place in financial accounting reports:
profit and loss account and also the balance sheet.
An entity type called Support with attributes Sno. and Name is used to maintain
records of all the support documents, which are annexed to the accounting voucher.
Fig. 14.11 : Details of initial conceptual design based on example reality

14.3.6 ER Presentation of Accounting Reality

The example reality shown at Figure: 14.11 can be shown below diagrammatically
by using the ER notations.:
Fig. 14.12 : ER Schema diagram for accounting database
Fig. 14.13 : Diagrammatic presentation of an entity type accounts with code as key attribute
518 Accountancy
Fig.14.16 : Diagrammatic presentation of an entity type accounts with code as key attribute
14.4 Database Technology

It refers to a set of techniques that are used to design a database. These
techniques use certain concepts, which are crucial to the creation of structure
and development of the design. These concepts are: Reality, data, database,
information, DBMS and database system. A brief description of these concepts
is given below:
(a) Reality : It implies some aspect of the real world. It consists of an
organisation, its different components and the environment in which the
organisation exists and operates. Any organisation includes people, facilities
and other resources that are organised to achieve certain goals. Each
organisation operates within an environment. While operating, the
organisation interacts, influences and gets influenced by the environment.
An organisation may be viewed as a system consisting of several components called its

sub-systems. Each of these sub-systems follows certain procedures and continuously
interacts with each other and their external environment to accomplish the goals of
organisation. During the course of their interaction, events take place, which take the
shape of data items. These sub-systems communicate continuously with AIS to provide
data and seek information. A part of AIS is Financial Accounting System, which is designed
for processing accounting transactions. For example,a firm uses a voucher to document
an accounting transaction. The contents of voucher consist of accounting data, which
need be stored in an organised manner.
This continuous interaction results in real world transactions. These

transactions are analysed with a view to identify the components called data
items. A data item is the smallest named unit of data in an information system.
In a transaction, the names of accounts (or their accounting codes), date of
transaction, amount, etc. is all data items.
(b) Data : Data are known facts that can be recorded and which have implicit
meaning. Data represent facts concerning people, places, objects, entities,
events or even concepts. Data can be quantitative and qualitative or they can
be financial and non-financial in character. Consider the following transaction :
April 01, 2005 Commenced business with Cash Rs. 5,00,000.
This transaction, before being recorded through a Transaction Voucher, as
shown in figure 14.1, need be split up into its data contents as “01”, 01-Apr-
05, 642001, Bank Account, 110001,Capital Account, Rs.5,00,000. Data are
not useful for decision-making unless they are processed to suit to the
requirements of decision-making situation.
(c) Database : The data, after being collected, has to be stored so that different
people can use them. This requires the creation of a database. A database is
a shared collection of interrelated data tables, files or structures, which are
designed to meet the varied informational needs of an organisation (See
Example database in figure 14.19. It has two important properties (or
characteristics): one it is integrated and second it is shared. Integrated
property implies that distinct data tables have been logically organised. The
purpose is to reduce or eliminate redundancy (or duplicity) and also to
facilitate better data access. The shared property means that all those who
are authorised to use data/information have access to relevant data. Thus,
a database is a collection of related data that represents some aspect of the
real world (called mini-world or Reality). Accordingly, accounting database
is a collection of related accounting data to represent some aspect of an
accounting information system. Database is designed, built and populated
(or loaded) with data for a specific purpose.
(d) Information : refers to data that have been processed and organised in a
form, which is suitable for decision-making. The raw data when processed
in accordance with decision usefulness of a decision-maker becomes
information. In other words, information is a data that have been processed
and refined and then presented in a format that is convenient for decision-
making or other organisational activities.
520 Accountancy
Fig. 14.17 : The diagram showing the transaction data processing and information levels
However, information may be viewed as data at one level. But when it is

processed keeping in view the requirements of decision situation, it becomes
information at another level. For example, accounting data at transaction level
is processed to produce balances of each account. The balances are summarised
to prepare the trial balance. The amounts given in trial balance constitute data
to produce profit and loss account and balance sheet.
(e) Database management System (DBMS) is a collection of programs that
enables users to create and maintain a database. Formally, it may be defined
as a general-purpose software system that facilitates the processes of defining,
constructing and manipulating (or processing) databases for various
applications. General-purpose software is defined as a set of programs, which
are designed and developed for a community of users and not for any
particular application with respect to a particular user.
14.5 An Illustration of Accounting Database

Consider an example of ACCOUNTING database for maintaining data pertaining
to accounting transactions, support documents, accounts and employees with
which the students of accounting are familiar. Figure 14.18 shows below the
database structure and some sample data for this database, depicting the
following transactions :
Date Transactions Amount

Rs.
2005
Apr. 01 Commenced business with cash 5,00,000
Apr. 01 Cash deposited Into bank 4,00,000
Apr. 02 Goods purchased and payment made by Cheque No. 765421 1,50,000
Apr. 02 Rent for the month of April, 2001 paid by Cheque No. 765423 9,000
Apr. 03 Goods purchased for cash from R.S. & Sons 50,000
Fig. 14.18 : Accounting transactions of an organisation

Employees
Emp_Id Fname Minit LName Address PhoneNo Super_Id
A001 Aditya K Bharti

B001 Bimal S Jalan A001
S001 Smith K John A001
S002 Sunil K Sinha B001
Vouchers
↓ ↓ ↓ ↓
vno Debit amount vdate Credit Narration auth. by prep. by
2005
01 631001 500,000 Apr.01 110001 Commenced business A001 B001
with cash
02 632001 400,000 Apr. 01 631001 Deposited into bank A001 S001
03 711001 150,000 Apr. 02 632001 Purchases from R.S & Sons A001 B001
04 712002 9,000 Apr. 02 632001 Paid rent for April, 2001 A001 B001
05 711001 50,000 Apr. 03 631001 Goods purchased from R.S. A001 S001
& Sons
Support
Vno Sno Name
02 1 Cash deposit receipt

03 1 Purchase invoice no: Dated:
03 2 Delivery challan
04 1 Rent receipt for the month April, 2005
05 1 Purchase invoice no: Dated:
Accounts
↓
Code Name Type
110001 Capital account 4

631001 Cash account 3
632001 Bank account 3
711001 Purchases 1
711003 Carriage inwards 1
712002 Rent 1
711011 Wages 1
Account Type
Cat_Id Category
1 Expenditure
2 Income
3 Assets
4 Liabilities
Fig. 14.19 : An example of an accounting database that stores simple accounting transactions
522 Accountancy
Employees
Emp_Id Fname Minit LName Address PhoneNo Super_Id

Vouchers
↓ ↓ ↓ ↓
Vno Sno. Debit Amount Vdate Credit Narration auth. by prep. by
2005
01 1 631001 5,00,000 Apr. 01 110001 Commenced business A001 B001
with Cash
02 1 632001 4,00,000 Apr. 01 631001 Deposited into bank A001 S001
03 1 711001 1,50,000 Apr. 02 632001 Purchases from R.S & Sons A001 B001
03 2 711003 3,000 Apr. 02 632001 Paid to Nahar A001 B001
Transports
04 1 712002 9,000 Apr. 02 632001 Paid rent for April, 2001 A001 B00101
05 1 711001 50,000 Apr. 02 631001 Goods purchased from A001 S001
R.S. & Sons
05 2 711003 2,000 Apr. 03 631001 Paid for carriage to A001 S001
Saini Transports
Accounts
↓
Code Name Type

631001 Cash Account 3
632001 Bank Account 3
711001 Purchases 1
711003 Carriage Inwards 1
712002 Rent 1
711011 Wages 1
Account Type
Cat_Id Category
1 Expenditure
2 Income
3 Assets
4 Liabilities
Fig. 14.20 : An example of an accounting database to store accounting transactions

according to debit and credit vouchers support table omitted
Modified Version of Accounting Database : An attempt to accommodate Debit

and Credit vouchers, as shown in Figure: 14.2 and 14.3, results in adding a
new column Sno to Vouchers table of database, which is shown in modified
database in figure 14.19. This results in data redundancy as shown in figure
14.20.
ER Model, as already discussed above, is a conceptual model, which need
be transformed into a representational data model so that a database design is
formed for being implemented and operated upon by using DBMS. From among
several representational models, Relational Data Model (RDM) is the most popular
and widely used in actual practice. Let us understand some important concepts
of RDM.
14.6 Relational Data Model

The relational data model represents the database as collection of relations, which
resembles a table of values (or data table). Each row of the table, therefore,
represents a collection of related data values and hence typically corresponds to
real world entity or relationship. The table name and column names are used to
help in interpreting the meaning of values in each row. Each row of a table is
called a data record. All values in a column, which belong to a particular domain,
are of same data type
Consider the following table of data items, named as Accounts. The table
has rows and columns. The column arrow points to a column called Name. The
Row arrow points to a data record consisting of (110001, Capital Account and
4) each of which corresponds to Code, Name and Type, which are three different
columns of the table.
Name of Table : Accounts
Code Name Type

221019 Jain & Co. 4
411001 Furniture Account 3
Fig. 14.21 : Example data table of accounts and their attribute values
Formally, a row is called a tuple, a column header is called an attribute and

the table as such is called a relation. The data type describing the types of
values (such as text value, numeric values, date values, currency value, etc.)
that can appear in each column is called a domain. A domain is a set of indivisible
values. Associated with every domain is a data type such as Number,
524 Accountancy
Text, Currency, Date/Time, etc. Each domain must also be named so as to help
in interpreting its values. Besides this, a domain must be given a format and
any additional information to enable correct interpretation of values. For
example, a numeric domain such as distance should have units of measurement:
Miles or Kilometers
(a) Relations : A relation schema is made up of a relation name and a list of its
attributes. Each attribute is the name of role played by some domain in
the relation schema. A relation is given an identity by its name and
description by its schema. The degree of a relation is indicated by the
number of attributes it contains. For example, the degree of a relation schema
accounts is three as shown below :
ACCOUNTS (Code, Name, Type) ← Relation with attributes
ACCOUNTS is name of the relation which has three attributes;
Code = Identity of Account;
Name = Names of Account;
Type = Category of Account
A Relation represents an entity type. A relation (or relation state) is a set
of tuples wherein each tuple is an ordered list of values corresponding to
attributes of relation. Each of these values must belong to the domains of
their respective attributes. Each tuple in this relation represents a particular
entity. A relation schema may be interpreted as a declaration in the nature of
an assertion. For example, the schema of accounts relation, as shown above,
asserts that every account has a Code, Name and a Type. As a result, each
tuple in accounts relation can be interpreted as a fact or an instance of
assertion. Some relations represent facts about entities while others might
represent facts about relationships.
(b) Values in Tuples : Each value in a tuple is an indivisible value to imply
that it is not divisible into components within the framework of the basic
relational model. This implies that composite and multi-valued attributes
are not allowed. Composite attributes are represented by their simple
components. The multi-valued attributes are represented by separate
relations. A special value called Null is used to represent unknown or not
applicable values of attributes in a tuple. It is also possible to devise different
types of code values for different types of null value situation.
14.7 Relational Databases and Schemas

A relational database schema is a set of relation schemas and a set of integrity
constraints. A relational database state is a set of relation states such that every
relational database state satisfies the integrity constraints specified on relational
database schema.
In this context the following points merit a special consideration :

(a) A particular attribute, which stands for the same real word concept, might
appear in more than one relation with same or different name. For example,
in vouchers relation, the account Number is represented as debit and credit
whereas in accounts relation, it is represented as Code (figure 14.19). EmpId
appearing in Employees relation is represented in Vouchers as Auth.By and
Prep.By.
(b) The particular real world concept appearing more than once in a relation
must be represented by different names. For example, in employees relation,
employee is represented as subordinate, by using EmpId and as superior by
using SuperId.
(c) The Integrity constraints, specified on database schema, must hold in
every database state of that schema.
14.8 Constraints and Database Schemas

There are four different constraints, which can be specified on relational
databases. These are: domain constraint; key constraint; entity integrity
constraint; referential integrity constraints.
(a) Domain : The value of each attribute of a relation must be an indivisible
value and drawn out of possible values associated with its domain. The
value of an attribute, therefore, must conform to the data type associated
with the domain.
(b) Key Constraints and NULL Values : Each data record, which corresponds
to a tuple of a relation, in a table must be distinct. That means no two
tuples (or rows) in a relation ( or table) can have the same combination of
values for all their data items. This is because that a relation, as set of
tuples, has to have all its tuples distinct by definition. Every relation has
at least one key by default, which is the combination of all its attributes.
This is called super-key by default. Any such super-key, therefore, specifies
uniqueness constraint. Such a combination, representing super-key, may
have redundant attributes, implying thereby that a more useful concept
is that of a key which has not redundancy. This can be shown
diagrammatically as shown in figure 14.22. Therefore, minimal super-key
(also called Key) is defined as that part of super-key from which any attribute
cannot be removed without sacrificing the uniqueness constraint. The value
of key attribute can be used to identify each tuple in a relation. A key is
determined from the meaning of the attributes. The uniqueness feature of
key must continue to hold when new tuple in a relation is added. Sometimes
a relation may have more than one key in which case each of such keys is
called a candidate key. One such key is termed as primary key of relation.
The choice of which candidate key to be primary is generally subjective
526 Accountancy
and may depend on circumstances of mini-world. For Example: Both

PAN(Permanent Account Number) and EMPID are candidate keys in
EMPLOYEES relation because of being unique. But EMPID should be selected
in an organisation being native to the organisational environment.
Fig. 14.22 : Flow chart to reach a minimal super-key
(c) Entity integrity constraint : States that no primary key value can be null
because it is used to identify individual tuple in a relation. Null value implies
that we cannot identify such tuples or identify these as alike. A failure to
distinguish them means they are duplicates.
(d) Referential integrity constraint : While key and entity constraints are
specified on individual relation, the referential integrity constraint is specified
between two or more relations. This constraint is specified to maintain
consistency among the tuples of such relations. Accordingly, a tuple in one
relation that refers to another relation must refer to an existing tuple in that
other relation. In referencing Accounts Type, Accounts relation uses its
attribute Type, which acts as foreign key to reference the tuples of relation
Accounts Type through its primary key CatId. The value of Type cannot be
null because of total participation of Accounts in classify relationship.
Similarly, consider another example in which the relation Vouchers
(Vno, Sno, Vdate, Debit, Amount, Credit, Amount, Prep_by, Auth_by,

Narration) references two other relations as shown in figure 14.19.
First it references, Accounts (Code, Name, Type). In referencing Accounts,
the Vouchers relation uses its attributes Debit and Credit, which act as Foreign
Keys to reference the tuples of relation Accounts through its primary key,
Code. The values of debit and credit cannot be null because of total
participation of vouchers in debit and credit relationship.
Second, it references Employees (EmpId, Fname, Minit, Lname, Address,
PhoneNo, SuperId). While referencing Employees, the Vouchers relation
makes use of its other attributes Prep.By and Auth.By. These attributes act
as foreign keys to reference the tuples of relation Employees through its key
attribute EmpId. The values of PrepBy and AuthBy cannot be null because
of total participation of vouchers in PrepBy and Authby relationships.
The referential integrity constraint stands violated in above example, if
there is a debit or credit code in voucher relation, the tuple for which does
not exist in Accounts relation. Similarly, referential integrity fails, if there
exists a value corresponding to Auth.By or Prep.By attribute of vouchers,
the tuple for which does not exist in employees relation.
14.9 Operations and Constraint Violations

There are two categories of operations on relational model : updates and retrieval
The three basic types of updates are as given below :
(a) Insert : This operation is performed to add a new tuple in a relation. For
example, an attempt to add another record of an account with data values
corresponding to Code, Name and its Type to Accounts relation shall be
made by performing Insert operation. The insert operation is capable of
violating any of the four constraints discussed above.
(b) Delete : This operation is carried out to remove a tuple from a relation. A
particular data record from a table can be removed by performing such a
operation. The delete operation can violate only referential integrity, if tuple
being removed is referenced by foreign key from other tuples in the database.
(c) Modify : The operation aims at causing a change in the values of some
attributes in existing tuples. This is useful in modifying existing values of an
accounting record in a data table. Usually, this operation does not cause
problems provided the modification is directed on neither primary key nor
foreign key.
Whenever applied, these operations must enforce integrity constraints
specified on relational database schema.
Retrieval operation on Relational Data Model does not cause violation
any integrity constraints.
528 Accountancy
14.10 Designing Relational Database Schema

The rules or guidelines required to design the relational database schema attempt
to provide a step-by-step procedure that transforms ER design into Relational
Data model design to constitute the desired database. In the context of ER model
as shown in design figure14.12, the following specific steps are required to cause
its transformation into relational data model :
(i) Create a relation for every strong entity : For each strong entity type
(which has primary key) in ER schema, a separate relation that includes
all the simple attributes of that entity is created. Either choose one of the
key attributes of such an entity as the primary key for this relation, or
choose a set of simple attributes that uniquely identify this entity as the
primary key of the relation so created. For example, employee entity is
strong because it finds its primary key in EmpId which is one of its unique
attribute. Therefore, a separate relation for Employee has been created as
shown below :
Employee (EmpId, Fname, Minit,Lname,Address, PhoneNo, SuperId)
Similarly, separate relations need be created for the following strong entities
whose Primary Key attribute have been underlined.
Accounts (Code, Name, Type)
Vouchers (VNo,vDate, amount, narration)
Accounts Type (CatId, Category)
(ii) Create a separate relation for each weak entity type : Every weak entity
has an owner entity and an identifying relationship through which such
weak entity type is identified. For every weak entity type, a separate relation
is created by including its attributes. The primary key of this new relation
is the combination of its unique attribute(s) for a particular tuple of the
owner relation along with primary key attribute of such owner relation.
Furthermore, the primary key of owner entity is included as foreign key in
such a relation key of owner entity and the partial key of weak entity.
For example, Support Entity, with Vouchers as its owner Entity, does not
have a primary key of its own. It has partial key which is the Sno assigned
to each document. Therefore, the Primary key of Vouchers, Vno along
with Sno is designed as composite key for support entity and the relation
so formed is shown below as :
Support (vNo,Sno, dName,sDate)
(iii) Identify entity types participating in binary 1:N relationship type : Identify
the first relation on n-side of relationship and second on 1-side of such
relationship. The primary key of second relation should be included in
first relation as its foreign key. For Example, An employee can authorize a
number of vouchers. It implies that Vouchers entity participates in Auth.By
relationship on n-side while Employees entity participates in same

relationship on 1-side. Therefore, the vouchers relation as already formed
above in step 1, must also include as foreign key the primary key of
Employees, which is EmpId. Similarly, we can deal with Prep.By
relationship in which Employees and Vouchers again participate in binary
1:N relationship. The end result of mapping both these relationships is to
include twice the EmpId, but in different roles. Since a relation cannot
have same name (here EmpId twice to mean AuthBy and PrepBy), we use
their role names as attributes in Vouchers relation as foreign keys to
reference Employees relation.
Accordingly, the modified Vouchers relation appears as given below:
Vouchers (VNo, vDate, Amount, Narration, Auth.By, Prep.By)
Similarly, there exist two relationships between the relations Vouchers
and Accounts. The relation Vouchers as modified above shall further
include as foreign key the primary key of Accounts relation, which is code.
This code is to be included twice. One to represent debit and another to
represent credit relationship. Since a relation cannot have same name (here
Code is being included twice to mean Debit and Credit), we use their role
names as attributes in Vouchers relation as foreign keys to reference
Accounts relation. The modified vouchers relation shall appear as follows:
Vouchers (Vno,Vdate, Debit, Credit, Amount, Narration, AuthBy, Prep.By)
(iv) Identify entity types participating in binary M:N relationship type : For
each binary M:N relationship type, create a new relation to represent such
relationship. This new relation should include as foreign keys, the primary
keys of the relations that represent the participating entity types. For
example, consider the following entities and relationships in the context of
credit voucher shown in figure 14.23, which has one debit with multiple
credit accounts :
Fig. 14.23 : ER Diagram showing relationships between vouchers and accounts in the
context of credit vouchers, with one debit and several credit entries
530 Accountancy
In this case, relationship Credit has cardinality ratio of M:N between Vouchers
and Accounts(many vouchers are related to many accounts), While relationship
Debit has cardinality ratio of N:1 (many vouchers refer to one account). Further
Credit relationship has Sno, amount and narration has its attributes. Accordingly,
we create a new relation as follows :
Credit (vNo, Sno, Code, Amount, Narration)
In above relation credit Code is included as foreign key to represent primary
key of accounts relation, Vno is included as foreign key to represent primary
key of relation vouchers. (Vno,Code) constitute the primary key of this new
relation credit. By analogy, we can arrive at the following relation for Debit
voucher:
Debit (vNo, Sno, Code, Amount, Narration)
Finally, the following relations have been formed to constitute the relational
data model for our example reality.
Employee (EmpId, Fname, Minit,Lname,Address, PhoneNo, SuperId)
Accounts (Code, Name, Type)
Vouchers (VNo,Vdate, debit, credit, amount, narration, AuthBy, PrepBy)
AccountsType (CatType, Category)
Support (VNo,Sno,Dname,Sdate)
If we adopt the additional semantics the vouchers relation shall appear in
two different schemas :
Situation A : The schema given below is compatible with Debit voucher as shown
if figure 14.3.
Vouchers (vNo,vDate, Credit, Auth.By, Prep.By)
Debit (vNo, Sno, Code, Amount, Narration)
Situation B : The schema given below is compatible with Credit voucher as
shown if figure 14.2.
Vouchers (vNo,vDate, debit, AuthBy, PrepBy)
Credit (vNo, Sno, Code, Amount, Narration)
A generalised Schema for the two schemas shall be
Vouchers (vNo,vDate,Vtype, AccCode, vType, AuthBy, PrepBy)
Details ( vno, Sno, Code, Amount, Narration)
Where in another attribute vType has been introduced to indicate whether
this generalised schema applies to Situation A(vType=0) or Situation B(vType=1).
Debit and Credit attribute of vouchers relation have been renamed as AccCode
to mean Debit and Credit, depending on the value of Vtype. Debit and Credit
relations have been generalised into Details because both shared a set of common
attributes.
14.11 llustrating the Database Structure for Example Realities

DBMS software is used to implement the data model by creating several tables,
setting their interrelationships and imposing constraints as may be set out in
database design. After, the design is implemented, it must also allow for retrieval
of data and information. This is achieved by querying the database, for which
purpose, SQL statements are put to use. These retrieval requests result in
emergence of new virtual tables that may be formed out of one or more of existing
tables. A clear understanding of these SQL statements is a first step towards
the theoretical foundations for computerised reporting. This is because a report
is an organised set of information, which is extracted on the basis of these retrieval
requests. For a practical understanding of these operations, consider the following
Models, herein referred to as Model-I and Model-II. Each of these models, which
consist of a set of relations (or tables) and the integrity constraints, constitutes
the database design for accounting.
Model-I : This is based on initial conceptual design of example reality shown in
Figure: 14.11
Fig. 14.24 : Schema diagram for the accounting

system relational database schema
Model-II : The set relations given below are based on modified example reality
that uses Credit and Debit vouchers shown in figures 14.2 and 14.3.
532 Accountancy
Fig. 14.25 : Schema diagram for the accounting

system relational database Schema
Illustration No 1
Mr. Philips commenced business with cash and for that purpose opened a bank account
on April, 1 2005. His transactions for the month are as given below :
Date Transactions Amount

Rs .
2005
Apr. 01 Commenced business with cash 5,00,000
Apr. 01 Cash deposited Into bank 4,00,000
Apr. 02 Goods purchased and payment made by Cheque No. 765421 1,50,000
Cheque No. 765422 issued to M/s Nahar Transports for carriage 3,000
Apr. 02 Rent for the month April, 2001 paid by Cheque No. 765423 9,000
Apr. 03 Goods purchased for cash from M/s R.S. & Sons 50,000
Paid for carriage to M/s Saini Transports 2,000
Apr. 04 Goods sold to Kemp & Co. 1,75,000
Apr. 05 Goods purchased from M/s Jayram Bros. 2,50,000
Apr. 06 Sold goods for cash to M/s Kumbley & Co. 45,000
Apr. 08 Paid for adverisement by Cheque No. 765424 2,500
to M/s ABN Cables
Apr. 09 Received a bill of exchange from Kemp & Co.payable 1,75,000

after 3 months
Apr. 10 Bill of exchange received from Kemp & Co. discounted for 1,71,500
Apr. 12 Goods returned to Jayram Bros. being defective 15,000
Apr. 15 Advance cash payment to salesman for marketing tour 10,000
Apr. 17 Paid for insurance of godown Cheque No. 765425 5,500
Apr. 18 Paid for fuel, power and electricity 1,000
Apr. 18 Salary paid in advance to bimal 10,000
Apr. 19 Accepted a bill of exchange payable after four months 2,35,000
in favour of Jay Ram Bros.
Apr. 21 Returns from M/s Kumbley & Co., settled by 5,000
Cheque No. 765427
Apr. 23 Cash withdrawn by proprietor for household expenses 20,000
Apr. 25 Advance to salesman adjusted for cash after recording
expenses :
Entertainment 4,500
Travelling 2,200
Boarding and Lodging 3,500
Apr. 27 Goods taken from stock for personal use 5,000
Apr. 28 Furniture purchase from M/s S.N. Furnitures 45,000
by Cheque No. 765428
Apr. 29 A part of existing stock set a side for usage as 35,000
office furniture
Apr. 30 Salary for the month paid by Cheques
Cheque No. 765429 to Aditya 9,000
Cheque No. 765430 to Bimal ( one-fourth of advance 5,500
adjusted)
Cheque No. 765431 to Smith 6,000
Cheque No. 765432 to Sunil 5,000
Apr. 30 Payment of telephone bill by Cheque No. 765433 1,500
Apr. 30 Paid for wages by cash 7,000
The database state pertaining to Accounts and Employees table is as given below :
Accounts
Code Name Type

221019 Jain & Co. 4
222001 Bill Payables 4
411001 Furniture Account 3
411002 Office Fittings 3
412002 Plant and Machinery Account 3
534 Accountancy
621001 Kemp & Co. 3

621002 Kumble & Sons 1
631001 Cash account 3
632001 Bank account 3
641001 Salary in advance account 3
641002 Advance to salesman 3
642001 Bills receivable 3
651001 Drawings 4
711001 Purchases 1
711002 Purchases returns 1
711003 Carriage inwards 1
711004 Fuel, power and electricity 1
711011 Wages 1
712001 General expenses 1
712002 Rent account 1
712003 Salaries account 1
712004 Discount account 1
712005 Adverisement 1
712006 Entertainment 1
712007 Travelling 1
712008 Boarding and Lodging 1
712009 Communication expenses 1
712010 Insurance 1
811001 Sales account 2
811002 Sales returns 2
Account Type
CatId Category
1 Expenditure
2 Income
3 Assets
4 Liabilities
Employees
EmpId Fname Minit LName Address PhoneNo SuperId

Solution
The solution based on Model-I which lends support to Transaction Voucher with one Debit
and one Credit as shown in figure 14.19, shall appear as follows :
Vouchers
vNo Debit amount vDate Credit narration AuthBy PrepBy

Rs.
2005
01 631001 5,00,000 Apr. 01 110001 Commenced business A001 B001
with cash
02 632001 4,00,000 Apr. 01 631001 Deposited into bank A001 S001
03 711001 1,50,000 Apr. 02 632001 Purchases from A001 B001
R.S & Sons
04 711003 3,000 Apr. 02 632001 Paid to M/s Nahar A001 B001
Transports
05 712002 9,000 Apr. 02 632001 Paid rent for April, 2001 A001 B001
06 711001 50,000 Apr. 03 631001 Goods purchased from A001 S001
R.S. & Sons
07 711003 2,000 Apr. 03 631001 Paid for carriage to A001 S001
M/s Saini Transports
08 621001 1,75,000 Apr, 04 811001 Goods sold A001 S002
09 711001 2,50,000 Apr. 05 221020 Invoice no. dated : B001 S002
10 631001 45,000 Apr. 06 811001 Goods sold to M/s S001 S002
Kumbley & Co.
11 712005 2,500 Apr. 08 632001 Paid to M/s ABN Cables A001 S002
12 642001 1,75,000 Apr. 09 621001 Maturity Date : A001 S002
July 12, 2001
13 711002 15,000 Apr. 10 221020 Goods returned A001 S002
Note No. dated :
14 712004 3,500 Apr. 12 642001 Discount on Bill of A001 S002
exchange from Kemp & Co.
15 641002 10,000 Apr. 12 631001 Advance payment to B001 S001
sales for marketing tour
16 712010 5,500 Apr. 17 632001 Insurance of godown S001 B001
17 711004 1,000 Apr. 18 631001 Payment for fuel, power S001 B001
and electricity
18 641001 10,000 Apr. 18 631001 Salary paid in advance B001 B001
to Bimal
19 221020 2,35,000 Apr. 19 222001 Settlement by accepting B001 S001
a bill of exchange
20 811002 5,000 Apr. 21 632001 Goods returned by M/s A001 S001
Kumbley & Co.
21 651001 20,000 Apr. 23 631001 Withdrawal by proprietor A001 S001
for household expenses
22 712006 4,500 Apr. 25 641002 Expenses during tour : A001 S001
Support vouchers 1-4
536 Accountancy

25 641002 200 Apr. 25 631001 Final settlement of A001 S001
Refer to J.V No : 04/21
26 651001 5,000 Apr. 27 711001 Goods taken for private A001 S002
use
27 411001 45,000 Apr. 28 632001 Furniture purchased A001 S002
from S.N. Furniture
28 411001 35,000 Apr. 29 711001 Goods purchased for A001 S002
trading put to office use
29 712001 9,000 Apr. 30 632001 Salary to Aditya- A001 S001
Apr,2001
30 712001 5,500 Apr. 30 632001 Salary to Bimal-April, A001 S001
2001 after adjustment
31 712001 6,000 Apr. 30 632001 Salary to Smith- A001 S001
April 2001
32 712001 5,000 Apr. 30 632001 Salary to Sunil- A001 S001
April, 2001
33 712009 1,500 Apr. 30 632001 Telephone bill A001 B001
34 711011 7,000 Apr. 30 631001 Payment of Wages A001 S001
Shortcomings
The above solution, being based on transaction voucher with one debit and one credit in a
transaction requires multiple vouchers for one real transaction. For example, a transaction
dated April 30, 2005 “Salary for the month paid by cheque” requires four vouchers 29 to
32. One transaction should be recorded possibly through one voucher only.
Solution
The solution based on Model-II which lends support to Debit Voucher (with Multiple Debits
and one Credit) and Credit voucher (with one Debit and multiple Credits) as shown in
Figure: 14.2 and figure 14.3 shall appear as follows :
Vouchers
Vno Vdate Acc_code Vtype PrepBy AuthBy
2005
01 Apr. 01 631001 1 B001 A001
02 Apr. 01 632001 1 S001 A001
03 Apr. 02 632001 0 B001 A001
04 Apr. 02 632001 0 B001 A001
05 Apr. 03 631001 0 S001 A001
06 Apr. 04 811001 0 S002 A001
07 Apr. 05 221020 0 S002 B001
08 Apr. 06 631001 1 S002 S001

09 Apr. 08 632001 0 S002 A001
10 Apr. 09 621001 0 S002 A001
11 Apr. 10 632001 1 S002 A001
12 Apr. 10 221020 0 S002 A001
13 Apr. 12 642001 0 S002 A001
14 Apr. 12 631001 0 S001 B001
15 Apr. 17 632001 0 B001 S001
16 Apr. 18 631001 0 B001 S001
17 Apr. 18 631001 0 B001 B001
18 Apr. 19 222001 0 S001 B001
19 Apr. 21 632001 0 S001 A001
20 Apr. 23 631001 0 S001 A001
21 Apr. 25 641002 0 S001 A001
22 Apr. 25 631001 0 S001 A001
23 Apr. 27 711001 0 S002 A001
24 Apr. 28 632001 0 S002 A001
25 Apr. 29 711001 0 S002 A001
26 Apr. 30 632001 0 S001 A001
27 Apr. 30 632001 0 B001 A001
28 Apr. 30 631001 0 S001 A001
Details
Vno Sno Code Amount Narration
01 1 110001 5,00,000 Commenced business with cash

02 1 631001 4,00,000 Deposited into bank
03 1 711001 1,50,000 Purchases from R.S & Sons
03 2 711003 3,000 Paid to M/s Nahar Transports
04 1 712002 9,000 Paid rent for April, 2001
05 1 711001 50,000 Goods purchased from R.S. & Sons
05 2 711003 2,000 Paid for carriage to M/s Saini Transports
06 1 621001 1,75,000 Goods sold
07 1 711001 2,50,000 Invoice No. dated:
08 1 811001 45,000 Goods sold to M/s Kumbley & Co.
09 1 712005 2,500 Paid to M/s ABN cables
10 1 642001 1,75,000 Maturity date July 12, 2001
12 1 711002 15,000 Goods returned Note No. dated.
13 1 712004 3,500 Discount on bill of exchange from Kemp & Co.
14 1 641002 10,000 Advance payment to sales for marketing tour
15 1 712010 5,500 Insurance of godown
16 1 711004 1,000 Payment for fuel, power and electricity
17 1 641001 10,000 Salary paid in advance to Bimal
18 1 221020 2,35,000 Settlement by accepting a bill of exhange
538 Accountancy
19 1 811002 5,000 Goods Returned by M/s Kumbley & Co.

20 1 651001 20,000 Withdrawal by proprietor for household expenses
21 1 712006 4,500 Expenses during tour: Support Vouchers 1-4
22 1 641002 200 Final settlement of Refer to J.V no. 04/21
23 1 651001 5,000 Goods taken for private use
24 1 411001 45,000 Furniture purchased from S.N. Furniture
25 1 411001 35,000 Goods purchased for trading put to office use
26 1 712001 9,000 Salary to Aditya Apr. 2001
26 2 712001 5,500 Salary to Bimal Apr. 2001after adjustment
26 3 712001 6,000 Salary to Smith Apr. 2001
26 4 712001 5,000 Salary to Sunil Apr. 2001
27 1 712009 1,500 Telephone bill
28 1 711011 7,000 Payment of Wages
A. Indicate against each of the following statements, True or False :

(a) Every relation has at least one super key by default, which is the combination
of all its attributes.
(b) Data transformation is called Information.
(c) Referential integrity constraint arises because of relationships between various
entities.
(d) The complete absence of WHERE clause in SELECT statement implies that
no tuples of a relation shall be selected.
(e) ER model is an example of representational data model.
B. Fill in the blanks, an appropriate word(s)
(a) A ........... does not have key attributes of its own.
(b) The ........... for binary relationship specifies the number of relationship
instances that an entity can participate in.
(c) Each simple attribute of an entity type is associated with a value set called
........... of values.
(d) When structure of AIS is based on both human and computer resources, it is
called ........... AIS.
(e) An ........... is a collection of all entities of a particular entity type.
(f) A weak entity type always has a ........... constraint with respect to its identifying
relationship.
(g) When a relation has more than one attribute with unique values, each such
attribute is called ............
After appreciating the way accounting data is presented in above database models, let
us understand as to how the queries on such databases are expressed as relational
operations.
14.12 Interacting with Databases

One of the major reasons for the success of commercial databases is the SQL
language support they enjoy. This is because SQL became standard for relational
databases. As a result, users have become less concerned about migrating their
database applications from one database to another database. Another advantage
in using standard SQL is that users may write statements in a database
application program that can access data stored in two or more relational DBMS
without having to change the database sub-language (SQL) provided both the
DBMS enjoy the support of a particular SQL standard.
The name SQL stands for Structured Query Language, which was originally
called SEQUEL (Structured English QUEry Language), designed and
implemented at IBM Research as an interface for experimental relational database
system called SYSTEM-R.
Being a comprehensive database language, it has statements for data
definition, query and update. Besides this, it has the capability to define user-
oriented views of database, specify security and authorisation, define integrity
constraints and various other operations. Many computer-programming
languages can act as good host languages to incorporate the statements of SQL.
In this sense, it can be used as a sub-language in a database-programming
context.
Basic Queries in SQL : Data Query Language (DQL), which is a sub-set of SQL
is widely used to answer most of the basic queries. The basic set of queries
consists of those, for which the SELECT-FROM-WHERE Structure is put to use
as described below :
• SELECT : This clause is used to specify the data or information that is desired
to answer the query.
• FROM : This clause is used to specify the source of data for answering the
query. It can be a data table, an existing query or both.
• WHERE : This clause is meant to specify the conditions that are used to
narrow down the choice of data to extract the information desired in select
clause.
The following queries have been considered using the database design given
in Model-I and Model-II. The solution to queries has been given using MS
ACCESS implementation.
I. Query to retrieve all columns of data records from a table, subject to a
condition : To project all the attribute values of selected tuples, an asterisk
(*) need be specified. This asterisk stands for all the attributes.
(1) To retrieve all columns of voucher records whose voucher has been authorised
by an employee whose EmpId is equal to “A001”.
540 Accountancy
Solution
(Model-I and Model-II)
SELECT *
FROM vouchers
WHERE AuthBy=”A001”;
II. Query to retrieve selected columns of data records from a table, subject
to a condition.
(2) To Retrieve vouchers with Vno, Vdate, AuthBy columns wherein the vouchers
are dated “12/Apr/2005”
Solution
SELECT Vno, Vdate, AuthBy

FROM vouchers
WHERE Vdate = #04/12/2005#;
(3) To retrieve vouchers with Vno, Vdate, Auth_by columns, which are dated “12/
Apr/2005”. The columns of records retrieved by the query are to be renamed
as Voucher, Date and Employee
Solution
SELECT Vno As Voucher, Vdate As Date, Prep_by As Employee

FROM vouchers
WHERE Vdate = # 04/12/2005#;
III. Unspecified WHERE Clause : Absence of WHERE clause in SELECT

statement implies that the tuples from a relation are to be selected without
applying any condition. This in turn means that all tuples of a relation
specified in FROM clause qualify for being selected for the result of query.
Consider the following query with reference to Model-I.
(4) Find out the list of accounts which have been debited
Solution
(Model-I)
SELECT DISTINCT Debit As Code
FROM vouchers;
Solution
(Model-II)
SELECT AccCode As Code
FROM vouchers
WHERE vType = 0;
UNION
SELECT Details.Code
FROM vouchers, Details
WHERE vType = 1 AND vouchers.vNo = Details.vNo;
Save above query as DebitAccounts, and thereafter execute another query as
given below to get the final results.
SELECT DISINCT *
FROM Debit Accounts ;
(5) Find out the list of accounts which have been credited
Solution
(Model-I)
SELECT DISTINCT Credit As Code
FROM vouchers ;
Solution
(Model-II)
SELECT AccCode As Code
FROM vouchers
WHERE Vtype = 1;
UNION
SELECT Details.Code
FROM vouchers, Details
WHERE vType = 0 AND vouchers.vNo = Details.vNo;
Save above query as CreditAccounts, and thereafter execute another query as
given below to get the final results.
SELECT DISINCT *
FROM CreditAccounts;
(6) Find out the list of accounts which have been debited as well as credited
Solution
(Model-I)
FROM vouchers
WHERE Debit IN (SELECT Credit As Code
FROM vouchers);
542 Accountancy
Solution
(Model-II)
SELECT *
FROM DebitAccounts
WHERE Code IN (SELECT *
FROM CreditAccounts);
Save above solution query as DebitCredit, both for Model-I and
Model-II
(7) Find out the list of accounts which have been debited but not credited
Solution
(Model-I)
FROM vouchers
WHERE Debit NOT IN (SELECT Code
FROM DebitCredit);
Solution
(Model-II)
SELECT *
FROM DebitAccounts
WHERE Code NOT IN (SELECT *
FROM DebitCredit)
(8) Find out the list of accounts which have been credited but not debited
Solution
(Model-I)
SELECT DISTINCT Credit As Code
FROM vouchers
WHERE Credit NOT IN (SELECT Code
FROM DebitCredit);
Solution
(Model-II)
SELECT *
FROM CreditAccounts
WHERE Code NOT IN ( SELECT *
FROM DebitCredit)
IV. Ambiguous Attribute Names and Renaming (Aliasing) : SQL allows the
use of homonyms (that is same name for two or more attributes) as long
as such attributes are in different relations. If the use of a common attribute
with a particular name across the relations prevails, it becomes necessary
to qualify the attribute name with relation name in which it exits. This is
achieved by prefixing the relation name to the attribute name and
separating the two by a period symbol dot. In Model-II, the attribute Vno,
referring to voucher number in vouchers relation, also exists in details
relation. Whenever vouchers and details relations are used in a query, the
use of Vno attribute must precede the name of relation or its alias name.
For example,
(9) Retrieve a list of accounts and the amounts debited because of cash payments.
The Cash Account code begins with “631”.
Solution
(Model-I)
SELECT Narration, Debit As Code, Amount
FROM Vouchers
WHERE Credit LIKE “631*”;
Solution
(Model-II)
SELECT Narration,Acc_code AS Code, Amount
FROM Vouchers AS V, Details AS D
WHERE tType=1 AND V.vNo=D.vNo
AND acc_code like “631*”
UNION
SELECT Narration,Code, Amount
WHERE tType = 0 AND V.vNo = D.vNo
AND code LIKE “631*”;
(10) To retrieve a detailed list of all accounts, giving their code, Name and category.
Solution
SELECT Code, Name, Category
FROM Accounts, AccountType
WHERE CatId = Type
(11) To retrieve a detailed list of all account, giving their code, Name and category,
which have been debited
Solution
(Model-I)
SELECT DISTINCT Debit AS Code, Name, Category
FROM Vouchers AS V,Accounts AS A, AccountType
WHERE V.Debit = A.Code AND CatId = type
544 Accountancy
Solution
(Model-II by using query solution saved as DebitAccounts in Q.No: 4)
SELECT Code, Name, Category
FROM DebitAccounts AS D, Accounts AS A, Category
WHERE D.Code = A.Code AND Type = CatId
(12) To retrieve Code, Name and Category of Expense accounts which have been
debited
Solution
(Model-I)
SELECT Debit AS Code, Name, Category
FROM Vouchers, Accounts, AccountType
WHERE Debit = Code AND Type = CatId
AND Category = “Expenses”
Solution
(Model-II by using query solution saved as Debit Accounts in Q.No: 4)
SELECT D.Code, Name, Category
FROM DebitAccounts AS D, Accounts AS A, AccountType
WHERE D.Code = A.code AND Type = CatId
AND Category = “Expenses”
(13) To retrieve Narration and Amount of transactions where Expense head
“Carriage Inwards” has been debited.
Solution
(Model-I)
SELECT Narration, Amount
FROM Vouchers, Accounts
WHERE Debit = Code
AND Name LIKE “Carriage Inw*”;
Solution
(Model-II by using query solution saved as DebitAccounts in Q.No: 4)
SELECT Narration, Amount
FROM Details AS T,DebitAccounts AS D, Accounts AS A
WHERE T.Code = D.Code AND D.Code = A.Code
AND Name LIKE “Carriage Inw*”
V. Sub-string Comparisons and Arithmetic Operators and Ordering and use
of functions : SQL allows comparison on sub-strings (that are some parts
of a character string). This can be achieved by use of LIKE Operator. This
like operator instead of equal to (=) operator can be used when exact value
of comparison is not known. Partial strings or sub-strings are specified by

using * and range specification within rectangular brackets. For Example:
(14) To make a list of accounts pertaining to the assets of the company, given that
each of the assets account code begins with “4”, following query need be
executed:
Solution
SELECT Code, Name
FROM accounts
WHERE Code like “4*”
(15) To make a list of employees whose names start from a to k, following query
need be executed :
Solution
SELECT Fname & “ “ & Minit & “ “ & Lname As ‘Name of Employee’
FROM Employees
WHERE Fname like “[a-e]*”
VI. Another comparison operator used in SQL is BETWEEN ....AND
....operator. This operator facilitates numeric range tests for selection of
tuples. For Example:
(16) To retrieve vouchers with amount ranging between 5,000 and 10,000, following
query need be formulated.
Solution
(Model-I)
SELECT Vno, Amount
FROM Vouchers
WHERE Amount BETWEEN 5000 AND 10000 ;
Solution
(Model-II)
SELECT Vno, Amount
WHERE. V.vno = D.vno AND Amount BETWEEN 5,000 AND 10,000;
VII. Another feature of SQL permits the use of standard arithmetic operators,
which can be directly applied to numeric values appearing in a query
statement. Consider the following query:
546 Accountancy
(17) To find various amounts of sales during the month of April, 2005 and the
amounts of such sales if the prices of products are allowed to be raised by
16%.
Solution
(Model-I)
SELECT Vdate, Credit, Amount, Amount*1.16 AS Expected
FROM Vouchers, Accounts
WHERE Credit = Code AND name LIKE “Sales Account*”
Solution
(Model-II)
SELECT Vdate, D.code, Amount, Amount*1.16 AS Expected
FROM Vouchers AS V, Details AS D, accounts AS A
WHERE V.vNo = D.vNo AND D.code = A.Code AND A.Name LIKE
“Sales Account*” AND tType = 1
UNION
SELECT Vdate, V.Acc_code, Amount, Amount*1.16 AS Expected
FROM Vouchers AS V, Details AS D, accounts AS A
WHERE V.vno = D.vno AND V.acc_code = A.code AND A.name LIKE
“Sales Account*” AND Ttype = 0;
VIII. SQL also allows ordering of resultant tuples according to some specified
attribute, which may or may not form part of the resultant relation. Consider
the following example:
(18) To retrieve list of Accounts in dictionary order of their Names :
Solution
SELECT *
FROM Accounts
ORDER BY Name
IX. SQL queries allow the use of supported functions within the query itself.
List of these functions varies from one implementation to another depending
on the specific RDBMS. Consider the following example :
(19) To List details of vouchers released during April, 2005.
Solution
SELECT *
FROM vouchers
WHERE Month(vDate) = 4
To execute above query, month() function is used which accepts within parenthesis
the data a parameter and returns the numeric value of one month varying from 1
through 12. In this case the relevant value to be compared for the month of April
is 4.
X. Explicit Sets and NULL in SQL : Query results can be retrieved even for
rows in which value of an attribute is missing. This is achieved by using
NULL in Where clause while specifying the condition. If more than one
value is to be compared with an attribute, the value set can be given in
Where clause by specifying IN operator.
(20) To retrieve Details of Accounts with following Codes: relating to “621001”,
“632021” and “642002”.
Solution
SELECT *
FROM Accounts
WHERE Code IN(“621001”,”632001”,”642002”);
(21) To retrieve name of all employees who do not have supervisors.
Solution
SELECT *
FROM Employees
WHERE SuperId = NULL;
XI. Aggregate Functions and Grouping : The concept of aggregate functions
as referred to in relational operations, is implemented by SQL. Five such
functions commonly used for aggregate of data items are: COUNT,SUM,
MAX, MIN and AVG. These functions when applied on a set of numeric
values, return respectively number of rows, the sum , maximum, minimum
and average of these values. The GROUP BY clause is used for providing
the basis of creating collection of data items on which these functions are
to be applied. Consider the following examples.
(22) To find the sum, minimum and maximum of cash payment during April,
2005. The cash account code begins with “631”
Solution
(Model-I)
SELECT Debit AS Code, SUM(Amount) AS Total,
MIN(Amount) As Minimum, MAX(Amount) As Maximum
FROM Vouchers
WHERE Debit like “631*”
GROUP BY Debit
548 Accountancy
Solution
(Model-II)
SELECT Code, SUM(Amount) AS Total,
MIN(Amount) As Minimum, MAX(Amount) As Maximum
WHERE V.Vno=D.Vno, Ttype=0 and Code Like “631*”
GROUP BY D.Code
• Database System • Entity Relationship (ER) Model

• Reality Database • Rational Data Model
• Accounting Intermedia • Transaction Voucher
• Credit Voucher • Debit Voucher
• Attributes • Interacting with Database
• Designing Database for Accounting
(1) Database Concepts
Reality : It consists of different components of an organisation such as people,

facilities and other resources.
Data : It represent data concerning people, places, objects entities, events, etc.
and non-financial 14 nature.
Database : It was a shared collection of inter-related data tables, tiles or structures
which are designed to most varied information needs of all organisation.
International : Processed data organisation in a form that is suitable for decision-
making.
DBMS : A collection of programmes that enable users to create and maintain a
database.
(2) Database System Concepts and Architecture
Data model : Collection of concepts used to describe the structure of a database.

Database Schemes : The description of a database is called its scheme.
Data Base State and Instances : Data in a database at a particular movement is
called database state.
(3) Entity Relationship (ER) Model
An important concept of data model mostly used in data base oriented application.
The major elements of ER model are entities, Attributes, identities and relationship
that are used to express reality for which a data base is to be designed.
(4) Relation Data Model (RDM)

It represent the database at collection of tables comprising different volumes. It
consists of rows and columns. The table name and column name are used to help
in interpreting the meaning of volumes of each row. Each row of table is called a
data record.

Short Answers
1. State main categories of data models.
2. How are computers useful in processing the accounting data?
3. What do you understand by accounting data? Discuss the stages through
which it is finally transformed for being presented as information in financial
statements.
4. What do you understand by database. How does it differ from DBMS?
5. What is meant by entity type? How it is different from entity set? Illustrate
by giving suitable example from accounting reality.
6. What do you understand by relationship type? How is it different from
relationship instance and relationship set?
7. What do you understand by multi-valued attribute? How is it different from
complex and composite attribute? Illustrate by giving suitable example.
8. What do you understand by the concept of weak entity used in data
modelling? Explain the relevance of owner entity type, partial key and
identifying relationship in the context of such modelling.
9. What is a participation role? State the circumstances under which the use
of role names becomes necessary in description of relationship types.
10. Define foreign key. How is this concept useful in relational data model?
Illustrate with suitable example.
11. What is meant by NULL value? What are the reasons that lead to their
occurrence in database relations?
12. Why are duplicate tuples not allowed in a relation?
13. What do you understand union compatibility of relations? For which
operations such compatibility is required and why?
14. What is the need for database normalisation?
Long Answers
1. Discuss the basic concepts of Entity Relationship (ER) Model. Illustrate as
to how an ER model is diagrammed.
2. What integrity constraints are specified on database schema? Why is each
considered important?
3. Discuss the different types of update operations in relation to the integrity
constraints which must be satisfied in a relational database model.
4. Discuss the steps you would take to transform an ER Model into various
relations of Relational Data Model. Give suitable examples.
Project Work
(i) Consider the following reality in a business enterprise, which is engaged in
trading activity.
550 Accountancy
• It buys and sells a given number of items each of which is uniquely

identifiable. Each unit of item is expressed in numbers or Kilograms.
• It procures its supplies from a given number of suppliers who can supply
any number of items at a time. Each transaction is on credit for a
particular period of time expressed in days.
• It sells various items to its customers on credit for a definite period of
time expressed in days.
• Each purchase is made through a regular invoice, which has its distinct
number for the supplier. It is duly dated, mentions the items being
transacted, their quantities and prices and total amount of invoice.
• Design an ER schema for a database application for purchase and sales
accounting and also show as to how it shall be transformed into various
relations of a relational data model.
(ii) Following transactions of M/s Soumya Enterprises are given to you for the
period ending March, 31 2002.
March 05 Additional capital brought in cash by proprietor, Rs.5,00,000, out

of which deposited into a bank account Rs.4,50,000
02 Received Cheque for Rs.56,000 from K & Co. on account
08 Issued Cheque for Rs.75,000 in favour of Jain & Sons
10 Payment of rent for the month Rs.15,000
12 Goods purchased Rs.34,000 by Cash
16 Goods sold to R & Co Rs.45,000
20 Purchased furniture for office use Rs.25,000
24 Paid fire insurance premium by Cheque Rs. 12,000
28 Paid cash to Jayram Bros. Rs.29,000 in full settlement of their
account standing at Rs.29,500
30 Payment of salary to staff Rs.20,000
All these transactions have been stored in database tables as shown below
under (Model-I of database design). Data in Accounts table appears as follows:
Accounts
Code Name
110001 Capital Account
221019 Jain & Sons
411001 Furniture Account
411002 Fixtures & Fittings Account
621001 K & Co
631001 Cash Account
632001 Bank Account
641001 Salary in Advance Account
711001 Cartage Account
711002 Salaries Account
711003 Rent Account
711005 Insurance Premium
711006 Discount Account
811001 Sales Account
Show how will these transactions appear as accounting data in following vouchers
table.
Vno : Identity of a transaction stored through a voucher.

Vdate : to date of transaction
Debit : to code of account being debited
Amount : Amount of transaction
Credit : Code of account being credited
Narration : Narration of transaction.
(iii) M/s Soumya Exports set up a garments export business on March,1 2002.
Their transactions for the month ending March, 31 2002 are given below :
March 01 Capital brought in cash by proprietor, Rs.5,00,000, out of which

deposited into a bank account Rs.4,50,000
03 Received Cheque for Rs.86,000 from Kailash Nath & Co. as advance
account
04 Issued Cheque for Rs.85,000 to Jackson Bros. as advance for
supplies
11 Payment of rent for the month Rs.18,000
14 Purchased Computer system for office use Rs.53,000, payment for
which made by Cheque
14 Goods purchased Rs.1,30,000 , payment made by Cheque.
16 Goods purchased from Jackson and Bros. for Rs.97,500
19 Goods sold to Rajeshwar & Sons Rs.45,000
22 Purchased Furniture for office use Rs.25,000
25 Paid fire insurance premium by Cheque Rs. 12,000
29 Paid Cash To Jackson Bros. Rs.12,000 in full settlement of their
outstanding balance of Rs.12,500
30 Payment of salary to staff Rs.20,000
All these transactions have been stored in database tables as shown below under
(Model-I of database design). Data in Accounts table appears as follows:
Accounts
Code Name
110001 Capital Account
221019 Jackson Bros.
411001 Furniture Account
552 Accountancy
413001 Office Equipment

621001 Kailash Nath & Co
621002 Rajeshwar & Sons
631001 Cash Account
632001 Bank Account
641001 Salary in Advance Account
711001 Cartage Account
711002 Salaries Account
711003 Rent Account
711005 Insurance Premium
711006 Discount Account
811001 Sales Account
Show how will these transactions appear as accounting data in following accounting
data tables.
Vno : Identity of a transaction stored through a voucher

Vdate : date of transaction
Acc_code : code of account being debited or credited
Code : Codes of accounts being credited or debited, depending on
value of Vtype( = 0, means codes being debited, 1 means
codes being credited)
Sno : Serial number of accounts being debited in debit voucher
and those being credited in credit voucher
Vtype : 0 = means debit voucher, 1 = credit voucher
Amount : Amount of transaction
Narration : Narration of transaction
(iv) Write relational operation expressions and relevant SQL statements for
following queries using Database Design Model-I and Model-II :
(a) Retrieve the voucher details and type of voucher authorised by a
particular employee.
(b) Retrieve every bank payment voucher details, account name, amount.
You are given that bank account code =”632001”.
(c) Find details of cash vouchers pertaining to an expense account whose
account code = ”711003”. You ar e given that cash account
code=”631001”.
(d) Make a list of accounts and amount with respect to which a voucher
has been either prepared or authorised by a particular employee.
(e) Retrieve details of vouchers without support documents.
(f) List details of documents with at least one support document.

(g) Find all vouchers with total amounts raised during a particular month.
(h) Retrieve all vouchers prepared by an employee whose First name is “Smith”.
(iv) Write relational operation expressions and relevant SQL statements for
following queries using Database Design Model-I and Model-II.
(a) Retrieve all vouchers pertaining to a particular account with amounts
ranging between Rs. 10,000 to Rs. 20,000.
(b) Retrieve details of each voucher whose support document has the same
date as that of the voucher itself.
(c) Retrieve details of voucher authorised by employees who do not have
supervisors.
(d) Find sum of cash payments, maximum payments, minimum payments
and average.
(e) Find sum of cash payment, maximum and minimum amount with
respect to a particular account Code.
(f) Retrieve every bank payment voucher details, account name, amount
pertaining to a particular period ranging from Date1 to Date 2.
(g) Find details of cash vouchers pertaining to a particular expense account.
(h) Make a list of accounts and amount with respect to which a voucher
has been either prepared or authorised by a particular employee.
(i) Find all vouchers with total amounts raised during a particular month.
(j) Retrieve all vouchers prepared by an employee whose last name is Dev.
(k) Retrieve details of each voucher whose support document has the same
date as that of the voucher itself.

A. (a) T (b) T (c) T (d) F (e) F
B. (a) Weak entity

(b) Computer based
(c) Timeware
(d) Liveware
(e) Total participation
(f) Multi-valued
(g) Full functional
554 Accountancy
Accounting System Using

Database Management System 15
LEARNING OBJECTIVES I n chapter 14, you have lear nt about the

fundamentals of creating a database design in
the context of accounting system. This chapter deals
After studying this
chapter, you will be able with the basics of MS Access for implementing the
to : databases and specifically deals with implementa-
• identify the resources tion of accounting databases, the design of which
of MS ACCESS as has been shown, described and discussed in chapter
DBMS; 14 as Model-I and Model-II. The accounting
• create data tables
described in a data-
database design has been discussed below in terms
base design and set of its implementation modalities in the context of
relationship among MS Access.
these tables;
• explain the ACCESS 15.1 MS Access and its Components
basics and procedures
to create forms using It is one of the popularly used Database Management
ACCESS; System (DBMS) to create, store and manage
• describe and create
voucher for ms in database. It is also popularly called ACCESS.
consonance with diffe- Every component that is created using Access
rent database designs; is an object and several such similar objects
• identify infor mation constitute a class. Access is functionally available
requirement of reports
for querying databases; with the following seven-object classes. Each of
• formulate and imple- these object classes is capable of creating their
ment queries for retri- respective object replicas.
eving data and inform- • Tables : This object class allows a database
ation for presentation
in accounting reports ;
designer to create the data tables with their
and respective fieldnames, data types and properties.
• implement the process • Queries : This object class is meant to create the
in ACCESS for genera- SQL compatible query statement with or without
ting accounting reports
the help of Graphic User Interface (GUI) to define
by using accounting
information queries. tables, store data and retrieve both data and
information.
Accounting System using DBMS 555
• Forms : This object class allows the designer to create an appropriate user
interface to formally interact with the back end database, defined by the
tables and queries.
• Reports: This object class is used to create various reports, the source of
information content of which is based on tables, queries or both. Such
reports are designed in Access according to the requirement of end-user.
• Pages : This object class is meant to create Data Access Pages, which can
be posted on a Web site of an organisation using Internet or sent via
e-mail to someone of the organisation’s network.
• Macros : In macro programming, the objects using individual instructions
called macro-oriented actions are manipulated. A Macro is a list of macro-
oriented actions that run as a unit. Access provides for such Macro
programming.
Fig. 15.1 : An example of database window to work in Access
• Modules : These are the foundations of any application and allow the
designer to create a set of programming instructions, called functions or
sub-routines that can be used throughout the application.
556 Accountancy
The functions return a value while subroutines do not return any value.
Access provides for creating such modules.
Each of these object classes is contained in the named database file of
Access with MDB extension. Whenever this file is opened, a database window,
as shown on next page, opens with all the above object classes available on
the left hand side. As and when the specific objects are created or designed,
they get listed on right hand side of this window against each of these object
classes.
Box 1
Capabilities of MS Access
Access has certain capabilities, which bring it closer to an ideal Database
Management System. These capabilities are :
• Storing the data in an organised manner.
• Enforcing data integrity constraints.
• Representing complex relationship among data.
• Providing for persistent storage of database objects.
• Restricting unauthorised access to database.
• Allowing fast retrieval of data with or without processing by using SQL.
• Flexibility to create multiple user interfaces.
• Providing for data sharing and multi-user transaction processing.
• Supporting multiple views of data and information.
15.1.1 Access Basics for Creating a Database

When a new database is created from the scratch, there is complete control
over the database objects, their properties and the relationships. In order to
create a new database without the help of database wizard (that is an
automated process in Access), the following steps are required :
(i) Open Access Window to choose blank Access database and click OK
button.
(ii) Access responds by displaying File New Database dialog box, which
prompts the designer to enter a file name and a location for the database.
This must be followed by clicking Create button.
(iii) If the task pane is not open, choose File from menu bar and click at
new to open the task pane to create a new database.
15.1.2 Creating of Tables in Access

The creation of tables in Access requires the following steps and understanding
of the components of table object.
Click at Tables object of Access, followed by double click at create table by

design view. This results in providing a table window, the upper part of
which has three columns: Field Name, Data Type and Description. It is meant
to define the schema of a table being created. Each of its rows corresponds to
a column of the table being created. Two primary properties of the column of
a table are its field name and data type.
(a) Field name : refers to column name of the table being created. The name of
the column should be a string of contiguous characters. The Field name is
meant to define the name of column to be created, followed by data type of
such column. The designer can optionally provide description of the column
also. Once the data type is defined, the designer can further specify the
properties of each column in the lower part of the Table window.
(b) Data Types : Access supports different data types, the details of which are
as given below :
• Text : It is used for a string of characters: words or numbers that are
not to be used in any arithmetic calculations. The maximum length for
a text field is 255 characters. It is the default data type because of
being used most frequently.
• Memo : It is used for storing comments and is capable of accommodating
65,536 characters. But a field with this data type is not amenable to
sorting or filtering of data records.
• Number : It is meant to store numbers, which could be integers (-32768
to 32767), long integers (–2,147,483,648 to 2,147,483,647), bytes
( 0 – 255), single (to store values with decimal point up to a certain
limit), double (to store values in decimal point with greater magnitude
and more precision) or decimal types.
• Date/Time : It is used to store dates, times or a combination of both.
• Currency : It is used for storing numbers in terms of Dollars, Rupees or
other Currencies.
• AutoNumber : It is a numeric data automatically entered by Access. It
is of particular importance in a situation where none of the fields
individually or a set of fields as a combination in a table is unique.
• Yes/No : It is to declare a logical field which may have only one of the two
opposite values alternatively given as: Yes or No, On or Off, True or False.
• OLE Object : OLE stands for Object Linking and Embedding. It refers to
an object that could be a photograph, bar code image or another
document created in another software application.
• Hyperlink : This data type is meant to store a Universal Resource Locator
(URL) and e-mail addresses.
(c) Properties : Once the data type of a column is specified, Access allows the
designer to define the properties of each column. These properties are of
two types General and Look up.
558 Accountancy
(i) General : In the context of text data type the general properties are :
• Field Size : This property, in case of text fields, refers to the maximum
number of characters allowed in the column. The same property, in
case of numbers, refers to the type of numbers being stored as per
requirements.
• Format : It is meant to indicate as to how the field’s contents are
displayed. There are standard types of formats to choose from.
• Decimal places property : It applies to single, double or decimal types
of numbers.
• Input mask : Formats for data entry that include placeholders and
punctuations are called input masks. It works only for text and date
type of fields. It is of particular importance when the accounting codes
being used in the system are formatted with hyphens.
• Caption : It is a label used for the field in datasheet view and on the
Forms and reports. If the caption property is set to blank, the field
name becomes the default caption and is used to label the field.
• Default Value : It is used for specifying a value for new entries of data
records. While entering the data item, the operator can always over
write the default value. The default value should be the most frequently
entered value in the field.
• Validation Rule and Text : Validation means checking of data to eliminate
incorrect entries. Validation criteria can be specified for this property.
If the data so entered does not satisfy the validation criteria, the
validation text gets displayed.
• Required and Indexed : The Required property must be provided a logical
value Yes or No. When a field’s required property is set to Yes, a user
must enter data in the field before saving the record. A value of No
implies that the data entry in the field is optional. In other words, a
null value is also acceptable to the database. Indexing a field results
in speeding up sorting, searching and filtering of records on that field.
Primary key field is always indexed. For a single field primary key,
Access sets the Required property to Yes and the Indexed property to
Yes (No duplicates) because a primary key by definition must have
unique values without null entries.
• Allow-Zero Length : This property is available only for text fields. Setting
it to Yes/No determines whether a text string with zero length is a
valid entry or not.
(ii) Look up : The look up feature is used by a field to find its values in another
table, query or from a fixed list of values. A list of valid values can be
displayed using a list box or combo box. Text box is the default display
control of look up. Look up is created in case of a field, which is foreign
key (many side) into primary key (one side) between the tables that have
one-to-many relationship. Its other display controls are list control and
combo control. When list box or combo box is used as display control in
look up, it is important to specify the row source type (that is table, query
or list of values or field list). The list of values must be separated by comma.
Some additional properties in case of list box or combo box are meant to
specify the bound column whose values are copied to this field as references.
Number of columns to appear in the list box or combo box is determined
by column count property.
• The above steps for defining a column need be repeated for every column
to be created for a particular table.
• After defining all the columns of the table, the primary key column of
the table can be specified as any of the columns that are expected to
have unique data values. This can be achieved by right clicking at the
field to be specified as primary key followed by primary key item of
right clicked window. If more than one field constitutes a primary key,
select first field (of such composite primary key) by pressing and holding
Ctrl key and clicking other fields (of the composite primary key) one by
one in the same order in which they together constitute the primary
key. This must be followed by right click at selected fields to mark the
selected fields as primary key.
• Save the table design by clicking at File item of menu bar followed by
click at Save option. Access responds by providing a generic default
name of table. The table name provided by Access may be accepted by
clicking at OK or changed by re-typing another name at the input
dialog box. This must be followed by clicking OK. The table stands
created and appears as listed to the right of table object.
• Every other table, which constitutes part of the database design, may
also be created in the same manner as described above.
The foregoing discussion in this chapter is divided into four sections:
Creating tables and relationships for accounting databases; Vouchers and
forms; information using queries and generating accounting reports.
15.2 Creating Tables and Relationships for Accounting Database

The database designed in of this chapter is to be discussed in the context of
database components as detailed above. This is because the implementation
of each database design is conditioned by its particular table structure and
interrelationships. Such implementation modalities have been discussed in
detail for various types of transaction vouchers already described in the
preceding chapter.
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15.2.1 Database Design for Simple Transaction Vouchers

According to the design shown in figure 14.24 (Model-1) of preceding chapter,
there are five data tables: Employees, Accounts, Vouchers, Support and
AccountType. For the purpose of implementation, each table is described below
in terms of their storage structure, i.e. column names, data types and properties:
(a) AccountType : This table has two columns: CatId and Category.
• CatId : This column of the AccountType table is meant to specify the
identification value of the category of accounts. Since there are limited
number of accounts type and are being expressed as numeric only,
the data type of this field can be safely taken as ‘Number/byte’ because
the storage space taken by the data type ‘Number/byte’ is minimum.
This field has been designated as primary key because it has unique
values across a set of category records.
• Category : This field is meant to store the string of characters to express
the category of account such as Expenses, Revenues, Assets and
Liabilities. Its data type should be Text with suggested field size set to
15 characters.
(b) Accounts : This table has three columns: Code, Name and Type.
• Code : A unique account number or code identifies an account. This
column is meant to store this code. Its data type is chosen as Text
because it is not to be subjected to any calculations. Its field size is
required to have a length of six characters because every account is
designed to have six digits at leaf level. Because of uniqueness in values,
this field is a good primary key field. The Allow Zero Length property
must be set to No. Indexed property of this field must be set to Yes (No
duplicates) to imply that the database creates automatically an internal
index on this field for fast retrieval of data records and No duplicates
indicates that this index is based on unique values of code.
• Name : In a system of accounting, every account has a name. This
column is meant to store the name of an account corresponding to the
account code by which it is identified. Its data type is declared as Text
because it is a string of characters not required for any calculations.
Its field size need be set to 30 characters, which is considered to be
long enough to accommodate the name of account.
• Type : Every account must belong to one of the accounts type as stored
in AccountType table. This field is a foreign key to reference CatId field
of AccountType table. Its data type and other properties must be the
same as that of CatId field in AccountType table, except that its Index
property can be set to YES (Duplicates OK). This is because Type
value within accounts table cannot be unique as a number of accounts
might belong to a particular AccountType and store a common CatId
as data value in Type field. The relationship between the CatId column
of AccountType table and type column of Accounts table must also be
defined so as to maintain referential integrity.
(c) Employees : This table stores the data pertaining to employees of the
organisation and is designed to have following columns :
• EmpId : Each employee is identified by a unique data value called
EmpId, which in turn gets reflected in employee table as a column to
store for each employee record a unique identification value. The data
type of this column is text with field size equal to 4. Being a column to
store unique values and also because of its capability to identify an
employee record, it is designated as primary key field. Its Required
property is set to Yes and Zero length property is set to No with
Indexed property as Yes (No Duplicates).
• Fname : This column refers to the first name of employee and its data
type is declared as Text because it is meant to store string of alphabets.
Its Field size is set to 10 on the assumption that first name of every
employee can be completely accommodated within this field size. The
Required property is set to Yes with Zero Length Property being No
to imply that every employee has a first name and no employee record
can be stored unless the first name is also stored.
• Mname : Mname column is meant to store the middle name of an
employee. It data type is declared as text with field width equal to 10.
The Required Property can be set to No and Zero Length property to
Yes to imply that many employees may not have middle name.
Therefore, the storing of value in this field becomes optional.
• Lname : Lname column has been included in the table structure to
store the Last name of an employee. The data type of this column is
Text with field size set to 10. The Required Property can be set to No
and Allow Zero Length property to Yes for the reason which applies
to Mname.
• PhoneNo : This column is meant to store the Phone number of the
employee and its data type is set to Text with field size equal to 12.
The Required property is set to No with Allow Zero Length property
set to Yes to imply that null values are permitted for this field because
many employees may not have phone numbers.
• SuperId : This column in the Employee table structure refers to EmpId
of the supervisor or immediate superior of the employee. Its data type
is set to Text with field width 4, the same as is for EmpId. Its Required
property is set to No with Allow Zero Length property being Yes to
imply that null values are also permitted. This is because the overall
boss of the organisation, although an employee, does not have any
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boss and therefore a null value in this field is to be allowed to

accommodate the situation.
(d) Vouchers : This table has been designed to store the transaction data as
contained in a voucher. It has nine columns, the details of each are given
below :
• Vno : This column is meant to store voucher number, which indicates
the distinct identity of a transaction. Its data type could be number if
numeric digits are assigned to each of the vouchers. However, its data
type is normally taken as text because it is amenable to any type of
numbering, coding or ordering scheme: numeric, alpha-numeric or
formatted reference. Its width may be set to 6 so that first 2 places to
the left refer to numeric month of the date and next 4 places to numeric
digits giving identity to each of the transactions that have occurred
during the month under reference. This column is designed to have
distinct values and therefore can be designated as primary key of the
table. Accordingly, its value cannot be null and therefore its Allow
Zero Length property must be set to No with Required property being
Yes. However, its data type needs be taken as number (with Integer),
when numeric function(s) such as Dmax() is applied to find maximum
values for auto-generating the vouchers.
• Debit : This column is meant to store the code corresponding to an
account, which has been debited in recording a transaction. Since it
references the code column, which is the primary key of Accounts
table as described above, it is a foreign key column in Vouchers table.
The data type and properties of this column should be the same as
that of code column of Accounts table, except that its Indexed property
need be set to Yes Duplicates OK). The relationship between the code
column of accounts table and debit column of Vouchers table must
also be defined so as to maintain referential integrity.
• Amount : This column is meant to store the amount of transaction and
is common to the accounts being debited and credited. Its data type
can be Number with field size set to double; format set to standard;
decimal places set to 2 and default value set to 0.00. Alternatively, its
data type can be chosen as currency type, in that case its format can
be either accepted as currency or set to standard with decimal places
set to 2.
• Vdate : This column of the table stores the date of transaction. Its data
type is set to Date/Time with format set to Medium Date (dd-MMM-
yy); Default value set to = Now() to imply current date in Real Time
Clock (RTC) of computer system and caption property set to Date.
• Credit : This column is meant to store the code corresponding to the

account being credited in recording a transaction. Like Debit column,
this column too shares the same properties as code column of Accounts
table and must also be dealt with in the same manner as Debit column
described above.
• Narration : This column is meant to store the narration. Its data type
can be set to text type with field size set to 100 characters; Required to
No; Allow Zero Length to Yes and Indexed to No. If the narrations are
very large beyond 255 characters, its data type can be set to Memo so
as to accommodate the narrations up to 65,536 characters, almost
equal to 64 pages.
• PrepBy : This column is meant to store the identity of an employee who
has prepared the voucher. EmpId as defined and described in schema
of Employees table identifies the employee. The data type of this field
and other properties must be identical to that of EmpId, except that its
Indexed property must be set to No. This column as per design is
expected to refer to EmpId column of Employees table and therefore
must be defined as foreign key. Its relationship with EmpId column of
Employees table must also be specified to ensure referential integrity.
• AuthBy : This column is meant to store the identity of the employee
who has authorised the vouchers. This column is similar to PrepBy
column. Therefore, its data type, properties and relationship with EmpId
are the same as those for PrepBy column.
• Support : This table is created to store the details of support documents
annexed to a voucher. It is designed to have the following four columns:
• vNo : This column is meant to store the voucher number to which
this document is annexed. Its data type should be the same as that
of Vno in Vouchers table because this column refers to Vno column
of Vouchers table to maintain referential integrity. Its value cannot
be null and therefore its Allow Zero Length property must be set
to No with Required Property being Yes. Since there may be more
than one support documents annexed to a voucher, the values
stored in this column cannot be unique and therefore this column
alone cannot be a primary key field.
• sNo : This column has been included in the table structure to store
serial numbers 1,2,3… to correspond to the serial number of
documents being annexed. Duplicate values will occur in this field
also because the serial number of documents across the vouchers
shall be the same. However, both the columns: Svno and Sno
together provide a unique value because the documents, for every
voucher are serially numbered and therefore unique. Both the
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columns together need be declared as Primary key of this table.

• dName : This column refers to Document name. Its data type is
Text with field size equal to 30 to mean that within this character
limit the document name can be suitable accommodated.
• sDate : This column refers to any date reference given in the support
document. Its data type is Date/Time. Its format can be declared
as Medium Date with Required and Indexed property set to No.
15.2.2 Modified Design for Implementing Compound Vouchers

There are two tables: VouchersMain and VouchersDetails
(a) VouchersMain : This table has been created to store one record for every
transaction. The rows of this table refer to those data items of the vouchers,
which lie outside the voucher grid. It consists of Vno, AccCode, vdate,
PrepBy, AuthBy and Type.
• AccCode : This column is meant to store the complementing account
code, which in the context of debit voucher is credit account and in the
context of credit voucher is a debit account. In debit voucher, the debit
accounts are displayed in Debit Accounts Grid and therefore the
complementing account is the account to be credited. Similarly, in
Credit Voucher, the Credit Accounts Grid displays only the accounts,
which are being credited in recording a transaction. Therefore, the
complementing debit account need be stored in this column. This
column is also the foreign key column because it references the primary
key column of Accounts table. Its data type and properties must be
the same as that of Code column of Accounts table, except that its
Indexed property must be set to Yes (Duplicates OK) and the domain
of its data values is confined to the code values stored in Accounts
table.
• Type : This column has been created to store a value 0 (for debit voucher)
or 1 (for credit voucher). Its data type therefore is set to Number with
field size set to byte. This column is very important and therefore its
values must be carefully stored and interpreted in preparing accounting
reports. Improper handling of this column may cause the Errors of
Principle in accounting. The data types and properties of Vno,Vdate,
AuthBy and PrepBy continues to be same as have been defined and
discussed in Vouchers table of Simple Vouchers Design. However, Vno
column has acquired an added importance because of being referenced
by Vno column of VouchersDetail table.
(b) VouchersDetail : This table is meant to store those data items of the voucher,
which appear in the grid of debit or credit vouchers. However, the Total
amount of voucher is not stored because it is derived data. It consists

of Vno, Sno, Code, Amount and Narration as its columns.
• Vno : This column is meant to store voucher number of Debit/
Credit record of VouchersMain table to which the Credit/Debit
entries of vouchersDetails table are related. Its data type should
be the same as that of Vno in VouchersMain table because this
column refers to Vno column of vouchersMain table to maintain
referential integrity. Its value cannot be null and therefore its
Allow Zero Length property must be set to No with Required
property being Yes. Since there can be more than one debit/credit
Entry against each of the credit/debit entry of VoucherMain table,
the values stored in this column cannot be unique and therefore
this column alone cannot be a primary key field.
• Sno : This column has been included in the table structure to
store serial numbers 1,2,3… to correspond to the serial number of
debit/credit entries being referred to in the grid of an accounting
Voucher: Debit or Credit. Duplicate values will occur in this field
also because the serial numbers of entries across the vouchers
are bound to be the same. However, both the columns: vno and
Sno together provide a unique value because for every voucher
the entries are serially numbered and therefore unique. Both the
columns together need be declared as primary key of this table.
• Code : This column is meant to store the account codes, which in
the context of debit voucher are debit accounts and in the context
of credit voucher are credit accounts. This column is also the
foreign key column because it references the primary key column
of Accounts table. Its data type and properties must be the same
as that of Code column of Accounts table, except that its Indexed
property must be set to Yes (Duplicates OK). The domain of its
data values gets confined to the Code values stored in Accounts
table. The data type and properties of amount and narration
column continue to be the same as already described and
discussed for Vouchers table.
15.3 Vouchers Using Forms

The scope of this section includes the basics of Access for creating a
Form in Access; transforming the voucher designs in terms of Access
objects and properties; and also the procedure for creating Forms for
vouchers.
566 Accountancy
15.3.1 Access Basics for Creating Forms

A Form in Access may be designed, developed and used for the following
purposes :
• Data Entry: Form is used for entering, editing and displaying data.
• Application flow : Form is used for navigating through an application.
• Custom Dialog Box : It can be used for providing messages to the user or
getting parameters from the user for executing a parameter-based query.
• Printing information: It can be used for providing hard copies of data entry
information.
This is contrary to the belief that Forms in Access can be used only for
data entry. The most common use of a Form in Access is to display and edit
existing data and also for adding new data records.
15.3.2 Tool Box and Form Controls

A tool box is a collection of visual objects (or controls) that are placed (or
embedded) on the Form to provide some meaning or functionality. The Form
is designed by placing several such controls, which have their own functionality
and properties.
15.3.3 Properties of Controls

Every form control is a complete object with its independent set of properties,
which determine the shape, size, behaviour and functionality of the object.
The properties of these objects are divided into three categories: Format, Data
and Others. All these properties may not apply to all the controls. Some
important properties of these objects are as described below :
(a) Format Properties : Some of the important properties are as described as
under:
• Format : It determines the manner in which the data in the control is
displayed. This property is inherited from its underlying data source.
It is set and used in three situations : one when the property is not set
for the underlying field; second when the format setting of the underlying
field is to be overridden; third when a control, which is not bound to
any underlying data field, is to be displayed in a particular manner.
• Decimal Places : This property specifies the number of decimal places
up to which the control should display a numeric data. It must be
used in conjunction with format property to determine the final
appearance of numeric data.
• Caption : The caption property applies to label, command button and
toggle buttons. This property is used to specify what printed matter
will appear on the face of the control. In the context of label control,
the printed matter is made to appear using this caption property.
• Visible : This property specifies whether the control embedded on the

Form should be visible or hidden when the Form is opened. The property
can make a control appear conditionally when required.
• Layout Properties (Left, Top, Width, Height) : These properties are used
to set the position and size of the control.
• Back Colour and Style: The back colour property specifies background
colour, as opposed to text colour, for the control. This property, when
set to transparent, shows the form’s background colour through the
control. The setting is preferred for an Option group.
• Special effects: This property provides the three dimensional effect to a
control in its appearance. The options for this property are: Flat, Raised,
Sunken, Etched, Shadowed and Chiseled. Each of these effects give a
different look to the control.
• Border Properties(style, colour, and effect): The Border properties are
capable of affecting the style, colour and thickness of the Border of a
control. The Border style options are Transparent, Solid, Dashes, Dots,
etc. The Border colour property specifies the colour of the Border and
it is possible to select from a variety of colours. The Border width
property can be set to one of several point sizes. When the Border style
of a control is set to transparent, its colour and width properties are
ignored.
• Fore Colour: This property can be used for assigning a colour of choice
to the text being formatted.
• Font Properties (Name, Size, Weight, Italics, Underline): These properties
are meant to control the appearance of text within a control. These are
capable of affecting font, its point size, thickness and also whether the
text is italicised or underlined.
• Text Align : The text-align property affects the manner in which data is
aligned within the control. The available options are: General, Left,
Centre, Right and Distribute.
• Margins (Top, Left, Right and Bottom) : These properties determine how
far the text appears from top, left, right and bottom of a control. The
margin properties are of particular importance while using Text box
for memo field.
• Line Spacing: It is used to determine the spacing between the lines of a
text with multiple lines. This is useful when a text control is used for
displaying and storing data pertaining to Memo fields.
• Display When: This property is capable of deciding whether to send the
data of a control to a Printer or to a Screen. For example, the labels
containing instructions can be displayed on the screen but not on the
printer.
568 Accountancy
•Scroll Bars: This property is capable of determining whether scroll bars

appear when the data in the control does not fit within its size or not.
The options are none or vertical. This property is normally set to vertical
for text control to interact with data pertaining to Memo field.
(b) Data Properties
• Control Source : This property specifies the field from a record source
that is associated with particular control. By default, it is the record
source that underlies the Form being designed.
• Input Mask : The input mask property affects the format used for data
entry into the control as opposed to its appearance, which is affected
by Format and Decimal places property. The input mask of the field
underlying the control is automatically inherited by the control.
However, the input mask property of control in the Form is used to
further restrict what data is entered into the field.
• Default Value : This property determines the value assigned to the field
while adding a new data record. It is inherited from the underlying
field of record source to which the control is bound. The default value,
when set for control, has an overriding effect over the default value set
at the underlying field level.
• Validation (Rule and Text) : The function performed by Validation Rule
and Validation Text for controls is the same as it applies to Fields of
database tables, except that the validation is performed at Form level
in case of control and database level in case of fields. In case of bound
controls, the user cannot enter data into the control, if the validation
rules for control and the underlying field are in conflict.
• Enabled and Locked : This property is meant to determine whether
focus is allowed on the control or not. If it is set to No, the control
appears dimmed and mouse action cannot be performed on such
control. This property is useful for calculated controls meant only for
display of data. Locked property determines whether the data in the
control can be modified or not. This property, when set to Yes, deprives
a user the facility to edit data, though the focus becomes available.
The two properties interact with one another resulting in following
behaviour of control :
Locked Enabled Effect : The control can
Yes Yes get focus ; its data can be copied but not modified
No Yes get focus and its data can be modified
Yes No not get focus
No No not get focus; its data is displayed dimmed
(c) Other Properties

• Name : This property allows the designer to provide a customised name
to a control. The names assigned by the designer should be purpose
oriented so that the design structure of the Form becomes self-
documenting.
• Status Bar Text : This control specifies the text message that is displayed
in the status bar when the control acquires the focus.
• Enter Key Behaviour : This property is meant to determine whether the
use of Enter key adds a new line in the current control or results in
moving the cursor to next control. Its setting is useful for Text control
bound to Memo field.
• Allow AutoCorrect : This property, when set to Yes, enables the auto
correction feature to correct automatically common spelling errors and
types. It is useful while using Text control for Memo field.
• Vertical: This property is meant to determine whether the text in a
control appears horizontally or vertically. The default setting is No to
mean the horizontal. When set to Yes, the text within the control is
rotated at 90 degrees.
• Default : This property applies to command button and specifies whether
the control is a default control on the form or not.
• Tab Stop : This property indicates whether the Tab key can be used to
enter a control or not. It is desirable to set this property to No for those
controls whose values are rarely changed.
• Tab Index : This property is used to set the tab order for the control.
This property helps in setting the tab order manually as opposed to
automatic setting at Form level.
• Short cut Menu : This control is capable of attaching a specific menu to
a control and a bar/window gets displayed when the user right-clicks
at the control.
• Control Tip Text : This property is meant to enter text that acts as a
tool tip for the control. The tool tip appears automatically when the
mouse pointer is placed over the control and left there for a moment.
• Help Context ID : This property indicates the Help topic attached to a
particular control.
15.3.4 Common Controls in MS Access

Access provides for a number of controls and more can be added using the
add-in-manager in Tools of menu bar. There are three types of controls: Bound,
unbound and calculated. Bound controls are used to display and modify data
stored in a data table of database. These controls automatically appear in the
Form specified in its display control property and inherit many of the properties
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assigned to the field to which such controls are bound. Unbound controls
display information to the user or get data from user that is not going to be
stored in the database. A Calculated control is a special type of control,
which displays the derived results of an expression or query. The expression
may consist of ready-to-use functions that are meant to make computations
by using input values. Some commonly used functions have been discussed
and described in Appendix given at the end of the chapter. Therefore, the data
in calculated control cannot be modified because it is derived data or
information. The value of these controls changes automatically as and when
the data, to which the expression of the control is bound, changes. Some of
the common controls important for designing a Form are discussed below :
(a) Label : This control is used to write dark prints on the Form such as
Transaction Voucher, Voucher No, S.No, Debit, Credit, Amount, Narration,
Authorised By, Prepared By on the left hand side and “Choose the Account
to Debited” and “Choose the account to be Credited “on the right hand
side of Access voucher Form design of which is shown in Fig 15.4. The
attached labels are automatically appended to the Form when other
controls such as Text boxes, List boxes, Combo boxes, etc. are added
because every such added control has to be labeled to inform the user as
to what data to enter or edit through the control. The default caption of
the label is the caption of the field that underlies the control to which it is
bound. If the caption property of the field is kept blank, the label caption
uses field name as its caption.
(b) Text Box : This control is included in a Form to provide a blank area for
entering the data with or without default values. Blank space next to
Amount label, for example, is a text box control to receive the value of
amount of voucher. Text box, when bound to a particular field of the table,
retrieves and displays the data stored in field for a particular row and is
capable of modifying and adding data to the table. The unbound text box
is used to get the data from the user for its subsequent use in report for
providing report criteria.
(c) List Box : This control is used for allowing a user to make a limited choice
from a given set of values. The domain of its values is predefined and
therefore limited. List control may be used next to Debit and Credit labels
in a simple transaction voucher, so as to locate the accounts to be debited
or credited.
(d) Combo Box : This control combines the features of a list box and text box
by allowing a user to select an item from a list or enter a value using the
keyboard.
(e) Sub-form : Many Forms are based on more than one table with One-to-
Many relationship. The records of such tables can be displayed by creating
form within a form, with tabular presentation of records. The Form within
a Form (also referred to as Main Form) is called SubForm. The Main Form
and SubForm have parent-child relationship. The Control used for creating
such a child Form is called SubForm/SubReport. Data records appearing
in a grid can be stored in database by using SubForm Control. The SubForm
whenever created is listed as an independent object like main form in
Database Window. However, the SubForm Control in main Form has three
properties for creating a link :
• Source Object : It contains name of the Form that is being displayed in
SubForm control.
• Link Child Fields : These are the fields from the Child form that link the
this form to the Main form. These are also referred to as Foreign key of
related table.
• Link Master Fields : These are the fields from the Main Form that link
the Child form to the Main Form. These are also referred to as Primary
key of primary table. Make sure the Control Wizards tool is selected
before adding the SubForm/SubReport control to the Main form.
(f) Option Groups : Control, when applied to Option button, allows the designer
to select a particular option from out of a set of mutually exclusive options.
This option is useful in designing a common Voucher Form for Debit and
Credit Voucher for compound transactions.
(g) Command Button : It is meant to execute a defined action on the Form.
Access provides for six categories of command buttons as described below:
• Record Navigation : The record navigation set of command buttons are
meant to facilitate pointer movement on data records. At a point of
time, only one row of a table, called data record, is accessed. To access
other rows, there has to be a pointer for causing record movement.
• Record Operation : There are several operations on data records. These
are meant to facilitate such operations as add new record, delete record,
undo record, save record, duplicate and print record.
• Form Operation : These operations are meant to be performed on the
entire form as an object. These are Open form, Close form, Print form,
Refresh form data and so on.
• Report Operation : These operations are related to the report object.
Once a report is created, further actions, which can be taken on such
report are Mail report, Preview report, Print report and Send report to
file. Access provides separate command buttons for each of these
actions.
• Application : There are five command buttons especially designed for
possible operations pertaining to other application programs. Run
application is meant to execute any existing program ; and Quit
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application is used to stop the execution of a running application; Run

MS Excel command button is used for calling the MS Excel, spread
sheet program which is part of MS Office package. Similarly, a command
button to run MS Word results in calling the text processing program
of MS Office package; Run Note Pad command button when executed
calls the text writing program provided by the Operating System-
Windows.
• Miscellaneous : This category include four command buttons: Auto
dialer; Run query, Run macro, Print table. Auto dialer button in a form
when clicked is capable of dialing a telephone number, provided a
modem is attached and configured in the computer system. Run query
command button is meant to execute an existing query. Run macro
command button is used to execute a specified Macro and Print table
command button, when clicked is capable of printing contents of a
specified data table from among available tables in database.
In the example of Access Voucher Form shown in Fig 15.4, four command
buttons have been embedded. First button when clicked adds a Record while
a click action on the second button results in undoing the record. The third
command button is meant to delete a record and the fourth button when
clicked saves the record to back-end database tables while in this case it is
Vouchers table as already described.
(h) Control Wizard : If the selected controls (such as List box, combo box or
SubForm) when added to the Form do not invoke the automated wizard,
the control wizard need be selected by click action before selecting the
control which is to be embedded on the Form for design purposes.
15.3.5 Creation of Form

Access provides for creation of a Form either by Design or Wizard. This can be
achieved by double clicking at the database file. Immediately the Database
Window appears, which is vertically divided into two parts: left and right. The
left side displays a list of database objects such as Tables, Queries, Forms,
Reports, Pages, Macros and Modules. The right hand side of Database Window
shows the various objects created under each of the classes of objects. At the
top of Database Window and just below the title bar, there is a menu bar,
which consists of three named menu items: Open, Design and New, and five
Icons: one to delete an object, second and third to toggle between Large and
Small (default) Icons and fourth and fifth to toggle between list (default) and
details.
Select Forms Object : This can achieved by a click at Forms listed as object-
class. By default, two items appear on the right side of window: “Create Form
in design view” and “Create Form by using wizard”.
Fig. 15.2 : Database window showing the methods to create forms
(a) Create Form by using wizard : The following procedure is followed for using
the wizard to create a data entry Form :
• Double click at Create Form by using wizard. Immediately there is a
window titled, Form Wizard which allows the designer to choose the
data table along with the related available fields to choose from. The
designer should choose only those fields, which pertain to the data
content of Form being designed. But it must be ensured that every
essential field (defined as one with Required property set to Yes and
Allow Zero Length property set to No) must be included. In case of
voucher, choose all the fields by clicking at >> button.
• Click at Next command button. Form wizard responds by providing
six mutually exclusive choices with respect to layout of the Form. One
of these choices is exercised by clicking at an option button from a
group of six such buttons.
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• Click at Next command button after exercising layout choice. The Form
wizard responds by prompting the user to select from a list control one
out of the ten options to specify the style of presentation of this Form.
• Click at Next to move forward. Access responds by asking for the Title
of the Form. The designer can provide a useful title, which explains the
purpose for which the Form is being created. Further, the designer
may specify whether the Form is to be opened for entering data or for
modifying the design.
• Finally click at Finish command button to get the initial design of the
Form in run mode, if the option for entering data is exercised. If the
option for modify design is exercised, the design of the Form is available
along with tool box with various controls to facilitate modification of
design.
Modifying Form Design : The Forms created with wizard have limited visual
appeal. However, Forms have a design view, just as table do, and Access
includes many tools for modifying a Form’s design. Some of the common
modifications to the Form are listed below :
• Changing Properties of controls
• Re-sizing and moving controls
• Aligning and spacing controls
• Converting (or Morphing) controls
• Conditional formatting of controls
• Re-arranging Tab Order
• Adding New controls
• Deleting existing controls
Each of these modifications has been briefly discussed after describing
the procedure for creating a Form by Design view.
(b) Create Form by Design view : Under this method, a data entry Form is
created either as a data bound object or as an unbound object. A double
click at “Create Form in Design View” provides a New Form dialog but the
Form created in this manner is not bound to any back end database.
However, a click at New to open New Form dialog results in creating the
Form, which is bound to database. The use of drop down list in the new
Form dialog box to select a table or query serves as the foundation of the
Form being created. Fields can be easily added to a Form by using the
Field List window, which contains all the fields that are part of the Form’s
record source. The record source for the Form is the table or query that
underlies the Form. Make sure that the Field List window is visible. If it is
not, click at the Field List button on the tool bar. Pick up from the field list
every field, which is to be displayed in the Form for entering the data. It is
important to ensure that every essential field must appear in the Form, if
the Form is being designed to enter records rather than displaying just
part of record contents. Select and drag the field from the field list to a
place on the Form where it is desired to appear. The location selected
becomes the upper left corner of the text box, and the attached label appears
to the left of where the text control is dropped. Further, the following steps
are taken to develop a data entry Form :
(i) Click at New to open the New Form dialog. Two list controls appear
in the dialog box : one provides for various options to create a Form
such as Design view, Form Wizard, Auto Form; etc. and another to
“choose the table or query where object’s data comes from” (also
called record source). From First List control choose Design
view(default) by a click.
(ii) Choose a table as the record source because the entire data is stored
in the table record by record. Click OK after the table is selected.
(iii) Access responds by providing three windows : one for new blank
Form, second for tool box and third for Field list corresponding to
the selected record source. The Form object henceforth shall act as
a container for other controls to be used in designing Form.
(iv) Select and drag a field from the Field list and place it in the blank
Form by drag and drop method. Repeat this process for every field
in succession. Alternatively, all the fields can be selected by clicking
at every field in the field list while Ctrl Key is kept pressed. The
selected fields can be dragged and dropped at the Voucher Form.
(v) Adding a Title : The Form must be suitably titled for its identity,
which should be self-descriptive. To add a title, use tool box by
clicking at the label control. While the pointer is moved back into
the design area, it changes to a large letter A with crosshairs.
Move the pointer into the header area and click where the label is
desired to be placed and then type the text of title. Once the text is
entered, the focus from the label control can be freed by clicking
anywhere in the Form. The label can be reselected by a click, followed
by using the formatting tool bar to format the title. Alternatively
and in addition to the above, more formatting options can be
exercised by right clicking at the label control and clicking at
Properties item of drop down window of right click action.
(vi) Changing the Properties of Forms and Controls : Every Access object:
Form or Controls is described by its properties. These properties,
as already stated above, have been classified into three broad
categories: Format, Data and Others. It is not essential to know
every available property to work well in designing Forms in Access.
But it is always good idea to check up the property values if the
object is not behaving the way it is expected to. To view the properties
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for an object or control, right click at the control and select the
properties. Access responds by providing all the properties listed
under category tabs. The property sheet title bar includes names of
objects contained in the Form. Once property sheet is opened for
one object, it is easy to call for the properties of other objects by
selecting the name of object from property sheet title bar. The values
of such properties are changed as desired. The Form’s property
sheet can be opened by double-click at Form selector, which is
located at the left most intersection of vertical and horizontal rulers.
The property setting on multiple controls can be changed at the
same time by selecting multiple objects, in which case only those
properties become available for editing which are common to the
selected objects. The multiple objects can be selected by keeping
the Shift Key pressed, followed by clicking at desired objects.
(vii) Moving and Resising controls : In order to move a control, first select
it by a click action, then move the pointer to the edge of the selected
control, ensuring that any of the re-sizing handles appearing as
bold dot is not pointed at directly. The pointer turns its shape to a
small hand. At this stage, hold mouse button pressed and drag the
control to its new location. Movement of control beyond the bottom
or right edge of the Form, leads to increasing the Form area
automatically. Access also allows for combining of select and move
step thereby making it easier and more efficient to reposition the
control. A control can be re-sized by dragging the re-sizing handles
at the corners and sides of the object. A change in the size of text
control, however, does not result in changing the size of its
underlying field because the size of the field is specified in table’s
design and can be changed only by modifying the properties of the
field in table design.
(viii) Aligning and Spacing Controls : Select two or more controls (click at
control to be selected by holding the Shift Key pressed) to be aligned
and choose Format-align or right click and choose Align from the
shortcut menu to open the list of alignment options. Align-Left leads
to aligning the left edges of all the selected controls; Align-Right aligns
the right edges of the control. To adjust controls on the same
horizontal line, Align-Top or Bottom options can be used. Spacing of
controls allows to change (increase or decrease) the relative position
of selected controls by one grid point horizontally or vertically. The
spacing becomes important when the controls are to be spread out
or move closer together for a neater visual layout. Spacing can also
be used for ensuring that the controls are evenly spaced.
(ix) Converting (or Morphing) Controls : Initially, when a Form is built, it

is not always possible to choose the best type of controls to display
each field on the Form. One might make a choice for the control
only to find out later that it does not suit to the requirements. This
is particularly important when the initial design of a Form is created
using Form wizard. Access provides for conversion (or morphing) of
such control into the desired ones. One of the most common types
of morphing is from text to List box or combo box. This is achieved
by right click on the text box, followed by choosing Change To and
selecting the type of control to into which text box is to be morphed.
Every control cannot be morphed into every other type of control.
Text box, for instance, can be converted into a label, list box or
combo box. After morphing, a text box to list box, for instance, it is
important to modify the control properties such as row source,
bound column, column count and column width so that the changed
control behaves in a desired manner.
(x) Conditional formatting of text boxes : The conditional formatting is
displayed in a text control when the value of text control meets a
specified criteria or a set of specified criterion. For example, the
colour of Amount entered should turn Red when it exceeds a
certain limit say Rs. 20,000. In order to create conditional format,
right click at text box to be conditionally formatted when in design
mode, followed by conditional formatting item of right click window.
Access responds by providing conditional formatting window which
appears as follows : Conditional formatting window, as shown above,
is divided into two parts: the default setting and condition-1. Since
the formatting is to occur on the basis of a field value, the criteria
list control can be used to select greater than and Rs. 20,000 is
entered in the right most box of condtion-1. There are five icons:
bold, Italics, underline, Back colour and Fore colour for formatting
the data value. As and when the condition is satisfied, the formatting
based on the selected icons applies to the data value. If there are
multiple conditions for formatting, Add button can be clicked to call
for additional formatting conditions. At the most three conditions
can be set up for conditional formatting. Click OK to apply the
conditions and click Delete to remove the conditional format.
(xi) Re-arranging the Tab Order : The tab order of the Form (defined as
a sequence of controls to move through when pressing a tab) is
assigned while creating a Form. The tab order goes out of sequence
when the controls in the Form are re-arranged. An inconsistent
tab order leads to an erroneous data entry. To change the tab order,
choose View-Tab order or right click and choose tab order to open
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Tab Order dialog box. Clicking Auto Order generally rearranges

the fields in the correct order. It is preferable to try this option first.
If the auto order is not correct, the tab order can be set manually
by clicking the row selector for a control and then dragging the
control up or down into position in the Tab Order.
Fig. 15.3 : Conditional formatting window
15.3.6 Procedure for Creating Voucher Forms

On the basis of above discussion, the following procedure can be followed to
create the different types of vouchers :
(a) Simple Transaction Voucher : The transaction data of simple accounting
vouchers is required to be stored in the Vouchers table of a database by
using a data entry Form in Access. The format of such a form is shown in
figure 15.4.
Fig. 15.4 : Transaction voucher, using database design (model-I)
The above voucher form uses database design (Model-I) at the backend. A
perusal of the this voucher Form reveals that there are two parts: Left and
Right separated by a dark vertical line. Left part is dedicated to the data
entry of transaction data while the right part has two list controls: one
each giving the accounts to be debited and credited. The pre-printed
contents of simple transaction voucher appear to the left of above Form as
bold dark words. The access resource required to display such pre-printed
matter is label control. The data entry spaces against Voucher Number,
Dated, Amount and Narration are Text Controls. The list controls have
been deployed against Debit Account, Credit Account, Prepared By and
Authorised By. The Title of the Voucher Form has been written by using
the Label Control. Four operation buttons called Command Buttons control
the data entry into the voucher Form. On the Right hand side of above
voucher Form, the list controls have been used in expanded Form to choose
debit and credit accounts. The resources used in creation of above voucher
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Form, therefore, consist of Labels, Texts, List controls and Command

Buttons. Once a blank Form is picked up like a container, it is capable of
containing these controls including command buttons. The following steps
are required for creating the Simple Transaction Voucher as per the Access
design given above.
(i) Once the Database Window is opened and Forms object is selected,
click at New item of menu bar. Access responds by displaying a
New Form window in which design view option among others
appears by default along with a list control to select a table or
query which is to act as underlying data source for the voucher
being designed. In designing Simple voucher Form, it is fairly clear
that the data entered using this voucher Form is to be stored only
in the Vouchers table.
(ii) Choose Vouchers table, which has been designed to include the
transaction data in each row as a stand-alone record and click OK.
(iii) Access responds by displaying a blank Form object in Form window,
along with two other windows: Tool box and Field List of Vouchers
table. Expand this Form towards the right and divide it into two parts
left and right using line controls of tool box say in the ratio of 3:1.
(iv) Keep the Ctrl Key pressed and click at every field in Field List
Vouchers window. The colour of the list of fields turns blue.
(v) Press at the selected field’s area and drag all the fields to left side of
blank Form on which data entry contents of voucher are to be
located. It may be noted that every data entry control has been
assigned to its left an attached label control whose caption is the
caption of the fields in Vouchers table.
(vi) Re-position all the controls to their desired location in the left part
of the Form and set the font weight property of each to bold. The
caption property of each label can be modified to match the pre-
printed layout of the voucher.
(vii) Click at label control in tool box and add it to the centre top of left-
hand side of the Form to add the title: Transaction Voucher. Its
font size property need be set to 16 with font weight set to bold. Set
the fore colour to Blue.
(viii) Paste another text box anywhere in the Form and set its Control
Source property as =Val(DMax(“Vno”,”Voucher”))+1 and Visible
property to No. Further, Set Default value property of Text Box to
the left of label Voucher No. as =Val(DMax(“Vno”,”Voucher”))+1.
This ensures that the text control generates a new value one more
than the preceding value of last voucher number entered in Vouchers
table, as and when a new record is added. As a result, the voucher
number is detected in Vouchers table and incremented by one to

auto generate the voucher number sequentially. Further, set the
Enabled property to No so that the auto generated value is not
amenable to any changes by the user.
(ix) Set Default value of Text box meant for entering the voucher date
as = Now(). This results in giving current RTC date as the default
date to voucher as and when a new voucher record is added.
Alternatively, click at More Control button in tool box to select
Microsoft Data and Time Picker Control, Version 6. This control
provides a user-friendly and interactive method of selecting a date.
Set the format property of this control to “3-dpt custom” and
custom-Format property to “dd-MMM-yy” by using DT Picker
properties dialog. Control source of this control is set to vdate so
that the selected date is stored directly into this field.
(x) Set the format property of Text box meant for Amount to Standard
with decimal places to 2. This ensures the appearance of amount up
to two decimal places with standard punctuation of numeric values.
(xi) Provide for conditional formatting of amount so that its colour
turns red as and when an expense voucher exceeding Rs. 20,000 is
not authorised by an employee whose EmpId =’A001’. This can be
achieved by a right click at text box for amount to click at conditional
formatting. A conditional formatting dialog appears in which
condition-1 is to be given as “Field value greater than Rs. 20,000”
interactively. Click Add button to provide condition-2 as Expression
is [AuthBy]<>’A001’ and [Debit] like ‘71*’. Click colour icon to
select red colour in condition-2. Click OK to close the conditional
formatting dialog.
(xii) Control morphing from Text box to List box is to be applied on
four-text control, each one meant to store Debit, Credit, AuthBy
and PrepBy. This can be achieved by right click at each of these
controls one by one and click at Change To item of right click
window. To begin with, select List Box option for text box next to
Label Debit. Height of text box is expanded. Re-size, it to its original
shape and right click to select the property window. Select Data
properties button to provide the Row Source as Account table. Click
at format properties button to set the column count property to 2
and column width property to 0.5". Ensure that the width property
of list control for debit is set to a minimum of 1.75” to accommodate
the code as well as Name of Account in a row of list control. The
process can be repeated for Text boxes next to Credit. Text controls
meant for AuthBy and PrepBy can also be morphed into List Box
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controls in a similar way, except that the Row Source Property

should be Set to Employees table and Column width be set to .33”
only because Empl_Id occupies only four text spaces as opposed to
Account code, which need six spaces. Width property of these list
controls can be suitably adjusted to accommodate both EmpId and
Fname of employees authorising or preparing a voucher.
(xiii) Paste List Controls for selecting debit and credit Accounts on the
Right Hand Side (RHS) of Voucher Form. Following steps are taken
to accomplish this :
• Click at list box control available in tool box and carry the
mouse pointer to the right side of the Form. Its shape will turn
into a cross with icon of list control. Place it at the top of right
part of the Form. Access responds by invoking List Box Wizard,
which provides for three options to choose the look up values.
By default, the wizard provides for choosing look up values from
table or query.
• Click at Next button to get the classified list of tables and queries
to choose from. At this stage, choose the Accounts table because
domain of accounts to be debited or credited remains confined
to accounts available in Accounts table only.
• Click at Next button to get the available fields of Accounts table:
Code, Name and Type. Select Code and Name by clicking at >
button.
• Click at Next to get a list of accounts with key column hidden.
Uncheck the already checked box to display the key column
also in list control.
• Click at Next to get an option to select code to store in database.
• Clicking at Next provides two options: One to remember the value
for later use and second to store that value in this field. Choose
second option and select the debit field to the right of this option
as the column against which the key value of accounts from list
control is to be stored.
• Repeat the above process to provide for a list control for Account
to be Credited.
• Once both the List box controls for debit and credit entries have
been pasted, change the caption property of labels attached to
such List boxes and write the text “Choose the Account to be
Debited” for first list box and “Choose the Account to be Credited”
for second. Set the Font weight property to bold, the fore colour
to red and green respectively to distinguish between debit and
credit list control and re-size the label control by increasing its
width to accommodate the text to caption of label. Re-size the
list boxes to adjust their width and height appropriately. This

can be achieved by right clicking at each of the controls to get
the property windows.
(xiv) Click at Command button in Tool Box and carry the mouse pointer to
Area at the bottom of Left most bottom corner of the Voucher Form. Its
shape turns into a cross with command button icon. Paste it by horizontal
and vertical dragging to give suitable width and height. Immediately, the
Command Button wizard is invoked to seek information about category
of operation and the action to be performed using this command button.
Choose Record operation as category with Add New Record as the action.
Click at Next to state whether the caption of the command button is to
be a text value or an icon. A click at next after appropriate selection
results in giving a suitable object name to the command button. Accept
the default value and click at finish. This results in pasting an operational
button on the Form with the capability to add a new record.
(xv) Repeat this action to create various other command buttons to
match the design of Transaction Voucher Form given above.
(b) Compound Transaction Voucher : The transaction data of Debit or Credit
vouchers, which have already been described as compound transaction
vouchers, is required to be stored in VouchersMain and VouchersDetails
tables of database. Its design, when transformed in Access Form layout,
is expected to appear in the following format :
A perusal of the above Access Form for Credit Voucher reveals that
there are four labels: Voucher No, Date, Prepared By and Authorised By in
Dark bold letters. These labels are meant to define the pre-printed content
of the voucher as per design. Next to first two labels: Voucher No. and
Date are text boxes displaying their respective data contents. To the right
of labels Authorised By and Prepared By are List Box controls to get and
display the first name of employees. Text Box displays the Title of the
Voucher Form Credit Voucher as calculated control because the same
voucher design is used for Debit vouchers also. Just below this dynamic
title is the Option group control whereby the user can make a mutually
exclusive choice for Debit or Credit Voucher. The title of Entries Grid and
Text box to the left of a list control are used to select an account to be
debited or credited (the complementing account) against the accounts being
mentioned in the Entries Grid are also calculated text controls. The
calculated text controls acquire the text value to display on the basis of
what is selected in the Option groups. Next to calculated text box control
is a label to print an instruction for refreshing the display in grid. The grid
consists of five columns: S.No, Code, Name of Account, Amount and
Narration. The grid appears in the voucher by using SubForm control.
Besides this, there are five command buttons, each dedicated to Add
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Record, Undo Record, Delete Record, Save Record and Close. These
command buttons operate on the data entry Form.
Fig. 15.5 : Credit voucher created as a form in access

To create this voucher Form, following steps are taken using design view :
(i) Create a blank form in design view and ensure that its underlying
data source is selected as VouchersMain table and Field List window
along with tool box is also displayed. As already discussed in Section
I of this chapter, the Compound Voucher Form requires another related
data table, VouchersDetail, for storing the data contents of grid.
(ii) Keep the Ctrl key pressed and click at Vno,Vdate, AuthBy and
PrepBy fields in Field List window.
(iii) Press at any of the selected field’s area, drag and drop it to blank
Form. It can be observed that all the selected fields are also dragged
and dropped along with this field.
(iv) Re-position all the controls to their desired location in the Form and
set the font weight property of each to bold. The caption property of
each label can be modified to match the pre-printed layout of the voucher.
(v) Paste Option group control just below the form space meant for dynamic
title. Access responds by prompting the user to enter the label names
for each option. Enter two options by writing Debit and Credit in different
rows. This must be followed by a click at Next button.
(vi) Option group wizard responds by prompting the designer to enter
the default option.
(vii) Select Debit so that by default, the compound voucher is a Debit
Voucher. Click at Next button. Access responds by prompting the
designer to enter the data values corresponding to each of the option
labels. Enter against Debit and Credit 0 and 1 respectively. Click
Next button.
(viii) Access Responds by requiring the user to either opt for Save the
value for Later Use or Save the value in this Field. Choose the
second option for Save the value and select Vno as Type field.
Click at Next button.
(ix) Access responds by asking the designer to choose the appropriate
control type. Choose Option buttons, along with any of the styles
given below in wizard dialog. Click Finish button. Access assigns a
default label to the Option group. Select the label by right clicks
and remove it by clicking at Cut.
(x) Click at text control in tool box and add it to the centre top of the
Form to provide a dynamic text for the title: Debit or Credit Voucher.
The attached label control is removed by a right click on this label
followed by a click on Cut. The font size property of Text need be set to
16 with font weight set to bold. Set the fore colour to Blue. Set its
Control Source property as = IIF([Type] = 0,”Debit”,”Credit”) & “ “ &
“Voucher” Re-size the width of this text control so that it can
accommodate and display the dynamic title of voucher. By entering the
above formulae in Control Source property, text control for title becomes
dynamic. Whenever, the Type field is assigned 0 value, a text control for
title displays Debit Voucher and when the value of Type is set to 1, the
Credit Voucher is displayed by the this Text control. The title of simple
Transaction Voucher is static. Therefore, a label control has been used
for this purpose. Further, set the Enabled property to No so that the
displayed text is not amendable to any changes by the user. This
applies to other similar controls meant for dynamic texts in this Voucher
Form.
(xi) Paste another text box anywhere in the Form and set its Control
Source Property as = Val(DMax(“Vno”,”Voucher”)) + 1 and Visible
property to No. Further, Set Default value property of Text box to
the left of label Voucher No. as =Val(DMax(“Vno”,”Voucher”))+1.
This ensures that the text control generates a new value one more
586 Accountancy
than the preceding value of the last voucher number entered in

vouchers table as and when a new record is added. As a result, the
voucher number is detected in Voucher table and incremented by
one to auto generate the voucher number sequentially. Set its
Enabled property to No for reasons already explained earlier.
(xii) Set Default value of Text box meant for entering the voucher date
as = Now(). This results in displaying RTC date as the default date
to voucher as and when a new voucher record is added.
(xiii) Paste another text control below, the label Voucher No: to indicate
Debit in case of Credit voucher and Credit in case of Debit Voucher.
Remove its attached label and set its Font size and font weight
property appropriately. However, its Control Source property is set
as = IIF([Type] = 0,”Credit”,”Debit”) so that this text box displays
the desired text as stated above. Pick up a List control from tool box
and place it next to this calculated text control to choose the account.
Immediately, the List control wizard gets activated and displayed.
Complete the list control creation process as already discussed while
designing the simple transaction form. Ensure that its Control source
property is assigned the Field name AccCode; Row Source to
Accounts; Column Count set to 2; Bound Column set to 1 and
Column width to 0.5". Re-size the control for proper display.
Creating Grid for Debit/Credit Entries : The grid for entries is created by using
SubForm Control. Following steps are taken to create SubForm to be linked
to Main Voucher Form :
(i) Pick and paste SubForm control for creating a grid to accommodate the
Debit/Credit Entries. SubForm wizard gets activated and displayed.
Choose existing Tables/Queries, followed by click at Next button.
Subform wizard displays a dialog to giving fields classified by their
respective tables. Choose Sno, Code from VouchersDetail table; Name
from Accounts table; again Amount, narration and Vno from
VouchersDetail table. Click Next button.
(ii) Choose “Show VoucherDetail for each record in VouchersMain using
Vno” and Click Next and provide the name for subform object as
“VouchersDetail SubForm” Click at Finish. The SubForm stands created
to accommodate the data contents in voucher grid. The attached label
of SubForm is removed to pave the way for creating dynamic title. This
is achieved by adding another text control (remove the attached label
control) at the top of the SubForm in the same manner as applies to the
title of voucher, except that the Control Source property is set to =
IIF([Type] = 0,”Debit”,”Credit”) & “ “ & “Entries”. This calculated
control is capable of showing the title of the grid as Debit Entries or
Credit Entries, depending on choice of Option button at run time.
The Voucher number column in grid can be hidden by merging its right
most vertical line with vertical line separating narration and voucher
number column by drag and drop method.
(iii) Set the format property of Text box meant for Amount to Standard
with decimal places to 2. This ensures the appearance of amount up to
two decimal places with standard punctuation of numeric values.
(iv) Provide conditional formatting of amount so that its colour turns ino red
as and when an expense voucher exceeding Rs. 20,000 is not authorised
by an employee whose EmpId =’A001’. This is achieved by a right click at
text box for amount to get short-cut window so that conditional formatting
item is selected. A conditional formatting dialog appears in which condition-
1 is to be given as “Field value greater than Rs. 20,000” interactively. Click
Add button to provide condition-2 as Expression is [AuthBy]<>’A001’ and
[Debit] like ‘71*’. Click colour icon to select Red colour in condition-2.
Click OK to close the conditional formatting dialog.
(v) Text control for entering Code in SubForm can be morphed to List control
in the same manner as already explained for Debit/Credit Account in
simple Transaction Voucher except that the Control source property is
assigned the Field name Code of VouchersDetail Table.
(vi) Control morphing from Text box to List box is also to be applied on text
controls meant to store the data values for AuthBy and PrepBy
respectively. This can be achieved in the manner as already described
in the context of designing a simple Transaction Voucher.
(vii) Paste a label control to the top right of SubForm for displaying the
instruction “Press F9 to Refresh Display”.
(viii) Command button at the bottom of Debit/Credit Voucher Form can be
added in the same manner as described above in the context of Simple
Transaction Form. An additional Command button with Caption Close
Form can be added by choosing Form Operation as category with Close
Form as the action.
While operating on the above form in run mode, it must be ensured by the
user that the entries in the grid are made only after saving the data contents
of voucher outside the grid. This is because a data record for contents outside
the grid belongs to VouchersMain table. Such record in primary table must
exist before any data record is entered in grid to be finally stored in
VouchersDetail table.
15.4 Information Using Queries

Accounting information that is presented in an accounting report is generated
by creating and executing various queries using DBMS. The basics of creating
such queries in MS Access have been described below along with their usage
in the context of Model-1.
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15.4.1 Basics of Creating Queries in Access

Recall that one of the great advantages of relational databases is that the
fragmented data is stored in different data tables so that there is no or minimum
redundancy. But a complete view of data stored across various tables is
achieved only by executing queries based on SQL. A query is capable of
displaying records containing fields from across a number of data tables.
15.4.2 Types of Queries

There are several types of queries in Access that are used to generate
information. Such queries are called select queries because they are used to
“select” records with a given set of fields: actual and computed and also for a
given criteria. There are three important query types that are required for
generating the accounting reports. These queries have been discussed as below:
(a) Simple Query : A select query is a simple query if it does not involve use of
any query function to produce a summary of data. The criteria, if any,
used in such a query is based on some constant value or values, forming
an integral part of the query. For example, a query, to find date and
amount of transactions records in which an account, identified by code =
’711001’ is debited, is a simple query and is executed, using database
design of Model-I by the following SQL statement :
SELECT vDate, Amount
FROM Vouchers
WHERE Debit = ’711001’
In the above SQL statement, the SELECT statement is meant to specify
the fields to be selected, FROM clause specifies the source of data and
WHERE clause filters the records matching the condition that Debit field
has code = ’711001’
(b) Parameter Queries : A parameter query prompts the user to enter
parameters, or criteria through an input box, for selecting a set of records.
A parameter query is useful when there is a need to repeat the same query
with different criteria. The criteria, this means, is not constant as in the
case of the simple query. While extracting the transactions to prepare
ledger accounts, the same set of queries need be executed for different
account codes. Consider the following SQL statement :
PARAMETERS AccountName Text (255)
SELECT Name
FROM Accounts
WHERE Code = AccountNo
In the above query, the PARAMETERS clause is meant to declare the

variable AccountNo. This SQL statement, when executed, prompts the
user to provide the value of AccountNo.
(c) Summary Queries : A summary query, as opposed to a simple query, is
used to extract aggregate of data items for a group of records rather than
a detailed set of records. This query type is of particular importance in
accounting because the accounting reports are based on summarisation
of transaction data. Consider the following SQL statement :
SELECT Code, Name, Sum(Amount)
From Vouchers INNER JOIN Accounts
ON (Accounts.Code=Vouchers.Debit)
GROUP BY Code, Name
In the above query, the Vouchers table has been joined with Accounts table
on the basis of Code field of Accounts and Debit field of Vouchers. The resultant
record set has been grouped on the basis of Code and name of accounts.
Accordingly, the sum of amount for each group (or set of records) has been
ascertained and displayed. Finding the sum is the process of summarisation.
15.4.3 Adding Computed fields

The computed fields, representing secondary data, do not form part of data
stored in tables because such data items unnecessarily increase the size of
database. The secondary data items can always be generated on the basis of
primary (or stored) data. In order to find values of such secondary data items,
the query is based on computed fields. The computed fields provide up-to-
date calculated results because they rely upon updated stored data values.
For example, a data table, named Sales, which includes ItemCode, Quantity,
Price, Dated and CustId, is maintained in a database to store sales
transactions. In order to get list of sales transactions along with total sales
relating to CustId=’A051', the following simple query is executed by including
Sales as computed field :
SELECT Dated, ItemCode, Quantity*Price AS Sales
FROM Sales WHERE CustId= ‘A051’;
In the above query the expression Quantity*Price has been given the name
Sales by using AS clause.
15.4.4 Using Functions in Queries

A function in the Access environment is named and followed by parenthesis
( ). The function receives some inputs as its arguments and returns a value
(also called its output). These functions also form a part of the expression for
a computed field. Some commonly used functions have been described and
discussed in Appendix given at the end of the chapter.
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15.4.5 Methods of Creating Query

There are three ways in which any of the above queries can be created in
Access. These methods are Wizard, Design and SQL View. A brief description
of each is given below :
(a) Wizard Method : In order to create a query using Wizard, the following
steps are required :
(i) Select Queries from Objects list given in LHS (Left Hand Side) of
Database window.
(ii) Double click at Create Query by Using Wizard given on the RHS
(Right Hand Side). Immediately, there is a window titled ‘Simple Query
Wizard’ (Shown in figure: 14.6) that prompts the user to select a
field from a table or an existing query that is to be included in the
query being created. Many such fields may be selected according to
the information requirement of the query. The tables (or queries)
Fig. 15.6 : Window to display simple query wizard

being chosen represent the data source of the query being created.
The fields being selected imply the data items to be displayed by the
query. Use arrow buttons or double click at the list of fields on LHS
of this window to select fields.
(iii) Click at Next after the desired fields have been selected. If the selected
fields include a number or currency field, the designer is prompted
to choose an option button to specify whether the query to be created
is a summary or detail query.
• If detail option is chosen, the execution of query results in
displaying records from data source.
• If summary option is selected, the user is prompted to indicate
the type of summarisation required: Sum, Average, Minimum
and Maximum with respect to the field of summarisation. Clicking
at check boxes against different types of summarisations specifies
this. Click OK.
(iv) Click at Next and specify the name of the query being created %
Finish to save and execute the query. The results of the query are
displayed in datasheet view.
(b) Design Method : In order to create a query by design method, the following
steps are required :
(i) Select Queries from Objects list given in LHS of database window.
Double click at Create Query by Using Design View given on the
RHS.
(ii) Access responds by displaying a Select Query and Show Tables
Window. The Select query window is vertically divided into two panes:
upper pane and lower pane, as shown in Figure: 15.7. The upper
pane is meant to display data sources (Tables or Existing Queries)
and the lower pane, which also called Query By Example (QBE)
grid, has one column each for field to be included in query being
created. The row of this grid shows field name, table (or query), sort
order, whether the selected field is shown in the query results or not
and also the criteria that have been applied to the field or fields to
restrict the query results. The Show Table Window is meant to add
tables, queries or both to the upper pane of Select Query Window. If
closed, the Show Table Window can be recalled by a right click at
upper pane % show table.
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Fig. 15.7 : Select query and show tables windows
(iii) Click at View item of Menu bar % Total and then % Table Names.
(iv) Click at field row of first column of QBE grid to select the fields to be
included in the query. The process is repeated for second and
subsequent columns of grid to include more fields in the query. This
process of selection constitutes the data items to be displayed by
SELECT clause of SQL statement.
(v) The name of table or query is displayed, in accordance with selection
of fields. Such tables or queries constitute the data sources shown
after FROM clause of SQL statement. However, the initial selection
of a table/query in the second row of QBE grid restricts the choice
of fields to the selected table/query only.
(vi) Click at row of grid to specify the Group by clause and aggregate
functions so that summary a query is created.
(vii) Click at row of grid to specify the sort order (Ascending or descending)
on field(s). The selected fields for sort order are shown after ORDER
BY clause of SQL statement in which ascending order is the choice
by default.
(viii) Click at row to check for the selected field to be displayed in the
query result. The field(s) may be selected only for the purpose of
specifying the sort order or criteria.
• Click at row of the grid to specify the criteria to limit the records
to be displayed by the query being created. The specified criteria
result in a conditional expression, which is shown after the
WHERE clause of SQL statement.
• Click File % Save (or Press Ctrl+S) to save a query. A dialog box
prompts the user to specify the name of the query being created.
By default a generic name appears which can be accepted or
rewritten with a desired name.
(c) SQL View Method : A query may be directly specified in Select Query Pane
by a right click at table pane % SQL view. The upper and lower panes of
selected query window are substituted by a pane to specify the SQL statement
that is written by using keyboard. The desired SQL statement is directly
okeyed in on this pane and saved in the same manner as described for
design method. While forming the SQL statement, the following clauses are
normally used for generating information (or Select) queries :
(i) SELECT : This clause is used to specify the fields to display data or
information. Consider the following SQL statement segment :
SELECT Code, Name, Amount
The fields Code, Name and Amount after SELECT clause indicate
the data items to be displayed by the query statement.
(ii) FROM : This clause is meant to indicate the source of data in terms
of tables or queries or a combination of both. Two tables are joined
by specifying a JOIN clause based on a condition of Join. There can
be three types of Join: Inner, Left and right.
(iii) INNER : This Join clause is meant to display only exactly matching
records between two data sources. Consider the following SQL
statement segment:
FROM Accounts INNER JOIN AccountType
ON ( CatId=Type)
In the above statement, only those records of Accounts and
AccountType table constitute the source of query data, which match
exactly on CatId = Type.
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(iv) LEFT : With this Join, all the records in the primary table in the
relationship are displayed irrespective whether there are matching
records in the related table or not. Consider the following SQL
statement segment :
FROM Accounts LEFT JOIN AccountType
ON ( CatId=Type)
In the above statement, all records of Accounts along with matching
records of AccountType table constitute the source of query data,
The matching condition is CatId = Type.
(v) RIGHT : With this Join, all the records of related table in the
relationship are displayed irrespective whether there are matching
records in the primary table or not. Consider the following SQL
statement segment
FROM Accounts RIGHT JOIN AccountType
ON ( CatId=Type)
In the above statement, all records of AccountType along with
matching records of Accounts table constitute the source of query
data. The matching condition is CatId=Type.
(iv) WHERE : This clause in SQL statement is used to provide the
condition to restrict the records to be returned by query. The
resultant records of query must satisfy the condition which is
specified after WHERE clause. This is meant to filter records returned
by the query.
(v) ORDER BY : This clause is meant to specify the order in which the
resultant records of query are required to appear. The basis of
ordering is determined by the list of fields specified after the order
by clause. Consider the following SQL statement segment :
ORDER BY Type, Code
The above statement in the context of Accounts table implies that
the resultant record set is ordered by the Type field of Accounts
and within Type, by Code field of Accounts.
(vi) GROUP BY : The group by clause is used in the SQL statement to
enable grouping of records for creating summary query. The fields
after GROUP BY clause constitute the basis of grouping for which
summary results are obtained. Consider the following SQL statement:
SELECT Debit, Sum(Amount)
FROM Vouchers
GROUP BY Debit
In the above SQL statement, the GROUP BY clause uses Debit

account codes as the basis for computing the sum of amount of
voucher. The total amount, by which every transacted account has
been debited, is given by this SQL statement In this case, sum of
amount is found for each group of records formed using GROUP BY
clause.
15.5 Generating Accounting Reports

An Accounting system without reporting capability is incomplete as reporting
is one of the main purposes for which an accounting system is designed and
operated upon. The output of accounting system takes the form of accounting
reports. Access offers a great flexibility in designing and generating customised
reports.
15.5.1 Accounting Reports

Every report consists of ‘information’, which is different from ‘data’. Data
processing leads to data transformation and when this processing is in
accordance with decision usefulness, it is called information. Information
generation is the process of compiling, arranging, formatting and presenting
information to the users. A report is prepared with a definite objective. Every
report is collection of related information for a particular need and purpose
and must meet the twin objectives of reporting : one to reduce the level of
uncertainty that is faced by a decision-maker; second to influence the behaviour
(or positive actions) of the decision-maker. Accordingly, accounting information,
generated by processing accounting data is gathered to generate an accounting
report. An accounting report, therefore, is the physical form of accounting
information. Useful accounting information, regardless of its physical form,
must have five characteristics: relevance, timeliness, accuracy, completeness
and summarisation. An accounting report, in order to be useful, must display
information content in such a manner as to give confidence to the user,
influence his behaviour and prompt him to take positive actions. Reports,
which do not meet the above stated objectives, lack or do not have sufficient
information content, have no value. There are two broad classes of accounting
reports: Programmed and Casual (also called Adhoc or Pass through).
(a) Programmed Reports : These reports contain information useful for decision-
making situations that the users have anticipated to occur. There are two
types of reports within this report type: Scheduled and On demand.
• Scheduled Reports : The reports, which are produced according to a
given time frame, are called scheduled reports. The time frame may be
daily, weekly, monthly, quarterly or yearly. Some examples of scheduled
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reports are: Trial Balance, Ledger, Statement of Cash Transactions

(Cash Book), Statement of Ageing Accounts, Closing Stock Report, Profit
and Loss Account and Balance Sheet, etc.
• On Demand Reports : The reports, which are generated only on the
triggering of some event, are called On demand reports. Some examples
of On demand reports are a Customer’s Statement of Account, Inventory
Re-order Report, Stock in hand Report for a Selected Group of
items, etc.
• Casual Reports : There are reports, the need for which is not anticipated,
the information content of which may be useful but casually required.
These are adhoc reports and are generated casually by executing some
simple queries without requiring much of professional assistance. As
opposed to programmed reports, casual reports are generated as and
when required.
15.5.2 Process of Creating Reports

The process of generating accounting reports in Access involves three steps:
designing the report, identifying the accounting information queries, and finally
creating an accounting report by using such queries.
(i) Designing the Report : Every report is expected to meet certain objectives
of reporting for which it is designed and developed. It should not be too
big so as not to be read at all or too small so as to conceal certain vital
information of importance that is expected to facilitate decision-making.
Objective-oriented reporting means designing the report in such a manner
as to meet the pre-conceived objectives in view.
(ii) Identifying Accounting Information Queries : A number of SQL statements
are written in such a manner that each successive SQL relies on the
results of the preceding SQL statement and refines its results by using
fresh data (or information) from existing data tables (or queries).
(iii) Using the Record set of Final SQL : The record set of final SQL that relies upon
preceding SQL statement, is collection of report-oriented information. This
record set need be embedded in the report being produced.
15.5.3 Basics of Designing a Report in Access

A report, in Access, is a static presentation of stored or transformed data in
an organised manner. Access saves the design of the report, which consists of
information structure along with various controls to display information
content and its record source. When a saved report is opened, the information
content is retrieved from the tables and displayed according to the design. As
a result, a saved report design, when opened, displays the information content
according to the current state of data. There are two types of formats of
presenting information through a report: Columnar and Tabular.
• Columnar Report Format : A columnar format displays the caption of each
field on a separate line in a single column down the page. The corresponding
information contents of the fields are shown in another column next to
their respective fields. If the caption property of a field is kept blank, the
name of the field is used as its caption. This implies that there are two
columns in this format: one for displaying the fields and another for showing
the corresponding information content. A record set that consists of nine
fields, when presented in such a format, requires nine lines of report. In
columnar format, the total number of lines to be printed equals the number
of fields multiplied by the number of record sets to be displayed.
• Tabular Report Format : A tabular format displays the caption of fields on
the same line so that their respective information contents appear in the
next line. The number of columns in tabular report is exactly equal to the
number of fields to be displayed. It implies that the above mentioned record
set, when presented in tabular format, requires one line for captions of
fields and another line for information content. In tabular format, the
total number of lines to be printed equals the number of record sets to be
displayed plus one for captions of fields to constitute column headings.
15.5.4 Structure of Report in Access

A report in Access is designed using seven sections which taken together
constitutes the structure of report design. It is not necessary that every report
designed in Access must have all the sections that have been described below:
• Report Header : Report header appears at the top of the report and may
include title and other relevant information pertaining to the report.
• Page Header : Page header appears at the top of every page of the report.
It may include a uniform title to indicate that the page belongs to a
particular report.
• Group Header : The group header and footer are available in a report only
if the sort order and grouping levels are also defined on the basis of a field
of data source. This is because Group Header and Footers are properties
of the field that are used for defining the sort order. Depending on grouping
level, the group header appears at the top of each report group. A set of
report pages constitutes a report group. Each group level of report contains
a separate group header.
• Details : The details section, which is also called the main body of a report,
contains data from tables or queries that provide the record source to a
report. This section is most important as it consists of the main information
content of a report.
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• Group Footer : The group footer appears at the bottom of each grouping
level and may contain summaries or sub-totals for the grouped data.
• Page Footer : The page footer appears at the bottom of each page of the
report and is meant to include page numbers, date and time of report
generation.
• Report Footer : The report footer appears once on the last page of the
report to include summaries or totals for all data of the report.
It is not necessary to incorporate each and every section or component of
report structure. Those report structure components, which are not required
in a specific report being designed, are suppressed. To achieve this suppression,
open the View Menu to hide or display the Report Header/Footer, Report
Page Header/Footer. The size of every section or report structure component
is increased or decreased by dragging section bars up or down using a mouse.
15.5.5 Methods of Creating a Report

There are three ways in which a report can be created in Access. A brief
description of each method is given below:
(a) Auto Report: This is the easiest method of creating a report both with
columnar and tabular formats. To begin with formulate, create and save a
query, which is capable of providing a record set as the information source
of report. Alternatively, the information content must be available in a
single table of the database. If the information is generated by relying
upon more than one table, query is the option to be exercise. After the
information source becomes available in the database, the following
procedure is adopted to create Auto Reports.
(i) Select Reports from objects list given in LHS of Database window
and click at New object button of tool bar. Access responds by
displaying the following New Report Window.
(ii) Choose AutoReport: Columnar or AutoReport: Tabular, followed
by selecting the information source query or table.
(iii) Click OK to generate the report. Access responds by creating and
displaying the report in printpreview mode.
(iv) To print the report, click at the print icon on tool bar.
(v) To save the report design as object, close the print preview window,
and provide a suitable name.
Auto Reports are easy and fast to create. But these reports are less
attractive. To prepare more professional report, report wizard is used.
Fig. 15.8 : New report window to choose methods of report design
(b) Wizard : The Report wizard allows a designer to choose the fields from
multiple tables along with specification for grouping, sorting and formatting
of information content in report. This obviates the limitation of Auto
Reports. In order to create reports by wizard, following steps are required.
(i) After selecting Reports object, double click at Create Report by
Using Wizard. Access responds by displaying Report Wizard window
similar to the one displayed for query wizard (See Fig 14.10).
(ii) Choose the table or query that includes information content of report,
from Tables/Queries drop-down list on LHS.
(iii) Use arrow buttons to select fields to provide the information source
to report. Single right arrow button is used to select one field and
double arrow button to select all fields. Alternatively, double click
at the fields to be selected in the same order in which they are required
to be displayed in the report.
(iv) Another table or query can be chosen to select more fields for a
report to provide a definite relationship between the tables is defined.
Click Next when selection process of data source is complete.
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(v) Access responds by prompting the designer to add any grouping

level(s) for displaying the information content of the report. The report
is prepared by choosing any repeated data item to constitute a group.
Click Next when the grouping level is added and defined.
(vi) Access responds by requiring the designer to specify the sort order
based on any of the fields contained in the report. The records may
be sorted up to four fields by specifying either ascending or
descending order for each field. After specifying the sort order, click
Next or specify the summary values to calculate. The summary
values are sum, average, minimum and maximum. Once summary
values are specified, click OK, followed by click Next.
(vii) Report wizard responds by requiring the designer to choose the report
layout (stepped, block, outline and align left) and its orientation
(portrait and landscape). Click Next after specifying the layout and
orientation.
(viii) Report wizard prompts the designer to choose a particular style of
report from among six styles: bold, casual, compact, corporate,
formal and soft-gray. After choosing a suitable style for report, click
Next.
(ix) Report wizard prompts the designer to specify the title of report
being designed. Further, the designer is provided with two options:
preview the report or modify its design. After exercising the option,
click Finish.
(x) Access presents the report in preview mode or design mode depending
on which option is chosen in (i) above.
(c) Design View : The design view method offers greatest flexibility to the
designer in designing a report. In this method, the report is designed by
assembling and embedding various components from report tool box. In
order to design a report by using design view, following steps are required:
(i) After selecting Reports object, double click Create report in Design
view. Access responds by providing a blank report object with three
sections: Report/Page header, Detail and Report/Page footer as
shown in Figure : 15.9.
(ii) Right click the mouse at the black spot appearing at the left of
horizontal ruler of above report. Report object responds by displaying
a drop down window.
(iii) Click Properties and select Record Source from Data tab. The record
source turns into a combo control giving a list of various tables and
queries. Choose the appropriate source of information to be presented
in the report being designed. Access responds by providing a list of

fields of the selected record source. If this list does not appear or it
is closed by mistake, it can be recalled by clicking at the field list
icon appearing before the icon for tool box.
Fig.15.9 : Window displaying design view of report
(iv) Select the required fields from list of fields displayed as discussed in
(c) above, by clicking at each of the fields to be selected while keeping
the Ctrl key pressed. Drag and drop the selected fields to Detail
section.
(v) The label part of each field is moved to Report/Page header and text
part is accordingly aligned below their respective labels column wise.
The caption of each label giving headings can be suitably modified,
if required.
(vii) The vertical ruler controlling the distance between various report
sections can be suitably adjusted to give a better look to the report.
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The Report/Page footer bar is brought close to the fields laid out in
Detail section so that the gap between records of details section is
minimized.
(viii) Page headers and page footers may also be added by right click at
title bar of report object, followed by click at Page header/footer.
15.5.6 Refining the Report Design

The design of the report created by any of the methods described above may
be improved upon by making the following additions and modifications to the
report. For this purpose, an existing report is opened in design mode.
• Adding Dates and Page Numbers : When an existing report is opened in
design mode, the page footer of the report contains two unbound controls:
the current date and current page number of total number of pages.
Both the controls may be customised according to the requirement of the
designer. The date control uses = Now() function to retrieve the current
date from RTC of computer. The format of date may be modified by selecting
General date, Medium date, Short date or Long date from format property
of this control.
Further, when a report is created using design view method, the date and/
or time and also the page numbers may be added to any of its part. The
date and time is added by clicking Insert % date and time from the menu
bar to open the Date and Time dialog box. After selecting and specifying
the desired preferences regarding date and time, click OK to find that a
text control with chosen date and time preferences is added at the top of
active report section. This added text control containing date and time
may be dragged and dropped in any part of the report as per requirement.
Similarly, the page number is added by clicking Insert % page numbers
from the menu bar to open the Page numbers dialogue box. This dialogue
allows the designer to specify the format, position and alignment. The two
formats are: Page N (for example Page 1) and Page N of M ( for example
Page 1 of 10). The position to specify is either Top of Page (header) or
Bottom of Page (footer). Possible alignment, which may be specified are
Centre, left, right, inside and outside.
• Adding and Deleting Report Controls : After a report has been designed,
additional report controls may be added or deleted by the same procedure
as applicable to forms. Clicking tool bar icon opens report design tool bar,
which contains a set of useful controls.
(a) After opening the report in design mode, click Field List button on
report design tool bar. This results in opening the field list window.
(b) Drag the field into an appropriate section of the report. The field appears
with both label and text box control. The label part gives a constant
field heading while the text part provid
.es different values of the field. These two parts are accordingly placed at the
appropriate sections of the report.
(c) A field control may be deleted by selecting the control and pressing the
Delete key.
• Conditionally Formatting Report Controls : The conditional formatting of
text boxes and combo boxes in reports can be achieved in the same manner,
as it applies to Forms. The conditional formatting allows the designer to
apply special text formats that depend on the value of field. This facility is
a useful tool to draw the attention of user or reader of report to some
values of particular interest, such as amounts exceeding certain limit or
unexpected balances in some accounts. In order to create a conditional
formatting, following steps are required:
(a) Open the report in design view.
(b) Select a control and click at format on menu bar, followed by conditional
formatting.
(c) Provide the necessary conditions for formatting to occur in the same
manner as already discussed while applying conditional formatting to
design of Forms.
(d) The conditional formatting is removed by re-opening the same dialog
and clicking at delete button.
• Grouping Levels and Sorting Order : The purpose of grouping is to organise
the information content of a report into categories. Sorting order is meant
to arrange such information content into numerical or alphabetical order.
With groupings the sorting applies to each individual group. The grouping
and sorting of information, when applied together, make the report more
meaningful and therefore useful to the user of the report. In order to specify
the grouping and sorting order, following procedure is adopted.
(i) Click at Sorting and Grouping icon of Report Design Tool bar (This
icon is located next to icon for tool box). Immediately, Access
responds by displaying the following Sorting and Grouping dialogue
box.
(ii) The LHS of this dialog box provides a list of fields or expressions
that are to be used for grouping and sorting. In the above dialog
box, Type field of Accounts has been chosen as the basis of grouping
the information content of trial balance. The group header and footer
property is set to Yes to indicate that there is separate header and
footer for each group of accounts in trial balance.
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Fig. 15.10 : Window displaying sorting and grouping dialogue box
15.5.7 Saving and Exporting a Report

After a report is designed, it may be generated to preview its final shape. Both
the design and a generated report are saved for future use and reference. The
generated report may also be exported for use by others, as described below:
(a) Saving and Exporting Report Object in Access : The design of a report is
saved in Access as report object by assigning a particular name. The report
object, when opened in access by click action generates the desired report
as per design specification. The design may also be exported to another
database file of Access. This is achieved by clicking File % Export and
then selecting and existing database into which the report design is to be
exported. Access responds by providing a dialog box to give the name by
which the exported report is saved in a selected database.
(b) Saving as Snapshot : After a report is created, it may be saved in such a

manner so as to be viewed by others without the help of Access. This
becomes possible by saving the report as a snapshot file. As a result, a
high quality picture image of each page of report is created with Adobe
Acrobat software. Other users of the report can then view the report and
print any of its pages without being able to modify its contents. It must be
ensured that this feature of saving a report as snapshot is also installed
while installing the MS Office 2000 package. In order to create a report
Snapshot, following steps are required :
• Select and generate a report in Database Window.
• Click File % Export from menu bar. An Export Report dialog box
appears.
• Choose the folder from combo box next to Save in; provide a file name;
select snapshot from list control next to Save as type and click at
Save button. While saving the report ensure that the auto start check
box is enabled.
• The generated report is saved as a snapshot and can be supplied to
others for printing and viewing without the help of the Access database
environment.
(c) Exporting to Excel : A generated report may be exported to Excel, which is
a spreadsheet package. This software package is a part of MS Office product
and is generally installed while installing MS Access. A report is exported
to Excel by following the same steps as have been listed above while saving
a report as snapshot, except that before clicking save button in (c) above,
one has to select Microsoft Excel 2000/2002 from list control next to Save
as type.
(d) Exporting to MS Word : A report generated using Access can also be exported
to MS word, which is a text processing package. This package is also
installed while installing MS Access, as a part of MS Office. In order to
export a report to MS Word, the following steps are required :
(i) Select and generate a report in Database Window.
(ii) If print preview tool bar is absent in Access window, Click View %
Tool bars % Print preview from menu bar of Access. Access
responds by providing print preview tool bar for reports.
(iii) Click at right corner of icon for Official Links. There are three options
in the list: Merge It with MS Word, Publish It with MS Word and
Analyse It with MS Excel.
(iv) Click Publish it with MS Word, which is also the default option.
(v) The generated report is exported to MS Word package and can be
dealt with like any other document created using MS Word.
606 Accountancy
(e) Printing a Report : A generated report may also be printed by taking the
following steps provided a printer attached to the computer is installed.
(i) Choose File from menu bar % Print
(ii) Access responds by providing a print window, which allows the
user to select a printer, the number of copies to be printed and also
the range of pages to be printed.
(iii) Properties button is clicked to define print quality under set-up tab
and orientation under paper tab. Two-sided printing may also be
obtained if the printer supports this feature.
(f) E-Mailing a Report : A report generated by Access may also be sent using
E-Mail facility, provided the computer system has Internet facility and is
connected to the Mail Server of the Internet Service Provider (ISP). In order
to send a report using E-mail facility, following steps are required :
(i) Select and generate a report in Database Window
(ii) Click at File % Send-To % Mail recipient from Menu bar of Access.
A Send dialog box appears with various options for choosing the
Format: Microsoft Excel, HTML, Snapshot format, Rich Text format,
etc.
(iii) Choose an appropriate format and click OK. Access responds by
providing an E-Mail composition window.
(iv) Fill up the details regarding E-mail address of recipient and others
to whom copy of report is to be sent; provide a subject to E-mail
and click at Send button. The report gets dispatched to the mailbox
of the recipient of E-mail.
Fill in the blanks

(a) Reports, the need for which is not anticipated is called ........................reports.
(b) ................query does not involve use of any query function to produce a summary
of data.
(c) ................ query prompts the user to enter criteria for selecting a set of records.
(d) ................clause is used to specify the fields to display data or information.
(e) .................. is meant to include page number, data and time of report.
(f) The purpose of ................. is to organise the information of report into categories
whereas ............ arranges information into numerical or alphabetical order.
(g) When saved as ......................., the contents of reports can not be modified by the
user.
15.5.8 Designing Accounting Reports using Access

Financial Accounting Reports such as Cash book, Bank book, Ledger Accounts
and Trial Balance may be generated in Access by adhering to report generation
process. The exact process in the context of each of these reports is described
below :
Trial Balance
The Trial Balance is one of the accounting reports, which provides the net
amount by which each account, during a given period of time, has been debited
or credited. The format of a typical trial balance is as given below :
Trial Balance

Amout Amount
Rs. Rs.
Total
Fig. 15.11 : Format of trial balance
To produce a trial balance, it is necessary to retrieve a set of processed

data records each of which provides information on Code (or Account Number),
Name of Account (or Particulars), Debit balance and Credit balance with
reference to a each account. In order to find net balance corresponding to
every account along with its identity, following steps are taken :
(i) To find the total amount by which every account has been debited;
(ii) To find the total amount by which every account has been Credited;
(iii) To find a collective record set of accounts with their debit and credit
totals;
(iv) To find the net amount with which every account has been debited or
credited; and
(vi) To find the record set which consists of Account code, name of Account,
Debit and Credit Amount.
Above steps to produce trial balance are transformed into a series of SQL
statements, which vary according to the database design. The details of the
above procedure along with the relevant SQL statements need be explained in
the context of the three Models as given below :
Model-I : The following series of SQL statements retrieve a record set for
producing trial balance when database design for Model-I is used.
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(a) To find the total amount by which the accounts have been debited : In order
to ascertain the total amount by which every transacted account has been
debited, the SELECT clause need to have two fields: one code to identify
the transacted account and another to generate the total by which such
account has been debited. This is achieved by using Debit field of Vouchers
table and finding the sum of amount corresponding to each of the
transacted accounts. The FROM clause relies upon Vouchers table to get
the data source. The GROUP BY clause specifies the field on the basis of
which grouping of record set is formed. This grouping is necessary in SQL
when aggregate query is used to generate summary information. The
summing of amount is obtained by using aggregate function, Sum( ). This
function, as already explained, uses a field with data type Number, as an
input argument and returns its sum as output. Accordingly, the following
SQL statement is formed :
SELECT Debit AS Code, Sum(amount) AS Total
FROM vouchers
GROUP BY debit;
In the above SQL statement, the GROUP BY clause retrieves the rows of
vouchers table accounts-wise because the debit field refers to account code.
As a result, the Sum( ) computes the sum of amount of a particular debit
account and reports against Debit account of SELECT clause. This SQL
statement is saved as Query 01for its subsequent use. The total of debit amount
in this query is given by Total field with positive amounts.
(b) To find the total amount by which the accounts have been credited : In order
to ascertain the total amount by which every transacted account has been
credited, a query similar to that in (a) need be formed, except that the
Debit field in SELECT and GROUP BY clause is substituted by Credit
field. The sum of amount generated by sum(Amount) is multiplied by -1
so that the final amount assigned to Total field is always negative. This is
because the amount of credit must be a negative amount if amount of
debit is taken as positive. The purpose of using negative values is to
differentiate between debit and credit totals for each account and also to
facilitate the simple arithmetic summation for obtaining the net amount.
Accordingly, the following SQL statement is formed :
SELECT Credit AS Code, Sum(Amount)*(-1) AS Total
FROM vouchers
GROUP BY Credit;
This SQL statement is saved as Query 02 to be used as source by next
query.
(c) To generate a collective record set of accounts with their debit and credit
totals : Every transacted account that has been debited (or credited) only
appears once in this collective record set. However, those transacted
accounts that have been debited as well as credited appear twice in this
record set: once with a positive amount and thereafter with a negative
amount. This collective record set is generated by executing a UNION query
between Query 01 and Query 02.
SELECT*
FROM Query 01
UNION SELECT*
FROM Query 02 ;
This SQL statement is saved as Query 03 for further processing of its
resultant record set.
(d) To generate the net amount with which an account has been debited or
credited : Once the records of account codes with debit and/or credit
totals have been collected, the next logical step is to find out the net amount
by which such accounts have been either debited or credited. This is
accomplished by forming another aggregate query in which FROM clause
uses Query 03 as the data source. The sum of Total for each Code of data
source, provided by Query 03, results in computing net amount for every
account. Accordingly, the following SQL statement is formed to generate a
list of account codes with their respective balances: positive or negative.
SELECT Code, Sum(Total) AS Net
FROM Query 03
GROUP BY Code;
A positive net amount implies a debit and negative amount means a credit
balance corresponding to an account code. This is because in Query 02, the
total of credit amount has been made to appear as negative. This query is
saved as Query 04 for its subsequent use in generating record set for trial
balance.
(e) To find that record set which consists of account code, name of account,
debit amount and credit amount : Every row of a trial balance report consists
of Account Code, Name of Account, Debit Amount and Credit Amount.
The Debit Amount and Credit Amount are mutually exclusive. Such rows
are obtained by generating a record set based on the following SQL
statement.
SELECT a.Code, b.name AS [Name of Account], IIF
(a.Net>0,a.Net,null) AS Debit,
IIF (a.Net<0,abs(a.Net) ,null) AS Credit
FROM Query 04 AS a, Accounts AS b
WHERE a.code = b.code ;
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In the above SQL statement, the results of Query 04 and data stored in
Accounts table has been used. The SELECT clause of this SQL statement has
two computed fields as explained below :
• IIF(a.Net>0,a.Net,null) AS Debit: According to IIF( ) function, if the net
amount exceeds zero, it is displayed as Debit, otherwise nothing appears
in Debit field.
• IIF(a.Net<0,abs(a.Net) ,null) AS Credit: According to IIF( ) function, if the
net amount is less than zero (implying negative), it is displayed as Credit,
otherwise nothing appears in Credit field.
Besides, the other two fields: Code and Name, of SELECT clause are
retrieved from Query 04 and Accounts table respectively. This SQL statement
is saved as Query 05 for providing the necessary information content for Trial
Balance Report.
Model-II : The following series of SQL statements retrieve the record set for
producing trial balance when database design for Model-II is used. In addition
to this, the accounts have been categorised within the trial balance according
to the Account Type: Expenses, Revenues, Assets and Liabilities.
(a) To find the total amount by which the accounts have been debited : The
transacted accounts in design of Model-II have been stored in AccCode of
VouchersMain and Code of VouchersDetail. The following SQL statement
is formed to generate the relevant information from VouchersDetails.
SELECT Code, Sum(amount) AS Total
FROM vouchersMain INNER JOIN vouchersDetails ON
VouchersMain.Vno = VouchersDetails.Vno
WHERE Type = 0
GROUP BY Code ;
Similarly, the following SQL statement is formed to generate the required
information from VouchersMain table.
SELECT AccCode As Code, sum(amount) AS Total
WHERE Type = 1
GROUP BY AccCode ;
Both the SQL statements are meant to extract similar sets of records, but
from two different sources. Therefore, the resultant record set of these SQL
statements have been horizontally merged using UNION clause as shown below:
SELECT Code, sum(amount) AS Total
WHERE Type = 0
GROUP BY Code
UNION ALL
SELECT AccCode As Code, sum(amount) AS Total
WHERE Type = 1
GROUP BY AcCode ;
The above SQL statement is saved as Query101for its subsequent use.
The total of debit amount in this query represents the Total with positive
amounts.
(b) To find the total amount by which the accounts have been credited : In
order to ascertain the total amount by which every transacted account
has been credited, a query similar to that in (a) need be formed. This is
achieved by substituting Debit field in SELECT and GROUP BY clause by
Credit field and the sum of amount generated by sum(Amount) is multiplied
by-1 so that the final amount assigned to Total field is always negative.
Accordingly, the following SQL statement is formed :
SELECT Code, sum(amount)*-1 AS Total
VouchersMain.Vno=VouchersDetails.Vno
WHERE Type=1 GROUP BY Code, Amount
UNION
SELECT AccCode As Code, sum(amount)*-1 AS Total
VouchersMain.Vno=VouchersDetails.Vno
WHERE Type=0 GROUP BY AccCode, Amount;
In the above SQL statement, the sum of amount has been multiplied by -1 to
ensure that the amount of credit is always negative just as amount of debit is
taken as positive. This query is saved as Query102 for its subsequent use.
(c) To find a collective record set of accounts with their debit and credit totals:
A collective record set is generated by forming a union query between
Query101 and Query102 to ensure that the debit and credit amount with
respect to each account becomes available for generating the net amount.
Accordingly, the following SQL statement is formed.
SELECT*
FROM Query101
UNION Select*
FROM Query102;
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The above SQL statement causes horizontal merger of record sets returned
by Query101 and Query102. This SQL Statement is saved as Query103 for its
subsequent use in next query.
(d) To find the net amount with which an account has been debited or credited:
To generate the net amount, an SQL statement similar to Query04 (designed
for query (d) of Model-I) above, is formed as shown below, except that its
source of data is Query103 instead of Query 03.
SELECT Code, Sum(Total) AS Net
FROM Query103
GROUP BY Code;
This query is saved as Query104 for its subsequent use in generating a
record set, giving details of information for trial balance.
(e) To find the record set which consists of Account code, Name of Account,
Debit Amount and Credit Amount : This query, which is meant to provide
relevant information to the trial balance report, is similar to Query 05
(designed and discussed in (e) of Model-I). Accordingly, the following SQL
statement is formed by changing the source of data from Query 05 to
Query105 as shown below :
SELECT a.Code, b.name AS [Name of Account], IIF(a.Net>0,a.Net,null) AS
Debit, IIF(a.Net<0,abs(a.Net) ,null) AS Credit FROM Query104 AS a,
Accounts AS b/
WHERE a.code = b.code;
In above SQL statement, the results of Query104 and data stored in
accounts table has been used. This SQL statement is saved as Query105 for
providing source of information to Trial Balance Report.
Trial Balance with Sorting and Grouping levels : In order to prepare a trial
balance with all the account duly grouped by and sorted within category of
accounts, two additional queries (f) and (g) are required.
(f) To find the record set of accounts with their category and category ID :
Accounts table is related to AccountType table vide Type field. The following
SQL statement, using INNER JOIN clause, is formed to retrieve the relevant
fields for various accounts.
SELECT Accounts.Code, Accounts.Name, Category, CatId FROM Accounts
INNER JOIN AccountType ON
Accounts.Type = Account type.CatId;
This SQL statement is saved as Query 106 for its subsequent use in next
query.
(g) To find the record set consisting of Account Code, Name of Account, Debit
Amount and Credit Amount along with category details : This query, when
compared with (e) above, reveals that two additional fields: Category and
CatId are required. Accordingly, the SQL statement stored as Query105

is modified by substituting Accounts table with Query106 to form the
following Statement.
SELECT a.Code, b.name AS [Name of Account],
IIF(a.Net>0,a.Net,null) AS Debit, IIF(a.Net<0,abs(a.Net) ,null) AS Credit,
Category, CatId
FROM Query104 AS a, Query106 AS b
WHERE a.code = b.code ;
This SQL statement is saved as Query107 to provide information details
for designing trial balance with grouping and sorting of the accounts.
15.5.9 Procedure in Access for Designing a Simple Trial Balance

The Trial Balance is generated using the Design View method by following
the steps listed below :
(i) Select Reports from objects list provided by LHS of Database Window
and click at New object button of tool bar. Access responds by displaying
the New Report Window as shown in figure 15.8 Choose Design View
from list of methods and Query 05 from combo control meant to provide
data source to the report. Click OK after choosing method and data
source of report.
(ii) Access responds by displaying a blank report design divided horizontally
into three sections: Page Header, Detail and Page Footers. Besides, a
list of available fields of Query 05 is also provided for embedding on to
this blank design of report.
(iii) Alternatively, double click at Create report in design view. Access
respond by displaying a blank report design duly divided into three
sections as stated above. Right Click at the left most corner point of
report design where horizontal and vertical rulers converge. Click at
Properties of report and select Data tab to define the record source as
Query 05. Immediately, there appears as list of available fields of
Query 05 so as to be placed on to blank design of report.
(iv) Right click at any part of the report design and choose Report Page
Header and Footer. Access responds by providing two more sections:
Page Header and Page Footer.
(v) Click at the icon for tool bar and pick up a label control to be placed at
Page Header Section and assign set its caption property to Trial
Balance, Font Size to 16, Font colour to Blue, Text align to Left and
Font weight to Bold.
614 Accountancy
(vi) Select all the fields of Query 05 by clicking at every field while keeping
the Ctrl key pressed. Drag and drop the selected fields on Details section.
It may be noted that each of the dropped fields has two controls: Label
and Text. The former gives caption and the latter provides the data
content.
(vii) Select the label controls of all the four fields by clicking at each while
keeping the Shift Key pressed. Right click at selected label controls
and choose cut. Place the mouse at Page Header section and paste
these controls.
(viii) Re-arrange these label controls to appear as headings of columns for
trial balance as: Code, Name of Account, Debit and Credit. Select all
these label controls and right click to choose properties. Access provides
Properties of these controls. Choose format tab and set the Font weight
Property to Bold; Font Size to 10; Font colour to Blue and Text align to
Centre.
(ix) Align the Text controls in Detail section to appear just below each of the
respective label controls appearing in Page Header section.
(x) Select the Text controls and Debit and Credit field and modify their
properties by setting Decimal Places to Zero and Format to Standard.
(xi) Pick up a label control from tool box by click action and place at Report
Footer section, at the area vertically below the column “Name of
Accounts” and give the caption “Total”. Set its Text align property to
Centre, Font weight property to Bold and Font Size to 10.
(xii) Pick up a text control and place it at Report Footer section at the area
vertically below Debit column. Set its Record source property as
expression given below :
= Sum ([Query 05]![Debit])
The expression is written by clicking at (...) to call the expression pane.
The expression [Query 05]![Debit] within Sum( ) function refers to Debit
field of Query 05.
(xiii) Pick up another text control and place it at Report Footer section at the
area vertically below Credit column. Set its Record source property as
expression given below.
=Sum ([Query 05]![Credit])
The expression is written in the manner as it applies to sum of debit
column. The expression [Query 05]![Credit] within Sum( ) function refers
to Credit field of Query 05.
The report design prepared above is saved as Trial Balance by Design. The
Trial Balance report design appears on the RHS of Database Window as object
under Reports.
15.5.10 Designing of Trial Balance with Sorting and Grouping

To design a trial balance with grouping and sorting of accounts, the following
additional steps are required.
(i) Copy the trial balance design as created above and paste it with different
name say “Trial balance with Grouping”. Open this copied report design
for modification in design view to incorporate the grouping and sorting
of accounts in trial balance report.
Fig 15.12 : Window displaying sorting and grouping dialog
(ii) Change the data source property of report design by right click at the
top left corner of report design % click at properties % Choose Tab and
set the Record source property as Query107.
(iii) Modify the Record source of Text controls for sum of debit and credit
columns to replace existing expressions by
616 Accountancy
= Sum ([Query107]![Debit]) .......... for Debit

= Sum ([Query107]![Credit]) .......... for Credit
(iv) Right click at report design % click at sorting and grouping. Access
responds by providing a window for sorting and grouping as shown in
figure 15.12
(v) Define the basis of grouping as CatId in field/expression and its sort
order set to ascending. Set the Group Header property to Yes. Access
responds by inserting CatId Header section in report design.
(vi) Click at field list icon and drag and drop category field in CatId Header
section. Set its Font Size property to 10, Fore Colour property to Dark
Green and Font Weight property as Bold.
Save the modifications in the above report design. The trial balance report
is generated by double click at this or the previous object. The generated trial
balance may be saved or exported as desired.

• MS Access • Database Management System
• Accounting Report • Transaction Vouchers
• Compound Vouchers • Queries

1. Accounting Reports : A report displays information that is acquired from data
processing and transformation in an organised manner. Reports tend to reduce
the level of uncertainty associated with decision-makers and also influence their
positive actions. The output of the computerised accounting system are
accounting reports. Financial accounting reports such as Cash book, Bank
book, Ledger, and Trial Balance may be generated in Access by adhering to
report generation process.
2. Using Access for Producing Reports : In Access, the reports are created by
designing a report, identifying its information requirement, creating the queries
in SQL to generate such information so that the final SQL statement provides
the record set of information to the report design. Different Models of database
design require different sets of SQL statements to produce different types of
reports.
3. Queries Access : There are several types of queries in Access that may be used
to generate information. Such queries are called select queries because they are
used to select records from the given set of records. There are three ways in
which these queries may be created in Access: Wizard, Design View and SQL
View method.
4. Designing Reports in Access : A report in Access may be designed in three ways:
Auto Report, Wizard and Design View method. A SQL statement (or query) is
capable of displaying records containing fields from across a number of data
tables. A typical report in Access has the structure that consists of Report header,
Page header, Group header, Details, Group footer, Page footer and Report footer.

Short Answers
1. State what do you understand by accounting reports.
2. What do you mean by programmed or casual reports?
3. With the help of an example, briefly state the meaning of parameter queries.
4. Briefly state the purpose of functions in SQL environment.
5. Briefly explain in steps the method of creating a query, using wizard.
6. List the structure of a good report created in Access.
7. List the ways to refine the design of a report.
8. Briefly explain the purpose of grouping and sorting of the data as a means to
refine a report.
9. What do you understand by saving a report as snapshot?
10. State the procedure for creating ledger in MS Access.
Long Answers
1. Describe and discuss the procedure of creating the receipts side of a cash
book.
2. Discuss the concept of accounting reports? Explain the three steps involved
in creating such reports.
3. Discuss with a set of inter-related data tables, the basics of creating queries
in MS Access?
4. Briefly explain the set of SQL statements to produce the receipts side of a
cash book for Model-I.
5. Describe in steps the design view method to create a query in MS Access?
6. Discuss the SQL view method of creating a query?
7. Describe the ways to refine the design of a report.
8. Explain the data base design for Model-I for producing the receipts the series
of SQL statements for producing the payment side of cash book for Model-II.
9. Describe the series of SQL statements to produce trial balance data base
design for Model-II is used.
10. Using Model-III discuss the series of SQL statements to produce a trial balance
up to a particular date.
Project Work
1. Payroll Accounting: Using the database design given in Exercise of Chapter-IV,
as Project No: 1, you are required to generate the portion of payroll according
to the specified format under MS Access environment.
2. Financial Accounting: Write the SQL statements for each of the following
queries separately by using database design of accounting specified as Model-
I, II and III in Chapter-IV.
(a) List the transactions details of Accounts, which have been debited during
the period April 01, 2001 to September 30, 2001.
(b) List the transactions details of accounts which have been credited during
the month of August 2001.
(c) Find the total expenses incurred during the period September, 2001.
(d) List all the transacted accounts with the amounts by which they have
been debited and also the amount with which they have been credited.
(e) List the amount of expenses authorised by each of the employees.
618 Accountancy
3. Inventory Accounting: Using the database design developed in Exercise of

Chapter-IV, for Project No: 2, you are required to generate Statement of closing
stock in the following format by assuming that all goods are sold at a profit
of 25% on purchase price.
Statement of Closing Stock
Particulars Purchases Sales Balance
Code Item Name Qty Amount Qty Amount Qty Balance
4. Inventory Accounting: Using the database design developed in Exercise of

Chapter-IV, for Project No: 2, Write the SQL statements for each of the following
queries :
(a) List out the Invoice No, Date and amount of sales made during the
month of October, 2002.
(b) Make a list of Invoice No, Date and amount of Purchases during the
period April 01, 2002 to October 31, 2002.
(c) List items wise the quantity sold during the month of September 2002
(d) Find the Minimum and Maximum rate at which each item of goods has
been purchased during the period April 01, 2002.
(e) Make a list of physical quantity of each item in stock.

(a) Casual
(b) Simple
(c) Parameter
(d) SELECT
(e) Design view
(f) Sorting
(g) Snap shot
APPENDIX
Description of Commonly Used Functions in Access

There are three types of functions that are used to set the Control Source property
of calculated controls and/or to form part of calculated field expression in SQL
statement. A brief description of the commonly used functions is below :
A-1. Domain Aggregate Functions

These functions are used to perform calculations based on values in a field of a
table or query. Criteria to select the set of records in the table or query that is
desired to be used for calculations may also be specified. The criteria, if not
specified, imply that all the records of the table or query specific to the field are
used for computation. All the domain aggregate functions use the same syntax
as is given hereunder :
DFunction (“FldName”, “TblName” or QryName”, “SrchCond”)
Wherein DFunction refers to a named domain aggregate function. A brief
description of its input arguments is given below:
FldName : It refers to the name of field that is to be searched in a table or
query, which is specified as an argument.
TblName (or QueryName) : It refers to the name of a table or query that contains
the field specified as second input argument.
SrchCond : It refers to the search condition on the basis of which the relevant
record is searched.
Some of the important domain aggregate functions have been described as
below :
(a) DLookup : This function is meant to look up information that is stored in
a table or query, which is not the underlying source of Access Form or
Report. It is used to set the Control Source property of a calculated control
to display data from other table or query. Consider the following example:
DLookup (“Name”, “Accounts”, “Code = ‘110001’”)
In the above example, this function has been applied to search the name of
account (in Accounts table) whose code is ‘110001’.
(b) DMax and DMin : These functions are used to retrieve respectively the
maximum and minimum values in the specified field. Consider the
following example :
DMin (“Amount”, “Vouchers”, “Debit = ‘711001’”)
Dmax (“Amount”, “Vouchers”, “Debit = ‘711001’")
In the above examples, the amount of minimum purchase transaction
and maximum purchase transaction is retrieved and reported. It may also
be noted that ‘711001’ is the code of Purchase account in Accounts table
(c) DSum : This function computes and returns the sum of the values in the
specified field or expression. For Example, in a table : Sales that contains
620 Accountancy
ItemCode, Price and Quantity as fields, the total amount of sales may be
computed by using the DSum () function as follows :
DSum (“Price*Quantity”, “Sales”)
However, if the total sales is to computed for a particular item coded as
1678, the DSum () function shall be applied as follows :
DSum (“Price*Quantity”, “Sales”, “ItemCode = 1678”)
(d) DFirst and DLast : These functions are used to retrieve respectively the
values in the specified field from first and last physical records.
Consider the following application examples :
DFirst (“Name”, “Accounts”)
DLast (“Name”, “Accounts”)
In the above examples, the name first and last account that physically
exists in Accounts table is retrieved and reported.
(e) DCount : This function is meant to compute the number of records with
non-null values in the specified field. Consider the following application
example :
DCount (“*”, “Accounts”)
In the above example, The number of records in accounts table are counted
and reported by DCount () function.
A-2. SQL Aggregate Functions

The SQL aggregate functions have the functionality similar to that of domain
aggregate function. However, unlike domain aggregate functions, these functions
cannot be called directly into controls used in Forms and Reports of Access.
These functions are used in SQL statements that provide the underlying record
source of Forms and Reports. All these functions, when used require the GROUP
BY clause in SQL statement :
(a) Sum : This function is used to compute and return the sum of a set of values.
For Example, consider the following SQL statement that has been used in
Chapter-V to prepare the underlying information source of Trial Balance
(Model-I.).
SELECT Debit As Code, Sum (Amount) As Total
FROM VOUCHERS
GROUP By Debit ;
In the above SQL statement, Sum () has been used to compute the total amount
by which the transacted accounts have beeen debited.
(b) Min and Max : These functions are used to retrieve respectively the minimum
and maximum of value set with respect to field or query expression. For
Example, the following SQL statement is capable of returning the amount of
minimum and maximum sales transaction in Model-I :
SELECT Min (Amount) As MinSales, Max (Amount) As MaxSales
FROM Vouchers
WHERE Credit = ‘811001’ ;
It may be noted that the sales account that is coded as ‘811001’ is credited as
and when a sales transaction is recorded.
(c) Count : This function counts the number of records returned by a query. The
number of times a sales transaction has occurred and recorded in books of
accounts can be known by executing the following SQL statement.
SQL statement.
SELECT count (*)
FROM Vouchers
WHERE Credit = ‘811001’
In the above SQL statement, the Credit field stores the account code of sales
when a sales transaction occurs. The WHERE clause restricts the number of
records returned by the above SQL to those in which credit field has the
account code of sales. Accordingly, the count () function returns the count
value of records returned by the above SQL statement.
(d) First and Last : These functions are meant to retrieve the first and last record
of a value set pertaining to a field or query expression.
A-3. Other Functions

(a) IIF : The purpose of this function is to provide a value to the field from a
mutually exclusive set of values. Its syntax is as given below :
IIIF (<Condition>, Value-1, Value-2)
Wherein <Condition> refers to any logical expression in which a comparison
is made by using following comparison operators :
= equal to
<less than
>greater than
<= less than or equal to
>= greater than or equal to
The condition formed by the above comparison operators is evaluated to result
into TRUE or FALSE.
<Value-1> This value is returned by IIF() function to the field, if the condition
turns out to be TRUE
<Value-2> This value is returned by IIF() function to the field, if the condition
turns out to be FALSE
Example : Suppose a field Type is to return the string of characters “Debit”
when its value is 0 and “Credit” when its value is 1, IIF() function is used as
shown below :
IIF (Type = 0, “Debit”, “Credit”)
(b) Abs : The purpose of this function is to return absolute value, This function
receives a numeric value as its input argument and returns an absolute value.
Consider the following examples on use of Abs ( ) function :
When – 84 is given as input argument to Abs(– 84), it returns 84
When 84 is given as input argument to Abs(84), it returns 84
622 Accountancy
(c) Val : The purpose of this function is to return the numbers contained in a
string as a numeric value of appropriate type. Its Syntax is Val(string)
The string argument of the above Val( ) function is any valid string expression.
The Val( ) function stops reading the string at the first character that cannot
be recognised as number. For example, Val(“12431”) returns the value 12431
by converting the enclosed string of numerals into value. However, Val
(“12,431”) returns the numeric value 12 because comma after 12 in the
enclosed string of characters in Val ( ) function is not recognised as number.

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Accountancy XI

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Contents

O ver the centuries, accounting has remained

1.1 Meaning of Accounting

Fig. 1.1 : Showing the process of accounting

In 1970, the Accounting Principles Board of AICPA also emphasised that

information. In order to appreciate the exact nature of accounting, we must

Accounting enjoys a remarkable heritage. The history of accounting is as old as

1.1.1 Economic Events

1.1.2 Identification, Measurement, Recording and Communication

information is summarised as per well-established practice and is made

1.1.4 Interested Users of Information

1.2 Accounting as a Source of Information

• provide factual and interpretative information by disclosing underlying

Test Your Understanding - I

The role of an accountant in generating accounting information is to observe,

1.2.1 Qualitative Characteristics of Accounting Information

The economic development and technological improvements have resulted in an

Test Your Understanding - II

1.3 Objectives of Accounting

1.3.1 Maintenance of Records of Business Transactions

1.3.2 Calculation of Profit and Loss

Qualitative Characteristic of Accounting Information

Dedicative Feedback Verifiability Faithfulness

Fig. 1.3 : The qualitative characteristics of accounting information

or incurred losses. Thus, another objective of accounting is to ascertain the

1.3.3 Depiction of Financial Position

and claims against such resources (Liabilities) facilitates the preparation of a

Test Your Understanding - III

1.4 Role of Accounting

Test Your Understanding - IV

Tick the Correct Answer

9 As a language – it is perceived as the language of business which is used to

1.5 Basic Terms in Accounting

Current Assets are assets held on a short-ter m basis such as

Test Your Understanding - V

Summary with Reference to Learning Objectives

1. Meaning of Accounting : Accounting is a process of identifying, measuring,

3. Users of accounting information : Accounting plays a significant role in society

Questions for Practice

Checklist to Test Your Understanding

A s discussed in the previous chapter, accounting

the events and transactions to be accounted for, measuring them,

2.1 Generally Accepted Accounting Principles (GAAP)

2.2 Basic Accounting Concepts

2.2.2 Money Measurement Concept

2.2.3 Going Concern Concept

Test Your Understanding - I

Choose the Correct Answer

2.2.5 Cost Concept

2.2.6 Dual Aspect Concept

Assets = Liabilities + Capital

Liabilities(creditors equity). The two-fold effect of each transaction affects in

2.2.7 Revenue Recognition (Realisation) Concept

2.2.8 Matching Concept

like SEBI, also mandates complete disclosures to be made by the companies,

2.2.10 Consistency Concept

2.2.11 Conservatism Concept

are to be provided for in the books of account. To illustrate, valuing closing

2.2.12 Materiality Concept

2.2.13 Objectivity Concept

This can be possible when each of the transaction is supported by verifiable

Test Your Understanding - II

Fill in the correct word:

2.3 Systems of Accounting