SYLLABUS FINANCIAL ACCOUNTNG

Fundamentals of double entry book keeping up to the preparation of Trial Balance. Bills of Exchange including accommodation bills Preparation of Final accounts Final Accounts of non trading concerns Single Entry Consignment Joint Venture

Text and reference books : 1. 2. 3. 4. Dr. M.A. Arulanandam & K.G. Raman M.C. Shukla & T.S. Grewal Jain & Narang R.L. Gupta Advanced Accountancy Advanced Accountancy Advanced Accountancy Advanced Accountancy

Fundamental of double entry book keeping up to the preparation of Trial Balance

Preparation of final Accounts Double Entry system of Accounting Books Preparation of Journal Ledger Errors and Rectification Preparation of Trail Balance and final accounts. Double Entry system of Accounting: In the Western world the double entry system was developed in the 15 th century in Italy by Lucas Pacioli. Every transaction has two aspects and according to this system, both the aspects are recorded. For example, if the business acquires something then either it must have been given by someone or it must have been acquired by giving up something. On purchase of furniture either the cash balance will be reduced or a liability to the supplier will arise. The Double Entry System as: The double entry system is that system which recognizes and records both the aspects of transaction. This system has been proved to be systematic and has been found of great use for recording the transaction in the business enterprise. Advantage of double entry system: This system affords the under mentioned advantages: (i) (ii) (iii) (iv) (v) (vi) (vii) By the use of this system the accuracy of the accounting work can be established, through the device of the trail balance. The profit earned or loss suffered during a period can be ascertained together with details. The financial position of the firm or the institution concerned can be ascertained at the end of each period, through preparation of the balance sheet. This system permits accounts to be kept in as much detail a necessary and therefore, affords significant information for preparation of the balance sheet. Results of one year may be compared with those of previous years and reasons for the change may be ascertained. The management may be able to obtain the required information for the timely decision making. The firm is saved from frauds and misappropriations since full information about all assets and liabilities will be available.

Book Keeping A system of recording daily transactions of business leading to presentation of a complete financial picture is known a Book Keeping. The main purpose of book keeping financial accounts are summarized below.

1. 2. 3.

To ascertain the operating results during a period, i.e. to find out the quantum of profit/loss during a particular period. To ascertain the financial position at the end of the period. i.e. assets and liabilities of the concern. To determine the relation between the outsiders.

There are two systems of recording transactions. Single entry system and Double entry system. Single entry system is economical but it is not fool proof whereas double entry system recognizes the fundamental fact that every transaction is a double sided affair. If one gives something then a corresponding benefit must have been received. Rules for Journalizing. Accounting are classified into three categories. They are Personal account, real account and nominal account. Rules for journalizing these three accounts are given below: 1. 2. 3. Debit the receiver and credit the giver Debit what comes in and credit what goes out Debit all expenses (and losses) and credit all incomes (and gains) Personal Account Real Account Nominal Account

Books of Accounts: Cash book is meant out record dash and bank transactions. Left hand side of the cash book is called debit side which records for receipt of cast and right side if called credit side which records the transactions for payments. As business is translated through cash as well as bank, so double column cash book has been introduced by showing transaction both for cash and bank in debit and credit side. Cash discount arises for payment before specified date as per terms and conditions for purchase of good with the supplier. Cash discount when allowed to a customer is a loss and when received is a gain. In a triple column cash book the discount allowed and received is also recorded by maintaining a separate column on both sides. Ledger All the transactions of primary entry are posted in the Account Books called Books of Final entry. This is also called a ledger. It contains summaries of all transactions and final accounts are drafted from this ledger. Ledger may be divided in two portions: 1. 2. Personal Ledger Sundry debtors and sundry creditors ledger, Impersonal Ledger Cash book and General Ledger

Entries in the ledger follow the Double Entry Principle. This means for every debit entry there must be a corresponding credit entry and vice versa. All debit entries are proceeded by the word By in the right hand side of the relative ledger account. Preparation of Journal: Steps in Journalizing Before one can journalize transactions, one must think, on the basis of the rules given above, about the effect of the transactions and assets, liabilities, expenses, gains etc., of the firm. On the basis the accounts to be debited or credited will be determined. Then the entry will be made in the journal, as indicated above. It should be noted that the papers or documents supporting the transaction and establishing its validity are known as vouchers. These should be filed in proper order, together with necessary references, so that in times of need these can be referred to. Usually the transactions in a firm are so numerous that to record the transactions for a month will require many pages in the journal. At the bottom of one page the totals of the two columns are written together with the words Carriage forward in the particulars columns with the words Brought Forward in particular column. Illustration: Transactions of Ramesh for April are given below. Journalize them. 7 April 1. 2. 3. 4. 13 . 20 . 24 . 28 . 30 Ramesh started business with cash Paid into bank Bought goods for cash Drew cash from bank for office Sold to Krishna goods on credit Bought of Shyam goods on credit Received from Krishna Paid Shyam cash Discount allowed Cash sales for the month Paid rent 10,000 7,000 500 100 150 225 150 215 10 800 50

Paid Salary

100

SOLUTION
Date 1992 April 1 Particular JOURNAL L.F. Dr. Dr. Amount Cr. Amount 10,000.00 10,000.00

Cash Amount To Capital (Being the amount invested by Ramesh in to business as capital) Bank Account To Cash A/C (Being goods purchased for cash) Purchase Account To Cash A/C (Being good purchased for cash) Cash A/C To Bank A/C (Being cash withdrawn form bank) Krishna A/C To Sales A/C (Being goods sold to Krishna on credit) Purchase A/C To Shyam (Being goods bought from Shyam on credit)

Dr.

7,000.00 7,000.00

Dr.

500.00 500.00

Dr.

100.00 100,00

Dr.

150.00 150,00

2 0

Dr.

225.00 225.00

2 4

Cash A/C To Krishna (Being Cash received from Krishna)

Dr.

150.00 150.00

2 8

Shyam A/C To Cash A/C To Discount (Being cash paid to Shyam and discount allowed)

Dr.

225.00 215.00 10.00

3 0

Cash A/C To Sales A/C Being gods sold for cash Rent A/C Salaries A/C To Cash A/C (Being amount paid for rent & salary) Total

Dr.

800.00 800.00 50.00 100.00 150.00

19,290.00

19,290.00

19,290.00

Advantages of Journal: The chief advantages of the use of the journal are the following: (i) The possibility of errors id reduced. Since the amounts to be debited and credited are written side by side, the two can be compared to see that they are equal. If the accounts are written up directly it is possible that a wrong amount may be written or the amount written on the debit side may be more or less than on the credit side. Along with the entry in the journal a complete explanations is written so that later it would be possible to understand the entry property. Transactions are entered in to journal in the chronological order hence the order in which they occur inters the records permanently.

(ii) (iii)

Limits to the use of the journal It is possible to record every transaction in the journal. This however may make it unwieldy. Therefore the usual practice is to have separate journals or books for different classes of transactions. The reasons for this are the following. (i) (ii) The journal will be too long if all transactions are recorded there. Firms like to ascertain the cash balance everyday; hence they usually record cash transactions directly in a separate book. This obviated the necessity of journalizing cash transactions.

(iii)

By recording different classes of transactions in different books, book-keeping and accounting becomes easier, since, then, entries can often be made in totals.

The accounting equation tells us that in broad categories the accounts will be as follows: (i) (ii) (iii) Assets, indicating the resources which the firm is enjoying. These may be in the form of cash, stock of goods, amounts owing from customers, land,. Building, machinery, etc. Liabilities indicating the amounts which the firm owes an outsider. Capital indicating the amount which the proprietor has invested in the firm, the accretion to it or a reduction in it, Since capital is affected by expenses and gains, there will be two more categories as part of capital. Expenses: the accounts which show the amount which has been spent or even lost in carrying on operations. Incomes: the accounts which show the amounts earned by the firm.

(a) (b)

Alternatively, accounts may be classified in another manner, as shown below: (i) Personal Accounts accounts which relate to persons, debtors or creditors. Examples would be: the account of Ram&Co., a credit customer or the account of Jahveri&Co., a supplier of goods. The capital account is the account of the proprietor and, therefore, it is also personal but a adjustments on account f profit and loss will be made in it. Impersonal Accounts accounts which are not personal such as machinery account, cash account, rent account, etc. These can be further sub-divided as follows: Real Accounts: accounts which will relate to the assets of the firm but not debtors. For example, accounts regarding land, buildings, investments, fixed deposits will be real accounts. Cash in hand and the bank account are also real. Nominal Accounts- accounts which relate to expenses, looses, gains, revenue, etc. like salary account, interest paid account, commission received account. The net result of all the nominal accounts is profit and loss which is transferred to the capital account. Nominal accounts are, therefore, temporary.

(ii)

(a)

(b)

The classification may be illustrated as follows:

Accounts Personal Real Impersonal Nominal

Ledger:
Posting the entries: The journal tells us the accounts to be debited and credited and also the amounts involved. The amount is written on the left-hand side of the account to be debited. In the particulars column the name of the account which will be written, preceded by the word To. The amount will be written on the right-side of the account to be credited; in the particulars column, the name of the other account concerned will be written preceded by the word By. Consider the following entry: March 6 Furniture Account To Modern Furniture Dr. 1,200.00 1,200.00

The amount of Rs. 1,200.00 will be debited to the Furniture Account and credited to Modern Furnitures. In the Furniture Account in the particulars column we shall write To Modern Furnitures. In the account of Modern Furnitures will be written: By Furniture Account. The two accounts will appear as under.:

FURNITURE ACCOUNT
Dr. Date Particulars L.F. Amount Rs. 57 1,200.00 Date Particulars Cr. L.F. Amount Rs.

March To Modern 6 Furnitures

MODERN FURNITURES ACCOUNT

Dr. Date Particulars L.F. Amount Date Rs. Particulars Cr. L.F. Amount Rs.

March By Furniture 6 Account

57

1,200.00

57 is the assumed number of the page on which the entry was presumably made in the journal. Sometimes in the journal there may be two or more accounts to be debited and only one to be credited or vice versa. The entry given below shows that the debt of Rs. 500.00 due from Satish has been discharges by receipt of only Rs. 485.00 cash and by Rs. 15.00 allowed as discount. Cash Account Discount Account To Satish Dr. Dr. 485.00 15.00 500.00

In the Cash Account we shall state To Satish Rs. 485.00, in the Discount Account we shall write To Satish Rs. 15.00 In the account of Satish we may write as follows (on the credit side): By Cash Account By Discount A/C But we may also write By Sundries Rs. 500. The transactions which have been journalized in the previous illustration are posted below: LEDGER CASH ACCOUNT Dr. Date 1992 Apr1 4 24 30 Particulars L.F. Amount Date Rs. 10,000 100 150 800 11,050 Particulars Cr. L.F. Amount Rs. 7,000 485.00 15.00

To Capital A/C To Bank A/C

To Krishnan A/C

1992 Apr2 By Bank A/C

To Sales A/C

11,050

May1

To Balance b/d

3,185 CAPITAL ACCOUNT

1992 Apr1 By Cash A/C 10,000 BANK ACCOUNT 1992 Apr2 To Cash a/c 7,000 7,000
May1 To Balance b/d

Apr4 By Cash a/c 30 By Balance

100 6,900 7,000

6,900 SALES ACCOUNT 500 Apr13 By Krishna A/c 30 By Cash a/c 225 KRISHNA 100 800

1992 Apr3 To Cash a/c 20 To Shyam a/c

Dr. Date

Particulars

L.F.

Amount Rs. 215 10 225

Date

Particulars

L.F.

Cr. Amount Rs. 225 225

1993 To Cash A/C Apr28 To Discount

By Goods A/C

SHYAM
Dr. Date Particulars L.F. Amount Rs. 215 10 225 Date Particulars L.F. Cr. Amount Rs. 225 225

1993 To Cash A/C Apr28 To Discount

By Goods A/C

DISCOUNT ACCOUNT

Dr. Date

Particulars

L.F.

Amount Rs.

Date

Particulars

L.F.

Cr. Amount Rs. 10

1993 Apr28 By Shyam

RENT ACCOUNT
Dr. Date Particulars L.F. Amount Rs. Date Particulars L.F. Cr. Amount Rs. 50

1993 Apr30 To Rent A/C

SALARIES ACCOUNT
Dr. Date Particulars L.F. Amount Rs. 100 Date Particulars L.F. Cr. Amount Rs.

1993 Apr30 To Cash A/C

BALANCING ACCOUNT :At the end of each month or year on any particular day, it may be necessary to ascertain the balance in an account. This is not a too difficult thing to do; suppose a person has bought goods worth Rs. 1,000 and has paid only Rs. 850; he owes Rs. 150 and that is the balance in his account. To ascertain the balance in any account what is done is to add the two sides and ascertain the difference; the difference is the balance. If the credit side is bigger than the debit side, it will be a credit balance. In the other case, it will be a debit balance. The credit balance is written on the debit side as To Balance carried down. After this, the two sides will be equal. The totals are written on the two sides opposite to one another with one line above and two lines below, like this Then the credit balance is written on the credit side as By Balance brought down. This is the opening balance for the new period. The debit balance similarly is written on the credit side as By Balance carried down, the totals then are written on the two sides as shown above and the debit balance written on the debit side as, To Balance brought down, as the opening balance for the new period. It should be noted that nominal accounts are not balanced; the balances in them are transferred to the profit and loss account. Only personal and real accounts ultimately show balances. In the illustrations, given above, one will have noticed, the capital account, the Purchases account, the discount account,

the rent account and the salary account, have not been balanced. The capital account will have to be adjusted for profit and loss and that is why is has not been balanced yet. Subsidiary Books: Purchase Day Book: The purchase day book is used to record goods bought on credit. The sales invoice sent by the selling firm to its customer becomes a purchase invoice to that customer. Since purchase invoices received from different suppliers carry different numbers, they are again numbered serially by the purchaser and to be filled for future reference. The entry of credit purchases in the books of accounts follow a similar pattern to that of credit sales. The net amount of invoice is recorded in the purchases day book and the items are then posted separately to the credit of the personal account of the suppliers opened in the purchases ledger. At the end of the period (month/week) the total of the purchases day book is posted collectively to the debit of the purchase a/c in the General Ledger. Sales Day Book This book is used to record dales on credit. For each credit sale, the seller sends documents to the buyer showing full details of the goods dispatched, price and the terms of payment. This document is known Invoice and to the seller it is known as Sales Invoice. The seller retains one or more copies of each sales invoice for his own use. Examples of some items included in such invoices are given below: (a) (b) (c) Cash Discount; Trade Discount This is a deduction from the catalogue price allowed by the manufacture or wholeseller to the retailer. No entry is required for recording trade discounts. E & O.E. This stands for Errors and Omissions Expected. This indicated that if any error if found, it is liable for adjustment.

PURCHASE RETURNS BOOK Sometimes goods purchased are returned to the supplier. For recording this return it is necessary to use Purchase Returns Book. This is also used for recording empties returned, outward overcharges and allowances received. A debit note is issued advising the dispatcher of the goods returned or the overcharge as the Case may be. Debit note is the document through which the returned entries are made. The items in the purchases returns book are posted to the debit of the suppliers accounts the purchased ledger. To complete the double entry the total of the purchases return book for the period is transferred to the credit of purchases Return Account in the General Ledger.

SALES RETURN BOOK: Sometime goods sold and delivered are returned in full or n part by the customer because of problems of quality etc. For recording this sales return book is used. This book is also used for recording empties returned such as packing cases, drums, etc. A document known as Credit not is used which is sent to the customer advising him that his account has been duly credited. Credit notes are generally printed n red colour. Items of sales return books are posted to the credit of the customers & accounts in the sales ledgers and double entry is completed by posting the total of the items for the period of the debit of sale Return Account (Return Inward) in General Ledger. BILLS RECEIVABLE AND BILL PAYABLE BOOK: Bill accepted by the customers in favour of the concern are entered in Bills Receivable Book whereas the bills accepted by the concern in favour of suppliers are entered in Bills Payable Book. PREPARATION OF TRIAL BALANCE After posting the accounts in the ledger, a statement is prepared to show separetly the debit and credit balances. Such a statement is known as the trial balance. It may also be prepared by listing each and every account and entering in separate columns the totals of the debit and credit sides. Whichever way it is prepared, the totals of the two columns should agree. The agreement indicates reasonable accuracy of the accounting work; if the two sides do not agree there is definitely some errors. OBJECTIVES OF PREPARING TRIAL BALANCE The preparation of trial balance has the following objectives: 1. 2. 3. The trial balance enables on to establish whether the posting and other accounting processes have been carried out without committing arithmetical accuracy of the books. Financial statements are normally prepared on the basis of the trial balance; otherwise the work may be cumbersome. Preparation of financial statement therefore, is the second objective. The trial balance serves as a summary of what is contained in the ledger may have to be referred to only when much detail is required of an account.

The form of the trial balance is simple as shown below: TRIAL BALANCE

Ledger accounts The under-mentioned points may be noted: i) ii) iii) iv) v)

Dr. Amount

Cr. Amount

A trial balance is prepared as on a particular date which should be mentioned at the top. In the first column the name of the account is written. In the next column the total of the debit side of the account concerned or the debit balance, is entered. In the third column the total of the credit side or the credit balance is written. The two columns are totaled at the end.

METHODS OF PREPARING THE TRIAL BALANCE: The various methods are as follows: i) ii) The Total Method: In this method the total of each side of the account is entered respectively in the debit and credit columns of the trial balance. Such a trial balance is known as the gross trial balance. The Balance Method: In this methods, only the debit or credit balances are entered separately in two columns. This is known as the net trial balance.

SIGNIFICANCE OF VARIOUS BALANCES: The credit balance in the goods account indicates sale but this account is incomplete since we must also take in to consideration the stock of goods on hand. The credit balance in the discount account shows that the firm has earned a discount Rs. 5 on the whole. The rent account and the salary account show expenses incurred. We can say briefly that: (a) (b) A debit balance is either an asset (Cash, bank, etc) or expenses (salary, rent, etc); and A credit balance shows the income earned (discount) or liability or the amount invested by the proprietor.

Limitations of trail balance: One should note that the agreement of the trial balance is not a conclusive proof of accuracy. In other words, in spite of the agreement of the trial balance some errors may remain. These may be of the following types:

i) ii) iii) iv) v)

A transaction has not been entered at all in the journal. A wrong amount has been written in both columns of the journal. A wrong account has been mentioned in the journal. An entry has not all been posted in the ledger. An entry is posted twice in the ledger.

Errors and Rectification: Types of Errors: a) Errors of Principles: when a transaction is recorded in contravention of accounting principle like treating the purchase of an asset as an expenses, it is an error of principle. In this case, there if no effect on the trial balance since the amounts are places on the correct side, though in a wrong account. Clerical Errors: These errors arise because of mistakes committed in the ordinary course of the accounting work. These are of three types; Errors of omission: If a transaction is completely or partially omitted from the books of account, if will be a case of error of omission. Examples would be not recording a credit purchase of furniture or not posting an entry into the ledger. Errors of commission: If while making an entry the wrong amount is written either in the subsidiary book or in the ledger, or the entry is made on the wring side of the account, the error will be an error of commission. Compensating Errors: If the effect of the errors committed cancels out, the errors will be called compensating errors. The trial balance will agree. Form another point of view, errors may be divided into two categories. Those that affect the trial balance-because of the errors, the trial balances does not agree; and Those that do not affect the trial balance-it will agree inspite of the errors. The errors that affect the trial balance are the following. i) Wrong casting of the subsidiary books ii) Wrong balancing of an account iii) Posting an amount on the wrong side. iv) Wrong posing i.e. writing the wrong amount. v) Omitting to write the case book balances in the trial balance. vi) Omitting to write the case book balances in the trial balance. vii) Omitting to post the totals of subsidiary books into the ledger. viii) Omitting to write the balance of an account in the trial balances. ix) Writing a balance in the wring column of the trial balance. x) Totalling the trial balance wrongly.

b) i)

ii) iii)

a) b) c)

c)

The errors that do not affect the trial balance are the following: i) ii) iii) iv) v) Omitting an entry altogether from the subsidiary books. Making a entry in the wrong subsidiary books Posting an amount in a wrong account but on the correct side, Suppose an amount to be debited to A is debited to B, the trial balance will still agree. Errors of Principle. Suppose on the purchase of a typewriter, the office expenses account is debited, the trial balance will still agree. Compensating errors: If the effect on one error is cancelled by the effect of some other errors, the trial balance will naturally agree. Suppose an amount of Rs. 10 received from A is not credited to his account and the total of the sales book is Rs 10 in excess, the omission of credit to As account will be made up by the increased credit to the Sales Account: there will not be any effect on the trial balance.

STEPS TO LOCATE ERRORS Even if there is only a vary small difference in the trial balance, the errors leading to it must be located and rectified. A small difference may be the result of a number of errors. The following steps will be useful in locating errors. i) the two columns of the trial balance should be totaled again. If in the place of a number of accounts, only one amount has been written in the trial balance, the list of such accounts should be checked and totaled again, for example, the list of sundry debtors. It should be seen that the cash and bank balances have been written n the trial balance. The exact difference in the trial balance should be established. The ledger should be gone through; it is possible that a balance equal to the difference has been omitted from the trial balance. It is possible a balance equal to half the difference has been written in the wrong column. The ledger accounts should be balances again. The casting of Subsidiary books should be checked again, especially is the difference if Rs. 1, Rs. 10, Rs. 100, etc. If the difference is very big the balance in the various accounts should be compared with the corresponding accounts in the previous period. If the figures differ materially, the causes should be seen; it is possible that an error has been committed. Suppose the sale : account for the current year shows a balance of Rs 32,53,000 where as it was Rs. 36,45,000 last year: it is possible that there is an error in the Sales Account.

ii) iii)

iv) v) vi)

vii) viii)

Posting of the amounts equal to the difference or half the difference should be checked. It is possible that an amount has been omitted to be posted or has been posted on the wrong side. If there is till a difference in the trial balance, a complete checking will be necessary. The posting of all the entries including the opening entry should be checked. If may be better to begin with the nominal accounts.

RECTIFICATION OF ERRORS Errors should never be corrected by overwriting: if, immediately after making an entry, it is clear that an error has been committed, it may be corrected by neatly crossing out the wrong entry and making the correct entry. If however, the error is located after some time, the errors may be as such affect only in account-one sided errors-or they may affect both the accounts involved. ONE SIDED ERRORS The trial balance is affected by one-side errors but not by the other type. One sided errors do not require journal entries. We shall take up the correction or errors through illustration. i) The sales book for November is undercast by Rs. 200. The effect of the error is that the Sales Account has been credited short by Rs. 200, since this account is posted by the total of the sales book; there is no error in the accounts of the customers since they are posted with the amounts of individual sales. Hence only the Sales Account is to be corrected. This will be done by making an entry for Rs. 200 on the credit side. By understanding of Sales Book for November Rs. 200 While posting the discount column on the debit side of the cash book, the discount of Rs. 10 allowed to Ramesh has not been posted. There is no error in the cash book: the total of the discount column presumably has been posted to the discount account on the debit side; the error is one-sided, not crediting Ramesh by Rs. 10. This should now be done by the entry By omission of posting of discount on Rs. 10. Rs. 200 received from Ram have been entered by mistake on the debit side of his account. The error is only in the account of Ram-he should have been credited and not debited by Rs. 200. Not only is to be wrond debit to be removed but also a credit of Rs. 200 is to be given. This can be done by entering Rs. 400 on the credit side of his account.

ii)

iii)

iv)

v)

Rs. 50 were received from Mahesh and were entered on the debit side of the cash book but were not posted to his account. This error affects only the account or Mahesh, Rs. 50 have been omitted from the entry By Omission of posting on Rs. 50. Rs. 51 paid to Mohan has been posted as Rs. 15 to the debit of his account. This also is a one-sided error. Mohan has been debited short by Rs. 36.

Illustration: How would you rectify the following errors in the books of Ram & Co.? 1. 2. 3. 4. 5. 6. 7. Solution: 1. The purchase Account should receive another debit of Rs. 100 since it was debited short previously. To Undercastng of Purchase Book for the month of Due to this error the Returns Inward Account has been posted short by Rs. 50; the correct entry will be: To Undercastng of Returns Inward Book for the months of Rs 50 The Omission of the debit to the Depreciation Account will be rectified by the entry: To Omission of posting on .Rs. 250 The excess debit will be removed by a credit in the Salaries account by the entry. By Double posting on ..Rs. 75 The total of the Purchases Book has been undercast by Rs. 100. The Return Inward Book has been undercast by Rs. 50 A sum of Rs. 250 Written off as depreciation on Machinery has not been debited to Depreciation Account. A payment of Rs. 75 for salaries (to Mohan) has been posted twice to Salaries Account. The total of Bills Receivable Book Rs. 1,500 has been posted to the credit of Bills Receivable Accounts. An amount of Rs. 151 for a credit sale of Hari, although correctly entered in the Sales book, has been posted as Rs. 115. Discount allowed to Satish Rs. 25 has not been entered into Discount Column of the Cash Book but it has been posted to his personal Account.

2.

3.

4.

5.

6. 7.

Rs. 1,500 should have been debited to the Bills Receivable Account and not credited. To correct the mistake, the Bills Receivable Account should be debited by Rs. 3,000 by the entry; To Wrong posting of B/R received on.. Rs. 3,000:. Due to this error Hari has been debited short by Rs. 36. The correcting entry is: To Difference in amount posted on ..Rs. 36. Due to this error, the Discount Account has been debited short by Rs. The required entry is. To Omission of discount allowed to Satish on Rs. 25.

Two sided errors: So far we have discussed the correction of the errors which affect any one account. It wll have been notices that the rectifying entries were not complete journal entries: in fact the rectifying entry is made directly in the account concerned. We shall now take up the correction of errors involving both the accounts through illustrations. i) The purchase of machinery for Rs. 2,000 has been entered in the purchases book. The effect of the entry is that the account of the supplier has been credited by Rs. 2,000 which is quite correct. But the debit to the purchases Account is wrong the debit should have been to the Machinery Account. To rectify the error the debit in the Purchases Account has to be transferred to the Machinery Account. The correcting entry will be to credit the Purchases Account and debit the Machinery Account, Please see the three entries made below, the last entry rectifies the error. Purchase Account To Creditor Machinery Account To Creditor Machinery Account To Purchase Account Rs. Dr. 2000 Dr. 2000 2000 Dr. 2000 2000 Rs. 2000

Wrong Entry Correct Entry Rectifying Entry

ii)

Rs. 100 received form Kamal Kishore have been credited in the account of Krishnan Kishore. The error is that there is a wrong credit in the account of Krishnan should be debited to remove the wrong credit and Kamal Kishore should be credited. The following three entries make this clear. Cash Account To Krishnan Kishore Rs. Dr. 100 Rs. 100

Wrong Entry

Correct Entry Rectifying Entry

Cash Account To Kamal Kishore Krishnan Kishore To Kamal Kishore

Dr. 100 100 Dr. 100 100

iii)

The sale of old machinery. Rs. 1,000 has been entered in the sales book. P this entry the account f the customer has been correctly debited by Rs. 1,000. But instead of crediting the Machinery Account Sales Account has been credited. To rectify the error this account should be debited and the Machinery Account credited. See the three entries given below: Customers Account To Sales Account Customer Account To Machinery Account Sales Account To Machinery Account Rs. Dr. 1,000 Dr. 1,000 1,000 Dr. 1,000 1,000 Rs. 1,000

Wrong Entry Correct Entry Rectifying Entry

Illustration: The following errors were found in the books of Ram Prasad & Sons. Give the Necessary entries to correct them. 1. 2. 3. 4. 5. 6. 7. Rs. 500 paid for furniture purchased has been charged to ordinary purchases A/c. Repair made were debited to Building A/c for Rs. 50 An account of Rs. 100 withdrawn by the proprietor for his personal use has been debited to Trade Expenses A/c. Rs. 100 paid for rent debited to Landlords A/c Salary Rs 125 paid to a clerk due to his has been debited to his personal account. Rs. 100 received from Shan & Co. has been wrongly entered as from Shaw & Co. Rs. 700 paid in cash for a typewriter was charges to Office Expenses Account.

SOLUTION

RECTIFYING JOURNAL ENTRIES Errors 1. Particular Furniture A/c To Purchase A/c (Correction of worn debit to purchases A/C for furniture purchased) Repairs A/c To Building A/c (Correction of Wrong debit to Building A/C for repairs made) Drawing A/c To Trade Expenses A/c (Correction of wrong debit to Trade Expenses A/c for cash withdrawn 100 by the proprietor for his personal use.) Rent A/c To Landlords Personal A/c (Correction of wrong debit to Landlords for rent paid) Salaries A/c To Landlords personal A/c Correction of wrong debit to clerks personal A/c for salaries paid) Shan & Co. To Shaw & Co. (Correction of wrong credit to Shaw & Co. instead of Shan & Co.) Typewriter A/c To Office Expenses A/c (Correction of wrong debit to Office Expenses A/c for purchases of typewriter) L.F. Dr. Dr. Rs. 500 Cr. Rs. 500

2.

Dr.

50 50

3.

Dr.

100 100

4.

Dr.

100 100

5.

Dr.

100 100

6.

Dr.

100 100

7.

Dr.

700 700

Correcting the Errors Through Suspense Account:

The method of the correction errors indicated so far is appropriate when the errors have been located before the according period is closed. After the correction, the trial balance will agree. Sometimes, trial balance is artificially made to agree by opening a suspense account. The suspense Account will be debited if the total of the credit column of the trial balance exceeds the total of the debit column, it will be credited in the other case. Illustration Correct the following errors (1) without opening a suspense Account, and (2) opening a Suspense Account: a) b) c) d) e) f) The Sales book has been shorted Rs 100 short Goods worth Rs. 150 returned by Green & Co., have not been recorded any where. Goods purchased, Rs. 250 have been posted to the debit of the suppler, Gupta & Co. Furniture purchased from Gulab & Bros. Rs. 1000 has been entered in purchases Day book. Discount received from Red & Black, Rs. 15 has been entered n the Discount Column of the Cash Book. Discount allowed to G. Mohan & Co., Rs 18 has not been entered in the Discount Column of the Cash Book. The Account of G. Mohan & Co. has however, been correctly is not posted.

Solution: (1) If a suspense account is not opened: a) Since sales book has been cast Rs. 100 short, the sales Account has been similarly credited Rs. 100 short. The correcting entry is to credit the Sales Account by Rs. 100 as By Wrong totaling of the sales Book Rs. 100. b) To rectify the omission the Returns Inward Account has to be debited and the account of Green & Co. credited. The Entry Returns Inward Account To Green & Co. (Goods returned by the firm, previously omitted from the Returns Inward Book) Dr. 150 150

c) Gupta & Co. have been debited Rs. 250 instead of being credited. This account should now by Rs. 500 to remove the wrong debit and to give the correct credit, the entry will be on the credit side By Error in posing Rs. 500. d) By this error purchases Account has been debited by Rs. 1000 whereas the debit should be given to the furniture Account. The correcting entry will be: Furniture Account Dr. 1000

To purchase Account (Correction of the mistake by which purchases Account was debited instead of the Furniture Account)

1000

e) The Discount Rs. 15 received from Red & Black should have been entered on the credit side of the cash book. Had this been done, discount Account would have been credited (through the total of the discount column) and Red & Black would have been debited. This entry should now be made. Red & Black To discount Account (Rectification of the error by which the discount allowed by the firm was not entered in the Cash book) Dr. 15 15

f) In this case the Account of the customer has been correctly posted: the Discount Account has been debited Rs. 18 short since it has been omitted from the discount column on the debit of the cash book. The discount account should be now debited by the entry. To Omission of entry in the Cash Book Rs. 182) If a suspense account is opened. a) Suspense Account To Sales Account (Being the correction arising from undercasting of Sales Day Book) Returns Inward Account To Green & Co. (Being the recording of unrecorded returns) Suspense Account A/c To Gupta A/c (Being the correction of the error by which Gupta & Co. were debited instead of being credited by Rs. 250) Furniture A/c To Purchase A/c (Being the correction of recording purchasing of furniture as ordinary purchases) Dr. 100 100

b)

Dr.

150 150

c)

Dr.

500 500

d)

Dr.

1000 1000

e)

Red & Black To Discount Account (Being the recording of discount omitted to be recorded) Discount Account To Suspense Account (Being the correction of omission of the discount allowed from Cash BookCustomers account already posted correctly)

Dr.

15 15

f)

Dr.

18 18

Suspense Account Date Particular To Sales A/C Folio Amount Rs. P. 100.00 Date Particular Folio Amount Rs. P. By Difference in 582.00 Trail balance (Balancing Figure) By Discount A/C 18.00 600.00

To Gupta & Co.

500.00 600.00

Final Accounts:
Manufacturing Account: Manufacturing Account is prepared for performing manufacturing operations. The aim of manufacturing account is to find out of the cost of goods manufactured. The following items are required to be debited to the manufacturing account. a) b) c) d) Cost of raw materials consumed i.e. opening stock of raw materials plus purchase less closing stock of raw material. Amount of direct wages. Chargeable expenses: i.e expenses which are considered to have been directly incurred in connection with the manufacture. Indirect manufacturing expenses i.e depreciation of factory assets, factory rent etc.

e)

Opening work in progress is credited.

Only item closing work in progress is credited. Any excess of opening WIP over closing WIP may be debited to manufacturing account. After balancing between debit and credit side, the balance represents Trading, Profit and Loss Account.

Trading Account: Gross profit or loss is calculated through Trading Account. The items of debit and credit of trading account are given below. Debit Side a) Opening stock of finished goods b) Cost of goods manufactured c) Purchases of finished goods less returns Credit Side Sales less returns Closing stock of finished goods

Besides expenses incurred for putting the product into salable condition it should also be included in the debit side of Trading Account. Balancing of debit and credit side, represent balancing figure transferred to Profit and Loss Account. Profit and Loss Account : Net Profit is calculated by drawing up the profit and loss account. All administrative, selling, distribution expenses, provisions are debited to profit and loss account. Incomes of various nature, i.e. sales, commission, rent received, interest on investments are credited to profit while in case of gross loss it is debited. The net loss or net profit in case of proprietary concerns and partnership firms is transferred to the capital account of the proprietor or partners in the Balance Sheet. Profit and Loss Appropriation Accounts: Net profit or loss is brought down to credit or debit side of profit and loss appropriation account. Items which appropriations of profits such as salary to partners, interest on capital commission to partners, transfer to reserve etc., should be shown in profit and loss appropriation account. Balance Sheet : It is the classified summary of balances remaining in the General Ledger after all the income and expenditure accounts have been taken care of by transfer to Manufacturing Trading and Profit and Loss account. It shows readily the financial position of the business at a given date by disclosing the amount of capital contributed and how the same has been invested and the values of assets and liabilities and their nature.

The capital and liabilities of the business are shown on the left hand side. The order of performance so far as assets are concerned requires that these be arranged in the following order: i) Fixed Assets, ii) Floating or current assets iii) Fictitious assets. Liabilities concerned the order usually adopted as 1) Proprietary Interest, consisting of capital, Reserves and undistributed, 2) Long term loans, a distinction being made between those secured and those unsecured 3) Current liabilities and provisions. Form Balance Sheet as at ..XYZ Co. Ltd. LIABILITIES Share Capital Reserve & Surplus Secured Loans Unsecured Loans Current Liabilities & Provisions Illustration : The following is the Trail Balance of B. Govil on 30th June, 1975:Dr. Rs. Cash in hand Cash at Bank Purchases Accounts Sales Account Returns Inwards Account Returns Outwards Account Wages Account Fuel and Power Account Carriage on Sales Account Carriage on Purchase Account Stock Account 1st, July, 1974 Buildings Account Freehold Land Account Machinery Account Patents Account Salaries Account General Expenses Account Insurance Account Drawing Account Capital Account 540 2,630 40,675 680 500 10,480 4,730 3,200 2,040 5,760 30,000 10,000 20,000 7,500 15,000 3,000 600 5,245 71,000 Cr. Rs. 540 98,780 RS. ASSETS Fixed Assets Investments, Current Loans & Advances Miscellaneous Expenses (not written off)

Sundry Debtors Sundry Creditors

14,500 6,300 1,76,580 1,76,580

Taking into account the following adjustments, prepare Trading and Profit and Loss Account and the Balance Sheet :a) b) c) d) e) f) Stock on hand 30th June 1975 is Rs. 6,800. Machinery is to depreciated at the rate of 10% and patents at the rate of 10%. Salaries for the month of June, 1975 amounting to Rs. 1,500 were unpaid. Insurance includes a premium of Rs. 170 on a policy, expiring on 31st December 1975. Wages include a sum of Rs 2,000 spent on the erection of a cycle shed for employee and customers. A provision for Bad and doubtful Debits is to be created to the extent of 5 per cent on sundry debtors.

Trading and Profit and Loss Account for the year ended 30th June 1975. Dr. Rs. To Stock Account To Purchases Account Less Returns Outwards To Wages Account To Fuel & Power A/c To Carriage on Purchase A/c To Gross Profit trans Ferred to Profit & Loss A/c 40,675 500 8,480 4,730 2,440 43,715 1,04,90 0 To Salaries A/c Add Outstanding 15,000 1,500 16,500 By Gross Profittransfer Trading A/c 1,04,90 0 43,715 Rs. 5,760 By Sales A/c Less Returns Inwards 40,175 By Stock Account Rs. 98,780 680 98,100 6,800 Cr. Rs.

To Carriage on Sales A/c To General Expenses A/c To insurance A/c Less Prepaid To Provision for Bad and Doubtful Debtors A/c To Depreciation A/c Machinery Patents To Net Profit-transfer to capital Account

3,200 3,000 600 85 515

725 2,000 1,500 3,500 16,275 43,715 43,715 Rs. Rs. 540 2,630 14,500 725 13,775 85 6,800 10,000 32,000 20,000 2,000 7,500 1500 18,000 6,000 89,830

Balance Sheet on B. Govil as on 30th June, 1975 Liabilities Rs. Rs. Assets Current Assets: Sundry Creditors 6,300 Cash in Hand Salaries Outstanding 1,500 Cash at Bank Capital: Sundry Debtors Balance in the Less Provision for Bad beginning 71,000 and Doubtful Debts Add Profit during the year 16,275 87,275 Insurance Prepaid Less Drawings 5,245 82,030 Stock on hand Fixed Assets: Freehold Lad Building Machinery Less Depreciation Patents Less Depreciation 89,830

Illustration : From the following Trail Balance of A. Atmaram as at 31st December, 1973. You are required to prepare a Trading and Profit and Loss Account for the year ended 31 st Dec., 1973 and a Balance Set as at that date, after making the necessary adjustments. Trail Balance Dr. Rs. A Atmarams Capital Account A.Atmarams Drawing Plant and Machinery (balance 1st Jan 1973) Plant and Machinery (balance on 1st July, 1973) Stock on 1st January, 1973 Purchases Returns Inwards Sundry Debtors Furniture and Fixtures Freight and Duty Carriage Outwards Rent, Rates and Taxes Printing and Stationery Trade expenses Sundry Creditors Sales Returns Outwards Postage and Telegrams Provisions for Doubtful Debts Discounts Rent of premises sub-let for year up to 30th June, 1974 Insurance charges Salaries and Wages Cash in hand Cash at Bank 6,000 20,000 5,000 15,000 82,000 2,000 20,000 5,000 2,000 500 4,600 800 400 10,000 1,20,000 1,000 800 400 800 1,200 700 21,300 6,200 20,500 2,13,400 Adjustments: 1. 2. 3. Stock on 31st December, 1973, was valued at Rs. 14,600. Write off Rs. 600 as Bad Debts. The Provisions for Doubtful Debts is to be maintained at 5 percent on Sundry Debtors. 2,13,400 Cr. Rs. 80,000

4. 5. 6. 7.

Create a Provision for Discounts on Debtors and Reserve for Discounts on Creditors at 2 per cent. Provide for depreciation on Furniture and Fixture at 5 per cent per annum, and on Plant and Machinery at 20 per cent per annum. Insurance Prepaid was Rs. 100. A fire occurred on 25th December, 1973 in the godown and stock of the value of Rs. 5,000 was destroyed. It was fully insured and the Insurance Company admitted the claim in full. A. Atmaram

Trading and Profit and Loss Account for the year ended December 31, 1973 Dr. To Stock To Purchase Less Returns To Freight and Duty To Gross Profit transferred to Profit & Loss Account Rs. 15,000 By Sales Less Returns 81,000 2,000 By Stock By Insurance Co. 39,600 (Goods destroyed) 1,37,60 0 To Salaries and Wages To Rent, Rates & Taxes To Printing & Stationery To Trade Expenses To Postage & Telegrams To Insurance Charges Less prepaid To Depreciation: Plant & Machinery Furniture & Fixture To Provision for Doubtful Debts Required Add Bad Debts Less Existing Provision 700 100 4,500 250 1,000 600 1,600 400 21,000 By Gross Profittransfer from Trading A/c 4,600 By Discounts 800 By Reserve for Discount on Creditors 400 By Rent Receive 800 Less Receive in Advance 600 4,750 1,20,000 2,000 Cr. Rs. 1,18,00 0 14,000 5,000 1,37,60 0

82,000 1,000

39,600 800 200 1,200 600 600

1,200

To Provision for Discount on Debtors To Carriage Outwards To Net Profit-transfer to capital Account

380 500 5,870 41,200 41,200

Balance Sheet of A Atmaram as at December 31st, 1973 Liabilities Sundry Creditors Less Reserve for Discounts Rent Received in Advance Rs 10,000 200 600 Rs. Assets Rs. Rs. 6,200 20,500 20,00 0 for 1,000 19,00 0 for 380 14,620 100 5,000 20,00 0 5,000 25,00 0 4,500 5,000 250 18,620

Current Assets 9,800 Cash in Hand Cash at Bank Sundry Debtors Less Provision Doubtful Debts

Capital: Balance of 1st Jan 1973 Net Profit Less Drawings

80,000 5,870 6,000 Less Provisions Discounts Stock 79,87 Insurance prepaid 0 Insurance Company Fixed Assets Plant and Machinery: 1st Jan, 1973 Additions Less Depreciation Furniture and Fixtures Less Depreciation 90,27 Total 0

20,500 4,750 90,270

Total

Bills of Exchange
Credit is an important aspect in trade. Goods are sold or bought on credit. In such situations the value of goods will be received or paid only at a future date. A written document is prepared for acknowledge the amount receivable or payable. This document is known as bill of exchange. Example: If Kaman sells goods on credit to Vijayan, the buyer becomes the debtor. In this case, Kaman draws a bill of exchange on Vijayan for the amount due directing to pay the amount at a certain future date. Vijyan accepts the order by signing it with or without the word Accepted Section 5 of the Negotiable Instruments Act defines a Bill of Exchange as an instrument in writing containing an unconditional order signed by the market, directing a certain person to pay a certain sum of money only to or to the order of a certain person r the bearer of the Instrument. Essentials of Bills of Exchange 1) 2) A bill of Exchanger is always in writing. It is an unconditional order made by the drawer (creditor) on the drawer (debtor) to pay a certain sum of money. The person drawing the bill is called drawer and the person to whom the order is made is called drawee. The drawer becomes the Acceptor when the bill is accepted by him. For the drawer the bill is known as Bill Receivable and for the acceptor it to Bill Payable. The instruments may be drawn either payable to a particular person or his order or to the bearer. The bill of exchange may be drawn payable either on demand or after the expiry of a certain period. In the former case it is called Demand Bill and in the latter case it is called Time Bill. For Time Bill a period of 3 days known as grace days will have to be added to find out the due date.

3) 4)

Section 4 of the Negotiable Instruments Act defines a promissory note as an instrument if 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 the order of a certain person, or to the bearer of the instrument Noting Charges When a bill is dishonored, the holder of the bill should present the bill through the Notary Public and the facts of the dishonor are noted by the Notary Public on the reverse of the bill. The Notary Public will present the bill for payment and if payment is not forthcoming, not ehte fact on the bill. The Noting must be recorded within the reasonable time after the dishonour and must contain the fact of dishonour, the date of dishonour, the reasons if any, given for such dishonour and the noting charges. The service rendered by the Notary public is called noting charge. This charge is paid by the holder of the bill in the beginning and the same will be collects from the acceptor ultimately.

Accounting treatment for the bill of exchange is explained in the following illustration. Illustration 1 A sold goods to B for Rs. 10,000. A drew a bill of exchange for Rs. 10,000 on B and the bill was duly accepted by B and returned to A. Pass necessary entries in the book of A and B in the following cases. Case 1 : Case 2: On the due date the bill was honoured. On the due date the bill was dishonoured.

Case 3: A discount the bill with his banker for Rs. 9,800 and on the due date the bill was (a) honoured (b) dishnoured and the banker has paid a noting charges Rs. 100 Solution: Journal Entries In the books of A On sale of goods B a/c To Sales a/c On receipt of the bill Bills Receivable a/c Dr. To B a/c In the books of B Dr. 10,00 0 10,000 Purchase a/c To A a/c Dr. 10,000 10,000

10,00 0 10,000

A a/c To Bills Payable a/c

Dr. 10,000 10,000

First two entries are common in all the three cases. Case 1 On honouring the bill Cash a/c Dr. 10,000 To Bills Receivable a/c 10,000 Case 2 On dishnouring the bill B a/c Dr. 10,000 To Bills Receivable a/c 10,000 Bill Payable a/c Dr. 10,000 To Cash a/c Bills pyable a/c Dr. 10,000 To A a/c 10,000

10,000

Case 3 (a) On discounting the bill Cash a/c Dr. 9,800 Discount a/c Dr. 200 To Bills Receivable a/c On houring the bill No Entry

No Entry 10,000 Bills Payable a/c Dr. 10,000 To Cash a/c 10,000 No Entry

Case 3(b) On discounting the bill Cash A/c Dr. 9,800 Discount a/c Dr. 200 To Bills Receivable a/c 10,000 On dishonouring the bill B a/c Dr. To Bank Illustration 10,000 10,000

Bills Payable a/c Dr. 10,000 Noting Charges 100 To A a/c 19,100

X sold goods to Y for Rs. 10,000. X purchased goods from Z for Rs. 10,000. X drew a bill of exchange for Rs. 10,000 on Y and the bill was duly accepted by Y and returned to X. This bill was endorsed by X infavour of Z. Pass necessary journal in the books of X, Y and Z in the following cases: Case 1:On the due date the bill was honoured. Case 2:Z discounted the bill with his banker for Rs. 9,800 and on the due date the bill was dishnoured and the banker has paid a noting charge of Rs. 100. Solution Journal entries in the books of X Y a/c To Sales (Being goods sold) Purchases a/c To Z a/c (Being gods purchased) Bills Receivable /ac Dr. 10,000 10,000

Dr.

10,000 10,000

Dr.

10,000

To Y a/c (Being the bill received) Z a/c To Bills Receivable a/c (Being the bill endorsed to Z) In addition to above entries Case 1 No entry Dr. 10,000

10,000

10,000

Z the holder of the bill, presented the bill for payment and the payment has been made by the acceptor, Mr. Y. Case 2 Y a/c Dr. 10,100 To C a/c 10,100 (Being bill dishonored by B and banker paid noting charges) Journal Entries In the books of Y Purchase a/c Dr. To X a/c (Being the goods purchased X a/c To Bills Payable a/c (Being the bill accepted) In addition to above entries Case 1 On honouring the bill Bills Payable a/c To Cash a/c Case 2 On dishonouring the bill Bills Payable a/c Dr. 10,000 Noting Charges a/c Dr. 100 To X a/c (Being bill dishonoured and noting charges paid) Journal Entries in the books of Z Dr. 10,000 10,000 Dr. 10,000 10,000 10,000 10,000

10,100

X a/c To Sales a/c (Being the goods sold) Bills Receivable a/c To X a/c (Being the bill received) Bank a/c Discount a/c To Bills Receivable a/c In addition to the above entries,

Dr.

10,000 10,000

Dr.

10,000 10,000

Dr.

9,800 200 10,000

Case 1 No Entry As the bill is honoured, need not pass any entry in his books. Case 2 X a/c Dr. 10,100 To Bank a/c 10,100 (Being the bill dishonoured and noting charges paid by banker to be borne) Renewal of a bill The acceptor should pay the bill on the maturity date. In case if the acceptor is not in a position to apy the bill on the maturity date, he can request the drawer of the bill to renew the bill for a further period acceptable to the drawer. In this case, the old bill will be cancelled and a new bill wil be drawn and accepted. Cancellation of the old bill is treated as bill dishonoured and required journal entry is palled for the dishonour. While drawing a new bill, the drawer normally used to charge a sum of s interest and the interest may be collected from the acceptor in cash or it will be added with the new bill. Interest charges by the drawer is an income and it is an expense to the acceptor. The entry for the interest is : Acceptor To Interest Interest To Drawer Illustration Akbar sold goods to Bharathan for Rs. 10,000. Bharathan accepted a bill for Rs. 10,000 drawn by Akbar. On the due date, Bharathan approached Akbar and requested him to cancel the original bill and ot draw a new bill for Rs. 10,250 (including interest) which is agreed by Akbar. On the due date the second bill was honoured. Show the journal entries in the books of Akbar and Bharathan. A/c A/c A/c A/c Dr / / Dr / / In the books of drawer In the books of drawee

Solution Journal Entries in the books of Akbar Bharathan a/c Dr. To Sales a/c (Being the goods sold) Bills Receivable a/c Dr. To Bharathan a/c (Being the bill received) Bharathan a/c Dr. To Bills Receivable a/c (Being the bill cancelled) 10,000 10,000 10,000 10,000

10,000 10,000

Bharathan a/c Dr. 250 To Interest a/c (Being interest renewal of bills) Bills Receivable a/c Dr. To Bharathan a/c (Being new bill received) Cash a/c Dr. To Bills Receivable a/c (Being new bill honoured) 10,250

250

10,250 10,250 10,250

Journal entries in the books of Bharathan Purchase a/c Dr. To Akbar a/c (Being goods purchased) Akbar a/c Dr. To bills Payable a/c (Being bill accepted) Bills Payable a/c Dr. To Akbar a/c (Being bill cancelled) Interest a/c Dr. 10,000 10,000 10,000 10,000 10,000 10,000 250

To Akbar a/c (Being interest for renewing old bill) Akbar a/c Dr. To Bills Payable a/c (Being new bill accepted) Bills Payable a/c Dr. To Cash a/c (Being the bill honoured) Retiring the Bill 10,250

250

10,250 10,250 10,250

Sometimes the acceptor may approach the holder of the bill to make payment for discharging the bil before the maturity period. Discharging the bill before the maturity period is known as retiring the bill. As the acceptor pays the bill before the maturity period, the holder allows discount to the acceptor. The discount is called rebate on bill. The amount of discount allowed is based on the unexpired portion of the bill period, amount of the bill and rate of discount agreed by the holder and the acceptor. The accounting entries for retiring the bill are: Cash a/c Dr. Rebate or Discount a/c To Bills Receivable a/c Bills Payable a/c Dr/ To Cash a/c To Rebate or Discount a/c / / In the books of the holder / / /

In the books of the acceptor.

Insolvency If the accepted becomes insolvent, the holder of the bill cannot get the full amount of the ill. In this case the bill will be deemed to have been dishonoured and the entry for dishnour will be passed. The holder of the bill will get partial payment from the estate of the insolvent and the balance is treated as bad debts or written off. The accpetor credits the unpaid portion of the amount due to the holder of the bill either to the profit and loss Account or to the Deficiency Account. Illustration Arvind owes Babu Rs. 42,000. On 1st January 1995 he accepts a bill for 3 months for Rs. 40,000 in full settlement. On the same date Babu discounts the bill from his banker at 6% p.a. Before the due date, Arving becomes bankrupt and Babu receives first and final dividend of 20 paise in the rupee. Show journal entries in the Books of Babu and Arvind.

Solution Journal entries in the books of Babu 1995 Bills Receivable a/c Dr. 40,000 Jan 1 Discount a/c Dr. 2000 To A a/c (Being bill received from A) 1995 Bank a/c Dr. Jan 1 Discount a/c Dr. To Bills Receivable a/c (Being bill discounted) 1995 Arvind a/c Dr. April To Bank a/c 14 To Discount a/c (Being bill dishonoured) 38,400 600 40,000 42,000 40,000 20,00

42,000

1995 Bank a/c Dr. 8,400 April Bad debts a/c Dr. 33,600 14 To Arvind a/c 42,000 (Being 20% of the amount due from Arvind received) Journal entries in the books of Arvind 1995 Babu a/c Dr. Jan 1 To Bills Payable a/c To Discount a/c (Being bill dishonoured) 1995 Bills Payable a/c Dr. April Discount a/c Dr. 4 To Babu a/c (Being bill dishonoured) 42,000 40,000 2,000 40,000 2,000 42,000

1995 Babu a/c Dr. 42,000 April To Babu a/c 4 To Deficiency a/c (Being 20 paise in a rupee paid to Babu) Accommodation bill

8,400 33,600

Bill of exchange drawn and accepted for trading activity is known as trade bill. Apart from the trade bill, an individual may accept a bill drawn by another person by mutual consent for helping

the other person n creating the funds by discounting the bill and the amount may be utilized either by one person or by both. These types of bills are drawn and accepted for the purpose of accommodating another person and the bills are known as accommodation bill. The discount loss in discounting bills with the banker will be shared by the parties to the bill in the same proportion in which they have shared the proceeds of the bill. The accounting treatment for accommodation bills is similar to trade bills. Illustration Ratnam for the mutual accommodation himself and Sanjay, draws upon the latter a bill of exchange at 3 months date for Rs. 50,000. The bill is discounted by Ratnam at 12% and half the proceeds are remitted to Sanjay. Sanjay, at the same time, draws a bill of exchange at 3 months on Ratnam for Rs. 25,000. After securing Ratnams acceptance the bill is discounted at 12% by Sanjay who remits half the proceeds to Ratnam. Sanjay becomes bankrupt before the due date of his acceptance and Ratnam receives a first and final dividend of 40% in the rupees in full satisfaction. Show the journal entries and prepare ledger accounts in the books of both the parties. Solution Journal entries in the books of Ratnam. Bills Receivable a/c Dr To Sanjay a/c (Being bill received from Sanjay) Bank a/c Discount a/c To Bills Receivable a/c (Being the bill discounted) Dr. Dr. 50,000 50,000 48,500 1,500 50,000

Sanjay a/c Dr. 25,000 To Bank a/c 24,250 To Discount a/c 750 (Being half of the proceeds remitted to Sanjay and discount charges proportionately) Sanjay a/c Dr. 25,000 To Bills Payable a/c (Being bill accepted drawn by Sanjay) Bank a/c Discount a/c To Sanjay a/c Dr. Dr. 12,125 375 12,500 25,000

(Being amount received from Sanjay and proportiate Charged by him) Bills Payable a/c To Ban a/c (Being the bill honoured) Dr. 25,000 25,000

Sanjay a/c Dr. 50,000 To Bank a/c (Being Sanjay dishonoured his acceptance)

50,000

Bank a/c Dr. 15,000 Bad debts a/c Dr. 22,500 To Sanjay a/c 37,500 (Being 40% of the amount due from Sanjay received) Sanjay Account Dr. To To To To Bank Discount Bills Payable Bank Rs. 24,250 750 25,000 50,000 1,00,000 To Balance b/d 37,500 37,500 Journal entries in the books of Sanjay Ratnam a/c To Bills Payable (Being the bill accepted) Dr. 50,000 50,000 By By Bank Bad Debts By By By By Bills Receivable Bank Discount Balance c/d Cr. Rs. 50,000 12,125 375 37,500 1,00,000 15,000 22,500 37,500

Bank A/c Dr. 24,250 Discount a/c Dr. 750 To Ratnam a/c 25,000 (Being amount received from Ratnam and discount charged)

Bills Receivablle a/c Dr. 25,000 To Ratnam (Being acceptance received from Ratnam) Bank a/c Discount To Bills Receivable a/c (Being the bill discounted) Dr. Dr. 24,250 750

25,000

25,000

Ratnam a/c Dr. 12,500 To Bank a/c 12,125 To Discount a/c 375 (Being amount remitted to Ratnam and discount adjusted) Bills Payable a/c Dr. To Ratnam a/c (Being the bill dishonoured) 50,000 50,000

Ratnam a/c Dr. 37,500 To Bank a/c 15,000 To Deficiency a/c 12,500 (Being amount due to Ram discharged by payment of 40% of his dues)

Final Accounts of Non Trading Concerns Introduction Maintaining proper accounting records is essential not only to the trading concerns but also to the non-trading concerns. The educational institutions, sports and recreatin clubs and charitable institutions and societies/associations interested in the production of art, culture, education and recreation and which are not profit seeking are known as non Trading concerns. Systematic accounting records essential for avoiding or minimizing the possibilities of misappropriation and embezzlements and to reveal to cash and income position of the institution. The non trading concerns usually maintain the following books. a. b. c. d. Register of members. Minutes book Receipts book Payment book

Like any trading concerns of final accounts prepared at the end of the year consists of a (i) receipts and payments account (ii) Income and expenditure account and (iii) a balance sheet. Revenue/capital receipts and payments: Any sum received by a non-trading organization which is recurring by nature such as subscription, fees, interest rent etc. is known as revenue receipt. The revenue receipt is the income out of which the day to day expenses of the organization are met. The recurring expenses to meet day to day obligations in the organization are known as revenue payments. Any receipts is a lump sum, received once in a way or receive for a specific purpose is a capital receipt. The amount so received is credited to the specific fund (i.e. Tournament Fund) or to the General Fund, known as capital fund. Any expenditure incurred in the acquisition of assets, repayment of a long term liability etc. is known as capital payments. Receipts and payments Account Receipts and payments account is a summary of cash transactions made during the year. It shows the cash/bank balance at the end of the year. Income and Expenditure account is summary of income and expenditure during the year. It consists of revenue items only. At the end of the year it shows surplus of income over expenditure or vice versa.

Difference between receipts and payments account and Income and Expenditure Account. Receipts and payments Account 1. It is a real account. 2. It is like a cash boo 3. Receipts are recorded in the debit side of this account. 4. Payments are recorded in the credit side of this account 5. This account starts with the opening balance. Balance in the beginning represents cash in hand in the beginning. 6. Balance at the end shows cash inhand at the end or cash overspent. 7. Both capital and revenue items are recorded in this account. Income and Expenditure Account 1. It is a nominal account. 2. It is like a trading and profit and loss account. 3. Expenses are recorded in the debit side of this account. 4. Incomes are recorded in the credit side of this account. 5. No balance in the beginning in this account. 6. Balance at the end shows excess of income over expenditure of vice versa. 7. Revenue items are only recorded in this account.

Accounting treatment of some important items : 1. Legacy:

This is the amount donated to the non-trading concern by means of a will. It is recorded in Receipts and payments account and is not considered as income because it is nonrecurring in nature. However, legacy of small amount may be considered as income. 2. Subscription:

It is a major part of the income of the non-trading concern. It is recurring in nature. In non-trading concerns recurring receipts are treated as income. 3. Donations:

It is the amount received from some person, firm, company or any other body by sway of a gift. It is shown in receipts and payments accounts of the year. If a donation is received for a specific purpose (donation for building, donation for conducting specific events sports, annual day celebration etc.) It is in the nature of a capital receipt credited to a separate Fund account and shown in the balance sheet. The non trading concern has to sulfill the purpose for which the donation is received. Hence expenditure incurred out of this fund s deducted and the balance is shown in the Balance sheet. Sometimes, the donation is invested in securities, and the income interest earned is added with the investment. The investment appears in the assets side of the balance sheet.

If the donation is not for a specific purpose, it is known as a general donation. General donation of a big amount is capitalized and not shown as income as it is non recurring in nature. Donations of a small amount may be expected every year. So this may be considered as income during the year. 4. Entrance fee/Life Members fees:

It is receipt and recorded in the receipts and payments account. This is paid only once by the members. It is non recurring in nature. The recurring receipts are only treated as income. Hence the entrance fee is capitalized, Similarly, life members fee are also paid only once by members, and hence not a revenue receipt. 5. Sale of old assets:

The amount realized by the sale of old asset is shown in the receipt and payments account of the year in which the assets are sold. But the profit or loss on sale of such assets is surplus and is shown in the income and expenditure account. 6. Sale of old newspapers, journals, magazines etc:

This appears in the receipts and payments account and is considered as income and recorded in the credit side of the Income and Expenditure account. Selling old newspapers is a routine one and is justified to consider it as income. 7. Sale of sports materials:

The proceeds by sale of sports materials are shown in the receipts and payments accounts. Since sale of sports materials is the regular one for any sports club, the sales proceeds is treated as income and shown in the credit side of the income and expenditure account. 8. Payment of honorarium:

It is the revenue expense and is shown in the expenditure side of the income and expenditure account. It is the amount paid t the person who is not the employed of the organization paying the amount. Special Funds in non trading concerns: In non trading concerns, specific funds are created for specific purpose (prize fund for giving prizes, tournament fund for conducting tournaments, charity fund for clarity etc.) and they are invested in specific securities. The income derived from the investment is added to that fund and is not treated as income.

Example Prize Fund Prize fund investment Interest on Prize Fund investment for the year Prize given

Rs. 20,000 15,000 2,000 8,000

Now the total Prize fund is Rs. 22,000 (20,000 + 2,000) The interest of Rs. 2000 is added with the Prize fund. The expenses incurred out of fund is deducted form the fund itself. In the previous example the accumulated Prize fund is Rs. 22,000. The Prize given for of Rs. 8,000 is deducted from the Prize fund and the balance fund of Rs. 14,000 will be shown in the Balance sheet. Exercises in non-trading concern: There are four types of exercises in non trading concern. a. b. c. d. Preparing income and expenditure account from the receipts and payments account accompanied with notes. Preparing receipts and payments account from the income and expenditure account accompanied with notes. Preparing balance sheet both in the beginning and at the end from the receipts and payments account and income and expenditure account. Preparing final accounts when wrong statements are given.

Income and Expenditure Account for professional people. Professional people like Doctors, Lawyers etc. also prepare Income and Expenditure Account to ascertain their net income for a particular period. They prepare receipts and payments account also for recording cash transactions. Their accounts are purely based on cash basis. All outstanding expenses are considered but outstanding incomes are ignored. Professional people cannot file a suit for collecting the outstanding fees. The account prepared by them is called receipts and expenditure account instead of Income and Expenditure account. The outstanding income is aided with the income already received and reserve is created equivalent to the outstanding income and it is debited in the receipts and expenditure accounts. Hence outstanding in the receipts and expenditure account. Hence outstanding income is not considered as the income of the current year. Illustrations I. Prepare Income and Expenditure Account from the Receipts and Payments Accounts.

The following is the receipts and payment Account of the Gymkana Sports club for the year ending March 31 1981. Receipts To Balance b/d 1.4.80 To Subscription 1979-80 1980-81 1981-82 To profit on Sports meets To Interest on investment To Sundry receipts Rs. Payments 2050 By March 31, 1981 By Salaries By Rates & taxes By Stationary By Telephone By Investment in govt. securities 2850 By Sundry expenses 80 4220 160 4460 2000 By Balance c/d 250 11610 The following additional facts are ascertained 1. Stock of stationary on April 1, 1980 was Rs. 100 and on March 31, 1981 Rs, 180 2. Rates and taxes were prepaid to the extent of Rs. 400 3. Telephone charges outstanding amounts to Rs. 75. 4. In 1979-80 subscription received in advance amounting to Rs. 200 for current year and Rs. 180 were due on March 31, 1981 for 1980-81. 5. On March 31, 1980 the Building stood in the books at Rs. 20,000 and it is required to write off depreciation at 5%. Investments at March 31, 1980 were Rs. 40,000. You are required to prepare Income and Expenditure Account for the year ended march 31, 1981 and a Balance sheet as at that date. Solution: Income and expenditure Account for the year ended March 31, 1981. Dr. To To Salaries Rates & Taxes Less prepaid Received in 1979-80 for 1980-81 Outstanding 1980-81 Stationary Rs. 4160 By Subscription 1200 Add: 800 4600 Cr. Rs. 4220 11610 Rs. 4160 1200 800 200 2500 1850 900

400 200 180

To

Add : opening stock To To To To Less: Closing stock Telephone Add: outstanding Sundry expenses Depreciation Building Surplus

100 900 180 75 1850

800 By Interest on Investments 720 By Profit on sports meet 200 275 1850 By Sundry receipts 1000 895 9700 9700 2000 2850 250

Balance Sheet as on March 31, 1980 Liabilities Subscription received advance Rs. in 200 62030 Outstanding subscription Investments Buildings 62230 Balance Sheet as on March 31, 1980 Liabilities Rs. Outstanding Telephone charges 75 Subscription received in 160 advance Capital fund 62030 62925 Add : Surplus 895 Less: Depreciation 1000 19000 Investments Building 63160 42500 20000 63160 Assets Cash Stock of Stationary Rates & taxes- prepaid Outstanding subscription Rs. 900 180 400 180 80 40000 20000 62230 Assets Cash Stock of Stationery Capital fund (Balancing figure) Rs. 2050 100

II. Preparing Receipts and Payments Account from the Income and Expenditure Account.
The Income and Expenditure Account of the Nonesuch club for the year ended 31st March, 1990 is as follows: Income and Expenditure Account for the year ended March 31, 1990. To Salaries To General expenses To Audit fees To Secretarys honorarium To Stationary & Printing To Annual Dinner expenses To Interest and ban charges To Depreciation Rs. Rs. 2475 0 500 1250 1000 450 1150 0 150 9300 4950 0 By Subscriptions By Entrance fees By contribution for annual dinner By profit on annual sports meet Rs. 37500 250 11000 750

Rs. 49500

This account had been prepared after the following adjustments. Subscriptions outstanding on 31st March 1989 Subscriptions received in advance on 31st March 1989 Subscriptions received in advance on 31st March 1990 Subscriptions outstanding on 31st March 1990 Rs. 600 Rs. 450 Rs. 270 Rs. 750

Salaries outstanding on 31st March 1989 and 31st March 1990 were respectively Rs. 2000 and Rs. 2250. General expenses include insurance prepaid to the extent of Rs. 60. Audit fees for 1989-90 are as yet unpaid, during 1989-90. Audit fess for 1988-89 were paid amounting to Rs. 1000. The club owned a freehold lease of ground valued at Rs. 10000. The club had sports equipment on 1st April 1989 valued at Rs. 12600. At the end of the year, after deprecation, this equipment amounted to Rs. 13700. In 1988-89 the club had raised a bank loan of Rs. 2000. This was outstanding throughout 1989-90. On 31st March, 1990 in hand amounted to RS. 1600. Prepare Receipt and Payments account for the year ended 31st March 1990 and the Balance sheet and end of the year.

Receipts and payments Account of the Monesuch club for the year ended 31 st March 1990. Receipts
To Balance b/d (balancing figure) To subscriptions Add: outstanding 31.03.89 Add: Received in 31.03.89 Less: Received in advance on 31.03.89 Less 31.03.90 Outstanding on 750 37170 By Stationery and Printing 250 By Annual Dinner expenses 11000 By Interest ad bank charges 750 By Sports equipments (Rs. 13700-(12600-9300) By Balance c/d 51160 16000 450 11500 150 10400 1600 51160 37500 600 270 38370 450 37290

Rs.
1990 By Salaries

Payments
2475 0 2000 2645 0 2250 500 60

Rs.

Add Paid for 1988-89 Less: Payable for 1989-90 By General Expenses Add: prepaid 1990-91 By Audit fee (1989-90) By Secretarys honorarium

24500 560 1000 1000

To Entrance fee To contribution for annual dinner To Profit on annual sports meet

To balance b/d

Balance Sheet of the Nonesuch club as on 31st March, 1990 Liabilities Subscription received in advance Audit fee outstanding Salaries outstanding Bank Loan Capital fund Add Surplus 19740 600 Rs. 270 1250 2250 2000 2034 0 2611 0 Less Depreciation Subscription out-standing Insurance prepaid Cash in hand Assets Freehold grounds Sports equipments Additions during the year Rs. 10000 12600 1040 0 2300 0 9300 0

13700 750 60 1600 26110

Note: Capital fund is not given in this problem. To find out the capital found, the balance sheet for the year 1989 is to be prepared. Balance sheet of the Nonesuch club as on 31st March 1989. Liabilities Subscription received in advance Salaries outstanding Audit fee unpaid Bank Loan Capital fund (balancing figure) Rs. Assets Rs. 10000 12600 600 1990 25190

450 Freehold ground 2000 Sports equipment 1000 Subscriptions out-standing 2000 1974 Cash in hand 0 2519 0

III. Preparing Balance sheet at the beginning and at the end of the year from the receipts and payments account and income and expenditure account. Given below are receipts and payments accounts and income and expenditure account of a club for the year ending 31st Dec. 1995. Receipts and payments account for the year ending 31st December 1965 Receipts To Balance b/d To endowment To subscription To Entrance fee To Donation for books To Entertainment To sale of furniture (book value Rs. 800) Rs. 4000 2000 1020 0 800 1300 4000 Payments By Salaries By Advertisement By Provision By Printing and stationery By Bank By Sports material By Creditors (1964) By investments 4% purchased on 1.7.1964 By balance c/d 2300 0 Income and Expenditure Account for the year ending 31st December 1965. at 96 Rs. 6000 1200 6800 700 1000 2800 1300 1920 1280 23000

Expenditure To loss on sale of furniture To Salaries To Advertisement To Audit fee To provision and stationery To Printing and stationery To sports material

Rs. 100 6700 1000

Income Rs. By Subscription 10000 By Entrance fee 400 By Interest on investment at 4% 80 on Rs. 2000) By Entertainment 4000 300 By excess of expenditure over 2370 income 6000 750 2000 1685 0 16850

Prepare balance sheet both in the beginning and at the end Solution Balance sheet as on 1st Jan 1965. Liabilities Creditors for investments Creditors Capital fund Rs. 1920 1300 3500 6720 Assets Cash in hand Investments Furniture Rs. 400 0 192 0 800 672 0

Note :The investments were purchased on 1st July 1964. So, investments were the assets on 1st Jan. 1965. The payments for the investments appears in receipts and payents account of the year 1965 and it is inferred that the payment was not made in the year 1964. Hence creditors for investments. Balance sheet as on 31st December 1965. Liabilities Salary outstanding Rs. 700 Cash Assets Rs. 128 0

Audit fee outstanding Printing and stationary Endowment fee Subscription received in advance Entrance fee Donation for books Capital fund Less: Deficit 3500 2370

300 Bank 50 2000 200 400 Advertisement prepaid Stock of provision Stock of sports material Interest accrued Investments

100 0 200 800 800 80 192 0

1130 6080 608 0

IV. Preparing final accounts when the wrong statements are given. Following is the so-called receipts and payments account. Receipts and payments account. Receipts To balance b/d To annual income from 510 subscription Add : Outstanding of last 20 year received this year 530 Less : prepaid of last year 10 To other fees To Donation for building Rs. Payments Rs. 700 20

50 By expenses (including payments for sports material Rs. 300) By Loss on sale of furniture (cost price Rs. 50)

520 By balance c/d 200 1000 0 1077 0

10050

10770

Additional information: Club had on 1.1.65; furniture Rs. 200; investments at 5% Rs. 3000; sports material Rs. 740; On 31.12.65; Subscription outstanding Rs. 30; subscription prepaid Rs. 10; stock of sports material Rs. 200. If you do not approve of it, prepare correct receipts and payments accounts, income an expenditure account and balance sheet.

Solution Receipts and Payments account for the year ending 31st Dec. 1965 Receipts To Balance b/d To subscription: Annual income Less : Outstanding at the end 30 480 Add : prepaid at the end 10 490 Add: outstanding in the beginning 20 510 Less: Prepaid in the 10 beginning To other fee To Donation To sale of furniture Rs. Income Rs. 400 300

50 By expenses sundries By sports materials 510 By Balance b/d (balancing figure)

10080

500 200 1000 0 30 1078 0 10780

Income and Expenditure account for year ending 31st December 1965 Expenditure To Sundries To sports material Add: Additions Rs. 400 740 300 1040 840 20 1260 126 0 Income By subscriptions-annual income By other fee By deficit Rs. 510 200 400

Less: Sock in hand 200 To loss on sale of furniture

Balance Sheet as on 31st Dec. 1965 Liabilities Capital fund Less Deficit Donation Subscription paid in advance Rs. 400 0 400 Furniture 3600 Less sold : 50 1000 Investments (5%) 0 10 Interest accrued Stock of sports material Subscription outstanding Bank 1361 0 Assets Rs. 250 150 3000 150 200 30 10080 13610

Capital fund I the beginning has been calculated as follows: Balance Sheet as on 1st January, 1965 Liabilities Subscription prepaid Capital fund (balancing figure) Rs. Assets 10 Furniture 4000 Investments Sports material Subscription outstanding Bank Rs. 200 3000 740 20 50

4010

4010

Dr. Getwell commenced practice in January, 1982. He has prepared the following Receipts and payments Account for the yaer 1982. Receipts and Payments A.c Receipts To Cash Introduced: To Capital Fund To Income from Visits To Receipts from Dispensing Rs. Income Rs. 2000 3000 2000 1200

By Furniture 6000 By Equipments 8000 By Purchase of Drugs 6000 By compounders salary

To Miscellaneous receipts

100 By Rent By Conveyance By Stationery By Lighting By Journals & news-papers By Investments By Balance Cash 2010 0

600 1000 200 150 150 6800 3000 20100

Rs. 1500 were will still to be received on account of visits, Compounders salary of Rs. 300 and a bill of stationery for Rs. 100 are outstanding. Stock of drugs on hand was estimated at Rs. 500. Furniture and equipments are subject to depreciation at 5%. Prepare Doctors Receipts and Expenditure Account and Balance sheet for the year ended Dec. 31, 1982 Receipts and Expenditure Account Of Dr. Getwell & for the year ended December 31, 1982. Expenditure To Purchase of drugs Less : Closing stock To Compounders salary Add: Outstanding To Rent To conveyance To Stationery Add: outstanding To Lighting To Journals and newspapers To Depreciation Furniture (5%) Equipment (5%) To Provision for income From visits outstanding To surplus 200 0 500 120 0 300 Rs. Receipts Rs.

1500 1500

By Income from visits Add: Outstanding By Receipts from dispensing

8000 1500

9500 6000 100

600 1000 200 100 300 150 150 100 150 1500 8650 1560

By Miscellaneous Receipts

15600

0 Balance sheet as on 31st December 1982 Liabilities Capital fund Add: surplus Compounders salary outstanding Stationery outstanding 6000 8650 Rs. Assets Rs. 3000 6800

Cash 1465 Investments 0 300 100 Furniture Less: Depreciation Equipments Less: Depreciation Stock of drugs Income from visits Less: provision 1505 0 2000 100 3000 150 1500 1500

1900 2850 500 --15050

Single Entry
Accounting from incomplete records All business concerns have to maintain their accounting records under double entry systems. If not concerns are said to be following a single entry system (Singe Entry System) It is a defective double entry system. In this system only personal account, bank account and cash account are maintained and other requirements of double entry system are not followed. So it may be called as incomplete double entry system. The impersonal account relating to assets, expenses, gains etc., are not maintained. Kohlers dictionary for a accountants defines single entry as A system of book keeping in which as a rule only records of cash and of personal accounts are maintained; it is always incompletes double entry, varying with circumstances. Characteristics of Single Entry System a. b. c. d. Defects 1. 2. Preparing trial balance is not possible because both the aspects of transactions are not recorded. Hence arithmetic accuracy of books cannot be checked. It may encourage misappropriation and fraud. Since the trial balance and the real accounts are not available, preparation of profit and loss account and balance sheet is impossible and hence the profitability and true and fair view of the business cannot be revealed. The progress made by the business over the years is unknown. Accounting records under single entry system can be maintained only by sole traders and other petty shops. Limited companies, by legal provisions cannot adopt this system. It is defined as a system where only personal and cash accounts are maintained; other nominal and real accounts are not maintained. In this system not only business transactions but also personal transactions are maintained in cash book. Maintaining day-to-day transactions under this system is very simple. So it is adopted by small business units.

Profit Calculation Under single entry system, in the absence of trading and profit and loss account profit is ascertained by comparing the capital (Net Assets) at the end and at the beginning of the trading period. An increase in capital, is taken at profit and any decrease is considered as loss. The increase and decrease in capital may be due to additional capital introduced and withdrawal made respectively. So the additional capital is to be deducted from the closing capital and drawings is to be added to it. The difference between the adjusted closing capital and opening capital is ascertained. This is the profit or loss. Alternatively, the

additional capital introduced and drawings can be adjusted, with the difference between opening and closing capital, by adding the drawings and deducting the capital introduced. Steps in Profit Calculation Step 1: Step 2: Step3: Step4: Preparing statements of affairs at the beginning for ascertaining capital in the beginning. Preparing statement of affairs at the end for ascertaining capital at the end. Adjusting the capital at the end by adding additional capital introduced and deducting drawings made during the year. Ascertaing the difference between the adjusted capital and capital at the beginning. The difference is either profit or loss.

Formula for Profit Calculation Profit = (Capital and end + Drawing Additional Capital introduced) Capital in the beginning.

For profit ascertainment the opening and closing capital are needed. Capital refers to the difference between the assets and liabilities. The statement of affairs shows the assets and liabilities of a given period. It differs from balance sheet. Because the items available in the statement of affairs are not drawn from proper ledger accounts. Conversion Method In single entry system, personal and cash accounts are only maintained. So the trail balance is not prepared. Once the trail balance is prepared, preparing trading and profit and loss account and balance sheet becomes easy. The following steps are necessary to prepare trading and profit and loss account and balance sheet from the incomplete information available under single entry system. Step 1 : Step 2 : Preparing statement of affairs in the beginning to calculate capital in the beginning.

Preparing cash book. It will be useful to find out cash or bank balances in the beginning or end as the case may be. If both these balances (Figures) are given, the difference in cash book nay be treated either drawings, or cash purchases (if debit side exceeds credit side) or cash sales or capital introduced or sundry income (if credit side exceeds debt side) as the case may be. Step 3 : Preparing (i) total debtors account, (ii) total creditors account, (iii) Bills receivable account, and (iv) Bills payable account. This helps to

find out either in the Step 4 : Step 5 :

credit sales, credit purchases, creditors or debtors balance beginning or at the end, returns and discount. Ascertaining total sales by adding credit and cash sales and total purchases by adding cash and credit purchases. Preparing trading account, profit and loss account and balance sheet.

Finding out the Missing Figure Books of accounts maintained under single entry system are converted into double entry so as to prepare treading account, profit and loss account and balance sheet. For preparing these accounts the following information are needed. (i) For Trading Account (a) Opening Stock (b) Purchases (Cash and Credit) (c) Direct expenses (d) Sales (Cash and Credit) and (e) Closing Stock (a) Indirect expenses and Losses (b) Incomes and gains (a) All assets and liabilities (b) Opening capital (c) Profit made during the years.

(ii) For Profit and Loss Account (iii) For Balance Sheet

Opening Stock In general the closing stock of the previous year is taken as opening stock of the current year. However, if the opening stock is not given, it can be found out by preparing. Memorandum Trading Account making use of the rate of gross profit. Illustration Purchase made for the period Rs. 1,00,000, sales mad during the period Rs. 1,80,000 closing stock Rs. 14,000 Manufacturing expenses Rs. 10,000. Rate of Gross Profit was 50% on cost calculated opening stock.

Memorandum Trading Account Rs. To Opening Stock (Balancing figure) To Purchases To Manufacturing expenses To Gross profit 1/3 X 1,80,000 24,000 By Sales 1,00,000 By closing stock 10,000 60,000 1,94,000 Rs. 1,80,00 0 14,000

1,94,00 0

Purchases Total purchases are the sum of cash and credit purchases. Cash purchases can be ascertained from the cash book. Credit purchases are calculated by preparing total creditors account. Illustration From the following information, calculate the credit purchases. Creditors as on 1.1.1990 Cash purchases Cash paid to creditors Bills payable accepted during the year Purchases returns Creditors as on 31.2.1990 Rs. 8,000 17,000 31,000 5,000 1,000 13,000

Total Creditors Account Rs. 1990 Dec. 31 To Cash paid to Creditors To bills payable To Purchase returns To Balance c/d 1990 Jan.1 31,000 By Balance b/d Dec. 31 5,000 By Purchases (Balancing figure) 1,000 13,000 50,000 Total Purchases : Cash purchases Credit purchases 17,000 25,000 --------42,000 --------50,000 Rs. 1,80,00 0 25,000 25,000

Sometimes, in order to calculate purchases, bill payable account and total creditors account are prepared. This is done when some payment to creditors is made by accepting bills. Bills payable account shows the bills accepted in favour of creditors. This information is recorded in creditors account and then the balancing figure is assumed as credit purchases. Illustration From the following particulars find out the credit purchases and total purchases: Cash purchases Opening balance of bills payable s Opening balance of creditors Opening balance of bills payable Closing balance of creditors Cash paid to creditors Bills payable paid during the year Purchase returns Allowances from creditors Bills payable dishonoured Rs. 58,000 15,000 40,000 5,000 36,000 50,000 21,000 3,000 1,600 600

Solution Bills payable Account To Cash A/c To Creditors (B/P dishnoured) To Balance c/d 21,000 600 5,000 26,000 Total Creditors Account Rs. To Cash paid To B/P accepted To Allowances To Purchase returns To Balance c/d 50,000 11,600 1,600 3000 36,000 1,02,200 Sale Bills Receivable account and Bills Payable are to be prepared to calculate the bills receivable received during the year and credit sales. Illustration From the following particulars, you are required to calculate total sales. Bills receivable January 1, 1990 Debtors January 1, 1990 Bills receivable encashed during 1990 Cash received from debtors Bad debts written off Rs. 7,000 25,000 15,000 18,000 400 1,02,200 By Balance b/d By B/P dishonoured Rs. 40,000 600 26,00 0 By Balance b/d By Sundry accepted) Creditors 15,00 0 (B/P 11,60 0

By Credit Purchases 61,600 (Balancing Figure)

Returns inwards Bills receivable dishonoured Bills receivable December 31, 1990 Debtors December 31, 1990 Cash sales (as per pass book) Solution Bills Receivable Account 1990 Jan. 1 To Balance b/d Dec. 31 To Sundry debtors (Bill received) Rs. 1990 Dec. 31

500 1,500 6,000 18000 40,000

Rs. 15,00 0 1,500 6,000 22,50 0

7,000 By Cash 15,50 By Sundry 0 dishonoured) By balance c/d 22,50 0 debtors (Bill

Total Debtors Account 1990 Jan. 1 To Balance Dec 31 to B/R dishonoured To Credit Figure) Sales (Balancing

Rs.

1990 Dec. 31

Rs. 18,00 0 15,50 0 400 500 18,00 0 52,40 0

25,00 By Cash received 0 1,500 By B/R Received 25,90 By Bad debts 0 By Returns inwards By Balance c/d 52,40 0

Total Sales Cash Sales Credit Sales Total Sales Memorandum Trading Account

Rs. 40,000 25,900 65,900

Sometimes the total purchases or sales can be calculated by preparing a Memorandum Trading Account. The essential information required is the rate of gross profit earned. Find out the purchases: Opening Stock 8,000 Closing Stock 17,500 Sales 64,000 Rate of Gross Profit on sales 25% Memorandum Trading Account To opening Stock To Purchases (Balancing figure) To Gross profit 25 64,400 100 Rs. 8,000 By Sales 57,50 By Closing Stock 0 16,00 0 81,50 0 Illustration Find out the sales: Opening Stock Closing Stock Purchases Direct expenses Rate of gross profit 20% on sale Memorandum Trading Account To opening Stock To Purchases To Direct expenses To Gross Profit Rs. 12,000 80,000 6,000 20,000 1,18,00 By Sales (Balancing Figure) By Closing Stock Rs. 1,00,00 0 18,000 Rs. 12,000 18,000 80,000 6,000 Rs. 64,00 0 17,50 0

81,50 0

1,18,00

Cost goods sold is computed to work out the rate of gross profit on cost. Cost of goods sold = = = Opening stock + Purchases + Direct Expense Closing Stock 12,000 + 80,000 + 6,000 18,000 Rs. 80,000 = on cost = 80,000 x = Rs. 20,000

Gross Profit 20% on Sale

Balance Sheet items Most of the figure relating to assets and liabilities are given in the problem. If some assets and liabilities are not given, e.g. debtors, creditors, bills receivable or payable, then they are ascertained by preparing total debtors account, total creditors account, bills receivable account and bills payable account respectively. The closing cash balance is available in cash book, If the cash book is not given in a proper form, a cash book is to be prepared and missing information is to be found out. The missing information may be either the opening balance or closing balance of cash or cash sales or cash purchases or certain expenses or income. The values of fixed assets can be ascertained from the balance sheet of the previous year. These values are reduced by the depreciation to ascertain the values of fixed assets at the end of the year. The capital in the beginning is available in the opening balance sheet. If the opening balance sheet is not given, it is to be prepared and the difference between the assets and liabilities is the opening capital. In the way all the information needed for the preparation of balance sheet are collected and the balance sheet is constructed. Illustration Vikash started his business on January 1, 1990 with a capital of Rs. 1,00,000. His capital as on December 31, 1990 was Rs, 1,20,000. During the yare the introduced a further capital of Rs, 10,000 and withdraw from the business for his private use Rs. 16,000. Find out his profit for the year 1990. Solution Statement of Profit for the year 1990 Rs.

Capital as on December 31, 1990 Add: Drawing during the year Less: Additional capital introduced Less: Capital as on January 1, 1990 Profit for 1990

1,20,000 16,000 1,36,000 10,000 1,26,000 1,90,000 26,000

Alternative Method Capital at the end Less: Capital at the beginning Add: Drawings Less: Additional capital Profit for 1990 Illustration Rama keeps his books under singly entry system. From the following information given below prepare a Trading and Profit and Loss Account for the year ending December 31, 1978 and a Balance sheet on that date. 1.1.1978 31.12.1978 Capital 7,500 Sundry Debtors 3,440 4,500 Stock 1,750 2,000 Sundry creditors 1,125 850 Machinery 1,560 1,560 Analysis of the cash book for the year ended 31st December 1978 Rs. 1,20,000 1,00,000 20,000 16,000 36,000 10,000 26,000

To Balance b/d To Sundry Debtors To Cash sales To Commission

Rs. 1,875 6,000 1,350 90 9,315

By Sundry Creditors By Wages By General Expenses By Salaries By Drawings By Balance c/d

Rs. 1,500 300 200 2,800 1,600 2,915 9,315

Depreciate machinery by 10%. Allow interest on opening capital at 5% p.a. Provide for reserve for doubtful debts at 5% on debtors.

Liabilities Sundry Creditors Capital Stock Machinery

Balance Sheet as on 1.1.1978 Rs. Assets 1,125 Cash in hand 7,500 Sundry debtors 1,750 1,560 8,625

Rs. 1,875 3,440

8,625 6,000 4,500 10,500 1,125 1,225 2,350

To Balance b/d To Credit sales

Total Debtors Account 3,440 By Cash 7,060 By Balance c/d 10,500

To Cash To Balance c/d

Total Creditors Account 1,500 By Balance b/d 850 By Credit purchases 2,350

Trading and Profit and Loss Account for the year ending December 31, 1978 To opening Stock To Purchase To Wages To Gross Profit Rs. 1,750 By Sales Cash 1,225 Credit 300 7,135 By Closing Stock Rs. 1,350 7,060 2,000

10,410 Rs. 2,800 By Gross Profit 200 By Commission 156 225 375 3,469 7,225 Liabilities Sundry creditors Capital Add: Interest on Capital Net Profit Less: Drawings Rs. 7,500 375 3,469 11,344 1,600 Rs. Assets 850 Cash Debtors Less Reserve for bad debts Stock Machinery Less 9,744 Depreciation 10,59 4 Illustration Rs. 4,500 225 1,560 156

10,410 Rs. 7,315 90

To Salaries To Genera expenses To Depreciation on Machinery To Reserve for doubtful debts To Interest on Capital To Net Profit

7,225 Rs. 2,915 4,275 2,000 1,404 10,59 4

Johnson does not maintain books in the Double Entry System and Bank Accounts. From the following information, prepare Profit and Loss Account and Balance Sheet s at June 30th, 1977. (a) Assets and Liabilities 30.06.76 Rs. 19,800 31,000 1,18,000 90,000 11,000 15,000 30.06.77 Rs. 1,13,200 14,500 1,25,000 90,000 11,500 15,000

Stock Creditors Debtors Premises Furniture Air Conditioner

(c) (d)

Creditors as at 30.06.76 include Rs. 15,000 for purchase of Air-Conditioners. Cash Transactions

Cash at July. 1976 Collections from customers Payment to Creditors (Trade) Rent, Rates and Taxes Salaries Sundry expenses Sundry Income Drawings by Johnson Loan from Mrs. Fernandes Capital introduced Cash Sale Cash purchases Paid to credit for Air-Conditioner (d) Bad debts written off Trading and Profit and Loss Account for the year ended June 30, 1977. To Opening Stock To Purchase Cash Credit Rs. 19,800 15,000 1,42,500 1,57,50

Rs. 15,000 1,60,00 0 1,44,00 0 11,500 1,12,00 0 18,000 16,500 30,000 23,000 12,000 11,500 15,000 15,000 1,200

Rs. By Sales Cash Credit By Closing Stock 11,500 1,69,000 1,80,50 0 1,13,20

0 2,93,70 0 Rs. 1,12,00 By Gross Profit b/d 0 11,500 By Sundry income 18,000 By Net Loss 1,200 1,42,70 0

0 2,93,70 0 Rs. 1,16,40 0 16,500 9,800 1,42,70 0

To Salaries To Rent, Rate & Taxes To Sundry expenses To Bad debts

Balance Sheet as on June 30 1977 Liabilities Johnson Capital A/c as at 2,37,800 1.7.76 Add Capital introduced 12,000 2,49,800 Less: Drawings Less: Loss for the year Loan from Mrs. Fernandes Bank Balance Overdraft 30,000 2,19,800 9,800 2,10,00 0 23,000 1,07,00 0 Rs. Assets Premiseses Furniture Air- Conditioner Stock Debtors Rs. 90,000 11,500 15,000 1,13,00 0 1,25,00 0

Sundry Creditors

14,500 3,54,70 0 3,54,70 0

Calculation of Capital as at 1.7.76 Opening Balance Sheet s at 1.7.76 Liabilities Creditors (Trade 31,000 15,000) Rs. 16,000 Assets Premises Furniture Air-conditioner For Air Conditioner Capital (Balancing figure) 15,000 31,000 Stock Debtors 2,37,800 Cash 2,68,800 Rs. 90,000 11,000 15,000 19,800 1,18,000 15,000 2,68,800

Workings Calculation of credit sales Total Debtors Account To Balance b/d To Credit Sales Rs. 1,18,00 0 1,69,00 0 By Bank By Bad Debts By Balance c/d Rs. 1,60,80 0 1,200 1,25,00 0

2,87,00 0 Calculation on Creditors Account Total Trade Creditors Account To Bank Rs. 1,44,000 By Balance b/d (Rs. 31,000 15,000 due for air-conditioner) By Credit Purchases (Balancing figure) To Balance c/d 14,500 1,58,500 Calculation of bank balance Bank Account To Balance b/d To Collection from customer To Sundry income To Loan from Mrs. Fernandes To Capital introduced To Cash sales To balance c/d (balancing figure) (Bank Overdraft) Rs. 15,000 By payment to creditors 1,60,80 By Rent, rates and taxes 0 16,500 By Salaries 23,000 12,000 11,500 1,07,20 0 3,46,00 0 By Sundry expenses By Drawings By Cash purchases By Payment to creditors for AirConditioner By Purchase of furniture

2,87,00 0

Rs. 16,000 1,42,50 0 1,58,50 0

Rs. 1,44,00 0 11,500 1,12,00 0 18,000 30,000 15,000 15,000 500 3,46,00 0

Consignment
Manufacturers or wholesalers usually dispatch their goods periodically to a trader on consignment basis. It means the trader will sell the goods at the risk of the manufacturer or wholesaler. Goods sent by the manufacturer on consignment basis to the trader is not treated as sales. Manufacturer sends goods is called consignor. Trader receives goods is

called consignee. The transaction agreed between consignor and consignee is known as consignment. The relationship between the consignor and consignee is that of principal and agent. Sometimes the consignor will as advance money from the consignee before dispatch of goods. Consignee should sent statement to the consignor periodically, stating the details of goods received, sales (both ash and credit), expenses incurred, commission charged remittances made and the balance due. This statement is known as Account Sales. The consignee is entitled to charge his commission from sales. The percentage of commission will be mentioned in the consignment agreement. Consignee can get del credere commission in addition to usual commission, if he bears the responsibility of collecting bad debts. The del credere commission is paid to consignee on total sales. Consignee can deduct the del credere commission in addition to usual commission from the sales. The consignor and consignee should prepare the books of accounts stating the details of consignment transaction for every financial year. Consignor prepares consignment account. It reveals goods sent, expenses incurred, commission, sales closing stock and profit/loss. Consignee prepares consignor account revealing the sales, expenses incurred, commission and the amount to be remitted to consignor. ACCOUNTING TREATMENT IN CONSIGNMENT In the books of Consignor 1. When goods are consigned: Debit Consignment A/c Credit Goods sent on Consignment A/c Expenses incurred by the Consignor Debit Consignment A/c Credit Bank/Cash A/c Expenses incurred by the Consignee: Debit Consignment A/c Credit Consignees A/c When a bill is received: Debit Bills Receivable A/c Credit Consignees A/c When the bill is discounted: Debit Bank/Cash A/c Debit Discount A/c Credit Bills Receivable A/c In the books of the Consignee No Entry

2.

No Entry

3.

Debit Consignors A/c Credit Bank/Cash A/c Debit Consignors A/c Credit Bills Payable A/c No Entry

4.

5.

6.

When the Goods are sold by the Consignee: Debit Consignees A/c Debit Cash/Bank/ Consignors Debtors Credit Consignment A/c Credit Consignors A/c For the commission due to the Consignee: Debit Consignment A/c Debit Consignors A/c Credit Consignees A/c Credit Commission A/c For the Cash received Consignee: Debit Consignment A/c Credit Consignees A/c from the Debit Consignors A/c Credit Cash/Bank A/c Debit Bad Debts A/c Credit Consignors Debtors A/c And Debit Commission Credit Bad Debts A/c

7.

8.

9.

For the Bad Debts Suffered by the Consignee: (a) When the Del_Credere Commission is allowed No Entry

(b) When the Del_Credere Commission is Debit Consignors A/c not allowed Credit Consignors Debtors A/c Debit Consignment A/c Credit Consignees A/c 10 . For the stock lying with the consignee at No Entry the end: Debit Consignment Stock A/c Credit Consignment A/c The above entry will be reversed in the next year, by treating the stock as opening for that year 11 . For closing the goods sent on No Entry Consignment A/c: Debit goods sent on Consignment A/c Credit Trading A/c if the Consignor has the manufacturing activity Credit Purchase A/c if the Consignor has Trading activity For transferring the profit or loss made on the consignment:

12 .

For Profit For Loss

Debit Consignment A/c Credit Profit and Loss A/c Debit Profit and Loss A/c Credit Consignment A/c

Valuation of closing stock with the consignee A part of the goods, sent by the consignor may remain unsold with the consignee at the end of the financial year. The unsold goods are known as Closing Stock. A proper valuation is to be done for the closing stock. While valuing the closing stock, the cost of the goods, the proportionate expenses incurred by the consignor will have to be added to compute the value of closing stock lying with the consignee. The computed value of Closing Stock (cost price) is to be compared with the market price and valuation of closing stock must be least of the cost price or market price. Expenses incurred by the consignee till the goods teach the consignees premises are considered as non-recurring expenses. Example, unloading charges, customs duty, carriage, freight, insurance in transit etc. Expenses like advertisement, salesmans salary and godown rent are considered as recurring expenditure and not taken into account for the purpose of the computation of closing stock. Normal Loss In consignment goods are dispatched by consignor to consignee. While transferring or dispatching goods from one place to another, some loss is in-hearten and unavoidable. Such loss is known as normal loss. It causes for loss in quantity of goods dispatched. Example: evaporation of petrol due to atmosphere, leakage of oil, loss in weight due to loading and unloading of goods etc. The quantity and value of normal loss are small and can be easily recovered from the good units. While computing the value of closing stock at the end of the year, normal loss (in units) is deducted from the total quantity of goods dispatched but the value is not deducted for the purpose of calculating the value of remaining good units at an escalated cost so as to recover the loss due to normal loss. Example Goods dispatched 1000 units Value Rs. 1,00,000 Value per unit Rs. 100 Normal Loss 1% (10 units) Good Units = 1000-10 = 990 Unit Value of good units = ABNORMAL LOSS 100000 = Rs.101.01 990

Certain losses are accidental or may occur due to carelessness-for example theft of goods or destruction of goods by fire or flood. Such losses are known as abnormal losses. They will not occur often. Abnormal loss may occur during goods in transit or at the consignees premises. Abnormal loss is separated while preparing the consignment account for ascertaining the correct profit from the particular consignment. Example : Vikash consigned 1000 kg of groundnut oil to Basker of Nagpur at Rs. 15 per kg. Expenses incurred by Vikash being Rs. 750 for freight and Rs. 250 for insurance. During transit 50 kg of oil was destroyed due to accident and the insurance company accepted the loss to the extent of Rs. 700. Basker received the balance of consignment and sold 700 kg of oil at Rs. 20 per kg. 10 kg of oil was lost due to leakage. Calculate the abnormal loss and the value of the closing stock lying with the consignee. Groundnut oil dispatched In Qty Kg. 1,000 Expenses Freight Insurance 75 0 25 0 1000 50 1,000 16000 800 16000 50 1000 15,200 ------15200 Value Rs. 15,000

Abnormal loss

Normal Loss

950 10 940

Closing Stock (940 700) = 240 kg Valuation of Closing Stock = Accounting Treatment 15200 240 = 3881 940

Abnormal loss a/c Dr. To Consignment a/c Insurance Company A/c Dr. To Abnormal loss A/c Profit and loss A/c Dr. To Abnormal loss A/c

800 800 700 700 100 100

INVOICING GOODS HIGHER THAN COST Sometimes, consigner may not like to disclose the cost of the goods consigned and the real profit. So he invoices the goods in such a way to earn the expected profit on sales. The invoice sent by the consignor will not be at a cost price, but at selling price. It is known as invoice price. The consignee is at the option either to sell the goods at the invoice price or above the invoice price. While preparing the consignment account, the journal entries are passed at invoice price. In order to ascertain the true profit, the loading is eliminated on the goods sent ant a stock reserve is created for the closing stock lying with the consignee. The journal entries are as follows: ENTRIES IN THE BOOKS OF CONSIGNOR When the goods are consigned: Debit Consignment A/c Credit Goods sent on Consignment A/c For unsold stock lying with the consignee: Debit Stock on Consignment A/c Credit Consignment A/c At invoice price

At invoice price plus proportionate non recurring expenses.

To remove the load on goods sent on consignment: Debit Goods sent on Consignment A/c Difference between the invoice price and Credit Consignment A/c cost To remove the load on unsold stock: Debit Consignment A/c Credit Stock Reserve A/c Difference between the invoice price and cost (excluding expenses) for the number of units unsold.

The closing stock and stock reserve will be carried forward to the next year and will be closed by transfer to the Consignment Account as opening stock and opening stock reserve. Illustration: 3

Johar of Jaipur sends goods on consignment to Pawan to Patna. The terms are that Pawan will resume 10% commission (including del crederre) on the invoice price (which is cost plus 25%) and 20% of any price realized above invoice price. Johar sent goods for Rs. 90,000 at invoice price and spent Rs 6,740 on freight, forwarding charges etc. Pawan accepted a bill for 2 months for Rs. 72,000 immediately on receiving consignment. His expenses were Rs. 1,200 as rent and Rs. 150 as insurance. Pawan sold 3/4 of goods for Rs. 87,750. One customer failed to pay Rs. 1,800. This amount could not be realized. Pawan met his acceptance and remitted the amount due to Johar. Give the important ledger accounts in the books of Johar and Pawan. Solution IN THE BOOKS OF JOHAR CONSIGNMENT TO PATNA ACCOUNT Dr. To Goods sent on Consignment To Bank Expenses To Pawan Expenses To Pawan- commission To Stock Reserve To Profit and Loss A/c profit Rs. 90,000 6,740 1,350 10,800 4,500 16,545 1,29,93 5 Cr. By Pawan Sale Proceeds By Stock on Consignment By Goods sent on Consignment Rs. 87,750 24,185 18,000

1,29,93 5

GOODS SENT ON CONSIGNMENT ACCOUNT To Consignment to Patna A/c difference between cost and Rs. 18,00 By Consignment to Patna A/c 0 Rs. 90,00 0

invoice To Purchase 72,00 0 90,00 0 Pawan account To Consignment A/c Rs. 87,75 By Bills Receivable 0 By Consignment Exp. By Consignment commission By Bank Balance received 87,75 0 1. Calculation of Commission: Rs. Sales made by Pawan ths of the invoiced value 90,000 X Excess over invoice value 87,750 67,500 10% 20,250 20% Commission Rs. 6,750 4050 10,800 2. Calculation of Unsold Stock: 22,500 1,685 --------24,185 --------Rs 72,00 0 1,350 10,80 0 3,600 87,75 0 90,00 0

1/4th of invoice value Rs. 90,000 1/4th of Consignors Expenses Rs. 6,740

IN THE BOOK OF PAWAN JOHAR ACCOUNT Rs. 72,00 0 1,350 10,80 0 3,600 87,75 0 Rs. By Bank & Consignment Debtors 87,75 A/c 0

To Bills Payable A/c To Cash Expenses To Commission To Bank

87,75 0

Messers East India Company of Madras, consigned 100 steel chairs to United Company of Hyderabad. The cost of each steel chair was Rs. 500. The consignor paid insurance Rs. 500. Freight Rs. 800. Account sales was received from United Company showing gross sale proceeds of 80 units at Rs. 600 each. The expenses paid and deducted by them were: Carriage Rs. 20 : Establishment expenses Rs. 130 commission @ Rs. 2400 Show journal entries and important ledger accounts in the books of both the parties. BOOKS OF EAST INDIA COMPANY Journal Consignment to Hyderabad A/c To Goods sent on consignment (100 Steel chairs consigned to United Company, Hyderabad) Consignment to Hyderabad A/c To Cash (Freight and Insurance paid for the consignment) Consignment to Hyderabad A/c To United Company (Expenses paid by United Company) United Company A/c To Consignment to Hyderabad (Sale proceeds received by United Company) Consignment to Hyderabad A/c To United Company (Commission due to United Company) Dr. Dr. 50,000 Cr. 50,00 0 Dr. 1,300 1,300 Dr. 150 150 Dr. 48,000 48,00 0 Dr. 2,400 2,400

Stock on consignment A/c To Consignment to Hyderabad a/c (Closing Stock in United Company) Bank A/c To United Company (Amount received from United Company) Consignment to Hyderabad Account To Goods sent on consignment A/c To Cash -Insurance -Freight To United Company -Carriage -Establishment Expenses To United Company -Commission To Profit / Loss A/c

Dr.

10,264 10,26 4

Dr.

45,450 45,45 0

50,00 By United Company sales 0 By Stock on consignment a/c 500 800 20 130 2,400 4,414 58,26 4

48,00 0 10,26 4

58,26 4

Goods sent on Consignment Account Rs. 50,00 By Consignment to Hyderabad a/c 0 50,00 0 United Company Account To Consignment to Hyderabad A/c Sales 48,00 By Consignment to Hyderabad a/c 20 0 -carriage 130 Rs 50,00 0 50,00 0

To Purchase a/c

-Establishment expenses -commission -Bank (amount received) 48,00 0 Valuation of unsold stock 20 steel chairs Proportionate expenses incurred by cosignor Proportionate non recurring expenses (carriage) incurred by consignee @ Rs. 500 1300 20 100 20 20 100

2,400 45,45 0 48,00 0 Rs. 10,00 0 260 4

10,26 4 Books of United Company Journal East India Company a/c To Cash (Expenses incurred for consignment) Bank A/c To East India Company (Sale of 80 steel chairs) East India Company A/c To Commission (Commission due for sale) East India Company a/c To Bank (Balance money paid) East India Company Account To Cash To Commission To Bank Rs. 150 By Bank sales 2,450 45,45 0 Rs. 48,00 0 Dr. Dr. 150 Cr. 150 Dr. 48,000 48,00 0 Dr. 2,400 2,400 Dr. 45,450 45,45 0

48,00 0

48,00 0

1000 gift articles were consigned by ABC & Co., of Calcutta to XYZ & Co., of Chennai at an invoice cost of Rs. 150 each. ABC & Co., paid freight Rs. 10,000 and insurance Rs. 1500. During the voyage 100 articles were totally damaged by fire and had to be trrown overboard. No recovery has been made from the insurance company. XYZ & Co. took delivery of the remaining gift articles and paid Rs. 14,400 as customs duty. XYZ & Co., had sent a bank draft to ABC & Co., for Rs. 50,000 as advance payment and later sent an account sales shoeing that 800 gift articles were sold at Rs. 220 each. Expenses incurred by XYZ & Co., on godown rent and advertisement etc. amounted to Rs. 2000. XYZ & Co., is entitled to commission of 5% One of the credit customers could not pay the cost of 5% of gift articles. Prepare the consignment account and XYZ & Co., account. Consignment to XYZ & Co. to Chennai Account Rs. To Goods sent on consignment 1,50,000 By Sales ( 800 220) To Cash Freight Insurance To XYZ Co. Customs duty Expenses Commission Bad debt ( 5 220 ) To Profit/Loss a/c 10,00 0 1500 11,500 14,400 2,000 8,800 1,100 22,100 2,09,900 2,09,90 0 By Profit/Loss By Stock on consignment 16,150 17,750 Rs. 1,76,00 0

X Y AND Z & CO. ACCOUNT Rs. 1,76,00 By Bank 0 5,000 By Consignment a/c Rs. 50,000

To consignment to Chennai a/c To Balance c/d (advance for 100 gift articles)

-customs duty -expenses -bad debts By Consignment a/c -commission By Bank 1,81,00 0 By Balance b/d Value of the loss (100 gift articles damaged by fire) Cost of 100 gift articles (100 Rs.150) Freight and insurance for 100 articles 11500 100 1000

14,400 2,000 1,100 8,800 1,04,70 0 1,81,00 0 5,000

Rs. 15,00 0 1,150

Value of closing stock Cost of 100 gift articles unsold (100 Rs.150) Proportionate Expenses incurred by consignor (freight and insurance) 11500 100 1000 Proportionate non-recurring expenses incurred 14400 100 by consignee (customs duty) 900

15,00 0 1,150

1,600

JOINT VENTURE
Joint venture is a temporary partnership between two or more parties who undertake jointly a small commercial venture. Joint venture is established for the purpose of consigning the goods from one place to another, undertaking contracts for construction works, underwriting of chares or debentures of joint stock companies etc. The persons entering into joint venture agreement are called co-venturers. They share profit or loss of joint venture in agreed proportions. The joint venture agreement will come to an end once the business mentioned in the agreement is completed. Once the business of the joint venture is completed, the co-venturers account is closed and settled either by receipt of cash or payment of cash. The accounts of joint venture can be maintained in any one of the following methods: Method 1: Each co-venturer is maintaining a joint venture account and other co-venturers account in his own books of accounts. Every co-venturer records all the transactions in his books relating to the joint ventre. Accounting entries: In the books of A Goods supplied by A and expenses paid Joint Venture a/c Dr. To Purchase a/c To Cash a/c Goods supplied by B and expenses paid Joint Ventre a/c Dr To B a/c In the books of B Joint Venture a/c Dr To A a/c

Joint Venture a/c Dr To Purchase a/c To Cash a/c

When goods are directly purchased for joint venture by the co-venturer, cash/bank is credited instead of purchases account Bill drawn by A and accepted by B Bill Receivable a/c Dr To B a/c When the bill is discounted Cash/Bank a/c Dr Joint Venture a/c Dr (discount To Bills Receivable a/c As a/c Dr To Bills payable a/c

Joint Venture a/c Dr To A a/c

Goods sold A Cash a/c Dr To Joint Venture a/c Goods Sold B B a/c Dr To Joint Venture a/c Commission allowed to B Joint Venture a/c Dr To B a/c Unsold goods taken by B B a/c Dr To Joint Venture a/c Transferring Profit Joint Venture a/c Dr To Profit and Loss a/c -for A share -for B share To B a/c Illustration:

A a/c Dr To Joint Venture Cash a/c Dr To Joint Venture a/c Joint Venture a/c Dr To Commission a/c Purchase a/c Dr To Joint Venture a/c

Joint Venture a/c To Profit and Loss a/c To A a/c

A and B entered into a joint venture in textile goods. B is to be allowed a commission on sales at 10% and profits are to be shared in the ratio of A 2/3 and B 1/3 provide textile goods from stock for Rs. 1,00,000 and incurs expenses amounting to Rs. 10,000. B pays Rs. 10,000 for unloading and other non recurring expenses. A drew upon B for Rs. 60,000. The draft was accepted and A got it discounted for Rs. 57,000. B sold 90% of the textile goods for Rs. 1,50,000 and took over the remaining textile goods at cost plus 20 per cent. B settle his account by bank draft. Show the journal entries and the relevant ledger accounts in the book of both the parties. Solution: Journal entries in the books of A Joint Venture Dr 1,10,000 To Purchase ac To Bank a/c (Goods sent to B and expenses incurred for joint venture) Joint Venture a/c Dr 10,000 1,00,000 10,000

To B a/c (Expenses incurred by B) Bills Receivable a/c Dr To B a/c (Bill drawn accepted by B) Bank a/c Joint Venture a/c (discount) To Bills Receivable a/c (Bill discounted) Dr Dr 60,000

10,000

60,000 57,600 2,400 60,000

B a/c Dr 1,50,000 To Joint Venture a/c (Sale proceeds of joint venture received by B) Joint Venture a/c To B a/c (for commission) Dr 15,000

1,50,000

15,000

B a/c Dr 14,400 To Joint Venture a/c (Unsold goods taken by B at cost plus 20%) Joint Venture a/c To Profit and loss a/c To B a/c (profit transferred) Bank a/c To B a/c (Balance received from B) Dr 27,000

14,400

18,000 9,000 Dr 70,400 70,400

Joint Venture Account Dr To Sundries -goods -expenses To B a/c (expenses) To B a/c (commission) To Discount To Profit/Loss a/c To B a/c 18,000 9,000 Rs. By B a/c sales 1,00,00 0 10,000 10,000 By B a/c goods taken 15,000 2,400 27,000 1,64,00 0 B Account Dr To Joint Venture a/c sales To Joint Venture a/c goods taken Rs. 1,50,00 Bills Receivable 0 14,000 By Joint Venture a/c -expenses By Joint Venture a/c -commission By Joint Venture a/c -profit By Bank a/c 1,64,40 0 Calculation of Textile goods taken by B 1/10 of cost 1/10 of As expenses 1/10 of Bs expense 10,00 0 1,000 1,000 12,00 0 2,400 14,40 Rs 60,000 10,000 15,000 9,000 70,400 1,64,00 0 1,64,00 0 Rs 1,50,00 0 14,400

Add : 20% of Rs. 12,000

Journal Entries in the books of B Joint Venture a/c Dr TO A a/c (Goods supplied by A and expenses incurred) Joint Venture a/c To Cash a/c Expenses for joint venture) A a/c To Bill Payable a/c (Bill accepted drawn by A) Joint Venture a/c To A a/c (Discounted on bills discounted) Dr 1,10,000 1,10,000

10,000 10,000

Dr

60,000 60,000

Dr

2,400 2,400 1,50,000 1,50,000 15,000 15,000 14,400 14,400

Cash a/c Dr To Joint Venture a/c (Goods sold and proceeds received) Joint Venture a/c Dr To Commission a/c (10% of commission on Rs. 1,50,000) Purchase a/c To Joint Venture a/c (Unsold goods taken by B) Joint Venture a/c To Profit/loss a/c To A a/c (profit transferred) Dr

Dr

27,700 27,700

A a/c Dr To Bank a/c (Balance due to A settled by bank draft

70,400 70,400

Joint Venture Account To A goods To Expenses To Sundries expenses To Commission To A discount To Profit/Loss a/c To A a/c Rs. 1,00,00 By Cash sale proceeds 0 10,000 By Purchase goods taken 10,000 15,000 2,400 9,000 18,000 27,000 1,64,40 0 A Account To Bills payable a/c To Bank a/c Rs. 60,000 By Joint Venture a/c goods 70,400 By Joint Venture a/c expenses By Joint Venture a/c discount By Joint Venture a/c profit 1,30,00 0 Method 2 : Memorandum Joint Venture Method Memorandum Joint Venture Account is prepared under this method. This account reveals the profit or loss on joint venture. After ascertaining the profit on joint venture each venturer will prepare in his books only on account in the name of the other venturer, which is styled as in Joint Venture Account. The goods supplied for joint venture and expenses incurred are debited to Memorandum Joint by other venturer. This account is also debited with ones share of profit made on joint venture, and the corresponding credit is given to his profit and loss account. The sale proceeds received is credited to the Memorandum Account. The balance in the account reveals the amount due to or due from the other venturer. Rs. 1,00,00 0 10,000 2,400 18,000 1,30,00 0 1,64,40 0 Rs. 1,50,00 0 14,400

Illustration : 2 Illustration 1 is done under the second method. Memorandum Joint Venture Account To A goods - expenses -discount To B expenses -commission To A profit To B profit Rs. 1,00,00 By B sales 0 10,000 By B goods taken 2,400 10,000 15,000 18,000 9,000 1,64,40 0 In the book of A B in Joint Venture with A To Purchase To Cash expenses To Discount To Profit/loss a/c Rs. 1,00,00 By Bills Receivable a/c 0 10,000 By Bank a/c 2,400 18,000 1,30,40 0 In the book of B A in Joint Venture with B To Bills Payable To Cash Expenses To Commission To Profit/loss a/c To Bank a/c Rs. 60,000 By Cash sales 10,000 By Purchase goods taken 15,000 9,000 70,400 1,64,40 0 Rs. 1,50,00 0 14,400 Rs. 60,000 70,400 Rs. 1,50,00 0 14,400

1,64,40 0

1,30,40 0

1,64,40 0

Method 3 : Separate Books In this method separate accounts are prepared for all the transactions relating to joint venture as it is done in the case of partnership firm. Joint venture account, joint bank account, co-ventures accounts and any other account that is needed in connection with the joint venture are maintained under this method. Accounting Entries: When cash contributed by co-ventures Joint Bank a/c To Co-venturers a/c Dr

When expenses are paid/met by co-venturers Joint Venture a/c Dr To Joint Bank/Co-ventrers a/c When sale proceeds/contract price received Joint Bank a/c Dr To Joint venturer a/c When untutilised materials disposed of at the end Joint Bank a/c Dr Co-vertnurers a/c Dr To Joint Venture a/c When profit or loss on joint venture is transferred for profit For Profit Joint Venture a/c To Co-vneturers a/c For Loss Co- venturers a/c To Joint Venture a/c Dr

Dr

Illustration 3 : X and Y, both builders, undertook a Joint Venture involving the construction of a building. A Joint Bank Account was opened in which X deposited Rs. 75,000 and Y deposited Rs. 37,000. The contract price was Rs. 3,75,000. X and Y shared profit or loss in the proportion of 2/3 and 1/3. the details of the transactions were as follows

Wages paid Material supplies by X Material supplied by Y Materials purchased Salaries Cartage Architect fee paid by X Concrete Mixer plant purchased

Rs 89,000 13,500 12,000 1,65,000 12,000 18,500 10,000 38,500

The stock of materials on the completion of the contract valued at Rs. 16,500 was taken over by X. Concrete Mixer plant taken over by Y for Rs. 30,000. X was to be3 paid Rs. 18,000 per annum against establishment expenses, to be charges to the Joint venture account. The contract lasted for 8 months. Prepared Joint Venture Account, Joint Bank Account and Accounts of A & B. Solution: Journal Entries Joint Venture a/c To X a./c To Y a/c Amount contributed by X and Y) Joint Venture a/c To Joint Bank a/c (Wages paid) Joint Venture a/c To X a/c To Y a/c Joint Venture a/c To Joint Bank a/c (Materials purchased) Joint Venture a/c To Joint Bank a/c (Salaries Paid) Joint Venture a/c To Joint Bank a/c (Cartage paid) Dr 1,12,000 75,000 37,500

Dr

89,000 89,000

Dr

25,500 13,500 12,000

Dr

1,65,000 1,65,000

Dr

12,000 12,000

Dr

18,500 18,500

Joint Venture a/c To X a/c (Architect for paid by X)

Dr

10,000 10,000

Joint Venture a/c Joint Bank (Concrete mixer plant purchased) Joint Bank a/c To Joint Venture a/c (Contract price received)

Dr

38,500 38,500

Dr

3,75,000 3,75,000 16,500 16,500 30,000 30,000

X a/c Dr To Joint Venture a/c (Un utilized materials taken over by X) Y a/c Dr To Joint Venture a/c (Concrete mixer plant taken over by Y)

Joint Venture a/c Dr 12,000 To X a/c [Establishment expenses provided to X for 8 8 months ( 18,000 )] 12 Joint Venture a/c Dr. To Joint Bank wages To X a/c material To Y a/c material To Joint Bank material To Joint Bank salaries To Joint Bank cartage To X a/c architect fee To Joint Bank concrete mixer To Profit X 2/3 To Profit Y 1/3

12,000

Rs. 89,000 By Joint Bank contract price received 13,500 By X a/c un utilized material taken 12,000 By Y a/c concrete mixer plant taken 1,65,000 12,000 18,500 10,000 38,500 34,000 17,000

Cr. Rs. 3,75,00 0 16,500 30,000

4,21,500

4,21,50 0

A A/c Dr. Rs. To Joint Venture material taken To Joint Bank By Joint Bank a/c 16,500 1,28,000 By Joint Venture a/c -material -architect fee -establishment -profit 1,44,500 Cr. Rs. 75,000 13,500 10,000 12,000 34,000 1,44,50 0

B A/c Dr. Rs. To Joint Venture a/c -concrete mixer plant taken To Joint Bank a/c By Joint Bank a/c 30,000 By Joint Venture a/c 36,500 By Joint Venture profit 66,500 Joint Bank A/c Dr. To X a/c To Y a/c To Joint Venture concrete price Rs. 75,000 By Joint Venture 37,500 -wages 3,75,000 -material -salaries -cartage -concrete mixer By X a/c By Y a/c 4,87,500 Cr. Rs. 89,000 1,65,00 0 12,000 18,500 38,500 1,28,00 0 36,500 4,87,50 Cr. Rs. 37,500 12,000 17,000 66,500

0 Illustration : 4 X, Y and Z enter into a joint venture sharing profits and losses in the ratio of 5:3:3. No separate set of books are maintained. Amounts contributed and received by different venturers are as follows:

Particular Cost of materials Expenses Sale proceeds received Stock taken over

X Rs. 4,00,000 60,000 1,70,000 30,000

Y Rs. 2,00,000 40,000 3,40,000 60,000

Z Rs, 1,00,000 20,000 6,80,000 90,000

Prepare i) Memorandum Joint Venture Account and ii) Joint Venture with account in the books of all the three parties. Solution Memorandum Joint Venture Account Dr. To X -materials -expenses To Y -materials -expenses To Z -materials -expenses 2,50,000 1,50,000 1,50,000 Rs. 4,00,000 By X -Sales 60,000 -stock taken over 2,00,000 By Y -Sales 40,000 -stock taken over 1,00,000 By Z -Sales 20,000 -stock taken over Cr. Rs. 1,70,000 30,000 3,40,000 60,000 6,80,000 90,000

To profits X 5/11 Y 3/11 Z 3/11

5,50,000 13,70,00 0

13,70,00 0

Books of X Joint Venture with Y and Z Account Dr. To Purchases -materials To Bank -expenses To Profit/loss -profit a/c Rs. 4,00,000 By Bank sale proceeds 60,000 2,50,000 By Purchases stock taken over By Bank -settlement (cheque received) 7,10,000 Books of Y Joint Venture with X and Z Account Dr. To Purchases -materials To Bank -expenses To Profit/loss -profit a/c To Bank settlement (cheque issued) Rs. 2,00,000 By Bank sale proceeds 40,000 1,50,000 By Purchases stock taken over 10,000 Cr. Rs. 3,40,000 60,000 Cr. Rs. 1,70,000 30,000 5,10,000 7,10,000

4,00,000 Books of Z Joint Venture with X and Y Account Dr. Rs.

4,00,000

Cr. Rs.

To Purchases -materials To Bank -expenses To Profit/loss -profit a/c To Bank settlement (cheque issued)

1,00,000 By Bank sale proceeds 20,000 1,50,000 By Purchases stock taken over 5,00,000

6,80,000 90,000

7,70,000

7,70,000

IMPORTANT THEORY
BOOK KEEPING The main aim of every business is to earn profit. Profit is nothing but the excess of Income over expenditure. So to calculate profit the businessman must record the incomes and expenditure related to his business, this recording of business transactions is called book-keeping. Thus book keeping means recording, classifying and summarizing business transaction systematically so that the businessman may be able to know his profit or loss during a specified period. Single-Entry Bookkeeping In a single-entry system, every transaction is recorded just once either as an income or expense, an asset or a liability. The system does not record assets, inventory and revenues, except in memorandum form. The advantage of the single-entry method of bookkeeping is that it is simple, easy to understand and requires little training. The disadvantage is that since all the assets and liabilities of the municipal corporation do not get recorded in the single-entry system, the government will never have the right figures to make the decisions. There is no way to check if the entries made are correct or not which may lead to errors or theft. What Are The Disadvantages Of Single Entry System? The single entry thus failing to record the two-fold aspects of every business transaction is most incomplete and unreliable in its results and fails to give the necessary information to the trader as to how far his business is profitable or otherwise. The system ignores the two-fold aspects of each and every transaction and as such the records in the ledger are incomplete and partial. Under this system as the two-fold aspects of each and every transaction are not recorded a Trial Balance cannot be prepared to test the arithmetical accuracy of the records. Owing to the absence of Nominal Accounts, Profit and Loss Account cannot be prepared. In the absence of real and property Account cannot be prepared. In the absence of nominal accounts, profit and loss account cannot be prepared, and the true financial position of the business cannot be ascertained. Any information obtained under the system will not be free from doubt. Should the proprietor want to sell his businesses, it will be a difficult task to fix proper value of various assets, especially of goodwill. In the absence of various checks, which exist in Double Entry System, fraud is more easily committed and is very difficult to detect. In the absence of any reliable information no comparison can be made between one trading periods with that of another.

REFORMING ACCOUNTING SYSTEMS To mitigate the disadvantages of the cash-based, single-entry system we need to move to an accrual-based, double-entry system. Accrual-based Accounting Systems An accrual-based accounting system records credit transactions also. Revenue is recognized for the period that it was realized and expenses incurred are recorded in the same period irrespective of actual cash flow. DOUBLE ENTRY SYSTEM The system of accounting is based on Dual Aspect concept. According to this concept, every financial transaction involves a two fold aspect (a) receiving of a benefit (b) giving of that benefit, for example if a business has acquired an asset, it must have given up some other asset such as cash. Thus a giver necessarily implies a receiver and a receiver necessarily implies a giver. There must be a double entry to have a complete record of each business transaction, an entry being made in the giving account and an entry of the same amount in the receiving account. The receiving account is termed as debtor and the given account is called creditor. Thus every debit must have a corresponding credit and vice versa and upon this dual aspect has been raised the whole superstructure of double entry system of accounting. Thus we may define the Double Entry System as that system which recognizes and records both the aspects of transaction. This system has been proved to be systemic and has been found of great use for recording the financial affairs of all institutions requiring use of money. ADVANTAGES OF DOUBLE ENTRY SYSTEM 1. Scientific system This system is the only scientific system of recording business transactions as compared to other systems of book keeping. It helps to attain the objectives of accounting. 2. This system maintains a complete record of all business transactions. 3. By the use of this system the accuracy of the accounting work can be established through device of Trial Balance. 4. This system helps in assessment of profit earned or loss suffered by the business though preparation of Profit and Loss A/C. 5. The financial position of the firm can be ascertained at the end of each period, through preparation of Balance Sheet. 6. This system permits accounts to be kept in as much detail as necessary and therefore affords significant information for purposes of control etc. 7. Comparative study is possible results of one year may be compared with those of previous year and reasons for the change may be ascertained. 8. Helps management for decision-making. The management may be able to obtain good information for its work, especially for decision making. 9. No scope for fraud The firm is saved from frauds and misappropriations since full information about all assets and liabilities will be available. It is because of these advantages that the system has been used extensively in all countries. Average due date: The mean date of payment of several sums becoming payable at different dates (applies particularly to a bill of exchange).

What is ACCOUNTING Definition

American Accounting Association defines accounting as the process of identifying, measuring and communicating economic information to permit informed judgments and decision by users of the information. Objectives The main objectives of accounting are i. to maintain accounting records. ii. to calculate the result of operations. iii. to ascertain the financial position. iv. to communicate the information to users.

PROCESS

In order to accomplish its main objective of communicating information to the users, accounting embraces the following functions. i. Identifying: Identifying the business transactions from the source documents. ii. Recording: The next function of accounting is to keep a systematic record of all business transactions, which are identified in an orderly manner, soon after their occurrence in the journal or subsidiary books. iii. Classifying: This is concerned with the classification of the recorded business transactions so as to group the transactions of similar type at one place. i.e., in ledger accounts. In order to verify the arithmetical accuracy of the accounts, trial balance is prepared. iv. Summarizing : The classified information available from the trial balance are used to prepare profit and loss account and balance sheet in a manner useful to the users of accounting information. v. Analyzing: It establishes the relationship between the items of the profit and loss account and the balance sheet. The purpose of analyzing is to identify the financial strength and weakness of the business. It provides the basis for interpretation. vi. Interpreting: It is concerned with explaining the meaning and significance of the relationship so established by the analysis. Interpretation should be useful to the users, so as to enable them to take correct decisions. vii. Communicating: The results obtained from the summarized, analyzed and interpreted information are communicated to the interested parties. What is TRIAL BALANCE ? How it is prepared ?

Trial balance is a statement which shows debit balances and credit balances of all accounts in the ledger. Since, every debit should have a corresponding credit as per the rules of double entry system, the total of the debit balances and credit balances should tally (agree). In case, there is a difference, one has to check the correctness of the balances brought forward from the respective accounts. Trial balance can be prepared in any date provided accounts are balanced. Definition Trial balance is a statement, prepared with the debit and credit balances of ledger accounts to test the arithmetical accuracy of the books J.R. Batliboi. Objectives The objectives of preparing a trial balance are: i. To check the arithmetical accuracy of the ledger accounts. ii. To locate the errors. iii. To facilitate the preparation of final accounts. Advantages The advantages of the trial balance are i. It helps to ascertain the arithmetical accuracy of the book-keeping work done during the period. ii. It supplies in one place ready reference of all the balances of the ledger accounts. iii. If any error is found out by preparing a trial balance, the same can be rectified before preparing final accounts. iv. It is the basis on which final accounts are prepared. Methods A trial balance can be prepared in the following methods. i. The Total Method : According to this method, the total amount of the debit side of the ledger accounts and the total amount of the credit side of the ledger accounts are recorded. ii. The Balance Method : In this method, only the balances of an account either debit or credit, as the case may be, are recorded against their respective accounts. The balance method is more widely used, as it supplies ready figures for preparing the final accounts.

Format

Points to be noted :

i. Date on which trial balance is prepared should be mentioned at the top. ii. Name of Account column contains the list of all ledger accounts. iii. Ledger folio of the respective account is entered in the next column. iv. In the debit column, debit balance of the respective account is entered. v. Credit balance of the respective account is written in the credit column. vi. The last two columns are totalled at the end. WHY FINAL ACCOUNTS Trial balance proves the arithmetical accuracy of the business transactions, but it is not the end. The businessman is interested in knowing whether the business has resulted in profit or loss and what the financial position of the business is at a given period. In short, he wants to know the profitability and the financial soundness of the business. The trader can ascertain these by preparing the final accounts. The final accounts are prepared at the end of the year from the trial balance. Hence the trial balance is said to be the connecting link between the ledger accounts and the final accounts. HOW TO PREPARE FINAL ACCOUNTS In a broad sense Final Accounts means P & L a/c and Balance Sheet. First of all prepare Trial Balance. Trial Balance consists of Net Balances of all ledgers. If the Trial Balance is tallying we can assume the posting of entries are correct. P & L includes Revenue & Expenses post the same to P&L. Then either Net profit / Loss will arrive. Then calculation of depreciation and taxes the net balance will transfer to balance sheet. Balance sheet consists of Source of Fund & Application of funds (Assets & Liabilities)

Distinguish between Receipts and Payment Account AND Income and Expenditure Accounts Receipts & Payments Account Receipts are shown on debit side and payment shown on credit side Starts with the opening balance of cash in hand and at bank Only cash transactions takes place Capital as well as revenue items appear The difference of two sides is the cash in hand and at bank at the end of the periods All receipts and payments are shown irrespective of the year to which they relate Income & Expenditure Account Expenses are shown on debit side and Incomes are shown on credit side

It has no opening balance

Other transactions also take place Only revenue items appear

The difference between is either surplus or deficit for the period Only those expenses and incomes are shown which related to the period for which the account is prepared

Distinguish between Cash Discount and Trade Discount Cash Discount Trade Discount Is a reduction granted by supplier from the list price of goods or services on business consideration re: buying in bulk for goods and longer period when in terms of services

Is a reduction granted by supplier from the invoice price in consideration of immediate or prompt payment

As an incentive in credit management to encourage prompt payment Not shown in the supplier bill or invoice

Allowed to promote the sales

Shown by way of deduction in the invoice itself

Cash discount account opened in the ledger

is

Trade discount account is not opened in the ledger Allowed on purchase of goods It may vary with the quantity of goods purchased or amount of purchases made

Allowed on payment of money It may vary with the time period within which payment is received

Distinguish between Profit and Loss Account AND Income and Expenditure Account

Profit And Loss Account Prepare by undertakings business

Income And Expenditure Account Prepared by organizations non-trading

Credit balance of this account is known as Net profit and added to opening capital

Credit balance is known as excess of income over expenditure or surplus and added to opening capital fund Debit balance is known as excess of expenditure over income or deficit and deducted from opening capital fund To check correctness of accounts, receipts and payment account is prepared before preparing this account.

Debit balance of this account is known as Net loss and deducted from opening capital To check correctness of accounts, trial balance is prepared before preparing this Profit & Loss Account

Distinguish between Capital Receipts and Revenue Receipts

Capital Receipts (a)

Revenue Receipts

Receipts derived from activities which are not (a) Receipts related to NORMAL part of the normal trading ACTIVITIES of the business activities of the business Appears as capital or (b) Credited as revenue to Trading liabilities in the Balance and Profit & Loss Account Sheet Examples: receipts from sales of

(b)

Examples: receipts of cash

brought in by partners, shareholders, debenture holders and bank loans

goods and services, rent, commission and interest on bank deposits received by the business.

Valuation of Stocks The valuation of stock can be classified depending on the various instances when we will be required to value stocks based on when we do it are 1. 2. 3. 4. 5. Valuation of Closing Stock at the end of the accounting period. Valuation of Stock lost on account of abnormal reasons. Valuation of Stock in transit. Valuation of Stock transferred to other businesses. Valuation of Stock Returned to stores

Specimen with Example - Statement for Valuation of Stocks Particulars Goods Consigned Add: Consignor Direct Expenses 1. Freight 8,000 2. Loading Charges 3,000 Total 11,000 1,100 Less: Stock - in - Transit Goods Collected by the Consignee Add: Consignee Direct Expenses 1. Octroi 4,000 2. Unloading Charges 1,000 Total 5,000 100 1,000 60 60 60 5 66,000 6,000 60,000 5,000 Quantity (in units) 1,100 Rate (in Rs/unit) 50 10 Amount (in Rs) 55,000 11,000

Value of Stock received by the Consignee Add: Opening Stock with the Consignee Average Value of total stock

1,000 100 1,100

65.00 62 64.73

65,000 6,200 71,200

Value of Unsold Stock Cost of Goods Sold

150 950

65 (?) 64.68

9,750.00

Self-balancing ledgers: A system which makes use of control accounts so that each ledger will balance on its own. A control account in a subsidiary ledger will be mirrored with a control account in the nominal ledger. RULES OF DEBIT AND CREDIT 1. IN CASE OF PERSONAL ACCOUNT(these are the accounts in the names of persons eg K SONS & COMPANY) DR THE RECEIVER CR THE GIVER 2. IN CASE OF REAL ACCOUNT(these account are based on amount which we get by selling or purchase of fixed asset) DR WHAT COMES IN CR WHAT GOES OUT 3. IN CASE OF NOMINAL ACCOUNT(these account based on expenses eg. telephone expenses etc) DR ALL EXPENSES AND LOSSES

BANK RECONCILIATION STATEMENT The cash Book and Pass Book are prepared separately. The Businessman prepares the Cash Book and the Pass Book is prepared by the Bank (here by cash book we mean three column cash Book). But as both the books are related to one person and same transactions are recorded in both the books so the balance of both the books should match i.e. the balance as per Pass Book should match to balance at bank as per cash book. But many a times these two balances do not agree then, it becomes necessary to reconcile them by preparing a statement which is called Bank Reconciliation Statement. A BANK RECONCILIATION STATEMENT may be defined as a statement showing the items of differences between the cash Brook balance and the pass book balance, prepared on any day for reconciling the two balances. A transaction relating to bank has to be recorded in both the books i.e. Cash Book and Pass Book but sometimes it happens that a bank transaction is recorded only in one book and not recorded simultaneously in other book this causes difference in the two balances. The need and importance of the bank reconciliation statement may be given as follows:

1. The reconciliation process helps in bringing out the errors committed either in cash Book or Pass Book. 2. Bank reconciliation statement may also show any undue delay in the clearance of cheques. 3. Sometimes the cashier may have the tendency of cheating like he may made entries in the Cash Book only but never deposit the cash into bank. These types of frauds by the entrepreneurs staff or bank staff may be detected only through bank reconciliation statement. So this way bank reconciliation statement acts as a control technique too. CLASSIFICATION OF ACCOUNTING ERRORS Various accounting errors can be classified as follows : A. On the basis of their nature (a) Errors of omission (b) Errors of commission (c) Errors of principle B. On the basis of their impact on ledger accounts (a) One sided errors (b) Two sided errors.

A. On the basis of their nature (a) Errors of omission As a rule, a transaction is first recorded in books of accounts. However, accountant may not record it at all or record it partially. It is called an error of omission. For example, goods purchased on credit are not recorded in Purchases Book or discount allowed to a customer was not posted to Discount A/c in the ledger. In the first case it is a complete omission. Therefore, both debit and credit are affected by the same amount. Therefore, it does not affect the Trial Balance. The second example is the example of partial omission. It affects only one account i.e. Discount A/c. Therefore it affects Trial Balance. (b) Errors of commission When the transaction has been recorded but an error is committed in the process of recording, it is called an error of commission. Error of commission can be of the following types: (i) Errors committed while recording a transaction in the Special Purpose books. It may be : l Recording in the wrong book for example purchase of goods from Rakesh on credit is recorded in the Sales Book and not in the Purchases Book. l Recording in the book correctly but wrong amount is written. For example, goods sold to Shalini of Rs.4200 was recorded in the Sales Book as Rs.2400 In the above two cases two accounts are affected by the same amount, debit of one and the credit of the other. Therefore, trial balance will not be affected. (ii) Wrong totalling : There may be a mistake in totalling Special Purpose Book or accounts. The totalled amounts may be less than the actual amount or more than the actual amount. First is a case of undercasting and the other of overcasting. For example, the total of Purchases Book is written as Rs.44800 while actual total is Rs. 44300, the total of Sales Day Book is written as Rs.52500 while it is Rs.52900. It is a case of an error affecting one account hence it affects trial balance. (iii) Wrong balancing : While closing the books of accounts at the end of the accounting period, the ledger accounts are balanced. Balance is calculated of the totals of the two sides of the account. It may be wrongly calculated. For example, the total of the debit column of Mohans A/c

is Rs.8600 and that of credit column is Rs.6800. The balance calculated is as Rs.1600 while the actual balance is Rs.1800. It has affected one account only, therefore, the Trial Balance gets affected. (iv) Wrong carry forward of balances or totals : Totals or balances are carried forward to the next page. These may be carried forward incorrectly. For example, the total of one page of the Purchases Book. of Rs.35,600 is carried to next page as Rs.36500. Again the error affects one account only. Therefore, Trial Balance gets affected. (v) Wrong Posting : Transactions from the journal or special purpose books are posted to the respective accounts in the ledger. Error may be committed while carrying out posting. It may take various forms such as, posting to wrong account, to the wrong side of the account or posted twice to the same account. For example goods purchased of Rs.5400 from Rajesh Mohanti was posted to the debit of Rajesh Mohanti or posted twice to his account or posted to the credit of Rakesh Mohanti. In the above examples, only one account is affected because of the error therefore, Trial Balance is also affected. Compensating Errors Two or more errors when committed in such a way that there is increase or decrease in the debit side due to an error, also there is corresponding decrease or increase in the credit side due to another error by the same amount. Thus, the effect on the account is cancelled out. Such errors are called compensating errors. For example, Sohans A/c is debited by Rs 2500 while it was to be debited by Rs 3500 and Mohans A/c is debited by Rs 3500 while the same was to be debited by Rs 2500. Thus excess debit of Mohans A/c by Rs.1000 is compensated by short credit of Sohans A/c by Rs.1000. As the debit amount and the credit amount are equalised, such errors do not affect the agreement of Trial Balance, but the fact remains that there is still an error. (c) Error of Principle Items of income and expenditure are divided into capital and revenue categories. This is the basic principle of accounting that the capital income and capital expenditure should be recorded as capital item and revenue income and revenue expenditure should be recorded as revenue item. If transactions are recorded in violation of this principle, it is called error of principle i.e. the capital item has been recorded as revenue item and revenue item is recorded as capital item. For example, Rs. 5000 spent on the repairs of building is debited to Building A/c while it should have been debited to Repair to Building A/c. It is a case of error of principle because expenditure on repairs of building is a revenue expenditure, while it has been debited to Building A/c taking it as an item of capital expenditure. As both the sides i.e. credit as well as debit remain affected, the trial Balance also is not affected by such errors. B. On the basis of impact on ledger accounts Errors may affect one side i.e. either debit or credit side of an account or its two sides i.e. both debit and credit thus errors may be divided as: (a) One sided errors (b) Two sided errors (a) One sided errors Accounting errors that affect only one side of an account which may be either its debit side or credit side, is called one sided error. The reason of such error is that while posting a recorded transaction one account is correctly posted while the corresponding account is not correctly posted. For example, Sales Book is overcast by Rs.1000. In this case only Sales A/c is wrongly credited by excess amount of Rs.1000 while the corresponding account of the various debtors have been correctly debited. Another example of one sided error is Rs 2500 received from Ishita is wrongly debited to her account. In this case, only Ishitas account is affected, amount in the cash-book is correctly written. This type of mistake does affect the trial balance.

(b) Two sided errors The error that affects two separate accounts, debit side of the one and credit side of the other is called two sided error. Example of such error is purchase of machinery for Rs.1000 has been entered in the Purchases Book. In this case, Purchases A/c is wrongly debited while Machinery A/c has been omitted to be debited. So two accounts i.e. Purchases A/c and the Machinery A/c are affected.