Senior Secondary Course

ACCOUNTANCY (320)

Course Coordinator
Dr. Piyush Prasad

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NATIONAL INSTITUTE OF OPEN SCHOOLING

(An Autonomous Institution under MHRD, Govt. of India)
A-24-25, Institutional Area, Sector-62, NOIDA-201309 (U.P.)
Website: www.nios.ac.in, Toll Free No. 18001809393
Printed on 60gsm. paper with NIOS water mark

MAY,2015 (22,000 copies)

 ADVISORY COMMITTEE

Prof. C.B. Sharma Dr. Kuldeep Agarwal Dr. Rachna Bhatia

Chairman Director (Academic) Assistant Director (Academic)
NIOS, NOIDA (UP) NIOS, NOIDA (UP) NIOS, NOIDA (UP)

CURRICULUM COMMITTEE

Prof. Jawahar Lal Dr. Shipra Vaidya Dr. A.K. Sahajpal Dr. H.V. Jhamb
Professor Professor, Department of Reader Reader
Deptt. of Commerce Social Sciences & Humanities Deptt. of Correspondence Deptt. of Commerce
Delhi School of Eco. NCERT, New Delhi 16 D-32, University Campus, Khalsa College
Delhi Sector-14, Chandigarh Delhi

Dr. Jagmohan Gupta Ms. Meena Goel Sh. S.K. Bansal Dr. Piyush Prasad
Reader Principal Lecturer (Retd.) Academic Officer
Deptt. of Commerce, Navhind Girls Sr. Sec. School Commercial Sr. Sec. School (Accountancy)
Moti Lal Nehru College New Rohtak Road Daryaganj NIOS, NOIDA (UP)
New Delhi - 21 New Delhi - 05 New Delhi

COURSE WRITERS/REVIEWERS

Sh. S.K. Bansal Smt. Siba S. Dr. A.K. Yadav Dr. Shipra Vaidya
Lecturer (Retd.) PGT Commerce HOD Commerce Professor, Department of
Commercial Senior East Point School KMPG, Badalpur Social Sciences & Humanities
Secondary School, Delhi NCERT, New Delhi 16
Daryaganj, New Delhi

Dr. Piyush Prasad Dr. Neha Agarwal Sh. Sanjeev Kumar Smt. Alka Rani Dr. Amit Agarwal
Academic Officer Financial Expert Vice Principal PGT, Commerce Lecturer
(Accountancy) GAIL Town Ship Govt. Co-edu. School JP International School Govt. Inter College
NIOS, NOIDA (UP) Pata, UP Preet Vihar, Delhi Meerut Champwat, UK

CONTENT EDITOR

Dr. Piyush Prasad Sh. S.S. Seharawat Sh. Sanjeev Kumar Dr. Neha Agarwal Smt. Alka Rani
Academic Officer Former D. C Vice Principal Financial Expert PGT, Commerce
(Accountancy) KVS, Delhi Govt. Co-edu. School GAIL Town Ship JP International School
NIOS, NOIDA (UP) Preet Vihar, Delhi Pata, UP Meerut

GRAPHIC ILLUSTRATOR

M.K. Computers
Shop No. 19, DDA Market
Bhera Enclave, N. Delhi - 87
Chairman’s Message

Dear learners
As the needs of the society in general, and some groups in particular, keep on
changing with time, the methods and techniques required for fulfilling those
aspirations also have to be modified accordingly. Education is an instrument of
change. The right type of education at right time can bring about positivity in the
outlook of society, attitudinal changes to face the new/fresh challenges and the
courage to face difficult situations.

This can be very effectively achieved by the curriculum renewal at regular intervals
of time. A static curriculum does not serve any purpose, as it does not cater to the
current needs and aspirations of the individual and society.

For this purpose only, educationists from all over the country come together at
regular intervals to deliberate on the issues of changes needed and required. As an
outcome of such deliberations, the National Curriculum Framework (NCF 2005)
came out, which spells out in detail the type of education desirable/needed at various
levels of education – primary, elementary, secondary or senior secondary.

Keeping this framework and other national and societal concerns in mind, we have
currently revised the curricula of Accountancy course at Senior Secondary Level, as
per the Common Core Curriculum developed by COBSE (Council of Boards of School
Education) and NCERT (National Council for Educational Research and Training)
making it current and need based. Textual material production is an integral and
essential part of all NIOS programmes offered through open and distance learning
system. Therefore, we have taken special care to make the learning material user
friendly, interesting and attractive for you.

I would like to thank all the eminent persons involved in making this material
interesting and relevant to your needs. I hope you find it appealing and absorbing.

On behalf of National Institute of Open Schooling, I wish you all a bright and
successful future.

Prof. C.B. Sharma

Chairman
NIOS
A Note From the Director

Dear Learner,
The Academic Department at the National Institute of Open Schooling tries to bring
you new programmes every now and then in accordance with your needs and
requirements.
The Accountancy course at Senior secondary level has now been revised as per the
Common Core Curriculum developed by COBSE (Council of Boards of School
Education) and NCERT (National Council for Educational Research and Training)
making it current and need based.
The National Curriculum Framework developed by the National Council for
Educational Research and Training was kept as a reference point. Leading experts
in the subject of the country were involved and with their active involvement, study
materials based on the new curriculum have been updated. Old, outdated
information has been removed and new, relevant things have been added.
I am happy to place this new revised study material in Accountancy in your hands. I
hope you will find the new material that is now in your hands interesting and exciting.
Any suggestions for further improvement are welcome.
Let me wish you all a happy and successful future.

(Dr. Kuldeep Agarwal)

Director (Academic)
National Institute of Open Schooling
 A Word With You
Dear Learner,
I welcome you to this course in Accountancy for the Senior Secondary level.
We all know the importance of business in our everyday life. It not only fulfills our basic needs of recording
transactions but also provides accounting information to users for career decision making. It is a dynamic
process that keeps on changing as per the requirements and demands of the society. The procedure and
practices of business in the past are completely different from modern days. It is more informative than
what it was in past. The use of modern technology, government’s policies and the awareness among
common masses have made it user friendly. Therefore, a systematic effort is required to understand, analyse
and respond to the changes that affect the functioning of accounting in the present day society.
Keeping in mind the above, the curriculum in the subject of Accountancy at Senior Secondary level has
been designed. The whole learning material of the subject has been published in the form three volumes
for your convenience. The first book has two modules. Learning experiences considered essential for
Accountancy are described in the first two modules. The module on Basic Accounting consist lessons on
how to record transaction in books of Accounts while the second module of Trial Balance & Computers
explain about the pre work done for perfect financial statement with the use of computers in Accounting,
and these two modules are Tutor Marked Assignment Based modules.
The second volume which contains three modules are again the core modules. The third module in
Financial Statements of Profit & Not for Profit Organisations explains as how the financial statements
are prepared by various organisations. The fourth module in Partnership Accounts explains how various
types of accounts are maintained by Partnership firm under different situations. The fifth module in
Accounting for Shares & Debentures, which contains lessons on different situations in raising capital by
way of issue of Shares & Debentures by companies.
The third volume, which is an optional volume consist of two modules as Analysis of Financial Statement
and Elementary Cost Accounting. Learners has to opt any one module out of the two. Analysis of
Financial Statement consist four lessons as how to analyse the results of Business to corrective measures
& take future decisions while the Application of Computer in Financial Accounting again consist of four
lessons as how to do accounting with help of computers.
For your practice, a sample question paper along with the question paper design and marking scheme is
provided at the end of the second book.
To make your learning process interesting and useful we have changed the layout of the pages. You will
also find some attractive icons in the lesson symbolising the content of different sections. The details are
given separately under the heading ‘How to study your lessons’.
I am sure that you will find the lessons and their approach interesting and would be able to apply your
knowledge in the real life situations. So read and practice all the lessons of this course carefully and be
prepared for the examination with confidence. If you face any difficulty in your studies, please feel free
to write to me. Your suggestions are valuable for us.
Good luck and happy learning.
Dr. Piyush Prasad
Academic Officer
How To Study Your Lessons
Congratulation! You have accepted the challenge to be a self-learner. It means, you have to organise
your study, learn regularly, keep up your motivation and achieve your goal. Here it is solely you, who
is responsible for your learning. NIOS is with you at every step. It has developed the material in
Accountancy. A format supporting independent learning has been followed. You can take the best
out of this material if you follow the instructions given below.

Title: The title of the lesson will give a clear indication of the contents within. Do read it.

Introduction: This will introduce you to the lesson and also link it to previous one.

Objectives: These are statements of outcomes of learning expected from you after studying
the lesson. You are expected to achieve them. Do read them and check if you have achieved
the same.

Content: Total content has been divided into sections and sub-sections. A section leads
you from one content element to another and sub-section helps you in comprehension of
the concepts in the content element. The text in bold, Italics or boxes is important and must
be given attention.

Intext Questions: Objective types, self-check questions are asked after every section,
the answers to which are given at the end of the lesson. These will help you to check your
progress. Do solve them. Successful completion will allow you to decide whether to proceed
further or go back and learn the unit again.

Notes: Each page carries empty space on the outer margins for you to write important
points or make notes.

What You Have Learnt : It is the summary of the main points of the lesson. It will help in
recapitulation and revision. You are welcome to add your own points to it also.

Terminal Questions : These are very short, short and long answer type questions that
provide you an opportunity to practice for better understanding of the whole topic.

Answers to Intext Questions: These will help you to know, how correctly you have
answered the Intext questions.

Activity : Activities, if done by you, will help you to understand the concept clearly.
 CONTENTS

Module/ Name of the Lesson Page No.

Module 1 : Basic Accounting

1. Accounting - An Introduction ................................................................................. 3

2. Accounting Concepts ............................................................................................ 25
3. Accounting Conventions and Standards ................................................................. 40
4. Accounting for Business Transactions ..................................................................... 52
5. Journal .................................................................................................................. 82
6. Ledger................................................................................................................... 105
7. Cash Book ............................................................................................................ 122
8. Special Purpose Books ......................................................................................... 147

Module 2 : Trial Balance and Computers

9. Trial Balance .......................................................................................................... 173

10. Bank Reconciliation Statement................................................................................ 193
11. Bills of Exchange .................................................................................................. 207
12. Errors and their Rectification .................................................................................. 229
13. Computer and Computerised Accounting System ................................................... 247

z Appendix - B : Curriculum

z Appendix - C : Feedback Form

 Overview of the Learning Material

1
Module-I : Basic Accounting 8. Special Purpose Books
1. Accounting - An Introduction
Module-II : Trial Balance and Computers
2. Accounting Concepts
9. Trial Balance
3. Accounting Conventions and Standards
4. Accounting for Business Transactions 10. Bank Reconciliation Statement

5. Journal 11. Bills of Exchange

6. Ledger 12. Errors and their Rectification
7. Cash Book 13. Computer and Computerised Accounting System

2
Module-III : Financial Statements Module-IV : Partnership Accounts
14. Depreciation 22. Partnership - An Introduction
23. Admission of a Partner
15. Provision and Reserves
24. Retirement and Death of a Partner
16. Financial Statements - An Introduction 25. Dissolution of a partnership firm
17. Financial Statements - I Module-V : Company Accounts
18. Financial Statements II 26. Company - An Introduction
19. Not for Profit Organisations - An Introduction 27. Issue of Shares
28. Forfeiture of Shares
20. Financial Statements (Not for Profit Organisations)
29. Reissue of Forfeited Shares
21. Accounts From Incomplete Records 30. Issue of Debentures

3
Module-VI : Analysis of Financial Statements Module-VII : Application of Computers in Financial
Accounting
31. Financial Statements Analysis-An Introduction
35. Electronic Spread Sheet
32. Accounting Ratios-I
36. Use of Spread-sheet in Business Application
33. Accounting Ratios-II
37. Graphs and Charts for Business
34. Cash Flow Statement
38. Database Management System for Accounting
 Module - I
BASIC ACCOUNTING
Marks 10 Hours 25

Accounting is the language of business. It helps the busines not only in finding out profits/losses
for a period and its financial position on a particular date but also helps in management of
business. It has its own well designed and established principles which are guided by some
concepts and conventions Accounting is recording of transactions in a systematic manner in
various types of books and their posting to a master book called ledger.

This module has been designed to introduce accounting to the learners. This familiarises the
learners with some basic accounting terms, accounting concepts, conventions and standards.
This enables them to prepare Journal, Cash Book and Special Purpose Books and their posting
to Ledger.

Lesson 1. Accounting - An Introduction

Lesson 2. Accounting Concepts
Lesson 3. Accounting Conventions and Standards
Lesson 4. Accounting for Business Transactions
Lesson 5. Journal
Lesson 6. Ledger
Lesson 7. Cash Book
Lesson 8. Special Purpose Books
MODULE - 1
Basic Accounting

Notes

2 ACCOUNTANCY
 MODULE - 1
Basic Accounting

ACCOUNTING - AN INTRODUCTION Notes

Whenever your mother asks you to go to the nearby grocery store to buy items of daily
use like match box, candle stick, soap cake, coffee, spices etc. you need not pay for
these items immediately. When you buy these items, the store owner immediately opens
the page of a note book on which your father’s name is written. He records the value
of items purchased. At the end of the month, your father goes to him. He again opens
the same page tells the total amount to be paid and records when your father makes the
payment. In a similar manner, he keeps the record of other customers also. Whenever
he gets commodities from suppliers he records the same and also records the payment
he makes to them. Similarly, every business small or big, sole proprietor or a firm
keeps the record of the business transactions. Have you ever thought why do they
keep record of business transactions? If they do not keep the record how will they
know how much, when and to whom they have to make payments or from whom, how
much and when they have to receive payments or what they have earned after a particular
period and so on. Recording of transactions by a businessman in proper books and in
a systematic manner is known as accounting. In this lesson you will learn about this in
detail.

OBJECTIVES
After studying this lesson you will be able to
explain the meaning of Book-Keeping;
state the meaning and nature of accounting;
distinguish between book keeping and accounting;
explain the advantages & limitations of accounting;
explain the branches of accounting;

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MODULE - 1 Accounting - An Introduction
Basic Accounting
state the functions and objectives of financial accounting;

explain accounting as an information system for decision making by the interested

users and

explain various accounting terms.

1.1 BOOK KEEPING AND ACCOUNTING

Notes A business undertakes number of transactions. Can you estimate the number of
transactions a business undertakes? It depends upon the size of a business entity. Every
day business transactions may be around hundreds/thousands. Can a businessman
remember all these transactions in every respect? Not at all. So it becomes necessary
to record these business transactions in details and in a systematic manner. Recording
of business transactions in a systematic manner in the books of account is called book-
keeping. Book-Keeping is concerned with recording of financial data. This may be
defined as.

“The art of keeping a permanent record of business transactions is

book-keepng”.

From books of accounts important details such as total sales, total purchases, total
cash receipts, total payments, etc. may be ascertained. As you know the main objective
of business is to earn profits. In order to ascertain the profit earned during a period,
mere recording of business transactions is not enough. Accounting involves not only
book keeping but also many other activities. In 1941, the American Institute of Certified
Public Accountants (AICPA) defined accounting as

“The art of recording, classifying, summarising, analysing and

interpreting the business transactions systematically and communicating
business results to interested users in accounting”

Accounting is identified with a system of recording of business transactions that create

economic information about business enterprises to facilitate decision making. The
function of accounting is to provide quantitative information, primarily financial in nature,
about economic entities, that is intended to be useful in making economic decisions.

The American Accounting Association defined accounting as :

“It is the process of identifying, measuring, recording and communicating the

required information relating to the economic events of an organisation to the
interested users of such information.

4 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
In order to appreciate the nature of accounting it is necessary to understand the following
relevant aspects of the definition of accounting:

z Economic events : It is the occurring of the consequence to a business organisation

which consists of transactions that are measurable in monetary terms. Purchase of
a Machinery, installing and keeping it ready for manufacturing is an economic event
which consists of a number of financial transactions. These transactions are (a)
buying the machine, (b) transporting the same, (c) preparing the site for its installation Notes
and (d) incurring expenditure on installing the same.

z Identification, Measurement, Recording and Communication :

Identification implies determining what transactions are to be recorded i.e. items

of financial character are to be recorded. For example, goods purchased for cash
or on credit will be recorded. Items of non-financial character such as changes in
managerial policies, etc. are not recorded in the books of accounts.

Measurement means quantification of business transactions into financial terms

by using monetary unit. If an event cannot be quantified in monetary terms, it is not
considered fit for recording in the books of the firm. That is why important items
like appointment, signing of contracts, etc. are not shown in the books of accounts.

Recording : Having identified and measured the economic events in financial terms,
these are recorded in the books of accounts in monetary terms date wise. The
recording of the business transactions is done in such a manner that the necessary
financial information is summarized according to well established accounting
practices.

Communication : The economic events are identified, measured and recorded in

such a manner that the necessary relevant information is generated and communicated
in a certain form to the management and other internal and external users of
information. The financial information is regularly communicated through accounting
reports.

z Organisation : refers to a business enterprise whether for profit or not for profit
motive.

z Interested users of information. Many users need financial information to make

important decisions. These users can be investors, creditors, labour unions, Trade
Associations, etc.

ACCOUNTANCY 5
MODULE - 1 Accounting - An Introduction
Basic Accounting
Evolution of Accounting
As per Indian mythology Chitra Gupta is responsible for maintaining accounts
in God’s court.
A book on Arthashasthra written by Kautilya who was a minister in Chandra
Gupta’s kingdom twenty three centuries ago mentions about the accounting
practices in India. It describes how accounting records have to be maintained.
Notes In China and in Egypt accounting was used for maintaining revenue records of
the government treasury.
A book on Arithmetica Geometrica, Proportion at Proportionality
(Review of Arithmetic and Geometric proportion) by an Italian Luca Pacioli is
considered as the first authentic book on double entry book keeping. In his
book he used the present day popular terms of accounting Debit (Dr.) and
Credit (Cr). He also discussed the details of memorandum, journal, ledger and
specialised accounting procedures. He also stated that, “all entries have to be
double entries, i.e. if you make one creditor you must make some debtor.

Accounting process can be summarised as

The Accounting
Process

Accounting links decision Communicating

Economic makers with economic Accounting
Events activities and with the results Information
of their decisions

Decision makers
(internal and
external users)

Accounting Process

Difference between book keeping and accounting : Book keeping and accounting can
be differentiated on the basis of nature, objective, function, basis, level of knowledge,
etc.

6 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
Difference between Book Keeping and Accounting
Basis of Book-keeping Accounting
Difference
Nature It is concerned with identifying financial It is concerned with summarizing the
transactions; measuring them in monetary recorded transactions, interpreting
terms; recording and classifying them. them and communicating the results.
Objective It is to maintain systematic records of It aims at ascertaining business
financial transactions. income and financial position by
maintaining records of business Notes
transactions.
Function It is to record business transactions. So its It is the recording, classifying,
scope is limited. summarizing, interpreting business
transactions and communicating the
results. Thus its scope is quite wide.
Basis Vouchers and other supporting documents Book-keeping works as the basis for
are necessary as evidence to record the accounting information.
business transactions.
Level of It is enough to have elementary For accounting, advanced and in-
Knowledge knowledge of accounting to do book- depth knowledge and understanding
keeping. is required.
Relation Book-keeping is the first step to Accounting begins where book-
accounting. keeping ends.

INTEXT QUESTIONS 1.1

I. Fill in the blanks with suitable word/words:
i. Keeping systematic record of business transactions is known as ___________.
ii. The next step after classification of recorded transactions is ___________.
iii. The whole process of recording, classifying, summarizing and interpreting the
business transactions systematically and communicating business results to the
interested users of financial information is known as ___________.
iv. Interested users of accounting information are ___________.
II. Identify transactions related to book-Keeping or accounting and write B
for book-keeping and A for accounting against the space provided:
i. Credit Sales/Purchases (................)
ii. Cash Purchases/Sales (................)
iii. Calculation of business profits (................)

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MODULE - 1 Accounting - An Introduction
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iv. Find out total debtors (................)
v. Find out financial position of the business enterprise (..................)

1.2 BRANCHES AND OBJECTIVES OF ACCOUNTING

Branches of Accounting
The changing requirements of the business over the centuries have given rise to specialized
branches of accounting and these are :
Notes
Financial Accounting
It is concerned with recording the transactions of financial character, summarising and
interpreting them and communicating the results to the users. It ascertains profit earned
or loss incurred during a period (usually one year as accounting year) and the financial
position as on the date when the accounting period ends. It can provide financial
information required by the management and other parties. The word accounting and
financial accounting are used interchangeably. At present we are concerned with financial
accounting only.
Cost Accounting
It analyses the expenditure so as to ascertain the cost of various products manufactured
by the firm and fix the prices. It also helps in controlling the costs and providing necessary
costing information to management for decision making.
Management Accounting
It is concerned with generating information relating to funds, cost and profits etc. This
enables the management in decision making. Basically, it is meant to assist the
management in taking rational policy decisions and to evaluate the impact of its decisions
and actions and the performance of various departments.
Tax Accounting
This branch of accounting has grown in response to the difficult tax laws such as relating
to income tax, sales tax etc. An accountant is required to be fully aware of various tax
legislations.
Social Accounting
This branch of accounting is also known as social reporting or social responsibility
accounting. It discloses the social benefits created and the costs incurred by the
enterprise. Social benefits include such facilities as medical, housing, education, canteen,
provident fund and so on while the social costs may include such matters as exploitation
of employees, industrial interest, environment pollution, unreasonable terminations, social
evils resulting from setting up industries etc.

8 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
Objectives and Functions of Financial Accounting
The main objectives of financial accounting are as under :
Finding out Various Balances
Systematic recording of business transactions provides vital information about various
balances like cash balance, bank balance, etc.
Providing Knowledge of Transactions
Systematic maintenance of books provides the details of every transactions. Notes
Ascertaining Net Profit or Loss
Summarisation in form of Profit and Loss Account provides business income over a
period of time.
Depicting Financial Position
Balance sheet is prepared to depict financial position of business means what the business
owns and what it owes to others.
Information to All Interested Users
After analysis and interpretation, business performance and position are communicated
to the interested users.
Fulfilling Legal Obligations
Vital accounting information helps in fulfilling legal obligations e.g. sales tax, income tax
etc.
Functions of Accounting
The function of accounting is to provide quantitative information primarily financial in
nature about economic entities, which is intended to be useful in making economic
decisions. Financial accounting performs the following major functions:
Maintaining SystematicRrecords
Business transactions are properly recorded, classified under appropriate accounts
and summarized into financial statements.
Communicating the financial results
It is used to communicate financial information in respect of net profits (or loss), assets,
liabilities etc. to the interested parties.
Meeting Legal Requirements
The provisions of various Laws such as Companies Act, 1956 Income Tax and Sales/
VAT Tax Acts, require the submission of various statements i.e. Annual accounts, Income
Tax returns, Returns for VAT etc.

ACCOUNTANCY 9
MODULE - 1 Accounting - An Introduction
Basic Accounting
Fixing responsibility
It helps in computation of profits of different departments of an enterprise. This facilitates
the fixing of the responsibility of departmental heads.
Decision making
It provides the users the relevant data to enable them make appropriate decisions in
respect of investment in the capital of the business enterprise or to supply goods on
Notes credit or lend money etc.
Advantages of Accounting
1. Financial Information about Business : Financial performance during the
accounting period, i.e., profit or loss and also the financial position at the end
of the accounting period is known through accounting.
2. Assistance of Management : The management makes business plans, takes
decision and exercise control on affairs on the basis of accounting information.
3. Replace Memory : A systematic and timely recording of transactions obviates
the necessity to remember the transactions. The accounting record provides
this necessary information.
4. Facilitates Comparative Study : A systematic record enables a businessman
to compare one year’s results with those of other years and locate significant
factors leading to the change, if any.
5. Facilitates Settlement of Tax Liabilities : A systematic accounting record
immensely helps settlement of income tax, sales tax, VAT and excise duty
liabilities since it is a good evidence of the correctness of transactions.
6. Facilitates Loans : Loan is granted by the banks and financial institutions on
the basis of growth potential which is supported by the performance.
Accounting makes available the information with respect to performance.

7. Evidence in Court : Systematic record of transactions is often accepted by

the Courts as good evidence.

8. Facilitates Sale of Business : If someone desires to sell his business, the accounts
maintained by him will enable the ascertainment of the proper purchase price.

9. Assistance in the Event of Insolvency : Insolvency proceedings involve

explaining many transactions that have taken place in the past. Systematic
accounting records assist a great deal in such a situation.

10 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
10. Helpful in Partnership Accounts : At the time of admission of a partner, retirement
or death of a partner and dissolution of the firm, accounting records are of vital
importance and use. It is so because such records provide the basis to reach a
settlement.
Limitations of Accounting
1. Accounting information is expressed in terms of Money : Non-monetary
events or transactions are completely omitted. Notes
2. Fixed assets are recorded in the accounting records at the original cost :
Actual amount spent on the assets like building, machinery, plus all incidental charges
is recorded. In this way the effect of rise in prices is not taken into consideration.
As a result the Balance Sheet does not represent the true financial position of the
business.
3. Accounting information is sometimes based on estimates: Estimates are often
inaccurate. For example, it is not possible to predict the actual life of an asset for
the purpose of depreciation.
4. Accounting information cannot be used as the only test of managerial
performance on the basis of mere profits : Profit for a period of one year can
readily be manipulated by omitting certain expenses such as advertisement, research
and development, depreciation etc. i.e. window dressing is possible.
5. Accounting information is not neutral or unbiased : Accountants ascertain
income as excess of revenue over expenses. But they consider selected revenue
and expenses for calculating profit of the concern. They also do not include cost of
such items as water, noise or air pollution i.e. social cost, they may also use different
methods of valuation of stock or depreciations.

INTEXT QUESTIONS 1.2

I. Following are the statements relating to various branches of accounting.
Write against each the name of the branch of accounting to which the
same belongs:
i. It analyses the expenditure so as to ascertain the cost of products manufactured
by the concern.
ii. Accounting that discloses the social benefits and the costs incurred by the
business enterprises.

ACCOUNTANCY 11
MODULE - 1 Accounting - An Introduction
Basic Accounting
iii. Accounting that is concerned with generating information that will enable the
management in decision making.
II. How each of the following statements is a limitation of accounting?
i. Fixed assets are recorded in the accounting records at the original cost.
ii. Accounting information is sometimes based on estimates.
iii. Accounting information cannot be used as the only test of managerial
Notes performance on the basis of mere profit.
iv. Accounting information is expressed in terms of money.
III. How each of the following statements is an advantage of Accounting :
i. Evidence in Court
ii. Replaces Memory
iii. Financial Information about Business.

1.3 ACCOUNTING AS AN INFORMATION SYSTEM AND

ITS USERS
In 1970, the Accounting Principles Board of The American Institute of certified Public
Accountants (AICPA) emphasized that the function of accounting is to provide
quantitative information, primarily financial in nature, about economic entities, that is
intended to be useful in making economic decisions. Accounting is often called the
“Language of Business”. It is the common language used to communicate financial
information to individuals, organisations, government agencies about various aspects
of business such as financial position, operating results (i.e. Profit or loss) and cash
flows. Users, both inside and outside the business, have to make decisions concerning
the allocation of limited economic resources. In order to ensure that resources are
allocated in an efficient and effective manner, users require financial information
for the purpose of making decisions. Accounting provides information that is useful in
making business and economic decisions. It is the primary means of communicating
financial information to owners, lenders, managers,. Government and its regulatory
agencies ‘-and -others- who have interest in an enterprise. It helps the users in taking
better decisions by providing relevant, reliable and timely information on the financial
and operational position of an enterprise.
It is observed that almost all business enterprises maintain detailed accounting records.
Even the most intelligent manager with a sharp memory would find it difficult to remember
the daily transactions simply by observing them. So he/she must rely upon the accounting
process which begins with the recording of business transactions and ends up with the
preparation of summarized financial statements. Thus, Accounting as an information
system is necessitated by great complexity of modern business organisations.

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Basic Accounting
Accounting as a Source of Information
“Accounting is a service activity. It’s function is to provide qualitive information,
primarily financial in nature, about economic entities that is intended to be useful
in making economic decisions.”

As an information system, accounting collects data and communicates economic

information about the organisation to a number of users whose decisions and actions
are related to its performance. Accounting begins with the identification of transactions Notes
of financial nature and ends with the preparation of financial statements (i.e., Income
Statement and Balance Sheet). Each step in the process of accounting generates
information. Generation of information is not an end in itself, it is a way to facilitate the
dissemination of information among users of accounting information. Accounting
information is used for predicting, comparing and evaluating the earning power and
financial position of a business enterprise. Therefore, dissemination of information is an
essential function of accounting.

INTEXT QUESTIONS 1.3

State whether the following statements are True or False :
i. Systematic record of transactions is often accepted by the Courts as good evidence.
ii. The balance sheet makes available the information about the financial health of the
enterprises.
iii. Creditors are internal users of accounting information
Users of Accounting Information

Users of Accounting Information may be categorised into Internal Users and External
Users.
Internal Users
i. Owners : Owners contribute capital in the business and thus, are exposed to
maximum risk. Naturally, they are interested in knowing the profit earned or loss
suffered by the business besides the safety of their capital. The financial statements
give the information about profit or loss and financial position of the business.
ii. Management : The management makes extensive use of accounting information
to arrive at informed decisions such as determination of selling price, cost controls
and reduction, investment into new projects, etc.

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iii. Employees and Workers : Employees and workers are entitled to bonus at the
year end, which is linked to the profit earned by an enterprise. Therefore, the
employees and workers are interested in financial statements. Besides, the financial
statements also reflect whether the enterprise has deposited its dues into the provident
fund and employees state insurance accounts, etc., or not.
External Users
i. Banks and Financial Institutions : Banks and financial institutions are an essential
Notes
part of any business as they provide loans to the businesses. Naturally, they watch
the performance of the business to know, whether it is making progress as projected
to ensure the safety and recovery of the loan advanced. They assess it by analysing
the accounting information.
ii. Investors and Potential Investors : Investment involves risk and also the investors
do not have direct control over the business affairs. Therefore, they rely on the
accounting information available to them and seek answers to the questions such
as - what is the earning capacity of the enterprise and how safe is their investment?
iii. Creditors : Creditors are those parties who supply goods or services on credit.
Before granting credit, creditors satisfy themselves about the credit worthiness of
the business. The financial statements help them immensely in making such an
assessment.
iv. Government and Its Authorities : The government makes use of financial
statements to compile national income accounts and other informations. The
information so available to it enables them to take policy decisions.
Government levies varied taxes such as Excise Duty, VAT, Service Tax and Income
Tax. These government authorities assess the correct tax dues from an analysis of
financial statements.
v. Researchers : Researchers use accounting information in their research work.
vi. Consumers : Consumers require accounting information for establishing good
accounting control so that cost of production may be reduced with the resultant
reduction of the prices of products they buy. Sometimes, prices of some products
are fixed by the government, so it needs accounting information to fix fair prices so
that consumers and producers are not exploited.
vii. Public : They want to see the business running since it makes substantial contribution
to the economy in many ways, e.g., employment of people, patronage to suppliers,
etc. Thus, financial accounting provides useful financial information to various user
groups for decision-making.

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Qualitative Characteristics of Accounting Information
Two fundamental characteristics of financial statements are their truth and fairness. An
auditor of the enterprise has to make a statement in his report whether, in his opinion,
the financial statements give a true and fair view. It means that the Balance Sheet should
give a true and fair view of the state of affairs and the Profit and Loss Account should
give the true and correct profit or loss for the period. Besides the above fundamental
characteristics, there are other qualitative characteristics (attributes) that make the
information content of the financial statements meaningful to its users. There are: Notes
1. Reliability;
2. Relevance;
3. Understandability and
4. Comparability.
Let us discuss these characteristics in detail:
1. Realiability : Accounting information must be reliable. the foremost factors that
make it reliable are that
i. it should be verifiable. It means, transactions should be evidenced by
documents. For example, purchases be evidenced by bills of purchases, sales
be evidenced by sales bills, etc.
ii. it should be free from personal bias. It means, where personal judgement is to
be exercised, it should be independent and free from bias.
Reliability of the accounting information depends on:
i. Neutrality : Neutrality means that the accounting information made available
does not suffer from bias.
ii. Prudence : The accounting information prepared on the principle of prudence
(conservatism) means that the accounting information is prepared by providing
all prospective losses while leaving all prospective profits.
iii. Completeness : The accounting information given should be complete in all
respects as incomplete information may lead to wrong interpretation.
iv. Substance Over Form : The accounting information to be meaningful, should
be governed by the substance of the information and not by its legal form
alone.
2. Relevance : The accounting information, besides disclosing statutorily required
disclosures, should disclose other informations, after judging its relevance to the

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decision-making need of its users. For example, interest on borrowings is disclosed
without stating the rate of interest. Users, therefore, cannot link interest cost to
different types of borrowed funds. In the process, they fail to appreciate the rationality
of financing decisions. Generally, only the statutory (legal) required information is
disclosed. The information disclosure requirements are set after a public debate
reflecting the views of cross-sections of users. But, what is relevant information in
a particular circumstance cannot be generalised and specified. The management of
the enterprise is in the best position to decide the contents of the information. It
Notes may be noted that relevance of the information is always guided by the principle of
materiality.
3. Understandability : Understandability means that the information provided through
the financial statements be presented in a manner that the users are able to understand
it in the manner it should be. However, if an information is considered relevant for
the users’ decision-making it must be disclosed even if the information is complex
and not readily understandable by common users. The information disclosure
requirement of law must be fulfilled howsoever complex such information may be.
4. Comparability : Comparability means that the users should be able to compare
the accounting information of an enterprise of the period either with that of other
periods, known as intra-firm comparison or with the accounting information of
other enterprises, known as inter-firm comparison. It is, therefore, necessary to
follow standardised accounting policies consistently to the extent possible.
Accounting information to be useful should have all the above characteristics. The
accounting information produced in the light of Reliability and Relevance Qualitative
Characteristics can be useful but its usefulness shall be limited if it lacks understandability
and comparability. We may explain this with the help of a diagram :
Reliability Relevance

can produce

useful accounting information

which will be limited by

lack of

Understandability Comparability

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1.4 ACCOUNTING TERMS
Transaction
It is an event which involves exchange of some value between two or more entities. It
can be purchase of stationery, receipt of money, payment to a supplier, incurring expenses,
etc. It can be a cash transaction or a credit transaction.
Purchases
Notes
This term is used for goods to be dealt-in i.e. goods are purchased for resale or for
producing the finished products which are meant for sale. Goods purchased may be
Cash Purchases or Credit Purchases. Thus, Purchase of goods is the sum of cash
purchases and credit purchases.
Sundry Creditors
Creditors are persons who have to be paid by an enterprise an amount for providing
goods and services on credit.
Sales
Sales are total revenues from goods or services provided to customers. Sales may be
in cash or in credit.
Sundry Debtors
Persons who have to pay for goods sold or services rendered or in respect of contractual
obligations. It is also termed as debtor, trade debtor, and accounts receivable.
Revenue (Sales)
Sales revenue is the amount by selling products or providing services to customers.
Other items of revenue common to many businesses are: Commission, Interest,
Dividends, Royalties, and Rent received, etc.
Expenses
Costs incurred by a business in the process of earning revenue are called expenses. In
general, expenses are measured by the cost of assets consumed or services used during
the accounting period. The common items of expenses are: Depreciation, Rent, Wages,
Salaries, Interest, Cost of Heating, Light and water and Telephone, etc.
Income
The difference between revenue and expense is called income. For example, goods
costing ` 25000 are sold for ` 35000, the cost of goods sold, i.e. ` 25000 is expense,

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the sale of goods, i.e. ` 35000 is revenue and the difference. i.e. `10000 is income. In
other words, we can state that
Income = Revenue - Expense
Gain
Usually this term is used for profit of an irregular nature, for example, capital gain.
Loss
Notes
It means something against which the firm receives no benefit. It is a fact that expenses
lead to revenue but losses do not, such as theft.
Profit
It is the excess of revenue of a business over its costs. It may be gross profit and net
profit. Gross profit is the difference between sales revenue or the proceeds of goods
sold and/or services provided over its direct cost of the goods sold. Net profit is the
profit made after allowing for all types of expenses. There may be a net loss if the
expenses exceed the revenue.
Expenditure
Spending money or incurring a liability for some benefit, service or property received is
called expenditure. Payment of rent, salary, purchase of goods, purchase of machinery,
etc. are some examples of expenditure. If the benefit of expenditure is exhausted within
a year, it is treated as revenue expenditure. In case the benefit of expenditure lasts for
more than one year, it is treated as an asset and also known as capital expenditure.
Expenditure is usually the amount spent for the purchase of assets. It increases the
profit earning capacity of the business. Expense, on the other hand, is an amount to
earn revenue. Expenditure is considered as capital expenditure unless it is qualified
with words like revenue expenditure on rent, salaries etc., while expense is always
considered as a revenue expense because it is always incurred to earn revenue.
Drawings
It is the amount of money or the value of goods which the proprietor takes away from
business for his/her household or private use.
Capital
It is the amount invested in an enterprise by its owners e.g. paid up share capital in a
corporate enterprise. It also refers to the interest of owners in the assets of an enterprise.
It is the claim against the assets of the business. Any amount contributed by the owner
towards the business unit is a liability for the business enterprise. This liability is also
termed as capital which may be brought in the form of cash or assets by the owner.

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Assets
These are tangible objects or intangible rights owned by the enterprise and carrying
probable future benefits. Tangible items are those which can be touched and their
physical presence can be noted/felt e.g. furniture, machine etc. Intangible rights are
those rights which one possesses but cannot see e.g. patent rights, copyrights, goodwill
etc. Assets are purchased for business use and are not for sale. They raise the profit
earning capacity of the business enterprise.
Notes
Assets are broadly categorized as current assets and non-current assets/fixed assets.
Current assets are those assets which are held for a short period generally one year’s
time. The balance of such items goes on fluctuating i.e. it keeps on changing throughout
the year. The balance of cash in hand may change so many times in a day. Various
current assets are cash in hand/at bank, debtors, bills receivable, stock, pre-paid
expenses.
Non-current assets : Those assets are acquired for long term use in the business.
Such assets raise the profit earning capacity of the business enterprise. Expenditure on
such assets is non-recurring and of capital nature. Expenses incurred on acquiring these
assets are added to the value of the assets.
Liability
It is the financial obligation of an enterprise other than owners’ funds.
Liabilities : Liabilities mean the amount which the business owes to outsiders, that is,
except the proprietors. In the words of Finny and Miller, “Liabilities are debts,
they are amounts owed to creditors.” Thus, the claims of those who are not owners
are called Liabilities. This can be expressed as :
Liabilities = Assets – Capital
In business, transactions are recorded taking business to be an entity distinct from its
owners. Thus, capital invested by the proprietors is a liability but an internal liability. On
the other hand, external liability is a liability that is payable to outsiders, i.e., other
than the proprietors.
External liability arises because of credit transactions or loans raised. Examples of
external liabilities are creditors, bank overdraft, bills payable, outstanding liabilities.
Liabilities can be classified into the following :
i. Long-Term Liabilities : These are those liabilities which are payable after a long-
term, (generally more than a year). Examples of Long-Term Liabilities are long-
term loans, debentures, etc.

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ii. Short-Term/Current Liabilities : These are liabilities which are payable in the
near future (generally within a year). Examples of Current Liabilities are creditors,
bank overdrafts, bills payable, short-term loans, etc.
Account : Account is a summarised record of relevant transactions at one place relating
to a particular head. It records not only the amount of transactions but also their effect
and direction.
Stock or Inventory : Stock is the tangible property held by an enterprise for the
Notes purpose of sale in the ordinary course of business or for the purpose of using it in the
production of goods meant for sale or services to be rendered. Stock may be opening
stock or closing stock. In case of a manufacturing concern, Closing Stock comprises
raw materials, Work-in-Progress (i.e., semi-finished goods) and finished goods in hand
on the closing date. Similarly, Opening Stock (beginning inventory) is the amount of
stock at the beginning of the accounting period.
Goods : They refer to items forming part of the Stock-in-Trade of an enterprise, which
are purchased or manufactured with a purpose of selling. In other words, they refer to
the products in which an enterprise is dealing. For an enterprise dealing in home
appliances such as T.V., fridge, A.C., etc., these are goods. Similarly, for a stationer,
stationery is goods, whereas for others, it is an item of expense (not purchases). An
enterprise may purchase assets for use in furtherance of business or stationery for use
in the business, but they are not purchases of ‘goods’ but fixed asset and expense
respectively.
Receivables : The term ‘Receivables’ includes the outstanding amount due from others.
Sometimes, a debtor may accept a Bill of Exchange, which is payable after a certain
period. Such a bill is known as Bill Receivable. Sometimes, a debtor promises to
pay the specific amount in writing after a specified period. Such a promise is known as
a Promissory Note and is recorded as note receivable. The term – accounts
receivable includes trade debtors as well as bills receivable and promissory notes
receivable. The term receivable includes all the amounts due from others.
Payables : The term ‘Payables’ include the amounts due to other. Accounts Payable
includes trade creditors as well as bills payable and promissory notes payable. The
term payable includes all the amounts due to others.
Bill Receivable : Bill Receivable means a Bill of Exchange accepted by a debtor the
amount of which will be received on the specified date.
Bill Payable : Bill Payable means a Bill of Exchange, the amount of which will be
payable on the specified date.
Event : Any transactions in an organisation can be called as an event. Transactions in
an organisation have documentary evidence and will create a change in revenue, expense,
assets, liabilities and capital.

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Cost : It is the amount of expenditure incurred on or is attributed to a specified article;
product or activity.
Voucher : It is proof of a business transaction. Cash Memo, Bill/Invoice, Credit/Debit
notes etc. are examples of voucher.
Discount : Some customers are allowed reduction in the price of goods by the business.
It is called a Discount.
Trade Discount : It is the reduction allowed by the seller to the buyer at the time of Notes
sale on the list price of goods. Trade discount is allowed on bulk purchases. Normally,
trade discount is deducted from the list price and only the balance is accounted for.
Therefore, trade discount will not be shown in the books of accounts.
Cash Discount : It is the deduction allowed by the creditor to the debtor on the
amount due by the latter. This concession is given only to those who settle their accounts
within a stipulated period. Therefore, cash discount encourage prompt settlement of
accounts. For the debtor who pays the amount, it is an income. For creditor, cash
discount is an expense.

INTEXT QUESTIONS 1.4

Fill in the blanks :
i. Stock is a ___________ asset.
ii. Liabilities = Assets - ___________
iii. Debentures are ___________ term liabilities.
iv. Creditors are ___________ term liabilities.

Role of an Accountant in Society

The accountant with his specialized knowledge, extensive training and experience is
not merely responsible for preparing accounts, rather he/she is the best equipped person
to provide other related services normally required by the management. This helps the
management to discharge their duties more effectively thereby providing for efficient
utilization of resources. The accountants’ role in the society includes the following :
To maintain the proper books of accounts which portray the true and fair view of
the results of the business.
To provide information and reports to management to enable them to discharge
their duties more effectively.

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To act as auditor for attestation of accounts as per the requirement of law.
To act as an internal auditor to assist and strengthen the hands of the management.
To act as tax consultant to handle the tax matters of the business.
To act as management consultant to provide services regarding financial planning
of the business to their clients.

Notes
INTEXT QUESTIONS 1.5
I. Write against the following statements the terms for which these are made
in reference to accounting information.
i. It is a common language used to communicate financial information.
ii. Managing Director, functional managers, shareholders etc using the accounting
information.
iii. Ability of the firm to meet all its short term or current obligations as and when
they fall due.
II. State in each case, whether the items are to be regarded as goods or assets.
i. Furniture purchased by Makhan Singh, a dealer in furniture.
ii. Automatic Machine purchased by a workshop for manufacturing products.
iii. Machine manufactured by a firm for sale to a mill.
iv. Furniture purchased by Malti, a stationery shop-owner.
III. Multiple Choice Questions :
i. Goods in hand at the end of a year is called ___________.
a) Purchases b) cost c) stock d) profit
ii. A Bill of Exchange is considered as _________ from the view point of creditors.
a) Bills receivable b) Bills payable
c) Discounting d) None of the above
iii. A Bill of Exchange is ______________ from the view point of debtors.
a) Bills Receivable b) Bills Payable
c) Endorsement d) None of the above

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Basic Accounting
iv. _____________ are reductions allowed either on selling price or on the amount
due.
a) Discount b) Cost
c) Bills d) All of the above

WHAT YOU HAVE LEARNT Notes

Accounting is the art of recording, classifying and summarizing in terms of money
transactions and events of a financial nature and interpreting the results thereof. It is
the process of collecting, recording, summarizing and communicating financial
information. It is an information system which generates information for decision
making by the interested parties.
Recording of business transactions in a systematic manner in the books of accounts
is called book keeping.
Accounting consists of economic events which are identified, measured, recorded
and communicated.
Branches of accounting : Financial accounting, cost accounting and management
accounting are some of the branches of accounting.
Accounting in modern times is treated as an information system which has transaction,
accounting process, decision useful financial information as the necessary
ingredients.
The accountant with his specialised knowledge extensive training and experience
helps the management and plays an important role in the society.
Important accounting terms are : Business entity, transactions, purchases, sales,
debtors, creditors, etc.

TERMINAL EXERCISE
1. What is accounting? What are its objectives and limitations?
2. Distinguish between book-keeping and accounting.
3. Explain the different branches of accounting.
4. Explain the role of an accountant in the society.
5. Explain accounting as a system of information. Enlist the parties that are interested
in the accounting information.

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6. What is expense? Explain with example.
7. What is meant by liability? Explain with the help of examples.
8. State the meaning of the term ‘Asset’ with examples.

ANSWERS TO INTEXT QUESTIONS

Notes 1.1 I. i. Book keeping ii. Analysing

iii. Accounting iv.Investors, Creidtors etc.
II. i. B ii. B iii. A iv. A v. A
1.2 I. i. Cost accounting ii. Social accounting
iii. Management accounting
II. i. The effect of rise in price is not taken into consideration
ii. Estimates are sometimes inaccurate
iii. Profit can be manipulated by window dressing
iv. Non monetary transactions are completely omitted.
III. i. Systematic records are accepted as evidence in court.
ii. Systematic record keeping replaces memory.
iii. Accounting provides the financial information for decision making.
1.3 i. T ii. T iii. F
1.4 i. current ii. capital iii. long iv. short
1.5 I. i. Accounting ii. usersiii. language of business
II. i. Goods ii. Assets iii. Goods iv. Assets
III. i. c ii. a iii. b iv. a

ACTIVITY
One day you have visited your friend Shiva who runs a grocery shop and casually
talked about the accounts he maintains of his business unit. You were surprised to note
that he did not maintain accounts. Enquire from other businessmen you know about
their accounting records and about the uses and purposes of accounting. Explain them
to your friend Shiva to motivate him to maintain accounts of his business unit.

24 ACCOUNTANCY
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Basic Accounting

ACCOUNTING CONCEPTS Notes

In the previous lesson, you have studied the meaning and nature of business transac-
tions and objectives of financial accounting. In order to maintain uniformity and consis-
tency in preparing and maintaining books of accounts, certain rules or principles have
been evolved. These rules/principles are classified as concepts and conventions. These
are foundations of preparing and maintaining accounting records. In this lesson we will
learn about various accounting concepts, their meaning and significance.

OBJECTIVES
After studying this lesson, you will be able to
explain the term accounting concept and
explain the meaning and significance of various accounting concepts : Business
Entity, Money Measurement, Going Concern, Accounting Period, Cost Concept,
Duality Aspect concept, Realisation Concept, Accrual Concept and Matching
Concept.
2.1 MEANING OF ACCOUNTING CONCEPT
Let us take an example. In India there is a basic rule to be followed by everyone that
one should walk or drive on the left hand side of the road. It helps in the smooth flow
of traffic. Similarly, there are certain rules that an accountant should follow while re-
cording business transactions and preparing accounts. These may be termed as ac-
counting concepts. Thus, it can be said that :
Accounting concepts refer to the basic assumptions, rules and principles which
work as the basis for recording of business transactions and preparing accounts.

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The main objective is to maintain uniformity and consistency in accounting records.
These concepts constitute the very basis of accounting. All the concepts have been
developed over the years from experience and thus, they are universally accepted
rules. Following are the various accounting concepts that have been discussed in the
following sections :
Business entity concept
Money measurement concept
Notes
Going concern concept
Accounting period concept
Accounting cost concept
Duality aspect concept
Realisation concept
Accrual concept
Matching concept
2.2 BUSINESS ENTITY CONCEPT
This concept assumes that, for accounting purposes, the business enterprise and its
owners are two separate independent entities. Thus, the business and personal
transactions of its owner are separate. For example, when the owner invests money in
the business, it is recorded as liability of the business to the owner. Similarly, when the
owner takes away from the business cash/goods for his/her personal use, it is not
treated as business expense. Thus, the accounting records are made in the books of
accounts from the point of view of the business unit and not the person owning the
business. This concept is the very basis of accounting.
Let us take an example. Suppose Mr. Sahoo started business investing
`100000. He purchased goods for `40000, Furniture for `20000 and plant and
machinery of `30000. `10000 remains in hand. These are the assets of the business
and not of the owner. According to the business entity concept `100000 will be treated
by business as capital i.e. a liability of business towards the owner of the business.
Now suppose, he takes away `5000 cash or goods worth `5000 for his domestic
purposes. This withdrawal of cash/goods by the owner from the business is his private
expense and not an expense of the business. It is termed as Drawings. Thus, the business
entity concept states that business and the owner are two separate/distinct persons.
Accordingly, any expense incurred by owner for himself or his family from business will
be considered as expenses and it will be shown as drawings.

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Significance
The following points highlight the significance of business entity concept :
This concept helps in ascertaining the profit of the business as only the business
expenses and revenues are recorded and all the private and personal expenses are
ignored.
This concept restraints accountants from recording of owner’s private/personal
transactions. Notes
It also facilitates the recording and reporting of business transactions from the busi-
ness point of view
It is the very basis of accounting concepts, conventions and principles.

INTEXT QUESTIONS 2.1

Fill in the blanks with suitable word/words
i. The accounting concepts are basic ___________ of accounting.
ii. The main objective of accounting concepts is to maintain ___________ and
___________ in the accounting record.
iii. ___________ concept assumes that business enterprise and its owners are two
separate independent entities.
iv. The goods drawn from business for owner’s personal use are called ___________.

2.3 MONEY MEASUREMENT CONCEPT

This concept assumes that all business transactions must be in terms of money, that is in
the currency of a country. In our country such transactions are in terms of rupees.
Thus, as per the money measurement concept, transactions which can be expressed in
terms of money are recorded in the books of accounts. For example, sale of goods
worth `200000, purchase of raw materials `100000, Rent Paid `10000 etc. are
expressed in terms of money, and so these are recorded in the books of accounts. But
the transactions which cannot be expressed in monetary terms are not recorded in the
books of accounts. For example, sincerity, loyality, honesty of employees are not
recorded in books of accounts because these cannot be measured in terms of money
although they do affect the profits and losses of the business concern.
Another aspect of this concept is that the records of the transactions are to be kept not
in the physical units but in the monetary unit. For example, at the end of the year 2013,

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an organisation may have a factory on a piece of land measuring 10 acres, office building
containing 50 rooms, 50 personal computers, 50 office chairs and tables, 100 kg of
raw materials etc. These are expressed in different units. But for accounting purposes
they are to be recorded in money terms i.e. in rupees. In this case, the cost of factory
land may be say `12 crore, office building of `10 crore, computers `10 lakhs, office
chairs and tables `2 lakhs, raw material `30 lakhs. Thus, the total assets of the
organisation are valued at `22 crore and `42 lakhs. Therefore, the transactions which
can be expressed in terms of money is recorded in the accounts books, that too in
Notes
terms of money and not in terms of the quantity.
Significance
The following points highlight the significance of money measurement concept :
This concept guides accountants about what to record and what not to record.
It helps in recording business transactions uniformly.
If all the business transactions are expressed in monetary terms, it will easy to
understand the accounts prepared by the business enterprise.
It facilitates comparison of business performance of two different periods of the
same firm or of the two different firms for the same period.

INTEXT QUESTIONS 2.2

Put a tick mark (√) against the information that should be recorded in the
books of accounts and cross mark (×) against the information that should not
be recorded
i. Health of the managing director
ii. Purchase of factory building `10 crore
iii. Rent paid `100000
iv. Goods worth ` 10000 given as charity
v. Delay in supply of raw materials
2.4 GOING CONCERN CONCEPT
This concept states that a business firm will continue to carry on its activities for an
indefinite period of time. Simply stated, it means that every business entity has continuity
of life. Thus, it will not be dissolved in the near future. This is an important assumption
of accounting, as it provides a basis for showing the value of assets in the balance

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sheet; For example, a company purchases a plant and machinery of `100000 and its
life span is 10 years. According to this concept every year some amount will be shown
as expenses and the balance amount as an asset. Thus, if an amount is spent on an item
which will be used in business for many years, it will not be proper to charge the
amount from the revenues of the year in which the item is acquired. Only a part of the
value is shown as expense in the year of purchase and the remaining balance is shown
as an asset.
Notes
Significance

The following points highlight the significance of going concern concept :

This concept facilitates preparation of financial statements.

On the basis of this concept, depreciation is charged on the fixed assets.

It is of great help to the investors, because, it assures them that they will continue to
get income on their investments.

In the absence of this concept, the cost of a fixed asset will be treated as an ex-
pense in the year of its purchase.

A business is judged for its capacity to earn profits in future.

INTEXT QUESTIONS 2.3

Fill in the blanks by selecting correct words given in the bracket/brackets:

i. Going concern concept states that every business firm will continue to carry on its
activities ___________ (for a definite time period, for an indefinite time period)

ii. Fixed assets are shown in the books at their _________ (cost price, market price)

iii. The concept that a business enterprise will not be closed down in the near future is
known as ___________ (going concern concept, money measurement concept)

iv. On the basis of going concern concept, a business prepares its ___________
(financial statements, bank statement, cash statement)

v. ___________ concept states that business will not be dissolved in near future.
(Going concern, Business entity)

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2.5 ACCOUNTING PERIOD CONCEPT
All the transactions are recorded in the books of accounts on the assumption that
profits on these transactions are to be ascertained for a specified period. This is known
as accounting period concept. Thus, this concept requires that a balance sheet and
profit and loss account should be prepared at regular intervals. This is necessary for
different purposes like, calculation of profit, ascertaining financical position, tax
computation etc.
Notes
Further, this concept assumes that, indefinite life of business is divided into parts. These
parts are known as Accounting Period. It may be of one year, six months, three months,
one month, etc. But usually one year is taken as one accounting period which may be
a calender year or a financial year.
Year that begins from 1st of January and ends on 31st of December, is known
as Calendar Year. The year that begins from 1st of April and ends on 31st of
March of the following year, is known as financial year.
As per accounting period concept, all the transactions are recorded in the books of
accounts for a specified period of time. Hence, goods purchased and sold during the
period, rent, salaries etc. paid for the period are accounted for against that period only.
Significance
It helps in predicting the future prospects of the business.
It helps in calculating tax on business income calculated for a particular time period.
It also helps banks, financial institutions, creditors, etc to assess and analyse the
performance of business for a particular period.
It also helps the business firms to distribute their income at regular intervals as
dividends.

INTEXT QUESTIONS 2.4

Fill in the blanks with suitable word/words :
i. Recording of transactions in the books of accounts with a definite period is called
………………. concept.
ii. The commonly accepted accounting period in India is ……………….
iii. According to accounting period concept, revenue and expenses are related to a
………………. period.

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iv. If accounting year begins from 1st of January, and ends on 31st of December, it is
known as ……………….
v. If accounting year begins from 1st of April and ends on 31st of March of the following
year, then accounting year is known as ……………….

2.6 ACCOUNTING COST CONCEPT

Accounting cost concept states that all assets are recorded in the books of accounts at
their purchase price, which includes cost of acquisition, transportation and installation Notes
and not at its market price. It means that fixed assets like building, plant and machinery,
furniture, etc are recorded in the books of accounts at a price paid for them. For
example, a machine was purchased by XYZ Limited for `500000, for manufacturing
shoes. An amount of `1,000 were spent on transporting the machine to the factory site.
In addition, `2000 were spent on its installation. The total amount at which the machine
will be recorded in the books of accounts would be the sum of all these items i.e.
`503000. This cost is also known as historical cost. Suppose the market price of the
same is now ` 90000 it will not be shown at this value. Further, it may be clarified that
cost means original or acquisition cost only for new assets and for the used ones, cost
means original cost less depreciation. The cost concept is also known as historical cost
concept. The effect of cost concept is that if the business entity does not pay anything
for acquiring an asset this item would not appear in the books of accounts. Thus,
goodwill appears in the accounts only if the entity has purchased this intangible asset
for a price.
Significance
This concept requires asset to be shown at the price at which it has been acquired,
which can be verified from the supporting documents.
It helps in calculating depreciation on fixed assets.
The effect of cost concept is that if the business entity does not pay anything for an
asset, this item will not be shown in the books of accounts.

INTEXT QUESTIONS 2.5

Fill in the blanks with suitable word/words
i. The cost concept states that all fixed assets are recorded in the books of accounts
at their ___________ price.
ii. The main objective to adopt historical cost in recording the fixed assets is that the
cost of the assets will be easily verifiable from the ___________ documents.

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iii. The cost concept does not show the …………. of the business.
iv. The cost concept is otherwise known as …………. concept.

2.7 DUAL ASPECT CONCEPT

Dual aspect is the foundation or basic principle of accounting. It provides the very
basis of recording business transactions in the books of accounts. This concept as-
sumes that every transaction has a dual effect, i.e. it affects two accounts in their re-
Notes
spective opposite sides. Therefore, the transaction should be recorded at two places.
It means, both the aspects of the transaction must be recorded in the books of ac-
counts. For example, goods purchased for cash has two aspects which are (i) Giving
of cash (ii) Receiving of goods. These two aspects are to be recorded.

Thus, the duality concept is commonly expressed in terms of fundamental accounting

equation :

Assets = Liabilities + Capital

The above accounting equation states that the assets of a business are always equal to
the claims of owner/owners and the outsiders. This claim is also termed as capital or
owners equity and that of outsiders, as liabilities or creditors’ equity.

The knowledge of dual aspect helps in identifying the two aspects of a transaction
which helps in applying the rules of recording the transactions in books of accounts.
The implication of dual aspect concept is that every transaction has an equal impact on
assets and liabilities in such a way that total assets are always equal to total liabilities.

Let us analyse some more business transactions in terms of their dual aspect :

1. Capital brought in by the owner of the business

The two aspects in this transaction are :

(i) Receipt of cash

(ii) Increase in Capital (owners equity)

2. Purchase of machinery by cheque

The two aspects in the transaction are

(i) Reduction in Bank Balance

(ii) Owning of Machinery

32 ACCOUNTANCY
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3. Goods sold for cash
The two aspects are
(i) Receipt of cash
(ii) Delivery of goods to the customer
4. Rent paid in cash to the landlord
The two aspects are
(i) Payment of cash Notes

(ii) Rent (Expenses incurred).

Once the two aspects of a transaction are known, it becomes easy to apply the rules of
accounting and maintain the records in the books of accounts properly.
The interpretation of the Dual aspect concept is that every transaction has an equal
effect on assets and liabilities in such a way that total assets are always equal to total
liabilities of the business.
Significance
z This concept helps accountant in detecting error.
z It encourages the accountant to post each entry in opposite sides of two affected
accounts.

INTEXT QUESTIONS 2.6

Write the two aspects (effects) of the following transactions.
S.No. Transaction Ist aspect IInd aspect

(i) Owner brings cash in business

(ii) Goods purchased for cash

(iii) Goods sold for cash

(iv) Furniture purchased for cash

(v) Received cash from Sharma

(vi) Purchased machine from

Rama on credit

(vii) Paid to Ram

(viii) Salaries Paid

(ix) Rent Paid

(x) Rent Received

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Basic Accounting
2.8 REALISATION CONCEPT
This concept states that revenue from any business transaction should be included in
the accounting records only when it is realised. The term realisation means creation of
legal right to receive money. Selling goods is realisation, receiving order is not.
In other words, it can be said that :
Revenue is said to have been realised when cash has been received or right to
Notes receive cash on the sale of goods or services or both have been created.
Let us study the following examples :
i. N.P. Jeweller received an order to supply gold ornaments worth
`5,00,000. They supplied ornaments worth `2,00,000 up to the year ending 31st
December 2013 and rest of the ornaments were supplied in January 2014.
ii. Bansal sold goods for `1,00,000 for cash in 2013 and the goods have been deliv-
ered during the same year.
iii. Akshay sold goods on credit for `50,000 during the year ending 31st December
2013. The goods have been delivered in 2013 but the payment was received in
March 2014.
Now, let us analyse the above examples to ascertain the correct amount of revenue
realised for the year ending 31st December 2013.
i. The revenue for the year 2013 for N.P. Jeweller is `200000. Mere getting an
order is not considered as revenue until the goods have been delivered.
ii. The revenue for Bansal for year 2013 is `1,00,000 as the goods have been deliv-
ered in the year 2013. Cash has also been received in the same year.
iii. Akshay’s revenue for the year 2013 is `50,000, because the goods have been
delivered to the customer in the year 2013. Revenue became due in the year 2013
itself. In the above examples, revenue is realised when the goods are delivered to
the customers.
The concept of realisation states that revenue is realized at the time when goods
or services are actually delivered.
In short, the realisation occurs when the goods and services have been sold either for
cash or on credit. It also refers to inflow of assets in the form of receivables.
Significance
It helps in making the accounting information more objective.
It provides that the transactions should be recorded only when goods are deliv-
ered to the buyer.

34 ACCOUNTANCY
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INTEXT QUESTIONS 2.7

Ascertain the amount of current revenue realized for the year ending 31st De-
cember 2006

i. An order, to supply goods for `20,00,000 is received in the year 2006. The
goods have been supplied only for `10,00,000 in 2006.
Notes
ii. What will be the revenue (i) if the payment of `6,00,000 is received in cash in
2006 and the balance payment of `4,00,000 received in 2007.

iii. What will be the revenue if the goods have been sold on credit and the payment of
`1500000 is received in the year 2007, while all the goods of `20,00,000 are
supplied in the year 2006.

iv. What will be the revenue if an advance payment of `100,000 is received in the
year 2006 and the balance received in the year 2007.
2.9 ACCRUAL CONCEPT
The meaning of accrual is something that becomes due especially an amount of money
that is yet to be paid or received at the end of the accounting period. It means that
revenues are recognised when they become receivable. Though cash is received or not
received and the expenses are recognised when they become payable though cash is
paid or not paid. Both transactions will be recorded in the accounting period to which
they relate. Therefore, the accrual concept makes a distinction between the accrual
receipt of cash and the right to receive cash as regards revenue and actual payment of
cash and obligation to pay cash as regards expenses.
The accrual concept under accounting assumes that revenue is realised at the time of
sale of goods or services irrespective of the fact when the cash is received. For ex-
ample, a firm sells goods for `55000 on 25th March 2014 and the payment is not
received until 10th April 2014, the amount is due and payable to the firm on the date of
sale i.e. 25th March 2014. It must be included in the revenue for the year ending 31st
March 2014. Similarly, expenses are recognised at the time services provided, irre-
spective of the fact when actual payment for these services are made. For example, if
the firm received goods costing `20000 on 29th March 2014 but the payment is made
on 2nd April 2014 the accrual concept requires that expenses must be recorded for the
year ending 31st March 2014 although no payment has been made until 31st March
2014 though the service has been received and the person to whom the payment
should have been made is shown as creditor.

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Basic Accounting
In brief, accrual concept requires that revenue is recognised when realised and ex-
penses are recognised when they become due and payable without regard to the time
of cash receipt or cash payment.
Significance
It helps in knowing actual expenses and actual income during a particular time
period.

Notes It helps in calculating the net profit of the business.

INTEXT QUESTIONS 2.8

Fill in the blanks with suitable word/words :
i. Accrual concept relates to the determination of ...................
ii. Goods of `50000 are sold on 25th March 2014 but payment is received on 10th
April 2014. It will be a revenue for the year ending ....................
iii. Accrual concept requires revenue is recognised when ................... and expenses
are recognised when they become ...................

2.10 MATCHING CONCEPT

The matching concept states that the revenue and the expenses incurred to earn the
revenues must belong to the same accounting period. So once the revenue is realised,
the next step is to allocate it to the relevant accounting period. This can be done with
the help of accrual concept.
Let us study the following transactions of a business during the month of December,
2006
(i) Sale : cash `2000 and credit `1000
(ii) Salaries Paid `350
(iii) Commission Paid `150
(iv) Interest Received `50
(v) Rent received `140, out of which `40 received for the year 2007
(vi) Carriage paid `20
(vii) Postage `30
(viii) Rent paid `200, out of which `50 belong to the year 2005
(ix) Goods purchased in the year for cash `1500 and on credit `500
(x) Depreciation on machine `200

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 Accounting Concepts MODULE - 1
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Let us record the above transactions under the heading of Expenses and Revenue.
Expenses Amount Revenue Amount
` `
1. Salaries 350 1. Sales
2. Commission 150 Cash 2000
3. Carriage 20 Credit 1000 3000
4. Postage 30 2. Interest received 50
5. Rent paid 200 3. Rent received 140
Less for 2005 -50 150 Less for 2007 (40) 100
6. Goods purchased Notes
Cash 1500
Credit 500 2000
7. Depreciation on machine 200

Total 2900 Total 3150

In the above example expenses have been matched with revenue i.e (Revenue `3150-
Expenses `2900) This comparison has resulted in profit of `250. If the revenue is
more than the expenses, it is called profit. If the expenses are more than revenue it is
called loss. This is what exactly has been done by applying the matching concept.
Therefore, the matching concept implies that all revenues earned during an accounting
year, whether received/not received during that year and all cost incurred, whether
paid/not paid during the year should be taken into account while ascertaining profit or
loss for that year.
Significance
It guides how the expenses should be matched with revenue for determining exact
profit or loss for a particular period.
It is very helpful for the investors/shareholders to know the exact amount of profit
or loss of the business.

INTEXT QUESTIONS 2.9

Fill in the blanks with suitable word/words :
i. Expenses are matched with ___________ generated during a period.
ii. Goods sold for cash is an example of ___________.
iii. Salaries paid is an example of ___________.
iv. Income is the excess of ___________ over ___________.
v. ___________ concept states that the revenue and the expenses incurred to earn
the revenue must belong to the same accounting period

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Basic Accounting
vi. ___________ concept states how the expenses should be compared with rev-
enues for ascertaining exact profit or loss for a particular period

WHAT YOU HAVE LEARNT

Accounting concepts refer to the basic assumptions which serve the basis of re-
cording actual business transactions.
Notes
The important accounting concepts are business entity, money measurement, going
concern, accounting period, cost concept, duality aspect concept, realisation con-
cept, accrual concept, and matching concept.
Business entity concept assumes that for accounting purposes, the business enter-
prise and its owner(s) are two separate entities.
Money measurement concept assumes that all business transactions must be re-
corded in the books of accounts in terms of money.
Going concern concept states that a business firm will continue to carry on activi-
ties for an indefinite period of time.
Accounting period concept states that all the business transactions are recorded in
the books of accounts on the assumption that profits of transactions is to be ascer-
tained for a specified time period.
Accounting cost concept states that all assets are recorded in the books of ac-
counts at their cost price.
Dual aspect concept states that every transaction has a dual effect.
Realisation concept states that revenue from any business transaction should be
included in the accounting records only when it is realised
Matching concept states that the revenue and the expenses incurred to earn the
revenue must belong to the same accounting period

TERMINAL EXERCISE
1. Explain meaning and significance of going concern concept.
2. What do you mean by business entity concept?
3. State meaning and significance of money measurement concept.
4. Write short notes on the following
(a) Cost concept (b) Accrual concept

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(c) Matching concept (d) Accounting period concept
5. What do you mean by accounting concept? Explain any four accounting concepts.

ANSWERS TO INTEXT QUESTIONS

2.1 (i) rules (ii) uniformity and consistency
(iii) Business entity concept (iv) drawings
Notes
2.2 (i) × (ii) √ (iii) √ (iv) √ (v) ×
2.3 (i) for an indefinite time period (ii) cost price
(iii) going concern concept (iv) financial statements (v) Going concern
2.4 (i) accounting period (ii) one year (iii) particular
(iv) calender year (v) financial year
2.5 (i) purchase (ii) supporting (iii) true net worth (iv) historical cost
2.6 (i) Owner’s capital, cash (ii) Goods received, cash
(iii) Cash received, goods sold (iv) Furniture, cash
(v) Cash, Sharma (vi) Machine, Rama (vii) Ram, cash
(viii) Salaries, cash (ix) Rent, cash (x) Cash, rent
2.7 (i) `10,00,000 (ii) `10,00000 (iii) `20,00,000 (iv) `1,00,000
2.8 (i) income (ii) 31st March, 2006 (iii) realised, due
2.9 (i) revenue (ii) revenue (iii) expense (iv) revenue, expenses
(v) matching (vi) matching

ACTIVITY
In our country business concerns are not following the same accounting period every
year. Enquire from various sources and list various such periods prevailing in our country.
One for example is given
1. Year ending 31st March (financial year)
2. ____________________________________________
3. ____________________________________________

ACCOUNTANCY 39
MODULE - 1
Basic Accounting

Notes ACCOUNTING CONVENTIONS AND

STANDARDS

In the previous lesson, you have studied the accounting concepts like business entity,
money measurement, going concern, accounting period, cost, duality, realisation, accrual
and matching. These concepts or assumptions or principles are working rules for all
accounting activities.
You may visit some business units doing a particular kind of business. Enquire them and
find out how unsold goods are being valued. You will find that they follow the same
method of valuation of unsold stock of goods. If you ask them, why do they value the
unsold goods at cost or market price, whichever is lower, even though the market price
is higher than the cost price, the businessman may answer that it is the convention,
tradition or practice or custom of the business, that business is following year after
year. In accounting, there are many conventions or practices which are used while
recording the transactions in the books of accounts. Apart from these, the Institute of
Chartered Accountants of India (ICAI), which is the main regulatory body for
standardisation of accounting policies in the country has issued a number of accounting
standards from time to time to bring consistency in the accounting practices. We shall
study about accounting conventions and standards in detail in this lesson.

OBJECTIVES
After studying this lesson, you will be able to :
explain the meaning of accounting convention;
explain the meaning and significance of accounting consventions like consistency,
full disclosure, materiality and conservatism;
state the meaning of the term Generally Accepted Accounting Principles (GAAP);

40 ACCOUNTANCY
 Accounting Conventions & Standards MODULE - 1
Basic Accounting
explain the concept of accounting standards and enumerate the various accounting
standards issued by the Institute of Chartered Accountants of India.

3.1 MEANING OF ACCOUNTING CONVENTIONS

An accounting convention refers to common practices which are universally followed
in recording and presenting accounting information of the business entity. They are
followed like customs, traditions, etc. in a society. Accounting conventions are evolved
through the regular and consistent practice over the years to facilitate uniform recording
Notes
in the books of accounts. Accounting Conventions help in comparing accounting data
of different business units or of the same unit for different periods. These have been
developed over the years. The most important conventions which have been used for
a long period are :
Convention of consistency.
Convention of full disclosure.
Convention of materiality.
Convention of conservatism.

3.2 CONVENTION OF CONSISTENCY

The convention of consistency means that same accounting principles should be used
for preparing financial statements year after year. A meaningful conclusion can be drawn
from financial statements of the same enterprise when there is a comparison between
them over a period of time. But this can be possible only when accounting policies and
practices followed by the enterprise are uniform and consistent over a period of time.
If different accounting procedures and practices are used for preparing financial
statements of different years, then the result will not be comparable.
Generally a businessman follows the undermentioned general practices or methods
year after year.
While charging depreciation on fixed assets or valuing unsold stock, once a particular
method is used it should be followed year after year so that the financial statements can
be analysed and compared provided that the depreciation on fixed assets is charged or
unsold stock is valued by using particular method year after year. This can be further
clarified as : in case of charging depreciation on fixed assets accountant can decide to
adopt any one of the methods of depreciation such as diminishing value method or
straight line method.
Similarly, in case of valuation of closing stock it can be valued at actual cost price or
market price or whichever is less. However precious metals like gold, diamond, minerals
are generally valued at market price only.

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Basic Accounting
Types of consistency

There are three types of consistency namely :

i. Vertical consistency (Same organisation) : It is to be found within the group of

inter-related financial statements of an organisation on the same date. It occurs
when fixed assets have been shown at cost price and in the interrelated income
statement depreciation has also been charged on the historical cost of the assets.
Notes ii. Horizontal consistency (Time basis) : This consistency is to be found between
financial statements of one entity from period to period. Thus, it helps in comparing
performance of the business between two years i.e. current year with past year.

iii. Dimensional consistency (Two organisations in the same trade) : This

consistency is to be found in the statements of two different business entities of the
same period. This type of consistency assists in making comparison of the
performance of one business entity with the other business entity in the same trade
and on the same date.

Therefore, as per this convention the same accounting methods should be adopted
every year in preparing financial statements. But it does not mean that a particular
method of accounting once adopted can never be changed. Whenever a change in
method is necessary, it should be disclosed by way of footnotes in the financial statements
of that year.
Significance

It facilitates comparative analysis of the financial statements.

It ensures uniformity in charging depreciation on fixed assets and valuation of closing

stock.

INTEXT QUESTIONS 3.1

Fill in the blanks with suitable word/words

i. Convention of consistency means that same accounting principles should be used

for preparing financial statements ...………

ii. Unsold goods are valued at cost price or ...……… whichever is ...………

iii. Precious metals, like gold, mineral and others are generally valued at…………

iv. As per the convention of …………. year after year same methods are followed.

42 ACCOUNTANCY
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3.3 CONVENTION OF FULL DISCLOSURE
Convention of full disclosure requires that all material and relevant facts concerning
financial statements should be fully disclosed. Full disclosure means that there should
be full, fair and adequate disclosure of accounting information. Adequate means sufficient
set of information to be disclosed. Fair indicates an equitable treatment of users. Full
refers to complete and detailed presentation of information. Thus, the convention of full
disclosure suggests that every financial statement should fully disclose all relevant
information. Let us relate it to the business. The business provides financial information Notes
to all interested parties like investors, lenders, creditors, shareholders etc. The
shareholders would like to know profitability of the firm while the creditors would like
to know the solvency of the business. In the same way, other parties would be interested
in the financial information according to their requirements. This is possible if financial
statements disclose all relevant information in full, fair and adequate manner.
Let us take an example. As per accounts, net sales are `1,50,000, it is important for
the interested parties to know the amount of gross sales which may be `2,00,000 and
the sales return `50,000. The disclosure of 25% sales returns may help them to find
out the actual sales position. Therefore, whatever details are available, that must be
honestly provided. Additional information should also be given in the financial statements.
For example, in a balance sheet the basis of valuation of assets, such as investments,
inventories, land and building etc. should be clearly stated. Similarly, any change in the
method of depreciation or in making provision for bad debts or creating any reserve
must also be shown clearly in the Balance Sheet. Therefore, in order to achieve the
purpose of accounting, all the transactions of a business and any change in accounting
policies, methods and procedures are fully recorded and presented in accounting.
To ensure proper disclosure of material accounting information, the Companies Act
1956, under schedule VI has provided a format for the preparation of Profit and Loss
account and Balance Sheet of a company. It is necessary for every company to follow
this format. The regulatory bodies like Securities and Exchange Board of India (SEBI)
has also made compulsory for complete disclosures by registered companies.
Significance
It helps in meaningful comparison of financial statements of the different business
units.
This can also help in the comparison of financial statements of different years of the
same business unit.
This convention is of great help to investor and shareholder for making investment
decisions.
The convention of full disclosure presents reliable information.

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INTEXT QUESTIONS 3.2

Fill in the blanks with appropriate word/words :
i. The shareholders would like to know about the ___________ of the business.
ii. The convention of full disclosure requires that there should be full, ___________
and ___________ disclosure of accounting information.
Notes
iii. The creditors are interested to know the ___________ of the business.
iv. All relevant material facts should be ___________ in the financial statements.
v. The full disclosure convention presents ___________ information.

3.4 CONVENTION OF MATERIALITY

The convention of materiality states that, to make financial statements meaningful, only
material facts i.e. important and relevant information should be supplied to the users of
accounting information. The question that arises here is what is a material fact. The
materiality of a fact depends on its nature and the amount involved. Material fact means
the information of which will influence the decision of its user.
For example, a businessman is dealing in electronic goods. He purchases T.V.,
Refrigerator, Washing Machine, Computer etc. for his business. In buying these
items he uses larger part of his capital. These items are significant items; thus,
these should be recorded in the books of accounts in detail. At the same time to
maintain day to day office work he purchases pen, pencil, match box, scented
stick, etc. For this he will use very small amount of his capital. But to maintain
the details of every pen, pencil, match box or other small items is not considered
of much significance. These items are insignificant items and hence they should
be recorded separately. Thus, the items that are significantly important in recording
the details are termed as material facts or significant items. The items that are of
less significance are immaterial facts or insignificant items.
Thus according to this convention, important and significant items should be
recorded in their respective heads and all immaterial or insignificant transactions
should be clubbed under a different accounting head.
Significance
It helps in minimising the errors of calculation.
It helps in making financial statements more meaningful.
It saves time and resources.

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INTEXT QUESTIONS 3.3

Fill in the blanks with suitable word/words :
i. ___________ convention states that to make financial statements more meaningful,
only significant and important items should be supplied to the users.
ii. Convention of materiality states that significant items should be disclosed under
___________. Notes

iii. ___________ convention keeps accounts manager to focus on important /significant

items.
iv. ___________ means the information which will influence the decision of its users.

3.5 CONVENTION OF CONSERVATISM

This convention is based on the principle that “Anticipate no profit, but provide for
all possible losses”. It provides guidance for recording transactions in the books of
accounts. It is based on the policy of playing safe in regard to showing profit. The main
objective of this convention is to show minimum profit. Profit should not be overstated.
If profit shows more than actual, it may lead to distribution of dividend out of capital.
This is not a fair policy and it will lead to the reduction in the capital of the enterprise.
Thus, this convention clearly states that profit should not be recorded until it is realised.
But if the business anticipates any loss in the near future, provision should be made in
the books of accounts for the same. For example, valuing closing stock at cost or
market price whichever is lower, creating provision for doubtful debts, discount on
debtors, writing off intangible assets like goodwill, patent, etc. The convention of
conservatism is a very useful tool in situation of uncertainty and doubts.
Significance
It helps in ascertaining actual profit.
It is useful in the situation of uncertainties and doubts.
It helps in maintaining the capital of the enterprise.

INTEXT QUESTIONS 3.4

Give your decision in the following situations :
i. A business has unsold stock at the end of year. The cost price is
`2,00,000 and the market price is `2,50,000. At which price the unsold stock be
recorded ?

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MODULE - 1 Accounting Conventions & Standards
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ii. What will be your decision if the cost price in the above case is
`2,10,000 ?
iii. A businessman anticipates that it may not be possible to collect
`50,000 from one of his debtors. will he record this transaction in the books
of accounts and at what value?

3.6 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Notes (GAAP) AND ACCOUNTING STANDARDS
In order to maintain uniformity and consistency in accounting records throughout the
world, certain rules and principles have been developed which are generally accepted
by the accounting profession. These rules/principles are called by different names such
as principles, concepts, conventions, postulates, assumptions. These rules/principles
are judged on their general acceptability rather than universal acceptability. Hence,
they are popularly called Generally Accepted Accounting Principles (GAAP). The term
“generally accepted” means that these principles must have support, that generally
comes from the professional accounting bodies. Thus, Generally Accepted Accounting
Principles (GAAP) refer to the rules or guidelines adopted for recording and reporting
of business transactions of financial statements. These principles have evolved over a
long period of time on the basis of past experiences, usages or customs, etc. These
principles are also referred as concepts and conventions, which have already been
discussed.
Accounting standards : Concept and Objectives
The term standard denotes a discipline, which provides both guidelines and yardsticks
for evaluation. As guidelines, accounting standards provide uniform practices and
common techniques of accounting. As a general rule, accounting standards are
applicable to all corporate enterprises. They are made operative from a date specified
in the standards. The Institute of Chartered Accountants of India (ICAI) constituted
the Accounting Standards Board (ASB) in April, 1977 for developing accounting
standards. However, the International Accounting Standards Committee (IASC) was
set up in 1973, with its headquarter in London (U.K.).
The Accounting Standards Board is entrusted with the responsibility of formulating
standards on significant accounting matters keeping in view the international
developments, and legal requirements in India.
The main function of the ASB is to identify areas in which uniformity in standards is
required and to develop draft standards after discussions with representatives of the
Government, public sector undertakings, industries and other agencies.

46 ACCOUNTANCY
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In the initial years, the standards are of recommendatory in nature. Once an awareness
is created about the benefits and relevance of accounting standards, steps are taken to
make the accounting standards mandatory for all companies. In case of non compliance,
the companies are required to disclose the reasons for deviations and its financial effects:
Till date, the IASC has brought out 40 accounting standards. However, the ICAI has
so far issued 29 accounting standards. These are :
AS-1 Disclosure of accounting policies (January 1979). This standard deals with
the disclosure of significant accounting policies in the financial statements. Notes

AS-2 Valuation of Inventories (June 1981). This standard deals with the principles
of valuing inventories for the financial statements.
AS-3 (Revised) Cash flow statement (June 1981, Revised in March 1997). This
standard deals with the financial statement which summarises for a given period
the sources and applications of an enterprise.
AS-4 Contingencies and events occurring after the Balance Sheet date (November
1982, Revised in April, 1995) This standard deals with the treatment of
contingencies and events occurring after the balance sheet date.
AS-5 Net profit or loss for the period, prior period (period before the date of balance
sheet) items and changes in accounting policies (November 1982, Revised in
February 1997). This standard deals with the treatment in financial statement of
prior period and extraordinary items and changes in accounting policies.
AS-6 Depreciation Accounting (November 1982). This standard applies to all
depreciable assets. But this standard does not apply to assets in the category
of forests, plantations and similar natural resources and wasting assets.
AS-7 Accounting for construction contracts (December 1983, revised in April
2003). This standard deals with accounting for construction contracts in the
financial statements of contractors.
AS-8 Accounting for Research and Development (January 1985). This standard
deals with the treatment of costs of research and development in financial
statements.
AS-9 Revenue Recognition (November 1985). This standard deals with the bases
for recognition of revenue in the statement of profit and loss of an enterprise.
AS-10 Accounting for fixed assets (November 1991). This standard deals with
recognition of fixed assets grouped into various categories, such as land,
building, plant and machinery, vehicles, furniture and gifts, goodwill, patents,
trading and designs.

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AS-11 Accounting for the effects of change in foreign exchange Rates. (August 1991
and Revised in 1993). This standard deals with the issues relating to accounting
for effect of change in foreign exchange rates.
AS-12 Accounting for Government grants (April 1994). This standard deals with
the accounting for government grants.
AS-13 Accounting for investments (September 1994). This standard deals with
accounting aspect concerning investments in the financial statements.
Notes
These include classification, determination of cost for initial recognition,
disposal and re-classification of investment.
AS-14 Accounting for amalgamation (October 1994). This standard deals with
accounting treatment of any resultant goodwill or reserves in
amalgamation of companies.
AS-15 Accounting for retirement Benefits in the financial statements of
employers (January 1995). This standard deals with accounting for
retirement benefits in the financial statements of employers.
AS-16 Borrowing Costs (April 2000). This standard deals with the uses involved
relating to capitalization of interest on borrowings for purchase of fixed
assets.
AS-17 Segment reporting (October 2000). This standard applies to companies
which have an annual turnover of `50 crores or more. These companies
have to present segment wise financial statements and consolidated
financial statements.
AS-18 Related party disclosures (October 2000 revised 1st July 2003). This
standard requires certain disclosure which must be made for transactions
between the enterprise and related parties.
AS-19 Leases (January 2001). This standard deals with the accounting treatment
of transactions related to lease agreements.
AS-20 Earning per share (April 2001). This standard deals with the presentation
and computation of earning per share (EPS).
AS-21 Consolidated financial statements (April 2001). This standard deals with the
preparation of consolidated financial statements with an intention to provide
information about the activities of a group.
AS-22 Accounting for taxes on Income (April 2001). This standard deals with
determination of the account of tax expenses for the related revenue.

48 ACCOUNTANCY
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AS-23 Accounting for investments in Associates in consolidated financial statements
(July 2001). This standard deals with the principles and procedures to be
followed for recognising, in the consolidated financial statement.

AS-24 Discontinued operations (February 2002). This standard deals with the
principles of discontinuing operations of an enterprise with the activities which
are continuing.

AS-25 Interim financial reporting (February 2002). This standard deals with the Notes
minimum content of interim financial report.

AS-26 Intangible Assets (February 2002). This standard prescribed the accounting
treatment for intangible assets which are not covered by any other specific
accounting standard.

AS-27 Financial reporting of interest for joint venture (February 2002). This standard
sets principles and procedures for accounting for interest in joint venture.

AS-28 Impairment of Assets (2004). This standard prescribed procedures to ensure

that an asset is carried at no more than its carrying amount and procedures as
to when to recognise an asset as impaired.

AS-29 Provision for contingent labilities and contingent assets (2004). This standard
deals with measurement and recognition criteria in three areas, namely
provisions, contingent liabilities and contingent assets.

All the above standards issued by the Accounting Standards Board are recommended
for use by companies listed on a recognized stock exchange and other large commercial,
industrial and business enterprises in the public and private sectors.

INTEXT QUESTIONS 3.5

Fill in the blank with appropriate words

i. AS1 deals with ..........................

ii. AS29 deals with ..........................

iii. AS26 deals with ..........................

iv. AS20 deals with ..........................

v. AS21 deals with ..........................

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vi. AS22 deals with ..........................
vii. GAAP stands for ..........................
viii. Accounting standard Board (ASB) was established ..........................
ix. International Accounting Standard Committee was established ......................
x. AS2 deals with ..........................

Notes

WHAT YOU HAVE LEARNT

Accounting conventions are common practices which are followed in recording
and presenting accounting information of business.

Convention of consistency states that the same accounting methods should be

adopted every year in preparing financial statements.

Convention of disclosure states that all material and relevant facts relating to financial
statements should be fully disclosed.

Convention of materiality states that, to make financial statements more meaningful

only significant information should be shown in the financial statements.

Convention of conservatism states that, profit should not be recorded until it is

realised. But if business anticipates any loss in near future provision should be
made in the books of account.

Generally accepted accounting principles refer to the rules or guidelines adopted

for recording and reporting of business transactions in order to bring uniformity in
the preparation and presentation of financial statements.

TERMINAL EXERCISE
1. Explain the convention of consistency with example.

2. Explain the accounting convention of conservatism with example.

3. What do you mean by accounting standards? Enumerate the accounting standard

issued by the ASB from time to time.

4. Explains the convention of materiality.

5. Explain the accounting convention of full disclosure with example.

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ANSWERS TO INTEXT QUESTIONS

3.1 (i) year after year (ii) market price, lower
(iii) market price (iv) consistency

3.2 (i) profitability (ii) fair, adequate (iii) solvency

(iv) disclosed (v) reliable
Notes
3.3 (i) Materiality (ii) separate head
(iii) Materiality (iv) Material fact

3.4 (i) cost price i.e. `2,00,000 (ii) Cost price i.e.`21,00,000
(iii) Yes, as a bad debt `50,000
3.5 (i) Disclosure of accounting policies
(ii) Provisions, contingent liabilities and contingent assets
(iii) Intangible assets (iv) Earning per share
(v) Consolidated financial statements
(vi) Accounting for taxes on income
(vii) Generally Accepted Accounting principle
(viii) April, 1977 (ix) 1973 (x) Inventory valuation

ACTIVITY
Visit a number of business units and enquire from the accountants how do they deal
with the following while preparing the accounts :
1. Valuation of the stock at the end of the accounting period.
2. At what intervals do they close their account books?
3. What method of depreciation did they use in the last three or four years?
4. Have they ever suffered losses or earned profits because of the lethargic attitude or
loyality towards the organisation?
Complete the answer and draw the conclusion whether they are following some
accounting concepts or not. If yes, name the accounting conventions/accounting
concepts.

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Notes ACCOUNTING FOR BUSINESS

TRANSACTIONS

You visit the shop of a person known to you and observe the activities he/she is doing.
He/she is selling goods for cash and on credit, collecting payments, making payments
to suppliers, instructing the worker to deliver the goods in time, making payments for
telephone, carriage, etc. These are all business activities, but cash is not involved in all
of them at the time of making transactions. Activities which are in cash terms are called
business transactions. You will also find that for every transaction, he/she makes use of
a document like bills, cash memos, receipts, etc. These are termed as vouchers. In this
lesson, you will learn about business transactions, accounting vouchers, accounting
equation and the basic mechanism of accounting.

OBJECTIVES
After studying this lesson, you will be able to
explain the meaning of source documents and accounting vouchers;
explain the preparation of accounting vouchers;
explain the meaning of accounting equation;
explain the effect of business transactions on the accounting equation;
explain the rules of accounting;
explain the bases of accounting and
explain the double entry mechanism.
4.1 SOURCE DOCUMENTS AND ACCOUNTING VOUCHERS
Accounting process begins with the origin of business transactions and it is followed by
analysis of such transactions. A business transaction is a transaction, which involves
exchange of values between two parties. Every transaction involves Give and Take

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aspect. The debit represents Take aspect and credit represents the Give aspect in a
transaction. For example, when a computer is purchased for office use for cash, then
the delivery of computer represents Take aspect and payment of cash represents Give
aspect. Thus , business transactions are exchange of goods or services between two
parties and effects of these transactions are recorded in two accounts.
Source Documents and vouchers
All business transactions are based on documentary evidence. A Cash memo showing
cash sale, an invoice showing sale of goods on credit, the receipt made out by the Notes
payee against cash payment, are all examples of source documents. A document which
provides evidence of the transactions is called the Source Document or a voucher. It is
the primary evidence in support of a business transaction. A source document is the
first record prepared for a business transaction and is the basis for entries in the books
of accounts. There are certain items, which have no documentary proof, such as petty
expenses. In such case necessary voucher is prepared showing the necessary details.
All such documents are kept in a separate file in chronological order and are serially
numbered. All recording in books of accounts is done on the basis of accounting vouch-
ers. A Voucher is documentary evidence in support of a transaction. It is a document to
record the accounting transaction. A transaction with one debit and one credit is a
simple transaction and voucher prepared for such transaction is known as transaction
voucher. The format of transaction voucher is as follows:
Transaction Voucher
Firm Name
Voucher No.
Date:
Debit account:
Credit account:
Amount (`) :
Narration :
Authorised By : Prepared By:
Specimen of transaction voucher

Preparation of Accounting Vouchers

Accounting vouchers are the written documents containing the analysis of business
transactions for accounting and recording purpose. These are prepared by the ac-
countant and countersigned by authorised person. Features of Accounting vouchers
are as :
It is a written document.
It is prepared on the basis of evidence of the transaction.

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It contains an analysis of a transaction i.e. which account has to be debited and
which has to be credited.

It is prepared by an accountant and countersigned by the authorised signatory.

Accounting voucher may be classified as Cash voucher i.e., debit voucher, credit voucher,
and non-cash voucher i.e., transfer voucher.

Types of Accounting Voucher

Notes

Cash Voucher Non-Cash Voucher

Debit voucher Credit voucher (Transfer voucher)

[For Cash Payments] [For Cash Receipts] [For Non-cash Transaction]

Debit Vouchers

These vouchers are prepared for recording of transactions involving cash payments
only. Cash payments in the business are made on account of :

Expenses Purchases of Goods

Purchases of Assets Payment to creditors

Repayment of loans Drawings and advances etc.

In all cash payments, one aspect is cash and the other is either the party to whom the
payment is made, or an expense or an item of property for which the payment is made.
A format of debit voucher is as follows:

Firm’s Name

Debit Voucher

Voucher No. : Date:

Debit Account:

Amount:

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Credit Account
S.No. Account Name Amount Narration (i.e. Explanation)
(` )

Authorised By: Prepared By:

Notes
Specimen of Debit voucher

Illustration 1
On September 21, 2014 M/s Mohit Chemicals paid `40,000 in Cash and balance
amount of `1,60,000 by Banker’s Cheque to HT Chemicals Ltd., Prepare Debit
Voucher.
Solution:
Mohit Chemicals
Debit Voucher
Voucher No.: 22 Date: 21.9.2014
Debit Account: HT Chemicals Ltd
Amount : ` 200000.
Credit Accounts
S.No. Account Name Amount Narration (i.e. Explanation)
(`)

1. Cash 40,000 Paid Part payment in cash and

2. Bank 1,60,000 balance by bank draft.

Authorised By: Prepared By:

Credit Vouchers

These vouchers are prepared for recording of transactions involving cash-receipts only.
Cash receipts in the business are accepted on account of:

Cash sales of goods

cash sales of assets

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revenue income like interest, rent, etc. received in cash
Cash receipts from debtors.
Loan taken
Cash withdrawn from bank
receipts of advances, etc.

Notes In all cash receipts, one aspect is cash and the other is either person or party from
whom cash is received or revenue on account of which cash is received or the property
on sale of which cash is received. A format of credit voucher is as follows:
Credit Voucher
Firm Name
Voucher No. : Date:
Debit Account:
Amount:
Credit Account
S.No. Account Name Amount Narration (i.e. Explanation)
(`)

Authorised By: Prepared By:

Fig. 4.3 Specimen of Credit voucher

Illustration 2
`25000 Office furniture is purchased from Modern Furniture on July 4, 2014 and
`15000 are paid by cash immediately and `10000 is still payable. Prepare Credit
Voucher.
Solution:
Credit Voucher
Modern Furniture
Voucher No. : 125 Date: July 4,2014
Debit Account: Furniture
Amount: `25000.

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Credit Account
S.No. Account Name Amount Narration (i.e. Explanation)
(`)

1. Cash 15,000 Purchase of Office furniture from

2. Modern Furniture 10,000 Modern Furniture. Cash paid.
`15,000, for the Balance
Liability created as per terms
Notes
of purchase.

Authorised By: Prepared By:

Transfer Vouchers
With the expansion of business, the role of credit transactions is increasing at a
fast pace. For recording of these credit transactions, a voucher is prepared known
as transfer voucher. These transfer vouchers are prepared to record non-cash trans-
actions of the business involving:
Credit purchases
Credit sales
Return of goods sold
Return of goods purchased on credit
Depreciation on Assets
Bad Debts etc.
These vouchers are prepared both in debit and credit forms simultaneously.
Firm Name
Transfer Voucher
Voucher No. : Date:
Amount:
Debit Account
S.No. Account Name Amount Narration (i.e. Explanation)
(`)

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Credit account
S.No. Account Name Amount Narration (i.e. Explanation)
(` )

Authorised By: Prepared By:

Notes
Fig. 4.4 Specimen of Transfer voucher

Illustration 3
Stationery Mart furnishes the following information:

April 1,2014

Opening Balances:

(i) Cash `13000

(ii) Bank `5000

(iii) Furniture `22000

(iv) Land and Building `125000

(v) Trade Debtors :

Puneet `16000

Mohan `14000

(vii) Secured Bank Loan `70000

(viii) Trade creditors:

Gopi `18000

Sumit `24000

Vipin `8000

Prepare transfer Voucher.

Solution :

58 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
Stationery Mart
Transfer Voucher
Voucher No. Date: April 1,2014
Amount:
Debit Account
S.No. Account Name Amount Narration (i.e. Explanation)
Notes
(` )

1 Cash 13000 Opening Balance

2 Bank 5000 Opening Balance
3 Furniture 22000 Opening Balance
4 Land and Building 125000 Opening Balance
5 Trade debtors: 30000 Opening Balance
Puneet 16000
Mohan 14000

Credit Account
S.No. Account Name Amount (`) Narration (i.e. Explanation)

1. Secured Bank Loan 70000 Opening Balance

2 Trade creditors:
Gopi 18000
Sumit 24000
Vipin 8000 50000 Opening Balance
3 Capital 120000 Balancing Figure
(i.e.240000-120000)

Authorised By: Prepared By:

INTEXT QUESTIONS 4.1

I. Classify the following into Business and Non-business Transactions:
i. Manav commences business with cash `200000.
ii. He deposited cash into bank `160000.
iii. He purchased goods for cash `25000.

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iv. He took out cash from the shop and handed over to his wife for purchasing
household goods `3000.
v. He attended a family function and got a gift worth `1500.
vi. He paid monthly salary to his business employees `3,000.
II. Fill in the blanks with suitable word or words:
i. The accounting vouchers are based on ......................
Notes
ii. Invoice/bill is a ...................... document.
iii. Both debit and Credit aspects of a transaction are shown by ......................
Vouchers.
iv. A Credit voucher is prepared for ...................... receipts.
v. A debit voucher is prepared for ...................... payments.

4.2 ACCOUNTING EQUATION AND EFFECTS OF

TRANSACTIONS ON IT
The recording of business transactions in the books of account is based on a funda-
mental equation called Accounting Equation. Whatever business possesses in the form
of assets is financed by proprietor or by outsiders. This equation expresses the equality
of assets on the one side and equity on the other side i.e., the claims of outsider [liabili-
ties] and owners or proprietors funds on the other side. In mathematical form,

Assets = Equity

Equity = Liabilities + Capital

As an asset is introduced in the business, a corresponding liability also emerges.

Effect of business transactions on accounting equation

These transactions increase or decrease the assets, liabilities, or capital. Every business
has some assets. For example, Sunil started business with cash `3,00,000 as Capital.
In this transaction, asset in the form of cash is created for the business. Hence,

Cash (Asset) Capital (Equity)

`3,00,000 = `3,00,000

Sunil purchased Machinery for `40,000 and Furniture for `20,000. Thus, the position
of the assets and capital is as:

60 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
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Cash + Machinery + Furniture = Capital
2,40,000 + 40,000 + 20,000 = 3,00,000
The above transaction shows that
Assets = Capital
Or
Capital = Assets Notes
Increase or decrease in capital will result in the corresponding increase or decrease in
assets. For example Sunil withdrew cash for personal use `5,000. Thus, the position
of the assets and capital is as under :
Cash + Machinery + Furniture = Capital
2,40,000 + 40,000 + 20,000 = 3,00,000
[–5,000] + 0 + 0 = [–5,000]
2,35,000 + 40,000 + 20,000 = 2.95.000
Business enterprise borrows money in the form of loan from outsiders to carry on its
activities. In other words, every business concern owes money from outsiders. Money
borrowed from outsiders is called as liability. For example, `1,50,000 were borrowed
from Shipra. Thus, the position of the assets and capital will be as under
Cash + Machinery + Furniture = Liabilities + Capital
2,35,000 + 40,000 + 20,000 = 0 2,95,000
+1,50,000 + 0 + 0 = 1,50,000 + 0
3,85.000 + 40,000 + 20,000 = 1,50,000 + 2,95.000
The fact that business receives funds from proprietors and creditors and retains all of
them in the form of assets, can be presented in the terms of an accounting equation as
under
Assets = Liabilities + Capital or A= L+ C
OR
Liabilities = Assets – Capital or L= A – C
OR
Capital = Assets – Liabilities or C =A– L

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Expenses and Revenue also affect the accounting equation. Their effect is always on
the capital.

A business concern has to meet some expenses in its normal course of operations such
as payment of salary, rent, insurance premium, postage, wages, repairs etc. Payment
of these expenses reduces the cash. These expenses reduce the net income of the
business. All the income is the income of proprietor, which is added in the capital
account, so all these expenses are deducted from the capital. Similarly, business con-
Notes
cern receives some revenues during normal course of operations, such as rent re-
ceived, commission received, etc. Revenue is added to the cash balance as it is re-
ceived in terms of cash. Revenue increases the net income of the business and hence, it
is added to the capital. Now, the accounting equation is represented by

Assets = Liabilities + Capital

+ Revenue [Cash] = + Revenue

– Expenses [Cash] = – Expenses

Accounting equation is thus, affected by every business transaction. Any increase or

decrease in assets, liabilities, and capital can be identified by preparing accounting
equation. It shows that every business transaction satisfies the dual aspect concept of
accounting. It also serves as the basis for preparing the Balance Sheet.

Effect of Transactions on the Accounting Equation

You have learnt that assets, liabilities and capital are the three basic elements of every
business transaction, and their relationship is expressed in the form of accounting equa-
tion which always remains equal. At any point of time, there can be a change in the
individual asset, liability or capital, but the two sides of the accounting equation always
remain equal. Let us verify this fact by taking up some transactions and see how these
transactions affect the accounting equation :

1. Namita started business with cash `3,50,000 introduced as capital. Thus the equation
is as:

Assets = Liabilities + Capital

3,50,000 = 0 + 3,50,000

This transaction shows that `3,50,000 have been introduced by Namita in terms
of cash, which is the capital for the business concern. Hence on one hand, the asset
[cash] has been created to the extent of `3,50,000.

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2. She purchased goods for cash `90,000.
Thus the accounting equation is as :
Assets = Liabilities + Capital

Cash + Goods

old equation 3,50,000 = 0 + 3,50,000

Effect of Transaction –90,000 + 90,000 = 0 + 0 Notes

New equation 2,60,000 + 90,000 = 0 + 3,50,000

Goods purchased is an asset and cash paid is also an asset. Hence in this transac-
tion, there is an increase in one asset [Goods] and decrease in the other asset
[cash]. There is no change in capital and liabilities. i.e. the other side of the ac-
counting equation.
3. She purchased goods from Mohit for `60,000 on credit
Thus the equation is as:
Assets = Liabilities + Capital

Cash + Goods

Old equation 2,60,000 + 90,000 = 0 + 3,50,000

Effect of Transaction 0 + 60,000 = 60,000 + 0

New equation 2,60,000 + 1,50,000 = 60,000 + 3,50,000

In this transaction goods have been purchased on credit from Mohit , hence there
is an increase in the assets [goods] by `60,000 and also an increase in the liabilities
by `60,000 as the business concern now owes money to Mohit.
4. She sold goods to Anish for `40,000 (Cost `25,000) and received Cash `10,000
and balance after one month. Thus the accounting equation is as:
Assets = Liabilities + Capital

Cash + Goods + Debtors

Old equation 2,60,000 + 1,50,000 + 0 = 60,000 + 3,50,000

Effect of
Transaction 10,000 + [–25,000] + 30,000 = 0 + 15,000

New equation 2,70,000 + 1,25,000 + 30,000 = 60,000 + 3,65,000

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In this transaction goods have been sold on credit and some on cash to Anish, so
there is a decrease in the assets [goods] by `25,000, and increase in the assets
(Anish) by `30,000 and [Cash] by `10,000. In this process the proprietor has
gained an amount of `15,000 which is added to his capital.
5. She paid salaries to employees for `16,000.
Assets = Liabilities + Capital

Notes Cash + Goods + Debtors

Old equation 2,70,000 + 1,25,000 + 30,000 = 60,000 + 3,65,000

Effect of [-16,000] + 0 + 0 = 0 + [–16,000]

Transaction

New equation 2,54,000 + 1,25,000 + 30,000 = 60,000 + 3,49,000

In this transaction, salaries paid to employees are expenses for the business con-
cern. Salaries are paid in terms of cash, hence cash as an asset is reduced by
`16,000 and as all expenses reduce the capital, so capital is also reduced by
`16,000.
From the above transactions, it is obvious that how every transaction has its effect
on the accounting equation without disturbing the equality of the two sides of the
equation.
Illustration 4
Prepare accounting equation from the following Transactions:
`
1. Hemant started business with cash 3,00,000
2. Purchased goods for cash 80,000
3. Sold goods[costing `30,000] for 45,000
4. Purchased goods from Monika 70,000
5. Salary paid 7,000
6. Commission received 5,000
7. Paid Cash to Monika in full settlement 69,000
8. Goods sold to Rahul {Costing `20,000} for 25,000

64 ACCOUNTANCY
 Solution

S. Transaction Assets = Equity

ACCOUNTANCY
No. Cash + Goods + Debtors Total Liabilities + Capital Total
1. Started business with cash 3,00,000 + 0 + 0 3,00,000 0 + 3,00,000 3,00,000
2. Purchased goods for cash -80,000 + 80,000 + 0 0 + 0
New Equation 2,20,000 + 80,000 + 0 3,00,000 0 + 3,00,000 3,00,000
3. Sold goods for cash 45,000 + -30,000 + 0 0 + 15,000
New Equation 2,65,000 + 50,000 + 0 3,15,000 0 + 3,15,000 3,15,000
4. Purchased goods from Monika 0 + 70,000 + 0 70,000 + 0
Accounting for Business Transactions

New Equation 2,65,000 + 1,20,000 + 0 3,85,000 70,000 + 3,15,000 3,85,000

5. Salary paid -7,000 + 0 + 0 0 + -7,000
New Equation 2,58,000 + 1,20.000 + 0 3,78,000 70,000 + 3,08,000 3,78,000
6. Commission received 5,000 + 0 + 0 0 + 5,000
New Equation 2,63,000 + 1,20,000 + 0 3,83,000 70,000 + 3,13,000 3,83,000
7. Paid Cash to Monika in -69,000 + 0 + 0 –70,000 + 1,000
full settlement
New Equation 1,94,000 + 1,20.000 + 0 3,14,000 0 + 3,14,000 3,14,000
8. Goods sold to Rahul 0 + -20,000 + 25,000 0 + 5,000
New Equation 1,94,000 + 1,00,000 + 25,000 3,19,000 0 + 3,19,000 3,19,000

65
Notes
Basic Accounting
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Illustration 5
Prepare accounting equation from the following Transactions:
`
1. Nutan started business with cash 4,00,000
2. Purchased goods from Rohit 60,000

Notes 3. Sold goods[costing `25,000] for cash 22,000

4. Purchased goods for cash 50,000
5. Salary outstanding 3,000
6. Rent received 6,000
7. Paid Cash to Rohit on account 35,000
8. Goods sold to Bharti {Costing `30,000} for 40,000

INTEXT QUESTIONS 4.2

Fill in the blanks with suitable word/words:

i. Accounting equation satisfies the ................... concept of accounting.
ii. Assets = ................... + Liabilities
iii. Capital = Assets – ...................
iv. Accounting Equation serves as a basis for preparing ...................
v. Liabilities = ................... – Capital

4.3 RULES OF ACCOUNTING

Using Debit and Credit
In Double Entry accounting both the aspects of the transaction are recorded. Every
transaction has two aspects and according to this system, both the aspects are re-
corded. If the business acquires something, it must have been acquired by giving some-
thing. While recording each transaction, the total amount debited must be equal to the
total amount credited. The terms ‘Debit’ and ‘Credit’ indicate whether the transaction
is to be recorded on the left hand side or right hand side of the account. In its simplest
form, an account looks like the English Language Letter ‘T’. Because of its shape, this
simple form of account is called T-account (refer figure 4.5) . Have you observed that

66 ACCOUNTANCY
 Solution : (Illustration 5)
S.No Transaction Assets = Equity
Cash Goods Debtors Total Liabilities Capital Total

ACCOUNTANCY
1. Started business with cash 4,00,000 + 0 + 0 4,00,000 0 + 4,00,000 4,00,000
2. Purchased goods from Rohit 0 + 60,000 + 0 60,000 + 0
New Equation 4,00,000 + 60,000 + 0 4,60,000 60,000 + 4,00,000 4,60,000
3. Sold goods for cash 22,000 + [-25,000] + 0 0 + [-3,000]
New Equation 4,22,000 + 35,000 + 0 4,57,000 60,000 + 3,97,000 4,57,000
4. Purchased goods for cash [-50,000] + 50,000 + 0 0 + 0
New Equation 3,72,000 + 85,000 + 0 4,57,000 60,000 + 3,97,000 4,57,000
Accounting for Business Transactions

5. Salary outstanding 0 + 0 + 0 3,000 + [-3,000]

New Equation 3,72,000 + 85,000 + 0 4,57,000 63,000 + 394,000 4,57,000
6. Rent received 6,000 + 0 + 0 0 + 6,000
New Equation 3,78,000 + 85,000 + 0 4,63,000 63,000 + 4,00,000 4,63,000
7. Paid Cash to Rohit on [-35,000] + 0 + 0 [-35,000] + 0
account
New Equation 3,43,000 + 85,000 + 0 4,28,000 28,000 + 4,00,000 4,28,000
8. Goods sold to Bharti 0 + [–30000] + 40,000 0 + 10,000
New Equation 3,43,000 + 55,000 + 40,000 4,38,000 28,000 + 4,10,000 4,38,000

67
Notes
Basic Accounting
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the ‘T’ format has a left side and a right side for recording increases and decreases in
the item? This helps in ascertaining the ultimate position of each item at the end of an
accounting period. For example, if it is an account of a supplier all goods/materials
supplied shall appear on the right (Credit) side of the Supplier’s account and all pay-
ments made on the left (debit) side.

In a‘T’ account, the left side is called debit (usually abbreviated as Dr.) and the right
Notes side is known as credit (as usually abbreviated Cr.).

Account Title

(Left Side) (Right Side)

Fig.4.5: Specimen of T-account.

Rules of Accounting

All accounts are divided into five categories for the purpose of recording of the busi-
ness transactions:

(i) Assets, (ii) Liability, (iii) Capital,

(iv) Expenses/Losses, and (v) Revenues/Gains.

Two Fundamental Rules are followed to record the changes in these accounts:

1. For recording changes in Assets/Expenses/Losses

“Increase in Asset is debited, and decrease in Asset is credited.”

“Increase in Expenses/Losses is debited, and decrease in Expenses/Losses is

credited.”

2. For recording changes in Liabilities and Capital/Revenue/Gains

“Increase in Liabilities is credited and decrease in Liabilities is debited.”

“Increase in Capital is credited and decrease in Capital is debited.”

“Increase in revenue/gains is credited and decrease in revenue/gain is deb-

ited”.

The rules applicable to the five kinds of accounts are summarised in the following chart:

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Rules of Accounting
Assets Liabilities

(Increase) (Decrease) (Decrease) (Increase)

+ – – +

Debit Credit Debit Credit

Capital Expenses/Losses
Notes
(Decrease) (Increase) (Increase) (Decrease)

– + + –

Debit Credit Debit Credit

Revenue/Gains

(Decrease) (Increase)

– +

Debit Credit

I. Analysis of Rule Applied to Assets Accounts

Rohan Purchased Furniture for `80,000.
Analysis of Transaction : In this transaction, the affected accounts are Cash account
and Furniture account. Cash account is an assets account and has decreased. As per
rule if asset decreases the affected account is credited, so cash account credited. Fur-
niture is also an asset and it has increased. As per rule asset if increases the affected
account is debited thus, furniture account is debited.
Cash Furniture
Decrease Increase
80,000 80,000
[–] Credit [+] Debit

II. Analysis of Rule Applied to Liabilities Accounts:

Purchased Machinery for `60,000 on credit from M/s Indian Machinery Mart.
Analysis of Transaction: In this transaction, the two accounts affected are machin-
ery and M/s Indian Machinery Mart. Machinery is an asset, an asset has increased,
therefore machinery account is debited. M/s Indian Machinery Mart is the creditor on
account of supply of machinery and constitutes, the liability for the buying firm which

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has increased. Rule is that on increase of liability the concerned account is credited and
vice-versa. Thus, M/s Indian Machinery Mart A/c is credited.

M/s Indian Machinery Mart [Liability] Machinery (Assets)

Increase Increase

60,000 60,000

[+] Credit [+] Debit

Notes

III. Analysis of Rule Applied to Capital Accounts:

Cash of `50,000 introduced in business as Capital by Rakesh.

Analysis of Transaction: In this transaction, the two account affected are Cash ac-
count and Rakesh [Capital account] . Cash is an asset and Rakesh invested capital.
Rule for Capital is that if it increases the account is credited and vice-versa. So, here
capital account is credited.

Capital [Rakesh] Account Cash (Assets)

Increase Increase

50,000 50,000

[+] Credit [+] Debit

IV. Analysis of Rule Applied to Expenses/Losses Accounts:

Paid `6000 to the employees as Salary.

Analysis of Transaction: In this transaction, the two accounts affected are salary
account and Cash account. Salary account is an expense and has increased. Cash is an
asset and has decreased. Rule regarding expenses/losses is that if it increases the ac-
count is debited.

Salary Account [Expenses] Cash (Assets)

Increase Decrease

6,000 6,000

[+] Debit Credit [-]

V. Analysis of Rule Applied to Revenue/Profit Accounts:

Received interest for the month `4000.

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Analysis of Transaction: In this transaction, the two accounts affected are Interest
and Cash. Interest is an item of Income and Cash an item of asset. Rule regarding
Revenue/profit is, increase in revenue is credited. Cash is an asset and rule for assets is
increase in assets is debited.
Interest Account [Revenue] Cash (Assets)
Increase Increase
4,000 4,000 Notes
[+] Credit [+] Debit
Illustration 6
From the following transactions, state the titles of the accounts to be affected, types of
the accounts and the account to be debited and the account to be credited:
`
1. Ankur started business with cash 600000
2 Purchased goods for cash 80000
3. Paid salaries 10000
4. Sold goods to Rohit on credit 60000
5 Office machine purchased for cash 12000
6 He took loan from Bank 30,000
7 He received commission 4,000
8. Postage paid 500
9. Paid rent 6,000
10 Received cash from Rohit 60000
Solution
Trans- Names of Type of accounts Rules applicable to A/cs in
action accounts Debit/Credit items of
No Increase/Decrease

(1) (2) (1) (2) (1) (2)

1 Cash Capital Asset Capital Cash (Increase) Capital (Increase)

2 Purchases Cash Expense Asset Purchase ( ” ) Cash (decrease)

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3 Salaries Cash Expense Asset Salaries ( ” ) Cash (decrease)

4 Rohit Sales Asset Revenue Rohit ( ” ) Sales (Increase)

Debtor

5 Office Cash Asset Asset Office ( ” ) Cash (decrease)

machine machine

6 Cash Bank Asset Liability Cash (Increase) Bank loan

Notes laon (Increase)

7 Cash Commi- Asset Revenue Cash (Increase) Commission

ssion (Increase)

8 Postage Cash Expense Asset Printing and Cash (decrease)

Stationery
(Increase)

9 Rent Cash Expense Asset Rent (Increase) Cash (decrease)

10 Cash Rohit Asset Asset Cash (Increase) Rohit (decrease

INTEXT QUESTIONS 4.3

A list of the accounts is given below. Tick the category to which each of the
account belongs:
Type of Account
Name of Account Asset Liability Capital Revenue Expense

i. Wages

ii. Building

iii. Office Machine

iv. Cash

v. Mohan (Supplier)

vi. Krishan (Owner)

vii. Radha (Customer)

viii. Interest received

ix. Bank Overdraft

x. Commission Earned

xi. Discount allowed

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4.4 BASIS OF ACCOUNTING
As we are aware that one of the most significant functions of accounting is to make us
know true and fair amount of profit earned by the business entity in a particular period.
This Profit or income figure can be ascertained by following
(i) Cash Basis of accounting
(ii) Accrual Basis of accounting
Notes
(iii) Hybrid Basis of accounting
I. Cash Basis of accounting
This is a system in which accounting entries are recorded only when cash is received or
paid. Revenue is recognized only on receipt of cash. Similarly, expenses are recorded
as incurred when they are paid. The difference between the total revenues and total
expenses represents profit or loss of an enterprise for a particular accounting period.
Outstanding and prepaid expenses and income received in advance or accrued in-
comes are not considered.
Advantages
Following are the advantages of adopting cash basis of accounting:
It is very simple as no adjustment entries are required.
It appears more objective as very few estimates and personal judgments are re-
quired.
It is more suitable to those entities which have most of the transactions on cash
basis.
Disadvantages
Following are the disadvantages of adopting cash basis of accounting:
It does not give a true and fair view of profit and loss and the financial position of
the business unit as it ignores outstanding and prepaid expenses.
It does not follow the matching concept of accounting.
Illustration 7
During the financial year 2013-14, Mela Ram had cash sales of `580000 and credit
sales of `265000. His expenses for the year were `.460000 out of which `60000 are
still to be paid. Find out Mela Ram’s Income for the year 2013-14 following the cash
basis of accounting.

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Solution:
Amount (`)
Revenue (in terms of Cash Inflows) 580000
Less: Expenses (Outflow of cash) (i.e. ` 460000- 60000) 400000
Net Income 180000
Note : Credit Sales and Outstanding Expenses are not to be considered under cash
Notes
basis of accounting.
II. Accrual Basis of accounting
Revenue and expense are taken into consideration for the purpose of income determi-
nation on the basis of accounting period to which they relate. The accrual basis makes
a distinction between actual receipts of cash and the right to receive cash for revenues
and the actual payment of cash and the legal obligation to pay expenses. It means the
income accrued in the current year becomes the income of the current year whether the
cash for that item is received in the current year or it was received in the previous year
or it will be received in the next year. The same is true of expense items. Expense item
is recorded if it becomes payable in the current year whether it is paid in the current
year or it was paid in the previous year or it will be paid in the next year. For example,
credit sales are included in the total sales of the period irrespective of the fact when
cash on account is received. Similarly, in case the firm has taken benefit of a certain
service, but has not paid within that period, the expense will relate to the period in
which the service has been utilized and not the period in which the payment for it is
made.
Outstanding Expenses are those expenses which have become due during the ac-
counting period but which have yet not been paid off. Prepaid Expenses are those
expenses which have been paid in advance. Accrued Income means income which has
been earned by the business during the accounting period but has not yet become due
for payment and therefore has not yet been received. Income received in advance
means income which has been received by the business before being earned. Costs
incurred during a particular period should be set out against the revenue of the period
to ascertain profit or loss.
Following are the advantages :
It is based on all business transactions of the year and discloses correct profit or
loss.
This method is used in all types of of business units.
It is more scientific and rational in application.

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Following are the disadvantages :
It is not simple one and requires the use of estimates and personal judgment.
It fails to disclose the actual cash flows.
Illustration 8
Taking the data given in the Illustration 7, find out the net income of Mela Ram as per
accrual basis of accounting.
Notes
Solution
Amount (`)
Total Sales:
Cash Sales (` 580000) + Credit Sales (` 265000) 845000
Less: Total Expenses for the year 2013-14 460000
Net Income 385000
Note: Outstanding Expenses of `60,000 relate to this accounting year and hence are
to be charged to the revenues of current year. Similarly, credit sales of `2,65,000 are
considered for this year as the transaction took place during this current year.
Difference between accrual basis of accounting and cash basis of accounting
Basis of Difference Accrual Basis of accounting Cash Basis of accounting

1. Prepaid, Outstanding There may be outstanding There is no outstanding

and received in expense, prepaid expenses, expense, prepaid expenses,
advance items accrued income and income accrued income and income
received in advance in the received in advance in the
Balance sheet. Balance Sheet

2. Effect on income of Income statement will show Income statement will show
prepaid expenses relatively higher income if relatively lower income if
and accrued income there are items of prepaid there are items of prepaid
expenses and accrued income. expenses and accrued income

3. Effect of outstanding Income statement will show a Income statement will show
expenses and lower income if there are a higher income if there are
unearned income items of outstanding expenses items of outstanding
and unearned income expenses and unearned income

4. Legal Position Companies Act 1956 Companies Act 1956 does

recognizes this basis of not recognize this basis of
accounting. accounting.

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5. Option regarding The business unit has the No such option is available
valuation of inventories option to value the inventories in regard to inventory
and methods of at cost or market, whichever valuation and method of
depreciation is less of depreciation. depreciation.

6. Reliable It is a reliable basis of It is not a reliable basis of

accounting as it records all accounting as only cash
cash as well credit transactions are recorded. It
transactions. It ascertains true fails to ascertain true profit
Notes profit or loss. or loss.

7. Users A business unit with a profit Professional people, small

motive ascertains its profit or ventures of temporary
loss as per accrual basis. nature, some Not- for-Profit
Organizations ascertain their
profit or loss as per cash basis.

III. Hybrid Basis of Accounting

Both cash basis of accounting and accural basis of accounting have their own
advantages and limitations. Cash Basis of Accounting can be used only in units
which deal exclusively in cash and are very small in size. These days the number
of transactions undertaken by an enterprise are very large and are for cash as well
as on credit. Hence, an accounting system which is the combination of both cash
as well as accural basis is in use. This system is called hybrid basis of accounting.
It has advantages of both the systems and is able to eliminate disadvantages of
the both the system.
4.5 DOUBLE ENTRY MECHANISM
Double Entry Mechanism entails recording of transactions keeping in mind the
debit and credit aspect of the transaction. To record every transaction, one ac-
count is debited and the other is credited. This is based on the principle ‘every
debit has a credit’. The Double entry Book-Keeping seeks to record every trans-
action in money or money’s worth in its dual aspect. The advantages of double
entry mechanism are :
Systematic Record: It records, classifies, and synthesizes the business trans-
action in a systematic manner. It provides reliable information for sound de-
cision making. It meets the needs of users of accounting information.
Complete Record: It maintains complete record of a business transaction. It
records both the aspects of the transaction with narration.
Accurate records: By Preparing a Summarised Statement of Account the ar-
ithmetical accuracy of the records can be checked.

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Operational Results: By preparing Income Statement (Profit and Loss Account)
the business can know profit or loss due to its operations during an accounting
period.
Financial Position: By preparing Position Statement (Balance Sheet) the business
can know what it owns and what it owes to others. What are its assets and what
are its Liabilities and Capital.
Possibility of Fraud: Possibility of Frauds is minimized as complete information is
recorded under this system. Notes

INTEXT QUESTIONS 4.4

I. Answer the following with reference to cash basis of accounting
i. How it is simple?
As ____________________________________________________
ii. How it is more objective?
As ____________________________________________________
iii. To which business with it is more suitable?
Which _________________________________________________
iv. Which is the concept of accounting it does not follow?
The ___________________________________________________
v. Credit sales of `10000 taken into account for calculating profit.
II. State whether the following statements are True or False :
i. Creditors are the internal users of accounting information.
ii. Management are the internal users of accounting information.
iii. Hybrid basis of accounting has advantages of both the systems (Cash & Accural)
of accounting.
III. Answer the following question referring to double entry mechanism:
i. How possibility of frauds are minimised.
ii. How can arithmetical accuracy of the records can be checked?
iii. Name the concept on which to record every transaction one account is debited
and other is credited is based.

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WHAT YOU HAVE LEARNT

z Business Transaction : A business transaction is a transaction, which involves
exchange of values between two parties. Every transaction involves Give and Take
aspect.
z Source Documents and vouchers : All business transactions are based on docu-
Notes mentary evidence. A Cash memo showing cash sale, an invoice showing sale of
goods on credit, the receipt made out by the payee against cash payment, are all
examples of source documents. A Voucher is documentary evidence in support of
a transaction.
z Types of Accounting Vouchers : Accounting vouchers are the written docu-
ments, containing the analysis of business transactions for accounting and
recording purpose.
Types of Accounting Vouchers

Cash Voucher Non-Cash Voucher

Debit vouchers Credit vouchers [Transfer vouchers]

[For Cash Payments] [For Cash Receipts] [For Non-cash Transaction]

z Accounting Equation : The recording of business transaction in the books

of account is based on a fundamental equation called Accounting Equation.
Assets = liabilities + Capital
z Rules of Accounting
Using Debit and Credit
Two Fundamental Rules are followed to record the changes in these accounts:
For recording changes in Assets/Expenses/Losses
“Increase in Asset is debited, and decrease in Asset is credited.”
“Increase in Expenses/Losses is debited, and decrease in Expenses/Losses is
credited.”

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For recording changes in Liabilities and Capital/Revenue/Gains
“Increase in Liabilities is credited and decrease in Liabilities is debited.”
“Increase in Capital is credited and decrease in Capital is debited.”
“Increase in revenue/gains is credited and decrease in revenue/gain is debited”.
z There can be three basis of Accounting (i) Cash basis (ii) Accrual basis and (iii)
Hybrid Basis
Notes
In cash basis accounting entries are recorded only when cash is received or paid.
In accrual basis of accounting revenue and expense are taken into consideration
for the purpose of income determination on the basis of accounting period to which
they relate.
z Hybrid Basis : This is an accounting system which is the combination of both
cash as well as on credit.
Double Entry Book Keeping Mechanism: Double Entry Book Keeping
Mechanism entails recording of transactions keeping in mind the debit and credit
aspect of the transaction.

TERMINAL EXERCISE
1. State the meaning of business transaction.
2. What is meant by accounting voucher ? Explain in brief different types of account-
ing vouchers.
3. State the fundamental rules followed to record the changes in various accounts.
4. Explain in brief cash basis of accounting and differentiate it with accrual basis of
accounting.
5. What is meant by double entry mechanism? Give its advantages.
6. “Accounting equation remains intact under all circumstances” Justify the statement
with the help of examples.
7. Prepare accounting equation on the basis of the following :
(i) Anup started business with cash ` 2,50,000
(ii) Purchased goods for cash ` 35,000
(iii) Purchased office furniture for cash ` 12,000
(iv) Paid rent ` 7,000

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(v) Sold goods (costing ` 30,000) for ` 50,000 for cash
8. Show the accounting equation on the basis of the following transactions :
(i) Manu started business `
Cash 6,00,000
Goods 1,00,000
Notes (ii) Purchased office machine for cash 90,000
(iii) Sold goods (costing ` 60000) for credit to Asha 70,000
(iv) Purchased building for cash 1,30,000
(v) Cash received from Ashu 80,000
(vi) Purchased goods on credit from M/S Ashok Traders 70,000
(vii) Salaries paid 6,000
(viii) Insurance prepaid 10,000
(ix) Cash paid to M/s Ashok Traders in full settlement 68,000
9. Prepare necessary accounting vouchers from the following transactions:
(i) Building purchased for ` 6,00,000
(ii) Goods sold on credit to M/s Reema Trader ` 1,10,000
(iii) Salary paid to ` 1,00,000
(iv) Withdrew cash for personal use ` 6,000
(v) Cash receipts from debtors M/s Ankit Bros ` 22,000

ANSWERS TO INTEXT QUESTIONS

4.1 I. Business transactions Non-business transactions
(i), (ii), (iii) (vi), (iv), (v)
II. (i) supporting document (ii) source (iii) Transfer
(iv) Cash (v) Cash
4.2 (i) Dual (ii) Capital (iii) Liabilities
(iv) Balance sheet (v) Assets

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4.3 Asset Liability Capital Revenue Expense
(i) √
(ii) √
(iii) √
(iv) √
(v) √ Notes
(vi) √
(vii) √
(viii) √
(ix) √
(x) √
(xi) √
4.4 I. (i) No adjustment entries are required
(ii) Very few estimates and personal judgement are required.
(iii) Have most of the transactions on cash basis
(iv) Matching concept
(v) Should not
II. (i) False (ii) True (iii) True
III. (i) As complete information is recorded under this system
(ii) By preparing summarised statement of account.
(iii) Every debit has a credit.

ANSWERS TO TERMINAL EXERCISE

7. Assets Cash ` 2,46,000 + Goods ` 5,000 + Office furniture ` 12,000 = Capital `

2,63,000
8. Assets cash ` 3,76,000 + Goods ` 1,10,000, Office machine ` 90,000 + Building
` 1,30,000 + Prepaid insurance ` 10,000 = liabilities ` 7,16,000

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Notes JOURNAL

In the preceeding lessons you have learnt about various business transactions and Book
keeping i.e. recording these transactions in the books of accounts in a systematic manner.
Curosity may arise in your mind that what are these books? Why businessman keeps
many books? How does he records various transactions in these books? You have
learnt about the double entry system of maintaining accounts i.e. rules of debit and
credit in relation to various accounts. A book that is prepared by every businessman,
small or big. is a book in which business transactions are recorded datewise and in the
order in which these transactions take place is known as journal. In this lesson you will
learn about its meaning, objectives and its preparation.

OBJECTIVES
After studying this lesson, you will be able to :
z explain the meaning of journal;
z draw format of Journal;
z explain the process of journalising;
z journalise the simple and compound transactions;
z classify journal into Special Journals and Journal Proper.
5.1 JOURNAL : MEANING AND FORMAT
Journal is a book of accounts in which all day to day business transactions are recorded
in a chronological order i.e. in the order of their occurence. Transactions when recorded
in a Journal are known as entries. It is the book in which transactions are recorded for
the first time. Journal is also known as ‘Book of Original Record’ or ‘Book of Primary
Entry’.

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Business transactions of financial nature are classified into various categories of accounts
such as assets, liabilities, capital, revenue and expenses. These are debited or credited
according to the rules of debit and credit, applicable to the specific accounts. Every
business transaction affects two accounts. Applying the principle of double entry, one
account is debited and the other account is credited. Every transaction can be recorded
in journal. This process of recording transactions in the journal is’ known as ‘Journalising’.

In small business houses generally one Journal Book is maintained in which all the Notes
transactions are recorded. But in case of big business houses as the transactions are
quite large in number, therefore journal is divided into various types of books called
Special Journals in which transactions are recorded depending upon the nature of
transaction i.e. all credit sales in Sales Book, all cash transactions in Cash Book and so
on.

Format of Journal

Every page of Journal has the following format. It is a columnar book. Each column is
given a name written on its top. Format of journal is given below:

Journal

Date Particulars Ledger Folio Dr. Amount Cr. Amount

(` ) (` )

(1) (2) (3) (4) (5)

Column wise details of journal is as :

1. Date

In this column, we record the date of the transactions with its month and accounting
year. We write year only once at the top and need not repeat it with every date.

Example :

Date

2014

April 15

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2. Particulars

The accounts affected by a transaction i.e the accounts which have to be debited or
credited are recorded in this column. It is recorded in the following way :

In the first line, the account which has to be debited is written and then the short form
of Debit i.e. Dr. is written against that account’s name in the extreme right of the same
column.
Notes
In the second line after leaving some space from the left of the entry in the first line, the
account which has to be credited is written starting with preposition ‘To’. Then in the
third line, Narration for that entry which explains the transaction, the affected accounts
of which are entered, is written within Brackets. Narration should be short, complete
and clear. After every journal entry, horizontal line is drawn in the particulars column to
separate one entry from the other.

Example : Rent paid in cash on 1st April, 2014

Date Particulars

2014 Rent A/c ............................... Dr

April 1 To Cash A/c .................

(Rent paid in cash)

3. Ledger Folio

The transaction entered in a Journal is posted to the various related accounts in the
‘ledger’ (which is explained in another lesson). In ledger-folio column we enter the
page-number where the account pertaining to the entry is opened and posting from the
Journal is made.

4. Dr. Amount

In this column, the amount to be debited is written against the same line in which the
debited account is written.

5. Cr. Amount

In this column, the amount to be credited. is written against the same line in which the
credited account is written.

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Example : Paid ` 4,000 rent on 1st April 2014.
Journal
Date Particulars L.F. Dr. Amount Cr. Amount
(`) (` )
2014
April 1 Rent A/c ........ Dr 4000
To Cash A/c 4000 Notes

(Rent paid in Cash)

At the end of each page, both the Dr. and Cr. columns are totalled up. The total of both
these columns should be equal as the same amount is entered in the debit as well as in
the credit columns. The totals are carried forward to the next page with the words
‘total carried forward (c/f) and then at the top of the next page in Particulars column,
we write totals brought forward (b/f) and the amount of totals is written in the respective
amount columns.

INTEXT QUESTIONS 5.1

I. What is journal? Write in your own words.
................................................................................................................
................................................................................................................
II. Complete the following sentences with the appropr:ate word/words:
i. Journalising is the process of entering transactions in
ii. Another name for Journal is ..................... ..........................................
iii. Transactions, when recorded in Journal, are known as .....................
iv. The explanation of a Journal entry is known as .....................
v. In a Journal entry preposition ..................... is used before the name of the
account to be credited

5.2 PROCESS OF JOURNALISING

Following steps are taken for the preparation of a journal :
z Identify the Accounts : First of all, the affected accounts of an accounting
transaction are identified. For example, if the transaction of “goods worth `10000

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are purchased for Cash”, then ‘Purchases’A/c and ‘Cash’A/c are the two affected
accounts.
z Recognise the type of Accounts : Next we determine the type of the affected
accounts e.g. in the above case, ‘Purchases A/c and Cash A/c are expense and
asset account respectively.
z Apply the Rules of Debit and Credit : Then the rules of ‘debit’ and ‘credit’ are
applied to the affected accounts. You are aware of these rules. However, for the
Notes revision purposes, these are given below :
(a) Assets and Expenses Accounts are debited if there is an increase and credited
if there is decrease :
(b) Liability, Capital and Revenue Accounts are debited if there is decrease and
credited if there is increase.
In the example given when goods are purchased, as the assets are increasing, therefore,
Purchases Account will be debited and as payment is made in cash, assets are
decreasing, Cash Account will be credited.
Now, the journal entry will be made in the Journal alongwith a brief explanation i.e.
narration. The corresponding amounts will be written in the debit and credit columns.
After completing one entry, an horizontal line is drawn before entry for the next
transaction is made in the journal.
The transaction, given above in the example, is journalised in the following manner:
Date Particulars L.F. Dr. Amount Cr. Amount
(`) (` )
Purchases A/c .............. Dr 10000
To Cash A/c 10000
(Goods purchased for Cash)

Illustration 1
Analyse in Tabular form and Enter the following transactions in the Journal of Bhagwat
and Sons
2014 `
January 1 Tarun started business with cash 1,00,000
January 2 Goods purchased for cash 20,000
January 4 Machinery Purchased from Vibhu 30,000

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January 6 Rent paid in cash 10,000
January 8 Goods purchased on credit from Anil 25,000
January 10 Goods sold for cash 40,000
January 15 Goods sold on credit to Gurmeet 30,000
January 18 Salaries paid. 12,000
January 20 Cash withdrawn for personal use 5,000 Notes
Solution
As explained above, before making the journal entries, it is very essential to determine
the kind of accounts to be debited or credited. This is shown in the Table :
Tabular Analysis of Business Transactions
Date Transaction Affected Kind of Increaseor Debited Credited
Accounts Accounts Decrease Accounts Accounts
in Accounts Dr. Cr.
2014
Jan.1 Cash received Cash Asset Increase Cash A/c
from the owner Capital Capital Increase Capital A/c
Tarun
Jan. 2 Goods purcha- Goods Asset Increase Purchases A/c
ses for cash Cash Asset Decrease Cash A/c
Jan. 4 Machinery Machinery Asset Increase Machinery
purchased Vibhu Liability Increase A/c Vibhu A/c
on Credit
from Vibhu
Jan. 6 Rent paid Rent Expense Increase Rent A/c
in cash Cash Asset Decrease Cash A/c
Jan. 8 Goods on Purchases Asset Increase Purchases
purchased Anil Liability Increase A/c Anil A/c
Credit from (creditor)
Anil
Jan.10 Goods sold Cash Asset Increase Cash A/c
for cash sales Revenue Increase Sales A/c
Cash
Jan.15 Credit sales to Gurmeet Asset Increase Gurmeet
Gurmeet (Debtor) Revenue Increase Sales A/c
Sales
Jan.18 Salaries paid Salaries Expense Increase Salaries A/c
in cash Cash Asset Decrease Cash A/c

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Jan.20 Cash Drawings Capital Decrease Drawings A/c
withdrawn for Cash Asset Decrease Cash A/c
personal use

On the basis of the above table, following entries can be made in the Journal
Journal of Tarun
Dr. Cr.
Date Particulars L.F. Amount Amount
Notes ` `

2014

Jan. 1 Cash A/c Dr. 1,00,000

To Tarun Capital A/c 1,00,000
(Capital brought in by Tarun)

Jan. 2 Purchases A/c Dr. 20,000

To Cash A/c 20,000
(Goods purchased for Cash)

Jan. 4 Machinery A/c Dr. 30,000

To Vibhu’s A/c 30,000
(Machinery purchased from Vibhu
on credit)

Jan. 6 Rent A/c Dr. 10,000

To cash A/c 10,000
(Rent paid)

Jan. 8 Purchases A/c Dr. 25,000

To Anil’s A/c 25,000
(Good purchased on credit)

Jan.10 Cash A/c Dr. 40,000

To Sales A/c 40,000
(Goods sold for Cash)

Jan.15 Gurmeet’s A/c Dr. 30,000

To Sales A/c 30,000
(Goods sold on credit to Gurmeet)

Jan.18 Salaries A/c Dr. 12,000

To Cash A/c 12,000
(Salaries paid)

Jan.20 Drawings A/c Dr 5,000

To Cash A/c 5,000
(Cash withdrawn by the owner
for personal use)

Total 2,72,000 2,72,000

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INTEXT QUESTIONS 5.2

I. Below are given certain transactions. Write the names and kinds of affected
accounts in the given columns of debit and credit :
Dr. Cr

Transaction Name Type Name Type

of A/c of A/c of A/c of A/c Notes

i. Started business with cash Cash A/c Assets Capital Capital

ii. Credit purchases of goods

iii. Commission paid by cheque

iv. Cash deposited into Bank

v. Interest received in cash

vi. Furniture purchased from

Mukesh

vii. Goods sold by Ramesh

II. Write down the narration for the following Journal entries in the space
provided :

(i) Cash A/c Dr. (ii) Purchases A/c Dr.

To sales A/c To Vinay’s A/c

( ) ( )

III.Complete the following journal entries :

(i) Amit’s A/c Dr. (ii) ..................... Dr.

To ............. A/c To Cash A/c

(Goods sold to Amit) (Commission paid in Cash)

(iii) Cash A/c Dr. (iv) Goods A/c Dr

To ............. A/c To ............. A/c

(Interest received in Cash) (Goods purchased from Rohit

for Cash)

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5.3 COMPOUND AND ADJUSTING ENTRIES
The journal entries that you have learnt so far are simple and affect two accounts only.
There can be entries that affect more than two accounts; such entries are called
compound or combined entries.
A simple journal entry contains only one debit and one credit. But if an entry contains
more than one debit or credit or both, that entry is known as a compound journal entry.
Actually, a compound journal entry is a combination of two or more simple journal
Notes
entries.
Thus, a compound journal entry can be made in the following three ways:
(i) By debiting one account and crediting more than one account.
(ii) By debiting more than one account and crediting one account.
(iii) By debiting more than one account and also crediting more than one account.
Two simple journal entries are as :
Journal
Dr. Cr.
Date Particulars L.F. Amount Amount
` `
2014
Nov. 30 Salary A/c Dr. 6,000
To Cash A/c 6,000
(Salary paid in Cash)
Nov. 30 Rent A/c Dr. 12,000
To Cash A/c 12,000
(Rent paid in Cash)
The above two simple entries have been converted into compound Journal entry as
under :
2014
Nov. 30 Salary A/c Dr. 6,000
Rent A/c Dr. 12,000
To Cash A/c 18,000
(Payment of Salary and Rent in Cash)
Note : To make the compound entry, it is necessary that the transactions must be of
the same date and one account is common.

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If you match the first two simple entries with the converted compound entry, you will
find that there is no difference between them so far as the accounting effect is concerned.
The compound entries save time and space. Such compound entries are made in the
following cases:
(a) When two or more transactions occur on the same day.
(b) One aspect i.e. either the Debit account or Credit account is common.
A few more examples of compound entries are : Notes

1. Bad Debts
When a debtor fails to pay the full amount due to him, the unpaid amount is known as
bad debts.
For example, A business concern receives ` 8000 out of ` 10,000 due from Harish.
He is unable to pay the balance amount, thus, the remaining amount becomes a bad
debts for the business.
The compound entry for this transaction will be :
Bank A/c Dr. 8,000
Bad Debts A/c Dr. 2,000
To Harish’s A/c 10,000
(Receipt of ` 8,000 from Harish and remaining due
amount of ` 2,000 is treated as bad debts)
2. Discount Allowed and Received
To encourage a customer to pay the amount due before due date, discount is allowed.
This is called cash discount. If such discount is received the compound entry will be :
a) Creditor A/c Dr.
To Bank A/c
To Discount A/c
b) Similarly, when cash discount is allowed, the journal entry will be
Bank A/c Dr.
Discount A/c Dr.
To customer’s (Debtor’s) A/c

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Note : When the customer buys goods in bulk or in large quantity some discount may
be allowed to him. This is to encourage him to buy more and more. This discount is
called Trade Discount. When the bill is prepared for the purchase of goods, the amount
of trade discount is deducted from the total amount payable. No entry is made for this
type of discount in the journal i.e. it is not recorded in the books of accounts.
Illustration 2
Enter the following transactions in the books of Supriya, the owner of the business:
Notes
2014
Jan. 8 Purchased goods worth ` 5,000 from Sarita on credit.
Jan. 12 Neha Purchased goods worth ` 4,000 from Supriya on credit.
Jan. 18 Received a Cheque from Neha in full settlement of her account `3,850.
Discount allowed to her `150
Jan. 20 Payment made to Sarita ` 4,900. Discount allowed by him ` 100.
Jan. 22 Purchased goods for cash ` 10,000.
Jan. 24 Goods sold to Kavita for ` 15,000.
Trade discount @ 20% is allowed to her.
Jan. 29 Payment received from Kavita by Cheque.
Solution
The above transactions will be entered in the journal as follows :
Journal of Supriya
Dr. Cr.
Date Particulars L.F. Amount Amount
` `
2014
Jan.8 Purchases A/c Dr. 5,000
To Sarita A/c 5,000
(Goods Purchased on credit from Sarita)
Jan. 12 Neha’s A/c Dr. 4,000
To Sales A/c 4,000
(Goods sold on credit to Neha)

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Jan. 18 Bank A/c Dr. 3,850
Discount A/c Dr. 150
To Neha’s A/c 4,000
(Payment recived from Neha and
discount allowed)
Jan. 20 Sarita’s A/c Dr. 5,000
To Cash A/c 4.900
To Discount A/c 100 Notes
(Payment made and discount
allowed by Sarita)
Jan. 22 Purchases A/c Dr. 10,000
To Cash A/c 10,000
(Goods purchased for cash)
Jan. 24 Kavita A/c Dr. 12,000
To Sales A/c 12,000
(Sold goods to Kavita on credit of
` 15000 less Trade Discount @20%)
Jan. 29 Bank A/c Dr. 12,000
To Kavita’s A/c 12,000
(Payment received from Kavita
by Cheque)
Total 52,000 52,000
Adjusting Entry
To satisfy the principle of matching cost and revenue, amount of every expense and
revenue should pertain to the period for which accounts are being prepared. Thus,
there can be two situations : (a) Amount has been received or paid which belongs to
more than one accounting year (b) amount of expense or of revenue for the current
year stands due and not paid. In the above two cases adjustments need to be made.
Any journal entry made to adjust these amounts is called adjusting journal entry.
Journal entries made to adjust for outstanding expenses such as rent outstanding, prepaid
expenses such as insurance premium paid in advance, accrued income such as rent
(income) has become due but not received and income received in advance such as
commission has been received though not yet due are examples of adjusting journal
entries.
Following are the items for which adjustment is required :

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1. Outstanding Expenses
An expense for the current accounting peirod should be debited (as increase in expense
is to be debited). It is immaterial whether it is paid in that accounting period or not. In
case the same expense is not paid during the year, it becomes outstanding for that
particular year. It is the liability of the business for that year and, thus, expense outstanding
account will be credited, because liabilities are credited for increase.
For example, if salaries are outstanding for ` 5,000 for December 2014 then the entry
Notes
will be made as follows:
2014 Salaries A/c Dr. 5,000
Dec.31 To Salaries outstanding A/c 5,000
(Salaries remaining unpaid for the month of December)
2. Prepaid Expenses
This is an expense relating to the next year that has been paid in advance during the
current year. Thus, in such a case, this amount should not be treated as an expense for
this year. It should be treated as an asset in the current year as the services will be
received only in the next year (but the payment has been made in this year). As an
increase in asset is debited, so prepaid expense account will also be debited.
If, for example, Insurance is prepaid for 2015 in 2014 for ` 3,000 then entry will be
made as follows:
2014 Prepaid Insurance A/c Dr. 3,000
Dec. 14 To Insurance Premium A/c 3,000
(Insurance paid in advance)
3. Accrued Income
In case, income has been earned but it has not been recieved till now, it is an accrued
income. Accrued Income is an asset, as there will be an increase in the asset, it will be
debited.
For example, Rent (receivable) is outstanding for the month of November `4,000. The
entry in such a case will be:
Accrued Rent A/c Dr. 4,000
To Rent A/c 4,000
(Being Rent due but not yet received for the period)
Note : Here Rent Income A/c has been credited for the increase to be made in the
amount of Rent for the period of November, which has to be included in the total Rent
Income.

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4. Income Received in Advance

Whenever Income is received in advance during the current year i.e. it is received for
the next year, it should not be included in the current year’s income. As this income
pertains to the next year, it cannot be treated as income in the current year, so it becomes
a liability. As there is an increase in the liability, it should be credited.

For example, if Rent is received in advance for the period January and February 2015
in December 2014, ` 9,000. Then the entry will be Notes

Rent A/c Dr. 9,000

To Rent Received in Advance A/c 9,000

(Rent received in advance for January and

February 2015 in the month of December 2014)

Note : Here Rent Income A/c has been debited as it has to be decreased by ` 9,000
being Rent in advance for January and February 2015 which should not be included in
the month of December 2014 as the services have not yet been rendered.

Miscellaneous Entries

(a) Depreciation

Depreciation means decline in the value of an asset due to its wear and tear. It is an
expense for the business. Increase in expenses and losses are debited, so depreciation
is also to be debited. The value of the asset will also be reduced because of depreciation.
As decrease in assets is credited, so the same asset account will be credited.

For example, Depreciation on furniture ` 3,000 is charged for the year, Journal entry
will be :

Depreciation A/c Dr. 3,000

To Furniture A/c 3,000

(Depreciation charged on furniture)

(b) Interest on Capital

Business may allow interest to its proprietor on his/her capital. It is an expense for the
business. As the expense is debited for the increase, interest on capital will be debited.
The other account involved here is capital account. As Capital is increasing, it will be
credited with the amount of interest on capital.

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For example, Interest allowed on capital is ` 2,500. Thus, the journal entry will be :

Interest on Capital A/c Dr. 2,500

To Capital A/c 2,500

(Interest on Capital is allowed)

(c) Drawings
Notes
When the proprietor withdraws some money from the business for his personal or
domestic use, it is known as Drawings. Drawings reduce the amount of Capital. As
decrease in Capital is debited, drawings will also be debited. As Cash will be decreased
as an asset, it will be credited.

For example, Cash withdrawn by the proprietor for his peronal use is ` 4,000. So the
journal entry will be :

Drawings A/c Dr. 4,000

To Cash A/c 4,000

(Drawings made in cash)

INTEXT QUESTIONS 5.3

I. Fill in the blanks with sutiable word/words:

i. A cominbaiton of two or more simple journal entries is known as

...........................

ii. Bad debts are ........................... in the journal, as they are loss to the Business.

iii. In journal, only ........................... discount is recorded.

iv. No entry is made for ........................... discount in the Journal.

v. Prepaid Expenses are ........................... in the journal.

vi. Accrued Income is ........................... on the journal.

vii. Depreciation reduces the value of an ...........................

viii. When the proprietor- withdraws money from the business for his personal use,
then ........................... A/c is debited and ........................... A/c is credited.

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II. Complete the following journal entries:
(i) Drawings A/c ................... Dr.
To ................... A/c
(Money withdrawn from Bank for Personal use)
(ii) Cash A/c ................... Dr.
...................................... Dr. Notes
To Rohit’s A/c
(Payment received form Rohit in full and final settlement of his A/c)
(iii) ................... A/c Dr.
To Rent A/c
(Rent paid in advance)
(iv) Interest on Capital A/c Dr.
To ................... A/c
(Interest allowed on capital)
(v) ................... A/c Dr.
To Commission outstanding A/c
(Commission outstanding for December)
(vi) Cash A/c ................... Dr.
................... A/c Dr.
To Satish’s A/c
(Part payment of a debt received due to insolvency of Satish)

5.4 CLASSIFICATION OF JOURNAL

Journal is a book in which transactions are recorded in chronological order/ date wise,
therefore it will be practically difficult to record if the number of transactions is large. To
take the benefit of division of labour, journal should be divided into number of journals.
Journal can be classified into various special journals and Journal proper. Special journals
are also known as special purpose books.
Classification of Journal can be explained with the help of the following chart:

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Journal

Special Journal Journal Proper

Cash Journal Goods Journal Bill Journal

Notes
Purchase Sales Purchase Return Sales Returns
Journal/Book Journal/Book Journal/Book Journal/Book

Simple Cash Bank Column Bill Receivables Bill Payables

Journal/Book Cash Journal/ Journal/Book Journal/Book
Book

These journals are explained below :

I. Special Journals
Special journals are those journals which are meant for recording all the transactions of
a repetitive nature of a particular type. For example, all cash related transactions may
be recorded in one book, all credit purchases in another book and so on. These are :
(i) Cash Journal/Cash Book : Cash Journal or Cash Book is meant for recording
all cash transactions i.e., all cash-receipts and all cash payments of the ‘business.
This book helps us to know the balance of Cash in hand at any point of time.
It is of two types :
a) Simple Cash Book : It records only receipts and payments of cash. It is like
an ordinary Cash Account.
b) Bank Column Cash Book : This type of Cash Book contains one more
column on each side for the Bank transactions. This Book provides additional
information about the Bank transactions.
You will learn more details about the Cash Book in the lesson on Cash Book.
ii. Purchases Journal/Purchases Book : This journal is meant for recording all
credit purchases of goods only as Cash purchases of goods are recorded in the
Cash Book. In this journal, purchases of other things like machinery, typewriter,
stationery, etc. are not recorded. Goods means articles meant for trading or the
articles in which the business deals.
iii. Sales Journal/Sales Book : This journal is meant for recording all credit sales
of goods made by the firm. Cash Sales are recorded in the Cash Book and not

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in the Sales Book. Credit Sale of items other than the goods dealt in like sale
of old furniture, machinery, etc. are not entered in the Sales Journal.
iv. Purchase Returns or Returns Outward Journal : Whenever, the goods are
not as per the specifications, the buyer may return these goods to the supplier.
These returns are entered in a book known as Purchase Returns Book. It is also
known as Returns Outward Journal/Book.
v. Sale Returns or Returns Inward Journal : Sometimes, when the goods are
sold to the customer and they are not satisfied with the goods, they may return Notes
these goods to the businessman. Such returns are known as Sales Returns. Just
like Purchase Returns, they are also recorded in a separate Book which is known
as Sales Returns or Returns Inward Journal/Book.
Note : You will learn more details about these Special journals in the subsequent
lessons.
vi. Bill Receivables Journal/Book : When goods are sold on credit and the date
and period of payment is agreed upon between the seller and the buyer, this is
duly signed by both the parties. This written document is called a Bill of exchange.
For the seller it is a bill receivable and for the buyer it is a bill payable. Bills
Receivable Journal/Book and Bills Payable Journal Book are two journals
prepared by a businessman. For example : Pranaya sells goods to Gunakshi on
credit for `5,000 payable after three months. A document is prepared containing
these facts and is duly signed by Pranaya and Gunakshi. For Pranaya, it is a Bills
Receivable and she will record this transaction in Bill Receivable Book. For
Gunakshi, it is a Bill Payable and she will record the transaction in her Bill Payable
Book.
vii. Bill Payable Journal : This is a journal in which record of those bills is kept
on which the firm has given its acceptance for making payments on later dates.
Note : Bill books are not now in practice.
II. Journal Proper
This journal is meant for recording all such transactions for which no special journal has
been maintained in the business. Therefore, in this journal, all such transactions are
recorded which do not occur frequently and for these transactions, no special journal is
required. For example, if Machinery is purchased on credit, it will be recorded in the
journal proper, because in the Cash Book, we will record only cash purchases of
machinery. Similarly, many other transactions, which do not find their place in the special
journals, will be recorded in the Journal Proper such as
(i) Outstanding expenses – Salaries outstanding, Rent outstanding, etc.
(ii) Prepaid expenses – Prepaid Rent, Salaries paid in advance

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(iii) Income received in advance – Rent received in advance, interest received in
advance, etc.
(iv) Accrued Incomes – Commission yet to be received, interest yet to be received.
(v) Interest on Capital
(vi) Depreciation
(vii) Credit Purchase and Credit Sale of fixed Assets – Machinery, Furniture.
Notes
(viii) Bad debts.
(ix) Goods taken by the proprietor for personal use.

INTEXT QUESTIONS 5.6

Fill in the blanks with suitable word/words:
i. Return of goods purchased by the businessman to the suppliers will be entered in
___________ Journal.
ii. In ___________ Journal, credit purchases of assets is not recorded.
iii. When the payment is to be made by the debtor, under a written agreement it is
___________ for him.
iv. An order made by the creditor to his debtor to make the payment on a specified
date is known as ___________.
v. In ___________ all such transactions are recorded for which no special journals
are maintained.
vi. Assets sold on credit are entered in ___________.

WHAT YOU HAVE LEARNT

z The Book in which all business transactions are recorded, datewise i.e. chronological
order is known as Journal.
z A Journal contains the following columns:
1. Date: 2. Particulars; 3. Ledger folio; 4. Debit Amount; 5. Credit Amount.
z Brief explanation of a journal entry is known as Narration.
z A combination of two or more simple journal entries is known as compound entires.
z Cash discount is recorded in the journal whereas no entry is made for Trade Discount.

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z When the amount paid or received is partly utilised by the end of an accounting
year, and balance is for services to be provided in the next year or amount is yet to
be paid or to be received for the services availed of in the current year, adjustment
is required and adjusting entries will be made.
z In big business houses, a journal is classified into various special journals which
record transactions of similar and repetitive nature.
z All those transactions which arise occasionally or do not find place in any of the
special journals are recorded in Journal proper. Notes

z Special Journals : These are used for recording specific nature transactions:

Cash Purchase Sales Purchase Sale Bill Bill

Book Book Book Returns Returns Receivable Payable
Book Book

TERMINAL EXERCISE
1. Write the meaning of the following in one sentence each:
(i) Narration
(ii) Ledger folio
(iii) Bad debts
(iv) Cash Discount
2. The following journal entries have been made by a learner. You are required to
make correct entries wherever you think them to be wrong :
(i) Proprietor brought capital into Business
Capital A/c ................... Dr.
To Cash A/c
(ii) Goods Sold for Cash
Cash A/c ................... Dr.
To Goods A/c
(iii) Machinery Purchased in Cash
Purchases A/c ................... Dr.
To Cash A/c

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(iv) Goods sold to Ram for cash
Ram A/c ................... Dr.
To Sales A/c
(v) Salary paid to the Accountant
Accountant’s personal A/c ................... Dr

Notes To Salary A/c

(vi) Rent paid in advance
Prepaid Rent A/c ................... Dr
To Cash A/c
3. Distinguish between Special Journals and Journal Proper.
4. Journalise the following transactions :
(i) Started business with cash ` 3,00,000.
(ii) Bought Goods on credit for ` 5,000.
(iii) Sold Goods for cash ` 12,000 and on credit ` 8,000.
5. Explain the process of journalising the transactions with suitable examples.
6. What are compound entries? Explain with suitable examples.
7. What are adjusting entries? Give examples of any two such entries.
8. Enter the following transactions in Journal
2014
Jan. 1 Sushil & Co. started business with cash 1,00,000
Jan. 2 Paid into Bank 60,000
Jan. 4 Purchased Machinery and paid by cheque 30,000
Jan. 6 Bought goods from Naresh 20,000
Jan. 14 Paid salaries 5,000
Jan. 15 Sold goods to Rajesh Kumar 15,000
Jan. 17 Paid for Sundry Expenses 8,500
Jan. 18 Cash deposited into Bank 20,000
Jan. 19 Received Rent 6,000
Jan. 22 Paid Naresh by cheque in full settlement of his A/c 19,750

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Jan. 24 Withdrawn cash for personal use 8,000
Jan. 26 Salary paid in advance to Surjeet 2,500
Jan. 28 Rajesh made the payment on A/c 10,000
Jan. 30 Cash Sales for the month 16,500

9. The following are the transactions of Kumar Swami for the month of January 2014.
Journalise these transactions.
2014 Notes
`
Jan. l Capital paid into Bank 3,00,000
Jan. 1 Bought Stationery for cash 400
Jan. 2 Bought Goods for cash 25,000
Jan. 3 Bought Postage Stamps 600
Jan. 5 Sold Goods for Cash 10,000
Jan. 6 Bought Office Furniture from Mahendra Bros. 40,000
Jan.11 Sold goods to Jacob 12,000
Jan.12 Received cheque from Jacob 12,000
Jan.14 Paid Mahendra Bros. by cheque 40,000
Jan.16 Sold goods to Ramesh & Co 5,000
Jan.20 Bought from S. Seth & Bros 15,000
Jan.23 Bought Goods for cash from S.Narain & Co 22,000
Jan.24 Sold Goods to P.Prakash 17,000
Jan. 26 Ramesh & Co. Paid on account 2,500
Jan.28 Paid S.Seth & Bros. by cheque in full settlement 14,800
Jan.31 Paid Salaries 2,800
Jan.31 Rent is due to S. Sharma but not yet paid 2,000

ANSWERS TO INTEXT QUESTIONS

5.1 I. Journal is a book of accounts in which all day to day transactions are
recorded in the order of their occurence.
II. (i) the journal (ii) original book of entries/Primary Book of entries
(iii) entires (iv) narration (v) ‘to’

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5.2 I.
Debit Credit

S.No. Name of A/c Kind of A/c Name of A/c Kind of A/c

(ii) Goods A/c Asset Creditors A/c Liability

(iii) Commission A/c Expense Bank A/c Asset

(iv) Bank A/c Asset Cash A/c Asset

Notes
(v) Cash A/c Asset Interest A/c Revenue

(vi) Furniture A/c Asset Mukesh A/c Liability

(vii) Ramesh A/c Asset Goods A/c Asset

II. (i) Goods sold for cash (ii) Goods purchased from Vinay on credit
III. (i) Goods A/c (ii) Commission A/c (iii) Interest (iv) Cash A/c
5.3 I. (i) Compound entry (ii) Debited (iii) Cash (iv) Trade
(v) Debited (vi) Debited (vii) Asset (viii) Drawings, Cash
II. (i) Cash A/c (ii) Discount (iii) Prepaid Rent
(iv) Capital A/c (v) Commission A/c (vi) Bad Debts A/c
5.4 (i) Purchase Returns - Journal (ii) Purchase Journal
(iii) Bill Payable (iv) Bill of Exchange (v) Journal proper (vi) Journal proper

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LEDGER Notes

You have learnt that business transactions are recorded in various special purpose
books and journal proper. The accounting process does not stop here. The transactions
are recorded in number of books in chronological order. Such recording of business
transactions serves little purpose of accounting. Items of same title in different books of
accounts need to be brought at one place under one head called an account. There are
numerous account titles of items/persons or accounts. All the accounts, if brought in
one account book, will be more informative and useful. The account book so maintained
is called Ledger.
In this lesson, you will learn about Ledger and posting of items entered in various
books of accounts to ledger.

OBJECTIVES
After studying this lesson, you will be able to:
z state the meaning, features and importance of ledger;
z enumerate the various types of ledger;
z state the meaning of posting and explain the steps of posting journal into ledger;
z calculate the balance of the account in the ledger.
6.1 LEDGER : MEANING, IMPORTANCE AND TYPES
You have already learnt about accounts. Each transaction affects two accounts. In
each account transactions related to that account are recorded. For example, sale of
goods taking place number of times in a year will be put under one Account i.e. Sales
Account.

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All the accounts identified on the basis of transactions recorded in different journals/
books such as Cash Book, Purchase Book, Sales Book etc. will be opened and
maintained in a separate book called Ledger. So a ledger is a book of account; in
which all types of accounts relating to assets, liabilities, capital, expenses and revenues
are maintained. It is a complete set of accounts of a business enterprise.
Ledger is bound book with pages consecutively numbered. It may also be a
bundle of sheets.
Notes Thus, from the various journals/Books of a business enterprise, all transactions recorded
throughout the accounting year are placed in relevant accounts in the ledger through the
process of posting of transactions in the ledger. Thus, posting is the process of transfer
of entries from Journal/Special Journal Books to ledger.
Features of Ledger
z Ledger is an account book that contains various accounts to which various business
transactions of a business enterprise are posted.
z It is a book of final entry because the transactions that are first entered in the
journal or special purpose Books are finally posted in the ledger. It is also
called the Principal Book of Accounts.
z In the ledger all types of accounts relating to assets, liabilities, capital, revenue
and expenses are maintained.
z It is a permanent record of business transactions classified into relevant
accounts.
z It is the ‘reference book of accounting system and is used to classify and
summarise transactions to facilitate the preparation of financial statements.
Format of a Ledger Sheet
The format of a ledger sheet is as follows :
Title of An Account
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

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You must have noticed that the format of a ledger sheet is similar to that of the format of
an Account about which you have already learnt. A full sheet page may be allotted to
one account or two or more accounts may be opened on one sheet. It depends upon
the number of items related to that account to be posted.
Importance of Ledger/Utility of Ledger
Ledger is an important book of Account. It contains all the accounts in which all the
transactions of a business enterprise are classified. At the end of the accounting period,
each account will contain the entire information of all the transactions relating to it. Notes
Following are the advantages of ledger.
z Knowledge of Business Results : Ledger provides detailed information about
revenues and expenses at one place. While finding out business results the revenue
and expenses are matched with each other.
z Knowledge of Book Value of Assets : Ledger records every asset separately.
Hence, you can get the information about the Book value of any asset whenever
you need.
z Useful for Management : The information given in different ledger accounts will
help the management in preparing budgets. It also helps the management in keeping
the check on the performance of business it is managing.
z Knowledge of Financial Position : Ledger provides information about assets
and liabilities of the business. From this we can judge the financial position and
health of the business.
z Instant Information : The business always need to know what it owes to others
and what the others owe to it. The ledger accounts provide this information at a
glance through the account receivables and payables.
Types of Ledger
In large scale business organisations, the number of accounts may run into hundreds. It
is not always possible for a businessman to accommodate all these accounts in one
ledger. They, therefore, maintain more than one ledger.
These ledgers may be as follows :
1. Assets Ledger : It contains accounts relating to assets only e.g. Machinery account,
Building account, Furniture account, etc.
2. Liabilities Ledger : It contains the accounts of various liabilities e.g. Capital (Owner
or partner), Loan account, Bank overdraft, etc.
3. Revenue Ledger : It contains the revenue accounts e.g.. Sales account,
Commission earned account, Rent received account, interest received account,
etc.

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4. Expenses Ledger : It contains the various accounts of expenses incurred, e.g.
Wages account, Rent paid account, Electricity charges account, etc.
5. Debtors Ledger : It contains the accounts of the individual trade debtors of the
business. Individuals, firms and institutions to whom goods and services are sold
on credit by business become the ‘trade debtors’ of the business.
6. Creditors Ledger : It contains the accounts of the individual trade Creditors of
the business. Individuals, firms and institutions from whom a business purchases
Notes
goods and services on credit are called ‘trade creditors’ of the business.
7. General Ledger : It contains all those accounts which are not covered under any
of the above types of ledger. For example Landlord A/c, Prepaid insurance A/c
etc.

INTEXT QUESTIONS 6.1

I. Fill in the blanks with a suitable word or words :
i. Ledger contains various ...................... in it.
ii. The process of transfer of entries from Journal and special purpose books to
ledger is called ......................
iii. Ledger is also called ......................
iv. Ledger is a ...................... book of accounting system.
II. Match the column A with column B :
A B
i. Book containing accounts (a) Ledger
ii. Pages number of the ledger (b) Liabilities ledger
iii. Machinery account, Building (c) Revenue ledger
account, furniture Accounts, etc.
iv. Loan’s account, Bank overdraft (d) Expenses ledger
account, etc.
v. Rent paid, wages paid, (e) Folio
electricity charges
vi. Sales account, commission account, (f) Assets ledger
interest received account etc.

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6.2 POSTING OF JOURNAL PROPER INTO LEDGER
You know that the purpose of opening an account in the ledger is to bring all related
items of this account which might have been recorded in different books of accounts on
different dates at one place. The process involved in this exercise is called posting in
the ledger. This procedure is adopted for each account.
To take the items from the journal to the relevant account in the ledger is called posting
of journal. Following procedure is followed for posting of journal to ledger : Notes
1. Identify both the accounts ‘debit’ and ‘credit’ of the journal entry. Open the two
accounts in the ledger.
2. Post the item in the first account by writing date in the date column, name of the
account to be credited in the particulars column and the amount in the amount
column of the ‘debit’ side of the account.
3. Write the page number of the journal from which the item is taken to the ledger in
Folio column and write the page number of the ledger from which account is written
in L.F. column of the journal.
4. Now take the second Account and give the similar treatment. Write the date in the
‘date’ column, name of the account to be debited in the particulars column and the
amount in the ‘particulars’ column of the account on its credit side in the ledger.
5. Write page number of journal in the ‘folio’ column of the ledger and page number
of the ledger in the ‘LF’ of column of the journal.
Illustration 1
Journalise the following transactions.
2014 `
January 1 Commenced business with cash 50,000
January 3 Paid into bank 25,000
January 5 Purchased furniture for cash 5,000
January 8 Purchased goods and paid by cheque 15,000
January 8 Paid for carriage 500
January 14 Purchased Goods from K. Murthy 35,000
January 18 Cash Sales 32,000
January 20 Sold Goods to Ashok on credit 28,000

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January 25 Paid cash to K. Murthy in full settlement 34,200

January 28 Cash received from Ashok 20,000

January 31 Paid Rent for the month 2,000

January 31 Withdrew from bank for private use 2,500

Solution :
Notes Journal

Dr. Cr
Date Particulars LF Amount Amount
` `
2014

Jan 1 Cash A/c Dr. 50,000

To Capital A/c 50,000
(Commenced business with cash)

Jan 3 Bank A/c Dr 25,000

To cash A/c 25,000
(Cash paid into the Bank)

Jan 5 Furniture A/c Dr 5,000

To Cash A/c 5,000
(Purchased furniture for cash)

Jan 8 Purchases A/c Dr 15,000

To Bank A/c 15,000
(Purchased goods and paid by cheque)

Jan 8 Carriage A/c Dr 500

To Cash A/c 500
(Cash paid for carriage charges)

Jan 14 Purchases A/c Dr 35,000

To K. Murthy 35,000
(Goods purchased on credit)

Jan 18 Cash A/c Dr 32,000

To Sales A/c 32,000
(Goods sold for cash)

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Jan 20 Ashok Dr 28,000
To Sales A/c 28,000
(Goods sold to Ashok credit)
Jan 25 K Murthy Dr 35,000
To Cash A/c 34,200
To Discount A/c 800
(Cash paid to K. Murthi and discount
allowed by them) Notes

Jan 28 Cash A/c Dr 20,000

To Ashok 20,000
(Cash received from Ashok on Account)
Jan 31 Rent A/c Dr 2,000
To Cash A/c 2,000
(Cash paid for rent)
Jan 31 Drawings A/c Dr 2,500
To Bank A/c 2,500
(Cash withdrawn from bank for
domestic use)

INTEXT QUESTIONS 6.2

I. State the meaning of ledger posting :
____________________________________________________________
____________________________________________________________
II. Following are the steps of posting of journal to ledger but are not in proper
order. Write them in correct order :
i. Write the page number of journal in the JF column of ledger and that of
ledger on which account has been taken from journal.
ii. Identify the two affected accounts in the journal and open these accounts
in the ledger
iii. Take date and amount of the debit account, and name of the credit account
from journal to ledger in their respective columns.
iv. While posting the credit account from journal in the ledger write page
number of the journal from which item is taken to ledger in JF column of
ledger and page number of ledger on which item is taken on the LF column
of the journal.

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Basic Accounting
Posting Scheme
Posting from the Journal to the ledger-Dedit Account

Open the page of Journal

Read the title of the debit account

Notes

Does the account No Open the ledger and

exist in the ledger put title on blank page

Yes

Open the respective page

Make entry on debit side

Put month and Date in

Date Column

Write the name of the credit

account in 'particulars' column

Write the amount of transaction

in 'Amount' column

Put folio number of this ledger page in

'Folio' column of journal

Go to Next entry

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Posting Scheme
Posting from the Journal to the ledger-Credit Account

Open the page of the journal

Read the title of the credit account Notes

Does this account No Open the ledger and

exist in the ledger put title on blank page

Yes

Open the respective page

Make entry on credit side

of the account

Put month and Date in

Date' Column

Write the name of the debit

account in 'particulars' column

Write the amount of transaction

in 'Amount' column

Put folio number of this ledger page in

'Folio' column of journal and vice versa

Go to Next entry

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6.3 BALANCING OF AN ACCOUNT
Balancing of an account is the process of finding out the difference between the total of
debits and total of credits of an account. If debit side total is more than the credit side,
the account shows a debit balance. Similarly, the balance will be credit balance if the
credit side total of an account is more than the debit side total. This process of ascertaining
and writing the balance of each account in the ledger is called balancing of an account.
An account has two sides : debit and credit. Items by which this account is debited are
Notes entered on its debit side with their amounts and items by which this account is credited
are entered on its credit side with their amounts so all items related to an account are
shown at one place in the ledger. But then you would like to know the net effect of this
account i.e. the balance between its debit amount and credit amount. The following
steps are followed in Balancing the Ledger Account :
z Total the two sides of an Account on a rough sheet.
z Determine the difference between the two sides. If the credit side is more than the
debit side, the balance calculated is a credit balance.
z Put the difference on the ‘Shorter side’ of the account such that the totals of the
two sides of the account are equal.
z If the difference amount is written on debit side (i.e., if credit. side is bigger) then
write as “Balance c/d” (c/d stands for carried down). If difference is written on the
credit side (i.e., if debit side is bigger) then write it as “Balance c/d.
z Finally at the end of the year all the ledger accounts are closed by taking out the
balance of each account.
z The Balance then should be brought down or carried forward to the next period. If
the difference was put on credit side as “Balance c/d” it should now be written on
the debit side of the account as “Balance b/d” (b/d stands for brought down) and
vice-a-versa. Thus, debit balance will automatically be brought down on the debit
side and a credit balance on the credit side.
Balancing of Different Types of Accounts
Assets : All asset accounts are balanced. These accounts always have
a debit balance.
Liabilities : All Liability accounts are balanced. All these accounts have a
credit balance.
Capital : This account is always balanced and usually has a credit
balance.

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Expense and : These Accounts are not balanced but are simply totalled up.
Revenue The debit total of Expense/Loss will show the expense/Loss.
In the same manner, credit total of Revenue/Income will show
increase in income. At the time of preparing the Trial Balance,
the totals of these are taken to the Trial Balance.
The Balance of Assets, Liabilities and Capital Accounts will be shown in Balance Sheet
whereas total of Expense/Loss and Revenue/Income will be taken to the Trading and
Profit and Loss Account. These Accounts are, thus, closed. Notes
If two sides of an Account (usually Assets, Liabilities and Capital) are equal there will
be no balance. The Account is then simply closed by totalling up of the two sides of the
account.
Illustration 2 : Taking ledger accounts of illustration 1, ledger posting and balancing is
as follows :
Solution
Ledger : Cash A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `
2014 2014

Jan 1 Capital A/c 50,000 Jan 3 Bank A/c 25,000

” 18 Sales A/c 32,000 Jan 5 Furniture 5,000
” 28 Ashok 20,000 Jan 8 Carriage 500
Jan 25 K. Murthi 34,200
Jan 31 Rent A/c 2,000
Jan 31 Balance c/d 35,300

1,02,000 1,02,000

Feb 1 Balance b/d 35,300

Capital A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `
2014 2014

Jan 31 Balance c/d 50000 Jan 1 Cash A/c 50000

50000 50000

Feb 1 Balance b/d 50000

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Bank A/c
2014 2014

Jan 2 Cash A/c 25000 Jan 8 Purchases A/c 15000

Jan 31 Drawings A/c 2500
Jan 31 Balance c/d 7500

25000 25000

Notes Feb 1 Balance b/d 7500

Furniture A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 Cash A/c 5000 2014 Balance c/d 5000

Jan 1 5000 Jan 31 5000

Feb 1 Balance b/d 5000

Purchase A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan 8 Bank 15,000 Trading A/c 50,000

Jan 14 K. Murthy 35,000

50,000 50,000

Carriage A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan 8 Cash 500 Trading A/c 500

500 500

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Basic Accounting
K. Murthy A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan 25 Cash 34,200 Jan 14 Purchases 35,000

Jan 25 Discount 800
Notes
35,000 35,000

Sales A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan 1 Trading A/c 60,000 Jan 18 Cash 32,000

Jan 20 Ashok 28,000

60,000 60,000

Ashok A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan 20 Sales A/c 28,000 Jan 28 Cash 20,000

Jan 31 Balance c/d 8,000

28,000 28,000

Feb 1 Balance b/d 8,000

Rent A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Cash A/c 2,000 Profit and Loss A/c 2,000

2,000 2,000

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Drawing A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan 10 Bank 2,500 Jan 31 Balance c/d 2,500

Notes
2,500 2,500

Feb 1 Balance b/d 2,500

INTEXT QUESTIONS 6.3

I. Fill in the blanks with suitable word/words :
i. The debit accounts from the journal are entered on the ___________ side of
respective account in the ledger.
ii. The ___________ of the account in the ledger should be the same as that is
used in the Journal.
iii. The page number of the journal is entered in the ___________ column in the
ledger account.
iv. The Figures appearing in the amount column of the ___________ and the
amount column of the respective ___________ in the ledger must be the same.
II. Fill in the blanks with suitable word or words :
i. The balance of asset accounts are ..................... balance.
ii. The balance of liability accounts are always ..................... balance.
iii. The capital Account generally has ..................... balance.
iv. The Revenue and expense accounts are closed by taking the balances to
.......................

WHAT YOU HAVE LEARNT

z Ledger is a register with pages ruled in account form to enable the preparation of
accounts.

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z Ledger is a permanent record of business transactions which are classified according
to various accounts to which they pertain.
z Ledger may be Assets Ledger, Liabilities Ledger, Revenue ledger, Expense ledger,
Debtors’ ledger, Creditors’ ledger and General ledger.
z The debit item of journal is posted to the credit side of the relevant account in the
ledger.
z The credit item of journal is posted to the Debit Side of the relevant account in the Notes
ledger.
z Name of the account in the journal is entered in ‘Particulars’ column of the relevant
account in the ledger.
z The page No. of journal from where entries are being posted is entered in folio
column of the various relevant accounts.
z In the ledger Book, the balances of Assets, Liabilities and Capital are carried forward
to the next period. Revenue and Expense accounts are closed by transferring their
totals to Trading and Profit and Loss A/c.
z The balance of an account is written on the side having lower total, so that its total
becomes equal to the total of the other side.

TERMINAL EXERCISE
1. What is meant by ledger? Why is ledger prepared?
2. Why is ledger known as the primary book or the principal -book of accounts? Can
profit of the business and its financial position be known without maintaining ledger?
3. Enumerate the various types of ledgers which may be maintained by a business.
4. What is the rule for posting the debit account from the journal into the ledger
account?
5. What is rule for posting the credit items of the journal into the ledger accounts?
6. What are the advantages of maintaining a ledger?
7. What is meant by balancing of an account? Explain the various steps taken while
balancing accounts.
8. How do we balance the following types of accounts?
(a) Assets (b) expense (c) capital (d) Revenue

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Basic Accounting
9. Following are the transactions of Dhani Ram and Sons for the month of July 2014.
Make journal entries, post them into ledger and balance the account.
2014 `
July 1 Commenced business with cash 60,000
July 2 Paid into bank 40,000
July 5 Purchased furniture for cash 5000
Notes July 7 Purchased Goods and paid for them by cheque 20000
July10 Sold Goods to Lata Gupta for cash 12000
July12 Sold Goods to Mahavir on credit 24000
July18 Purchased Goods from Harish 30000
July19 Withdrew cash for domestic use 2500
July20 Received a cheque from Mahavir on account 18900
Allowed him discount 100
July27 Paid to Harish cash on account 16800
Discount allowed by him 200
July31 Paid salary by cheque 1800
Paid cash for telephone bill 600

ANSWERS TO INTEXT QUESTIONS

6.1 I. (i) accounts (ii) posting (iii) Principal Book of Account (iv) reference book
II. (i) a (ii) e (iii) f (iv) b (v) d (vi) c
6.2 I. Taking the items from the journal to the relevant account in the ledger is called
ledger posting
II. Correct order b, c, a, d
6.3 I. (i) credit (ii) ledger (iii) JF (iv) journal, account
II. (i) debit (ii) credit (iii) credit (iv) Trading and Profit and
Loss A/c

ANSWERS TO TERMINAL EXERCISE

9. Total of journal ` 2,25,400

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ACTIVITY
Contact someone who may be your friend’s father or a relative who is in business. He
operates his accounts and he collects computerised statements received from the banks.
You compare their format with the ledger accounts which you have learnt in your school
or the businessman in question are maintaining and find the difference with regards to :
Traditional Computerised Notes
A/c A/c
1. Format of the account
2. How the accounts are debited/credited
3. Balancing of accounts
4. Additional information

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Notes CASH BOOK

A person after passing his/her senior secondary examination started a grocery store.
The transactions were limited in number and he/she maintained only one register to
record them i.e., Journal. As the business grows, the number of business transactions
increases. Recording all the transactions only in the Journal becomes very inconvenient
and cumbersome. It needs to be divided into many books. There are various kinds of
books that are maintained where the transactions will be recorded in these books
according to their nature, such as Cash book for cash transactions, Sales Book for
credit sales; Purchases Book for credit Purchases and so on. Out of these books,
Cash Book plays a significant role because it records large number of cash items of a
business concern. In this lesson you will learn about Cash Book, its meaning and
preparation.

OBJECTIVES
After studying this lesson, you will be able to:
z state the meaning of Cash Book;
z enumerate the types of Cash Book;
z state the meaning and draw Simple Cash Book as per format;
z state the meaning and draw Cash Book with Bank Column as per format;
z prepare Simple Cash Book and Cash Book with Bank column;
z posting of Cash Book in the ledger;
z describe the meaning and need of Petty Cash Book;
z prepare the Petty Cash Book.

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7.1 CASH BOOK : MEANING AND SIMPLE CASH BOOK
On your birthday you got gift in the form of cash from your parents, grand parents and
some of your relatives. In the meantime, you got back some money that you have given
to your friend as a loan. You spent this money in buying books and clothes. You went to
see movies with your friends. You purchased some toys for your niece. As per habit
you noted down all receipts and payments in your note book. At the end of the month,
you calculated the balance of cash in hand and tallied it with the actual cash balance
Notes
with you. You may maintain separate book to record these items of receipts and
payments, this book is known as Cash Book.
Cash Book is a Book in which all cash receipts and cash payments are recorded. It is
also one of the books of original entry. It starts with the cash or bank balance at the
beginning of the period. In case of new business, there is no cash balance to start with.
It is prepared by all organisations. When a cash book is maintained, cash transactions
are not recorded in the Journal, and no cash or bank account is required to be maintained
in the ledger as Cash Book serves the purpose of Cash Account.
Cash Book : Types and Preparation
Cash Books may be of the following Types:
z Simple Cash Book
z Bank Column Cash Book
z Petty Cash Book
Simple Cash Book
A Simple Cash Book records only cash receipts and cash payments. It has two sides,
namely debit and credit. Cash receipts are recorded on the debit side i.e. left hand side
and cash payments are recorded on the credit side i.e. right hand side. In this book
there is only one amount column on its debit side and on the credit side. The format of
a Simple Cash Book is as under:
Format of a Simple Cash Book
Dr Cr

Date Particulars L.F. Amount Date Particulars L.F. Amount

(` ) (`)

ACCOUNTANCY 123
MODULE - 1 Cash Book
Basic Accounting
Column-wise explanation is as follows :
Date : In this column Year, Month and Date of transactions are recorded in
chronological order.
Particulars : In this column, the name of the account in respect of which cash
has been received or payment has been made is written. Account pertaining to
the receipts of cash is recorded on the debit side and those pertaining to cash
Notes payments on the credit side.
Ledger Folio : In this column, it records the page number of the ledger book
on which relevant account is prepared.
Amount : In this column, it records the amount received on debit side and cash
paid on its credit side.
Preparation of Simple Cash Book
Cash Book is in a way, a cash account with debit and credit side and Cash account
is an asset account, so the rule followed is ‘Increase in assets to be debited and
Decrease in asset is to be credited’. This implies that Cash Book is a book where
all the receipts in terms of cash are recorded on the debit side of the Cash Book
and all the payments in terms of cash are recorded on its credit side. This means:
Cash Book records all transactions related to receipts and payments in terms
of Cash only.
On the debit side in the particulars column, the name of the account, for which
cash is received is recorded. Similarly, on the credit side, the name of account for
which cash is paid, is recorded. In the amount column the actual cash paid or
received is recorded. At the end of the month, cash book is balanced. The cash
book is balanced in the same manner an account is balanced in the ledger. The
total of the debit side of the cash book is compared with the total of the credit side
and the difference, if any, is entered on the credit side of the cash book under the
particulars column as ‘balance c/d’. In case of Simple Cash Book, the total of
debit side is always more than the total of the credit side, since the payment can
never exceed the available cash. The difference is written in the amount column
and total of the both sides of the cash book becomes equal. The closing balance
of the credit side becomes the opening balance for the next period and is written
as Balance b/d on the Debit side of the Cash Book for the following period.
Recording of cash transactions in the Simple Cash Book and its balancing is
illustrated with the help of the following illustrations :

124 ACCOUNTANCY
 Cash Book MODULE - 1
Basic Accounting
Illustration 1
Enter the following transactions in the cash book of M/s. Rohan Traders:
Date Details (`)
2014
December 01 Cash in Hand 27,500
December 05 Cash received from Nitu 12,000
December 08 Insurance Premium paid 2,000 Notes

December 10 Furniture purchased 6,000

December 14 Sold Goods for cash 16,500
December 18 Purchased Goods from Naman for cash 26,000
December 22 Cash paid to Rohini 3,200
December 25 Sold Goods to Kanika for cash 18,700
December 28 Cash Deposited into Bank 5,000
December 30 Rent paid 4,000
December 31 Salary paid 7,000
Solution:
Books of M/s. Rohan Traders
Cash Book
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(`) (`)

2014 2014

Dec.01 Balance b/d 27,500 Dec.08 Insurance premium 2,000

Dec.05 Nitu 12,000 Dec.10 Furniture 6,000
Dec.14 Sales 16,500 Dec.18 Purchases 26,000
Dec.25 Sales 18,700 Dec.22 Rohini 3,200
Dec.28 Bank A/c 5,000
Dec.30 Rent 4,000
Dec.31 Salary 7,000
Dec.31 Balance c/d 21,500

74,700 74,700

2015

Jan. 01 Balance b/d 21,500

ACCOUNTANCY 125
MODULE - 1 Cash Book
Basic Accounting
Illustration 2
Prepare Cash Book for the month of April 2014 from the following particulars :
Date Details (`)
2014
April 01 Cash in hand 17,600
April 03 Purchased Goods for cash from Rena 7,500
Notes April 06 Sold Goods to Rohan 6,000
April 10 Wages paid in cash 500
April 15 Cash paid to Neena 3,500
April 17 Cash Sales 10,000
April 19 Commission paid 700
April 21 Cash received from Teena 1,500
April 25 Furniture Purchased for cash 1,700
April 28 Rent paid 3,000
April 30 Paid Electricity bill in cash 1,300
Solution:
Cash Book
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(` ) (`)

2014 2014

Apr. 01 Balance b/d 17,600 Apr. 03 Purchases 7,500

Apr. 17 Sales 10,000 Apr. 10 Wages 500
Apr. 21 Teena 1,500 Apr. 15 Neena 3,500
Apr. 19 Commission 700
Apr. 25 Furniture 1,700
Apr. 28 Rent 3,000
Apr. 30 Electricity Bill 1,300
Apr. 30 Balance c/d 10,900

29,100 29,100

2014

May 01 Balance b/d 10,900

Note : Credit transactions are not recorded in cash book (i.e. a credit sales to Rohan
` 6,000 on April 6, 2014)

126 ACCOUNTANCY
 Cash Book MODULE - 1
Basic Accounting
Posting of Cash Book in the Ledger
As we know that cash receipts are shown on debit side of Cash Book and the cash
payments are shown on the credit side of Cash Book. Account appearing on the
debit side of the Cash Book is posted on the credit side in the relevant ledger.
Similarly, account appearing on the credit side of Cash Book is posted on the
debit side of the relevant ledger.
Cash Book in itself is a Cash account, so no separate cash account will be
maintained in the ledger. Notes

For the posting of various cash book entries in the ledger, refer illustration No. 2.
(a) Posting of Debit side of Cash Book :
Sales Account
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(`) (`)

2014

April 17 Cash 10,000

Teena Account

Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(`) (`)

2014

April 21 Cash 1,500

(b) Posting of credit sides of cash Book

Purchases Account

Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(`) (`)

2014

April 03 Cash 7,500

ACCOUNTANCY 127
MODULE - 1 Cash Book
Basic Accounting
Wages Account
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(` ) (` )

2014

April 10 Cash 500

Notes
Neena’s Account
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(` ) (` )

2014

April 10 Cash 3,500

Commission Account
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(` ) (` )

2014

April 19 Cash 700

Furniture Account
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(` ) (` )

2014

April 25 Cash 1,700

Rent Account
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(` ) (` )

2014

April 28 Cash 3,000

128 ACCOUNTANCY
 Cash Book MODULE - 1
Basic Accounting
Electricity Bills Account
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(` ) (` )

2014

April 30 Cash 1,300

Notes

INTEXT QUESTIONS 7.1

I. Complete the following sentences with the suitable words:

i. Cash Book starts with the ___________ Balance at the beginning of the period.

ii. When a Cash Book is maintained, cash transactions are not recorded in
___________.

iii. Simple Cash Book records only Cash ___________ and Cash ___________.

iv. The total of ___________ side of the Simple column Cash Book is always
more than the total of its ___________ side.

v. Closing Balance of Cash Book becomes the opening balance of next period
and is written as ___________.

II. Some transactions are given below. On which side of the Cash Book would
you record them. Tick [√] the correct side:

S.No. Transactions Debit side Credit side

i. Saniya started business with Cash

ii. Goods Purchased for cash

iii. Goods sold for Cash

iv. Cash deposited into Bank

v. Rent paid

vi. Purchased Computer

vii. Closing Cash Balance

viii. Cash received from Mohit.

ACCOUNTANCY 129
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Basic Accounting
7.2 BANK COLUMN CASH BOOK
When the number of bank transactions is large in an orgnisation, it is necessary to have
a separate book to record bank transactions. Instead of having a separate book to
record bank transactions, a column is added on each side of the Simple Cash Book.
This type of cash book is known as Bank column Cash Book. All payments into bank
are recorded on the debit side and all withdrawals/payments through the bank are
recorded on the credit side of the cash book. The format of a Bank column cash Book
Notes is as under :
Format of a Bank Column Cash Book
Dr Cr
Date Particulars L.F Cash Bank Date Particulars L.F Cash Bank
(` ) (` ) (` ) (` )

Preparation of Bank Column Cash Book

In Bank column Cash Book, the cash transactions are recorded in a similar manner as
are recorded in the Simple cash book. The difference is that Bank column cash book
records transactions relating to Bank also. There are some special business transactions
which need special treatment in the Bank column of the Cash Book:
(i) Opening balance
(ii) Receipts of cheques
(iii) Contra entries
(iv) Endorsement of cheques
(v) Bank charges
The treatment given to these special transactions is as under :
Opening Balance
The opening cash and bank balances are recorded on the debit side of the cash book.
Sometimes a businessman withdraws excess amount from the bank (from his bank
account) and the closing bank balance of a month is a credit balance. This balance
amount is called ‘Bank overdraft’. It is written on the credit side of the bank column of
the cash book as opening balance. For example, if a business firm has ` 12,000 as
cash in hand and `15,000 as overdraft (credit balance) in the bank, it will be recorded
as under:

130 ACCOUNTANCY
 Cash Book MODULE - 1
Basic Accounting
Bank Column Cash Book
Dr. Cr.
Date Particulars L.F Cash Bank Date Particulars L.F Cash Bank
(` ) (` ) (` ) (` )

Balance b/d 12,000 Balance b/d 15,000

Receipt of Cheques Notes

All cash receipts are entered in the cash column and cheques received in the bank
column of Cash Book. If the cheques deposited in bank on the same date, it is entered
on the debit side of bank column of the cash book. If the cheques received from
customer are not deposited in the bank on same day, they are included in cash and
written on the debit side in the cash column of cash book. For example: On May 2,
2014 a cheque received from Tarun for ` 7,000 and deposited on same date.
Bank Column Cash Book
Dr Cr
Date Particulars L.F Cash Bank Date Particulars L.F Cash Bank
(` ) (` ) (` ) (` )
2014
May 2 Tarun 7,000

In case, this cheque is deposited on May 10, 2014 the entry on May 02, 2014 is as
under:
Bank Column Cash Book
Dr Cr
Date Particulars L.F Cash Bank Date Particulars L.F Cash Bank
(`) (`) (`) (`)
2014

May 2 Tarun 7,000

Contra Entries

When there is a transaction that relates to both cash and bank, this will be written on
one side of Bank Column and on other side of Cash Column, Such transactions are
known as ‘Contra entries’. In case, cash is withdrawn from bank for office use, it is
entered on the credit side of bank column and also in the debit side of cash column of
the cash Book. In case, cash is deposited in the bank, the amount is recorded on the

ACCOUNTANCY 131
MODULE - 1 Cash Book
Basic Accounting
debit side of bank column and on the credit side of cash column of the cash book. The
letter ‘C’ is written in the LF column on both sides against these entries. These entries
are not to be posted into ledger. For example: On May 15, 2014 Cash withdrawn
from bank for office use is `2,000. In this case the transaction recorded is as under:
Bank Column Cash Book
Dr Cr

Notes Date Particulars L.F Cash Bank Date Particulars L.F Cash Bank
(` ) (` ) (` ) (` )

2014

May May

15 Bank C 2,000 15 Cash C 2,000

Endorsement of Cheques

When cheque received from customer is given to some other party i.e. endorsed, on
receipt, it is recorded on the debit side of cash column. On endorsement of cheque, the
amount is recorded on the credit side of the cash column of Cash Book. For example,
on May 22, 2014 a cheque of ` 8,000 is received from M/s J.P Traders. On May
27,2014 it was endorsed in favour of M/s Kapila Traders. In this case the transaction
recorded is as under:

Bank Column Cash Book

Dr Cr

Date Particulars L.F Cash Bank Date Particulars L.F Cash Bank
(` ) (` ) (` ) (` )

2014 2014

May May

22 J.P.Traders 8,000 27 Kapila Traders 8,000

(Cheque) (Cheque)

Bank Charges
If bank charges any interest, outstation cheque collection charges etc., are entered on
the credit side of the Bank column of the Cash Book. Similarly, if bank gives interest,
collects commission etc., these will be recorded on the debit side on the Bank column
of Cash Book.

132 ACCOUNTANCY
 Cash Book MODULE - 1
Basic Accounting
Illustration 3
Record the following transactions in the Bank column Cash Book of
M/s Time Zone for the month of January 2014.
Date Details (`)
2014
January 01 Bank Balance 32,500
01 Cash Balance 12,300 Notes
03 Purchased Goods by cheque 5,300
08 Goods Sold for cash 9,500
10 Purchased Typewriter by Cheque 5,400
15 Sold Goods and received Cheque 7,900
(deposited on the same day)
17 Purchased Stationery by Cheque 1,000
20 Cash deposited into bank 10,000
22 Paid Cartage 500
24 Cheque given to Mudit 7,000
28 Rent paid by Cheque 3,000
30 Paid Salary 3,500
Solution
Bank Column Cash Book
Dr Cr

Date Particulars L.F Cash Bank Date Particulars L.F Cash Bank
(`) (`) (`) (`)

2014 2014
Jan.1 Balance b/d 12,300 32,500 Jan.3 Purchases 5,300
Jan.8 Sales 9,500 Jan.10 Typewriter 5,400
Jan.15 Sales 7,900 Jan.17 Stationery 1,000
Jan.20 Cash C 10,000 Jan.20 Bank C 10,000
Jan.22 Cartage 500
Jan.24 Mudit 7,000
Jan.28 Rent 3,000
Jan.30 Salary 3,500
Jan.31 Balance c/d 7,800 28,700

21,800 50,400 21,800 50,400

Feb 1 Balance b/d 7,800 28,700

ACCOUNTANCY 133
MODULE - 1 Cash Book
Basic Accounting
Illustration 4
Enter following transactions in the Bank column cash Book of M/s Tea Traders for
April 2014
Date Details Amount (`)
2014

April 01 Commenced business with Cash 60,000

Notes
April 03 Opened Bank account with SBI 45,000
April 05 Purchased Goods by Cash 7,000
April 10 Purchased Office Machine for cash 5,000
April 15 Sold Goods to Manjula and received cheque 6,000
April 18 Cash Sales 10,000

April 20 Manjula’s Cheque deposited into Bank

April 22 Paid Wages by cheque 300
April 25 Cash withdrawn from Bank for personal use 3,000
April 30 Rent paid by Cheque 2,000
Solution
Bank Column Cash Book
Dr Cr

Date Particulars L.F Cash Bank Date Particulars L.F Cash Bank
(` ) (` ) (` ) (` )

2014 2014
Apr. 1 Capital A/c 60,000 Apr. 3 Bank C 45,000
Apr. 3 Cash C 45,000 Apr.5 Purchases 7,000
Apr. 15 Sales 6,000 Arp.10 Office Machine 5,000
Apr. 18 Sales 10,000 Apr.20 Bank (Cheque) C 6,000
Apr. 20 Cash (cheque) C 6,000 Apr.22 Wages 300
Apr.25 Drawings 3,000
Apr.30 Rent 2,000
Apr.30 Balance c/d 13,000 45,700

76,000 51,000 76,000 51,000

May l Balance b/d 13,000 45,700

134 ACCOUNTANCY
 Cash Book MODULE - 1
Basic Accounting
Illustration 5
Prepare Bank Column Cash Book from the following information for December 2014
Date Details (`)
2014
Dec 1 Cash in hand 10,500
1 Bank Overdraft 9,500
4 Paid Wages 400 Notes
6 Cash Sales 10,000
9 Cash deposited into Bank 5,000
13 Purchased Goods and paid by cheque 6,000
15 Cash deposited into Bank 4,000
18 Paid Trade Expenses by cheque 1,200
22 Rent paid 2,300
25 Received Cash from Rahul 1,500
27 Commission paid 2,000
29 Salary paid 3,500
31 Bought Goods by Cheque 3,000
Solution
Bank Column Cash Book
Dr Cr

Date Particulars L.F Cash Bank Date Particulars L.F Cash Bank
(` ) (` ) (` ) (` )

2014 2014
Dec 1 Balance b/d 10,500 Dec 1 Balance b/d 9,500
Dec.6 Sales 10,000 Dec.4 Wages 400
Dec.9 Cash C 5,000 Dec.9 Bank C 5,000
Dec.15 Cash C 4,000 Dec.13 Purchases 6,000
Dec.25 Rahul 1,500 Dec.15 Bank C 4,000
Dec.31 Balance b/d 10,700 Dec.18 Trade Expenses 1,200
Dec.22 Rent 2,300
Dec.27 Commission 2,000
Dec.29 Salary 3,500
Dec.31 Purchases 3,000
Dec.31 Balance c/d 4,800

2015 22,000 19,700 2015 22,000 19,700

Jan 1 Balance b/d 4,800 Jan 1 Balance b/d – 10,700

ACCOUNTANCY 135
MODULE - 1 Cash Book
Basic Accounting
Posting of Bank column Cash book in the Ledger
Like Cash account no separate Bank account will be opened. Account relating to
Contra entries on either side of Cash book need not be posted. Other accounts on
either side of Bank column of the Cash book will be maintained in the ledger in
the same manner which we adopted in the case of Simple cash Book.
For the posting of various cash book items in the ledger refer to illustration No.5.
Notes (a) Posting of Debit side of Bank column Cash Book
Sales Account
Dr. Cr.

Date Particulars L.F Amount Date Particulars L.F Amount

(`) (`)

2014

Dec. 6 Cash 10,000

Rahul’s Accounts
Dr. Cr.

Date Particulars L.F Amount Date Particulars L.F Amount

(` ) (` )
2014
Dec. 25 Cash 1,500
(b) Posting of Credit Side of Bank Column Cash Book
Purchases account
Dr. Cr.

Date Particulars L.F Amount Date Particulars L.F Amount

(` ) (` )
2014
Dec.13 Bank 6,000
Dec.31 Bank 3,000
Wages Account
Dr. Cr.

Date Particulars L.F Amount Date Particulars L.F Amount

(` ) (` )
2014
Dec. 4 Cash 400

136 ACCOUNTANCY
 Cash Book MODULE - 1
Basic Accounting
Trade Expenses Account
Dr. Cr.

Date Particulars L.F Amount Date Particulars L.F Amount

(` ) (` )
2014
Dec.18 Bank 1,200

Commission Account Notes

Dr. Cr.

Date Particulars L.F Amount Date Particulars L.F Amount

(` ) (` )
2014
Dec. 27 Cash 2,000

Salary Account
Dr. Cr.

Date Particulars L.F Amount Date Particulars L.F Amount

(` ) (` )
2014
Dec.29 Cash 3,500

Rent Account
Dr. Cr.

Date Particulars L.F Amount Date Particulars L.F Amount

(` ) (` )
2014

Dec. 22 Cash 2,300

INTEXT QUESTIONS 7.2

Fill in the blanks with suitable word/words:
i. In Bank Column Cash Book ___________ columns are shown on each side.
ii. The Bank column Cash book records transactions relating to ___________ as
well as ___________.
iii. Credit balance of Bank Column of Cash Book is called ___________.

ACCOUNTANCY 137
MODULE - 1 Cash Book
Basic Accounting
iv. When a cheque is received from a customer but not deposited into the Bank on the
same day, it will be recorded on ___________ side in ___________ column.
v. When transactions relate to both cash and bank side of Bank Column Cash Book,
Such transactions are known as ___________.
vi. When cheque received from customer is given to some other party it is called
___________.

Notes 7.3 PETTY CASH BOOK : MEANING AND NEED

In big business organisations, a large number of repetitive small payments such as, for
conveyance, cartage, postage, telegrams, courier and other expenses are made. These
organisations appoint an assistant to the Head Cashier. The appointed cashier is known
as petty cashier. He makes payments of these expenses and maintains a separate cash
book to record these transactions. Such a cash book is called Petty Cash Book. The
petty cashier works on the imprest system. Under this system, a definite sum, say `
4000/- is given to the petty cashier at the beginning of the period. This amount is called
imprest money. The petty cashier meets all small payments out of this imprest amount,
At the end of the period say one month he presents the account to the Head Cashier
and gets reimbursed from the Head Cashier. Suppose out of ` 4,000 he has spent `
3,850 by the end of the month. He will get ` 3,850 from the head cashier. Thus, again
he has the full imprest amount in the beginning of the next period. The process of
reimbursement can be weekly, fortnightly or monthly depending upon the frequency of
small payments. The Petty Cashier is authorised to sanction and disburse small payments.
Assignment of the task of making of petty expenses to a person and the maintenance of
petty cash book by him reduces the burden of the Head Cashier.
The petty cash book has a number of columns for the amount on the payment side.
Each of the amount columns is allotted to items of specific payments, which are common.
The last column is allotted for miscellaneous payments. At the end of the period, all
amount columns are totalled. The total of the amount paid shown in column 5 is deducted
from the column 1. At the opening of the month the total amount paid in the previous
month is reimbursed by the Head Cashier.
Format of a Petty Cash Book is given as under:
Petty Cash Book (Format)
Amount Date Particulars Voucher Amount Analysis of Payments
Received No, paid (Rs)

Postage Tele Convey Station Miscella

phone ance ery neous
Telegram Expenses

1 2 3 4 5 6 7 8 9 10

138 ACCOUNTANCY
 Cash Book MODULE - 1
Basic Accounting
Illustration 6
Mr. Sumit the Petty Cahier of M/s Travels India received ` 2,000 on April 1, 2014
from the Head Cashier. Prepare Petty Cash Book on Imprest System from the petty
payments during the month of April 2014 for the following items:
Date Details (`)
2014
April 2 Auto fare 200
Notes
3 Courier services 50
4 Postage stamps 95
5 Pencils/Pads 65
6 Speed Post Charges 40
8 Taxi fare (205+90) 295
9 Refreshments 310
11 Auto fare 60
13 Telegram 64
16 Computer stationery 165
19 Bus fare 40
21 STD Call Charges 205
23 Refreshment 80
25 Photostat Charges 45
28 Courier services 40
30 Bus fare 40

Solution:
Petty Cash Book
Amount Date Particulars Voucher Amount Analysis of Payments
Received No. paid (`)

Postage Teleph Convey Station Miscell

one & ance ery aneous
Telegr Expenses
am

2014

April

2,000 01 Cash
received

02 Auto fare 200 200

ACCOUNTANCY 139
MODULE - 1 Cash Book
Basic Accounting
03 Courier 50 50
services

04 Postage 95 95
stamps

05 Pencils/Pads 65 65

06 Speed Post 40 40
Charges

08 Taxi fare 295 295

Notes 09 Refreshments 310 310

11 Auto fare 60 60

13 Telegram 64 64

16 Computer 165 165

stationery

19 Bus fare 40 40

21 STD Call 205 205

Charges

23 Refreshment 80 80

25 Photostat 45 45
Charges

28 Courier 40 40
services

30 Bus fare 40

1,794 225 269 595 230 435

30 Balance c/d 206

2,000 2,000

206 May Balance b/d

1,794 01 Cash received

INTEXT QUESTIONS 7.3

Fill in the blanks with suitable word/words:
i. The assistant of the Head Cashier is known as ....................
ii. A separate cash book to record small transactions is called ....................
iii. The amount which is paid to the petty cashier at the beginning of a period is known
as ....................
iv. Under Imprest system of Petty Cash Book, the Petty Cashier is reimbursed with
the amount equivalent to what he spent during the ....................

140 ACCOUNTANCY
 Cash Book MODULE - 1
Basic Accounting

WHAT YOU HAVE LEARNT

z Cash Book is a Book in which all cash receipts and cash payments are recorded.
It is also one of the books of original entry.
Type of Cash Book

Notes
Simple Cash Book Bank Column Cash Book Petty Cash Book
z Simple Cash Book : A Simple Cash Book records only cash receipts and cash
payments. It has two sides, namely debit and credit.
z Bank Column Cash Book : In this type of Cash Book, Bank and Cash columns
are shown on each side.
z Contra Entries : Transactions that relate to both cash and bank and are entered
on cash column of one side and bank column of other side of ‘Bank Column
Cash Book’. Recording of such transactions is known as ‘Contra entries’.
z In big business organisations, a large number of repetitive small payments such as,
for conveyance, cartage, postage, telegrams and other expenses are made. These
organisations appoint an assistant to the Head Cashier. The so appointed cashier is
known as petty cashier. He makes payment of these expenses and maintains a
separate cash book to record these transactions. Such a cash book is called Petty
Cash Book.

TERMINAL EXERCISE
1. What is Cash Book? Explain the different types of Cash Book.
2. Draw the format of ‘Bank Column Cash Book’ and write at least five items in it.
3. What is Contra entry? How will you deal with this entry while preparing Bank
Column Cash Book?
4. What do you mean by Petty Cash Book ? Explain the imprest system of Petty
Cash Book.
5. Enter the following transactions in the Simple Cash Book of M/s Golden Traders:
2014 `
April 1 Started Business with Cash 30,000

ACCOUNTANCY 141
MODULE - 1 Cash Book
Basic Accounting
April 2 Goods Purchased for Cash 10,000
April 3 Furniture Purchased 1,000
April 6 Goods Sold for Cash 7,000
April 9 Cartage paid 200
April 10 Postage 100
April 12 Cash Sales 3,000
Notes
April 14 Cash withdrawn for Personal use 2,000
April 18 Deposited into Bank 10,000
April 22 Goods purchased for Cash 13,000
April 25 Wages paid 500
April 27 Rent paid 3,000
April 28 Cash Sales 2,000
April 30 Commission received 500
6. From the following transactions prepare Simple Cash Book :
2014 `
March 01 Cash in hand 32,500
March 08 Cash paid to Rohan 8,000
March 12 Goods Purchased 3,000
March 15 Cash received from Tanaya 2,000
March 18 Cash Sales 4,000
March 22 Paid wages 4,000
March 25 Salary paid 3,000
March 28 Cash paid to Manish 3,500
March 31 Rent paid 2,500
7. Prepare Bank Column Cash Book from the following transactions:
2014 `
July 1 Cash in hand 18,000
Cash at Bank 27,500
July 3 Goods sold for cash 10,000

142 ACCOUNTANCY
 Cash Book MODULE - 1
Basic Accounting
July 6 Bought Goods by Cheque 16,000
July 8 Cash deposited into Bank 20,000
July 10 Paid Trade Expenses through Cheque 2,000
July 12 Paid Audit Fee for Cash 1,000
July 14 Cheque received from Garima and
deposited into bank 4,700
Notes
July 18 Withdrew from bank for personal use 2,000
July 20 Purchased office machine by Cheque 5,000
July 22 Wages paid 1,000
July 26 Cash Sales 5,000
July 28 Received Cheque from Mahesh 2,000
July 29 Salary Paid 5,000
July 30 Mahesh’s Cheque deposited into Bank
July 31 Rent paid 2,000
8. Prepare Bank column Cash Book of M/s Style India from the following transactions
for the month of April 2014 :
2014 `
August 1 Cash in hand 18,000
Cash at Bank 27,500
August 3 Cash Sales 10,000
August 5 Furniture purchased by cheque 8,700
August 8 Paid by cheque to Sonu 13,500
August 12 Received Cheque from Ashima and
deposited into Bank 13,000
August 15 Cash Sales 7,000
August 18 Deposited into Bank 8,000
August 20 Withdrawn from Bank for personal use 7,000
August 22 Cheque received from Naveen 7,000
August 24 Rent paid 5,000

ACCOUNTANCY 143
MODULE - 1 Cash Book
Basic Accounting
August 26 Naveen’s Cheque deposited into Bank
August 28 Withdrawn from Bank for office use 5,000
August 29 Salary paid 3,000
August 31 Cash paid for Electric Bill 500
August 31 Cash paid for Telephone bill 1,000
9. Prepare Bank Column Cash Book from the following transactions for the month of
Notes March 2014 :
2014 `
March 1 Cash in hand 3,200
Bank Overdraft 16,500
March 4 Cash Sales 4,000
March 7 Cheque received from Babli 6,000
March 10 Goods Purchased by Cheque 2,000
March 12 Babli’s Cheque deposited into Bank
March 14 Cash Sales 5,000
March 18 Cash deposited into Bank 8,000
March 20 Salary paid 2,000
March 22 Wages paid 150
March 23 Interest charged by Bank 300
March 27 Cash Sales 2,500
March 29 Telephone Bill paid by cash 100
March 31 Purchase of Goods on cash 2,000
10. Prepare Petty Cash Book on imprest system for the month of September 2014
from the following items of petty payments:
2014 `
Sept. 2 Postage 130
Sept. 4 Stationery 50
Sept. 6 Auto fare 60
Sept. 8 Refreshments 210
Sept. 10 Courier Services 60

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Sept. 12 Speed Post Charges 90
Sept. 15 Telegram 20
Sept. 18 Bus fare 30
Sept. 19 Postage 20
Sept. 21 Photostat Charges 30
Sept. 23 Bus fare 20 Notes
Sept. 25 STD Call Charges 35
Sept. 27 Taxi fare 110
Sept. 29 Cartage 35
Sept. 30 Computer Stationery 120
The petty cashier received ` 1200 from the Head cashier on September 01, 2014.

ANSWERS TO INTEXT QUESTIONS

7.1 I. (i) Cash (ii) Journal (iii) Receipts, Payments
(iv) Debit, Credit (v) Balance b/d
II. S.No Debit Side Credit Side
(i) √
(ii) √
(iii) √
(iv) √
(v) √
(vi) √
(vii) √
(viii) √
7.2 (i) Bank/Cash (ii) Cash, Bank (iii) Overdraft
(iv) Debit, Cash (v) Contra entry (vi) endorsement
7.3 (i) petty cashier (ii) petty cash book (iii) Imprest amount
(iv) previous month

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ANSWERS TO TERMINAL EXERCISE

5. Closing Cash in hand ` 2,700
6. Closing Cash in hand ` 14,500
7. Closing Cash in hand ` 4,000, Closing Bank Balance ` 29,200

Notes 8. Closing Cash in hand ` 3,060,Closing Bank Balance ` 48,300

9. Closing Cash in hand ` 2,550, Bank overdraft ` 4,800
10. Closing Cash Balance `480

ACTIVITY
If you ask your friends you may come across a friend who gets pocket allowance on
regular basis from his prarents and who spends it judiciously and maintains a record of
the money spent. He may also be receiving money from his grand parents and/or from
grand maternal parents. Procure the note book/diary in which your friend keeps the
notes regarding receipts and payments and prepare a Cash Book on the basis of the
given information.

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SPECIAL PURPOSE BOOKS Notes

In the previous lesson you have learnt that Journal can be divided into different
Journals/Books, so that we may get information separately as per the nature of
transactions. These journals/books are called Special Purpose Books or subsidiary
books. You have already learnt one such special purpose book i.e., Cash Book. In this
lesson you will learn other such books like Purchases Book, Purchase Returns Book,
Sales Book and Sales Returns Book. A business organisation can divide the journal
into many more journals, if the number of transactions of similar nature is quite large.

OBJECTIVES
After studying this lesson, you will be able to :
z state the meaning of Purchases Book and Purchase Returns Book;
z prepare Purchases Book and Purchases Returns Book as per format and its ledger
posting;
z state the meaning of Sales Book and Sales Returns Book;
z prepare Sales Book and Sales Returns Book as per format and its ledger posting;
z state the meaning of Bills receivable and bills payable book with its format and
z state the meaning of Journal Proper and its preparation.

8.1 PURCHASES AND PURCHASES RETURNS BOOK

Purchases (journal) book is also a book of original entry. This book records only credit
purchases of goods in which the firm deals. Cash purchases of goods are recorded in
the cash book. Credit purchases of items not for resale are not recorded in the Purchases
Book e.g, If a firm deals in Computer parts, any item of furniture purchased on credit

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is not recorded in this book. These are recorded in another book which is known as
‘journal proper’.
In case of Purchase of goods on credit, an Invoice or Bill prepared by the supplier is
received. It contains information about the date of transaction, details of items purchased
at List Price less trade discount, if any, Invoice Number, and the net amount payable.
Trade discount and other details of invoice need not be recorded in this book. Format
of Purchases Book is as under:
Notes Purchases (Journal) Book
Date Invoice Name of supplier L.F. Details Amount
No. (` )

Column-wise explanation is as follows :

Date : In this column Year, Month and Date of transactions are recorded in
chronological order.
Invoice Number : In this column, Invoice number is entered.
Name of Supplier : In this column, the name of the supplier from whom the goods
were purchased is written.
Ledger Folio : In this column, it records the page number of the ledger book in
which suppliers account is maintained.
Detail : The amount in respect of each article is written in this column. If the seller
has allowed a Trade Discount it is also deducted in this column itself.
Amount : In this column, it records the net amount payable to the supplier.
Illustration 1
Record the following transactions for the Month of August 2014 in the Purchases
Book of M/s Harsha Electronics :
Date Details
2014 Purchased from M/s.Naresh Electronics (Invoice No. 250)
August 5 5 Colour T.V @ ` 12500 per piece.
Trade Discount on all items @20%.

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August 10 Bought from M/s Capital Electronics: (Invoice No. 826)
20 Tape Recorders @ ` 1650 per piece
Trade Discount 10% on purchases.
August 17 Purchased from M/s. East Electronics: (Invoice No. 456)
15 Stereos @ ` 4000 per piece
2 Color T.V. 14′′ @ ` 10500 per piece
Trade Discount @5%. Notes
August 25 Purchased form M/s. Naresh Electronics: (Invoice No. 294)
10 Small T.V. @ ` 1,200 per piece
3 Colour T.V. 17′′ @ ` 12000 per piece
Trade Discount 10%.
August 30 Bought from M/s Pavitra Electronics: (Invoice No. 82)
20 Video cassettes @ ` 150 per piece Net.
Solution:
Books of M/s Harsha Electronics
Purchases (Journal) Book
Date Invoice Name of supplier L.F. Detail Amount
No. (` )

2014

August 5 250 Naresh Electronics 5 x 12,500 = 62,500

5 Clr. TV. @ 12,500 (-) 20% Discount = 12,500 50,000

August 10 826 Capital Electronics 20 x 1,650 = 33,000

20 Tap rec. @ 1,650 (-)10% Discount = 3,300 29,700

August 17 456 East Electronics 15 x 4,000 = 60,000

15 Steros @ 4,000 2 x 10,500 = 21,000

20 Clr. T.V @ 10,500 81,000
(-) 5% Discount = 4,050 76,950

August 25 294 Naresh Electronics 10 x 1,200 = 12,000

10 Small T.V. @ 1,200 3 x 12,000 = 36,000

3 Clr. T.V @ 12,000 4 8,000
(-) 10% Discount = 48,00 43,200

August 30 82 Pavitra Electronics 20 x 150 3,000

20 Video Cas. @ 150 2,02,850

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Posting of Purchases Journal/Book into Ledger
Posting from the Purchases Journal/Book is done daily to relevant supplier’s accounts
on the credit side with the Invoice amount at the end of the month, the grand total of the
Purchases Journal/Book is posted to the Debit side of Purchases Account in the ledger,
and written in the Particulars column “Sundries as per Purchases Book”.
For the posting of Purchase Journal/ Book items into the ledger refer to Illustration
No. 1.
Notes
Books of M/s Harsha Electronics
M/s. Naresh Electronics
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(` ) (` )

2014

Aug.05 Purchases 50,000

Aug.25 Purchases 43,200

M/s. Capital Electronics

Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(` ) (` )

2014

Aug.10 Purchases 29,700

M/s.East Electronics
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(` ) (` )

2014

Aug.17 Purchases 76,950

M/s.Pavitra Electronics
Date Particulars L.F. Amount Date Particulars L.F. Amount
(` ) (` )

2014

Aug.30 Purchases 3,000

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Purchases Account
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(`) (`)
2006
Aug.31 Sundries as per
Purchases Book 2,02,850
Notes
Purchase Returns Journal
Return of goods purchased is recorded in this book. Sometimes goods purchased
from the supplier are returned for various reasons such as goods are not as per our
order, or are defective. These goods are returned to the supplier. For this purpose
a debit note is prepared and sent to the supplier for making necessary entries. The
record of such return of goods in a journal is called Purchase Returns journal, the
format of which is as under :
Purchase Return (Journal) Book
Date Debit Note Name of supplier L.F. Deatil Amount
No. (`)

Column-wise explanation is as follows :

Date : In this column, Year, Month and Date of transactions are recorded in
chronological order.
Debit Note Number : In this column, the debit note number is written.
Name of Supplier : In this column, the Name of the supplier from whom the
goods were purchased is written.
Ledger Folio : In this column, the page number of the ledger book on which
supplier account is prepared is recorded.
Deatil : In this column the details of the goods returned to the supplier is
recorded.
Amount : In this column, it records the amount of the total goods returned to
the supplier.
Illustration 2
The Details submitted by M/s. Harsha Electronics for the month of August 2014
are as under :

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Date Details
2014 Goods returned to M/s. Capital Electronics vide Debit note
August 17 No.016/2014
5 Tape Recorders @ `1650 per piece
Trade Discount @ 10% on purchases.
Solution
Notes
Books of M/s Harsha Electronics
Purchases Returns (Journal) Book
Date Debit Note Name of supplier L.F. Detail Amount
No. (` )
2014
Aug. 17 016 Capital Electronics 5 x 1,650 = 8,250
5 Tape Recorders @ 1,650 (-) 10% Discount = 825 7,425

7,425

Posting of Purchase Returns Journal/Book into Ledger

The monthly total of Purchase Returns Journal/Book is credited to the Purchase Return
account in the ledger. Supplier account to whom the goods are returned is debited with
the net amount of goods returned.
For the posting of Purchase Returns Journal/Book into the ledger refer Illustration
No.2.
Solution
M/s.Capital Electronics
Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
(` ) (` )
2014
Aug. 17 Purchase Returns 7,425
Purchases Returns Account
Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
(` ) (` )
2014
Aug.31 Sundries as Per
Purchase returns
Book 7,425

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Illustration 3
Enter the following transactions in the Special Journal/Books of M/s Mohit Stationery
Mart of June 2014, prepare Purchases Book and Purchase Returns Book.

Date Details
2014

June 0l Purchased from M/s.Seema Stationers as per Invoice No. 031

50 Paper Rim @ ` 100 Per Rim. Notes
60 Simple Books @ ` 20 Each
100 Pkt Pencils @ ` 50 Per Pkt.

June 12 Bought from M/s Nisha Paper Mart as per Invoice No. 1202
200 Files @ ` l2 per file
Trade Discount @ 5% on purchases.

June 22 Purchased from M/s. Bansal Stationers as per Invoice No. 3211
500 Drawing Paper @ ` 4 each
100 Pkt Pencil Color @ ` 20 per pkt.
Trade Discount 5%.

June 23 Goods Returned to M/s Nisha paper Mart as per Debit Note No. 002
50 Files @ ` 12 each
Trade Discount 5%.

June 24 Purchased from M/s. Stationery Zone as per Invoice No. 6783
200 pkt Pens @ ` 100 per pkt.
Trade Discount 10%

June 27 Purchased form M/s. Sumit Paper Mart as per Invoice No. 2340
100 pkt water Color @ ` 50 per pkt.
50 pkt Paint Brushes @ ` 40 per pkt.
Trade Discount 10%

June 28 Goods Returned to M/s Bansal Stationers as per Debit Note No. 042
50 Pkt Pencil Color @ ` 20 per pkt.
Trade Discount 5%.

June 30 Bought from M/s Handa File Trader as per Invoice No. 1321
200 Plastic Files @ ` 25 per file
Trade Discount 10%

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Solution:
Books of M/s Mohit Stationery Mart
Purchase (Journal) Book
Date Invoice Name of supplier L.F. Details Amount
No. (` )

2014

June 0l 031 Seema Stationers

Notes 50 Paper Rim @ 100 50 x 100 = 5,000
60 Sim. Books @ 20 60 x 20 = 1,200
100 Pkt. Pencil @ 50 100 x 50 = 5,000 11,200

June 12 1202 Nisha Paper Mart

200 files @ 12 200 x 12 = 2,400
(-) 5% Discount = 120 2,280

June 22 3211 Bansal Stationers

500 Draw. Paper @ 4 500 x 4 = 2,000
100 Pkt. Pencil @ 20 100 x 20 = 2,000
4,000
(-)Trade Disc. 5% = 200 3,800

June 24 6783 Stationery Zone

200 Pkt. Pens @ 100 200 x 100 = 20,000
(-) Trade Disc. 10% = 2,000 18,000

June 27 2340 Sumit Paper Mart

100 Pkt. Water Clr. @ 50 100 x 50 = 5,000
50 Pkt Paint Brush @ 40 50 x 40 = 2,000
7,000
(-) Trade Disc. 10% = 700 6,300

June 30 1321 Handa File Trader

200 Plastic Files @ 25 200 x 25 = 5000
(-) Trade Disc. 10% = 500 4,500

46,080

Purchase Returns (Journal) Book

Date Debit Name of supplier L.F. Details Amount
Note No. (` )
2014
June 22 002 Nisha Paper Mart 50 x 12 = 600
50 fiels @ 12 (-) Trade Disc. 5% = 30 570
June 28 042 Bansal Stationers 50 x 20 = 1000
50 Pkt. Pencil Clr. @ 20 (-) Trade Disc. 5% = 50 950

1,525

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INTEXT QUESTIONS 8.1

Which of the following transactions will be entered in the Purchases Book or
Purchase Returns Book? If the transaction is not to be entered in any of the
two write None of these.
i. Furniture purchased from M/s. Modern Furnishers.
ii. Goods purchased from M/s Sell Well were returned to them as goods were not Notes
according to the specifications.
iii. Goods of ` 6,000 were purchased from M/s Rohit Brothers for Cash.
iv. M/s. Ravi & Sons supplied goods on Credit.
v. Purchased goods from Himanshu on Credit.

8.2 SALES JOURNAL/BOOK AND SALES RETURNS JOURNAL

Transactions relating to Sale of goods on credit are recorded in the Sales Journal. Cash
sales are recorded in the Cash Book. It means that Sales Journal records only credit
sales of goods. For example sale of old furniture by a firm which is dealing in computers
is not treated as goods and items relating to computer are regarded as goods.
In case of sale of goods on credit, one copy of an Invoice or Bill prepared by the
vendor firm is given to the customer. It contains information about the date of transaction,
details of items sold at List Price less trade discount if any. Invoice Number and the
amount receivable or payable by customer.
When a customer purchases goods in bulk, the vendor may allow him a discount,
which is called trade discount. In the invoice, trade discount is deducted from the list
price of the goods and the customer is debited only with the net amount. This discount
is quite different from the cash discount, which is allowed for payment within a stipulated
period. The format of the Sales Journal/Book is given as under :
Sales (Journal) Book
Date Invoice Name of customer L.F. Details Amount
No. (` )

Column-wise explanation is as follows :

Date : In this column Year, Month and Date of transactions are recorded in
chronological order.

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Invoice No. : In this column, Invoice number is written.
Name of Customer : In this column, Name of the Customer is recorded.
L.F. : In this Column, page number of the ledger book in which debtor’s account
is maintained.
Detail : For each item the amount is recorded in the detail column, after totalling
the amount of sale to one customer, charges for packing etc., are added and the trade
discount, if any is deducted.
Notes
Amount : In this column, the amount of the total goods sold to the customer is
recorded.
Illustration 4
M/s Furniture Mart wants you to prepare Sales journal for the month ended March
2014, from the following details of sale of goods :
Date Details
2014
March 4 Sold on Credit to M/s Mena Traders : Vide Invoice No.213
(a) Two Double Beds @ ` 7,100 each.
(b) Five Chairs @ ` 260 each
March 9 Sold on Credit to M/s Kohli Furniture : Vide Invoice No. 278
5 Tables @ ` 1,400 Each
March 24 Sold on Credit to M/s Handa Furniture Mart : Vide Invoice No. 302
4 Sofa Sets @ ` 18,000 each
March 30 Sold on Credit to M/s Furniture Traders : Vide Invoice No. 327,
6 Single Beds @ ` 6,000 each
Solution:
Books of M/s Furniture Mart
Sales (Journal) Book
Date Invoice Name of customer L.F. Details Amount
No. (` )
2014
March 4 213 Mena Traders
2 Double Bed @ 7,100 2 x 7,100 = 14,200
5 Chairs @ 260 5 x 260 = 1,300 15,500
March 9 278 Kohli Furniture
5 Tables @ 1,400 5 x 1,400 7,000
March 24 302 Handa Furniture Mart
4 Sofa Sets @ 18,000 4 x 18,000 72,000

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March 30 327 Furniture Traders
6 Single Beds @ 6,000 6 x 6,000 36,000

1,30,500

Posting of Sales Journal/Book into Ledger

The monthly total of the Sales Book is posted to the credit side of the Sales account in
the ledger. The net amount due from each customer is debited to customer account
individually. The customer’s account is generally posted daily. For the posting of Sales
Journal/Book into the ledger refer to Illustration No. 4. Notes
Books of M/s Furniture Mart
M/s. Mena Traders
Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
(` ) (` )
2014
March 4 Sales 15,500

M/s. Kohli Furniture

Date Particulars L.F. Amount Date Particulars L.F. Amount
(` ) (` )
2014
March 9 Sales 7,000

M/s. Handa Furniture Mart

Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
(` ) (` )
2014
March 24 Sales 72,000

M/s. Furniture Traders

Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
(` ) (` )
2014
March 30 Sales 36,000

Sales Account
Dr. Cr.
Date Particulars L.F Amount Date Particulars L.F. Amount
(` ) (` )
2014
Mar. 3l Sundries as per
Sales Book 1,30,500

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Sales Returns Journal/Book
Goods returned by the customers are recorded in the Sales returns journal/book. The
Sales returns Book does not record the return of goods sold on cash basis. Goods
supplied to the customer (Debtors) may not be as per specifications of the order, or
some of the goods may get damaged during transit. The Customer returns these goods.
For this purpose a credit note is made in favour of the customer. The format of Sales
returns Book is as under :
Notes Sales Return (Journal) Book
Date Credit Name of customer L.F. Detail Amount
Note No. (` )

Column-wise explanation is as follows :

Date : In this column, Year, Month and Date of transactions are recorded in
chronological order.

Credit Note No. : In this column, the Credit note number is written.

Name of Customer : In this column, the Name of the customer is written.

Ledger Folio : In this column, it records the page number of the ledger book on
which customer account is prepared.

Detail : For each item the amount is recorded in the detail column, after totalling
the amount for the goods received from customer and deducting the amount of
discount allowed at the time of sale.

Amount : In this column, it records the amount of the total goods returned from
customer.

Illustration 5

The Details submitted by M/s Furniture Mart for the month of March 2014 are as
under :

Date Details

2014 Returns from M/s Kohli Furniture : 2 Tables @ ` 1,400 Each

March 18 Vide Credit Note No. 019

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Solution:
Books of M/s Furniture Mart
Sales Returns (Journal) Book
Date Debit Name of supplier L.F. Detail Amount
Note No. (` )
2014
March 18 019 Kohli Furniture
2 Tables @ ` 1,400 2 x 1400 2,800
Notes
2,800

Posting of Sales Returns Journal/Book into Ledger

The total of the Sales Returns Journal/Book is debited to the Sales Returns account in
the ledger. Each customer account from whom the goods are returned is credited with
the net amount of the returns.
For the posting of Sales Journal/Book into the ledger refer to illustration No.5.
Solution :
Books of M/s Furniture Mart
M/s. Kohli Furniture
Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
(` ) (` )
2014
Mar. 18 Sales Returns 2,800

Sales Return Account

Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

(` ) (` )
2014
Mar. 3l Sundries as per
Sales Returns Book 2,800

Illustration 6
Enter the following transactions in Special Purpose Book of M/s Goel Electronic for
the month of August 2015
Date Details
2015
August 4 Sold on Credit to M/s.Tanaya Electronics as per Invoice No. 1248
12 Set [6"] B.W. T.V. @ ` 900 per set.
5 set DVD Players @ ` 2,500 per set
Less trade Discount 5%

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August 10 Sold on Credit to M/s Kanshik Electronics as per Invoice No. 1278
5 Washing Machines @ ` 4,500 Per Machine
2 Color T.V. 29" @ ` 16,500 Per T.V.
Less 10% Trade Discount
August 12 M/s.Tanaya Electronics returned goods as per credit Note No.73
1 Set DVD Player @ ` 2,500 per set
1 Set [6"] BW T.V. @ ` 900 per set.
Notes Trade Discount allowed @ 5%
August 18 Sold on Credit to M/s Diamond Electronic as per Invoice No. 1290
5 Tape Recorders @ ` 1,000 each
10 Two-in One @ ` 1,800 each
Less Trade Discount 5%
August 25 Sold on Credit to M/s Electronic Zone as per Invoice No. 1299
5 Water cooling Machines @ ` 7,000 each
August 28 Sold on Credit to M/s North East Electronics as per Invoice No. 1308
10 Music Systems @ ` 3,000 each
Less Trade Discount 10%
August 31 M/s. Electronic Zone returned goods as per credit Note No.93
1 Water cooling Machine @ ` 7,000 each
Solution
Books of M/s Goel Electronic
Sales (Journal) Book
Date Invoice Name of customer L.F. Detial Amount
No. (` )
2015
August 4 1248 Tanaya Electronics
12 T.V. @ 900 12 x 900 = 10,800
5 DVD @ 2,500 5 x 2,500 = 12,500
23,300
(-)5% T. Disc. = 1,165 22,135
August 10 1278 Kanshik Electronics
5 W. Machine @ 4,500 5 x 4,500 = 22,500
2 Clr. T.V. @ 16,500 2 x 16,500 = 33,000
55,500
(-)10% T.Disc = 5,550 49,950

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August 18 1290 Diamond Electronics
5 Tape Rec. @ 1,000 5 x 1,000 = 5,000
10 Two in One @ 1,800 10 x 1,800 = 18,000
23,000
(-)5% T. Disct.= 1,150 21,850
August 25 1299 Electronic Zone
5 Water Cooling
Machine @ 7,000 5 x 7,000 35,000 Notes
August 28 1308 North East Electronics
10 Music System @ 3,000 10 x 3,000 = 30,000
(-) T. Disc. 10% = 3,000 27,000
Total 1,55,935
Books of M/s Goel Electronic
Sales Returns (Journal) Book
Date Debit Name of supplier L.F. Detail Amount
Note (` )
No.
2015
August 12 73 Tanaya Electronics
1 DVD Player @ 2,500 1 x 2500 = 2,500
1 T.V. @ 900 1 x 9 = 900
3,400
(-)5% T. Disc. = 170 3,230
August 31 93 Electronic Zone
1 Water Cooling
Machines @ 7,000 1 x 7,000 7,000
Total 10,230

8.3 BILLS RECEIVABLE BOOK AND BILLS PAYABLE BOOK

Any enterprise which will accept/draw a number of bills will record these transactions
in special subsidiary books. Bills receivable are recorded in the Bills Receivable Book.
Bills payable are recorded in the Bills payable book.
Bills Receivable Book
Like Purchases Book, where all credit purchases of goods are firstly recorded,
the Bills Receivable Book is maintained for recording the receipts of all bills of
exchange. Bills Receivable Book is maintained, where the number of bill transactions

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is sufficiently large. Each bill received is posted only in the credit side of the party’s
account from the bills receivable book. At the end of the period, the amount of
bills received as per the bills receivable book, is debited in the bills receivable
account in the ledger.
Usual Format of Bill Receivable Books is given below :
Bills Receivable Book
S. Date From Name of Date of Term Date Where Amount How
Notes No. of whom Acceptor Bill of Payable (` ) Disposed
Receipt received Drawn Maturity

Ledger Posting of Bills Receivable Book

1. At the end of a month, total amount of Bills Receivable book is debited to the
Bills Receivable Account by writing, ‘To sundries as per the Bills receivable
book’.
2. The debtors or customers account is credited by writing ‘By Bills Receivable
Account’.
Illustration 7
A received the following Bills of Exchange. Record them in Bills Receivable Book and
post them into the Ledger:
2014
Jan. 1 Drawn on Raman a Bill of Exchange at 3 months which was accepted and
returned by him on January 1, 2014. The amount of the bill is ` 10,000.
Jan. 10 Drawn on Savita a Bill of Exchange for ` 5,000 at 2 months, which was
accepted on the same day. The bill is payable at Punjab National Bank.
Jan. 12 Raman’s acceptance endorsed in favour of Hari Kumar in full settlement of
a debt of ` 10,250.
Solution :
Bills Receivable Book
S. From Name of Date of Term Date Amount How
No. whom Acceptor Bill of (` ) Disposed
received Maturity

2014

Raman Raman Jan. 1 3 months April 4 10,000 Endorsed to

Savita Savita Jan. 10 2 months March 14 5,000 Hari Kumar

15,000

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Dr. Bills Receivable Accounts Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2014
Jan. 31 To Sundries
as per B/R Book 15,000
Dr. Raman Cr.
Date Particulars J.F. ` Date Particulars J.F. `
Notes
2014
Jan. 1 By Bills Receiv-
able A/c 10,000
Dr. Savita Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2014
Jan. 10 By Bills Receiv-
able A/c 5,000
Bills Payable Book
It is a special journal for recording the acceptance of the bills drawn by the creditors.
Each Bill payable is entered in this book and from here it is posted to the debit side of
creditor’s account. The total amount of bills payable for the period is credited in the
Bills Payable Account.
Usual Format of Bills Payable Book is given below :
Bills Payable Book
S. Date of To whom given Payee Term Date of Where Amount Remarks
No. issue Maturity payable `

Ledger Posting of Bills Payable Book.

1. The amount column of the Bills Payable Book is totalled and credited to the Bills
payable account by writing ‘By sundries as per Bills Payable Book.’
2. The creditor’s or seller’s account is debited writing ‘To Bills Payable Account’.
Illustration 8
A accepted the following bills. Enter them in Bills Payable Book and post them into the
Ledger :

ACCOUNTANCY 163
MODULE - 1 Special Purpose Book
Basic Accounting
2013
April 10 Accepted Vivek’s bill for ` 20,000 due at 2 months.
April 24 Accepted the bill drawn by Chunnu for `10,000 at 1 month payable at
Punjab National Bank.
Solution
Bills Payable Book
Notes S. Date of To whom given Payee Term Date of Where Amount Remarks
No. issue Maturity payable `

2013

1. April 10 Vivek Vivek 2 months June 13 .... 20,000

2. April 24 Chunnu Chunnu 1 month May 27 P.N. Bank 10,000

30,000

Posting of Bills Payable Book :

Dr. Bills Payable Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2013
Apr.30 By Sundries as per
Bills Payable Book 30,000
Dr. Vivek Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2013
Apr.10 To Bills
Payable A/c 20,000
Journal Proper
A Book maintained to record transactions, which do not find place in Special Journals
is known as Journal Proper. Following transactions are recorded in the Journal proper:
1. Opening Entry : In order to open new set of books at the beginning of new
accounting year and record therein opening balances of Assets, Liabilities and
Capital, one opening entry is made in the Journal.
2. Adjustment Entries : In order to update ledger accounts on accrual basis, entries
are made at the end of the accounting period. Entry for Rent outstanding, Prepaid
insurance, Depreciation and Commission received in advance is made in the journal.
3. Rectification entries : To rectify any accounting error, entries are made in the
journal proper.

164 ACCOUNTANCY
 Special Purpose Book MODULE - 1
Basic Accounting
4. Transfer entries : Drawing account is transferred to capital account at the end of
the accounting year. Expenses accounts and revenue accounts which are not
balanced at the time of balancing are opened to record specific transactions.
Accounts relating to operation of business such as Sales, Purchases, Opening Stock,
Income, Gains and Expenses etc and drawing are closed at the end of the year and
their Total/balances are transferred to Trading, Profit and Loss account by making
the journal entries. These are also called closing entries.
Notes
5. Other entries : In addition to the above mentioned entries recording of the following
transaction is done in the journal proper :

z At the time of a dishonour of a cheque the entry for cancellation of discount

received or discount allowed earlier.

z Purchase/sale of items other than goods dealt- in on credit.

z Goods withdrawn by the owner for personal use.

z Goods distributed as samples for sales promotion.

z Endorsement and dishonour of bills of Exchange.

z Transactions in respect of consignment and Joint Venture, etc.

z Loss of goods by fire/theft/spoilage.

z For recording amounts which have become irrecoverable.

Illustration 9

Record the following transactions in the Journal Proper of M/s Nishant Electronics:

(i) Purchased furniture from M/s Furniture House for ` 6,000.

(ii) Purchased stationery for office use from M/s Stationery Mart ` 700.

(iii) Made full and final payment to M/s Furniture House by Cheque discount allowed
by them ` 200.

(iv) Prepaid Insurance `1,000.

(v) Depreciation on Machinery ` 3,000.

(vi) Goods ` 5,000 withdrawn by the partner for personal use.

(vii) ` 600 not recovered from a debtor.

ACCOUNTANCY 165
MODULE - 1 Special Purpose Book
Basic Accounting
Solution
Books of M/s Nishant Electronics
Journal Proper
Date Particulars L.F. Debit Credit
amount amount
(`) (`)
(i) Furniture A/c Dr. 6,000
Notes To M/s Furniture House 6,000
(Purchase of Furniture on Credit)
(ii) Stationery A/c Dr. 700
To M/s Stationery Mart 700
(Purchase of Stationery on Credit)
(iii) M/s Furniture House Dr. 200
To Discount Received A/c 200
(Discount received)*
(iv) Prepaid Insurance A/c Dr. 1,000
To Insurance Premium A/c 1,000
(Insurance premium prepaid)
(v) Depreciation A/c Dr. 3,000
To Machinery A/c 3,000
(Depreciation charged on Machinery)
(vi) Partner’s Capital A/c/Drawings Dr. 5,000
To Purchases A/c 5,000
(Goods withdrawn for personal use)
(vii) Bad Debts A/c Dr. 600
To Debtors A/c 600
(Amount not recovered from Debtors)
* Entry for payment to M/s Furniture House by Cheque is made in the Bank
column Cash Book.

INTEXT QUESTIONS 8.2

I. Which of the following transactions will be entered in the Sales Book,
Sales Returns Book or Journal Proper? If the transaction can not to be
entered in any of the three write None of these.
(i) Goods sold to Nitin on credit for one month.

166 ACCOUNTANCY
 Special Purpose Book MODULE - 1
Basic Accounting
(ii) Old furniture sold to Dinesh on credit.
(iii) Salary pre-paid.
(iv) Goods sold to M/s Ramesh Bros.
(v) M/s.Jindal Traders returned goods.
(vi) Depreciation charged on Building.
(vii)Goods destroyed by fire.
Notes
(viii) Discount received from M/s N Zone.
(ix) Cash received from M/s Ramesh Bros.
II. Multiple Choice questions :
i. Acceptance by debtors for credit sales of trading items made by the seller
have to be recorded in _____________ books.
a) Bills Receivable book b) Bills Payable book
c) Purchases Book d) Journal
ii. Acceptance by debtors for credit purchases of trading items made by the
purchaser have to be recorded in ___________ book.
a) Bills Receivable book b) Purchases Book
c) Bills Payable book d) Sales book

WHAT YOU HAVE LEARNT

Purchase Journal/Book : Purchase (journal) book is also a book of original
entry. This book records only Credit purchase of goods in which the firm deals.
Purchase Returns Journal/Book : Purchase returns of goods is recorded in
this book. Sometimes goods purchased by the supplier are returned for various
reasons such as goods are not as per our order, or are defective.
Sales Journal : Transactions relating to Sale of goods dealt-in on credit is
recorded in the sales journal.
Sale Returns Journal/Book : Goods returned by the customers are recorded
in the Sales return journal/book. The sales returns book does not record the return
of goods sold on cash basis.
When credit sale takes place, a bill of exchange is prepared by the seller of goods
and accepted by the purchaser.

ACCOUNTANCY 167
MODULE - 1 Special Purpose Book
Basic Accounting
A Bill of Exchange received is recorded in Bills Receivable book. It is posted in the
credit side of party’s account from the Bills Receivable book.
A Bill payables is recorded in Bills payable book. It is posted on the debit side of
creditors account from Bills Payable book.
Journal Proper : A Book maintained to record transactions, which do not find
place in Special Journals, is known as Journal Proper.

Notes
TERMINAL EXERCISE
1. State the meaning of Purchases Book and draw the format of Purchases Book.
2. State the meaning of Purchase Returns Book. Draw the format of Purchase Returns
Book.
3. State the meaning of Sales Book and draw its format.
4. State the meaning of Sales Returns Book. Draw the format of Sales Returns Book.
5. Explain the meaning of Journal proper.
6. State the purpose of preparing Bills Receivable and Bills Payble Books.
7. Enter the following transactions in the proper Book of M/s Tina Traders for the
month of July 2014 :
2014
July 01 Bought from M/s.Soniya Traders as per Invoice No.10456
100 Note Books @ ` 30 each
50 Gel Pen @ ` 10 each
100 Pkt. Color Pencil @ ` 15 per pkt.
Trade Discount 10%
July 14 Bought from M/s Lazer Stationery as per Invoice No.2301
100 files @ ` 12 per file
10 Rim Paper @ ` 300 per rim.
Trade Discount 5%.
July 21 Returned Goods to M/s.Soniya Trader as per Debit Note No.0054
10 Pkt. Color Pencil @ ` 15 per pkt.
Trade discount 10%
July 26 Bought from M/s.Shimla paper Mart as per Invoice No.9870
50 pkt water color @ ` 50 per pkt.net.
July 31 Returned Goods to M/s. Lazer Stationery as per Debit Note No.0152
3 Rim Paper @ ` 300 per rim.
Trade Discount 5%.

168 ACCOUNTANCY
 Special Purpose Book MODULE - 1
Basic Accounting
8. Enter the following transactions in the proper Book of M/s Electronic Gallery for
the month of March 2014 and post them into ledger.
2014
March 02 Sold to M/s Amisha Electronics as per Bill No.0457
4 machine Air Conditioners @ ` 15,000 per machine
Trade discount 3%
March 09 Sold to M/s Naman Trader as per Bill No.0475
5 Washing Machines @ ` 9,000 per machine set. Notes
March 15 Sold to M/s.Electronic Zone as per Invoice No.486
10 Juicer Mixer Grinders @ ` 1,000 each
Trade discount 5%.
March 20 M/s Amisha Electronics returned the goods as per Credit Note No. 112
1 machine Air Conditioner @ ` 15,000 per machine
Trade discount 3%
March 25 Sold to M/s Bansal Electronics as per Invoice No.486
5 TV set Color @ ` 9,500 per set.
Trade discount 4%
March 31 M/s.Electronic Zone returned the goods as per Credit Note No. 116
2 Juicer Mixer Grinder @ ` 1,000 each
Trade discount 5%.
9. Pawan received the following Bills of Exchange. Record them in Bills Receivable
Book.
2014
July 01 Drawn on Manish a Bill of Exchange at 2 months which was accepted
and returned by him on July 1, 2014 for a sum of ` 15,000
July 15 Drawn on Sukant Singh a Bill of Exchange for ` 12,000 at 2 months,
which was accepted on the Same Day.
July 20 Drawn on Azmat a Bills of Exchange for ` 60,000 at 3 months which
was accepted and returned by her on July 20 it self.
10. Pawan Singh accepted the following bills. Enter them in Bills Payable Book.
2015
April 05 Accepted Shifali’s bill for ` 17,000 due at 2 months.
April 13 Accepted the bill drawn by Preena for ` 19,000 at 45 days Payable at
SBI Aligunj, Lucknow.
April 23 Accepted Rajeev’s bill for ` 35,000 due at 3 months.

ACCOUNTANCY 169
MODULE - 1 Special Purpose Book
Basic Accounting

ANSWERS TO INTEXT QUESTIONS

8.1 (i) Purchases Book (ii) Purchase Returns Book
(iii) None of these (iv) Purchases Book (v) Purchases Book
8.2 I. (i) Sales Book (ii) Journal Proper (iii) Journal Proper

Notes (iv) Sales Book (v) Sales Returns Book

(vi) Journal proper (vii) Journal proper
(viii) Journal proper (ix) None of these.
II. (i) a (ii) c

ANSWERS TO TERMINAL EXERCISE

7. Total of Purchases Book ` 10,990, Total of Purchase Returns Book ` 990

8. Total of Sales Book ` 1,58,300, Total of Sale Returns Book `16,450

ACTIVITY
Visit a number of shops/establishments of your areas and enquire whether they are
maintaining only journal proper or other special purpose books. Ascertain whether the
books maintained by them will serve the purpose or not. If not give suggestions.
Name of the Number of Books Sufficient/ If not sufficient
establishment transactions mentioned not sufficient book to be
visited mentioned
Quite Limited
large
1.
2.
3.
4.
5.

170 ACCOUNTANCY
 Module - II
TRIAL BALANCE AND COMPUTERS
Marks 10 Hours 25

Our important element of accounting process is summarising for which ledger accounts are
prepared which are finally balanced and are shown in the form of a statement called trial balance.
Businessman want to know the correct bank balance on a particular date for which bank
reconciliation statement is prefared. Business is mostly on credit which means involvement of
more capital, solution lies in the use of credit instruments like Bills of Exchange. Knowledge of
their accounting is thus very important.

Accounting is another name of accuracy but then to err is human and there can be accounting
errors. Knowledge of their rectification, necessary so as to enable achieving the aim of presenting
correct true, and fair view of business.

Growing use of computer has actually revolutionalised the accounting of business transactions
and computers are fast replacing the mannual accounting. True knowledge of computerised
accounting has become our cherished goal.

This module has been designed to prepare trial balance and detect accounting errors and their
rectifications. The learner will also know the meaning and purpose of preparing Bank
Reconcilation statement and its preparation. It contains accounting of bills of exchange. This
will also expose the learner to the utility of computers in accounting.

Lesson 9. Trial Balance

Lesson 10. Bank Reconcilitation Statement
Lesson 11. Bills of Exchange
Lesson 12. Errors and their Rectification
Lesson 13. Computer and Computerised Accounting System
MODULE - 2
Trial Balance and
Computers

Notes

172 ACCOUNTANCY
 MODULE - 2
Trial Balance and
Computers

9
TRIAL BALANCE
Notes

Whenever you attempt a question in arithmetic you try to verify whether your answer is
correct or not. If you attempt to solve any other type of problem you want to ensure
that it has been correctly solved. For this you try to find out some ways or means.
Similarly an accountant also wants to be sure that the ledger accounts he/she has
prepared are correct in respect of amount, side, balance, etc. To check the accuracy
of posting in the ledger a statement is prepared. This statement is called Trial Balance.
You also know that accounts are prepared by applying double entry system. According
to this system every debit of a transaction has corresponding credit for the same amount.
Hence, the total of debit balances of different accounts in the ledger must be equal to
the total of the credit balances in the remaining accounts, provided transactions have
been correctly posted in the ledger. A statement is prepared containing these balances
with two columns i.e. debit column containing debit balances and credit column containing
credit balances and the debit column total is compared with credit column total. If the
columnar totals are same it implies that ledger accounts are arithmetically accurate.
In this lesson, you will learn about meaning, objectives and preparation of Trial Balance.

OBJECTIVES
After studying this lesson you will be able to :
z state the meaning of Trial Balance;
z explain the objectives of preparing Trial Balance
z prepare a Trial Balance as per the format;
z identify the need for a Suspense A/c in case the Trial Balance does not tally and
z infer the possibility of errors even if the Trial Balance tallies.

ACCOUNTANCY 173
MODULE - 2 Trial Balance
Trial Balance and
Computers 9.1 MEANING AND OBJECTIVES OF PREPARING TRIAL BALANCE
If you recall the steps in the accounting procedure you find that at first the transactions
are entered in the Journal and Special Purpose Books like Cash Book, Purchases
Book, Sales Book, etc. From these books items are posted in the ledger in their
respective accounts. Finally, at the end of the accounting year these accounts are
balanced. To check the accuracy of posting in the ledger a statement is prepared with
two columns i.e. debit column and credit column which contains debit balances of
Notes accounts and credit balances of accounts respectively. Total of the two columns are if
equal, it means the ledger posting is arithmetically correct. This statement is called Trial
Balance.
Trial Balance may be defined as a statement which contains balances of all
ledger accounts on a particular date.
Trial Balance consists of a debit column with all debit balances of accounts and credit
column with all credit balances of accounts. The totals of these columns if tally it is
presumed that ledger has been maintained correctly. However, Trial Balance proves
only the arithmetical accuracy of posting in the ledger.
Objectives of Preparing a Trial Balance
Following are the objectives of preparing Trial Balance
(i) To Check Arithmetical Accuracy : Arithmetical accuracy in ledger posting means
writing correct amount, in the correct account and on its correct side while posting
transactions from various original books of accounts, such as Cash Book,
Purchases Book, Sales Book, etc. It also means not only the correct balance of
ledger account but also the totals of the special purpose Books.
(ii) To Help in Preparing Financial Statements : The ultimate objective of the
accounting is to prepare financial statements i.e. Trading and Profit and Loss
Account, and Balance sheet of a business enterprise at the end of an accounting
year. These statements contain balances of various ledger accounts. As Trial
Balance contains balances of all ledger accounts, in financial statements the balances
of ledger accounts are carried from the Trial balance for proper analysis.
(iii) Helps in Locating Errors : If total of two columns of the trial balance agrees it
is a proof of arithmetical accuracy in the ledger posting. However, if the totals of
the two columns do not tally it indicates that there are some mistake in the ledger
accounts. This prompts the accountant to find out the errors.
(iv) Helps in Comparison : Comparison of ledger account balances of one year
with the corresponding balances with the previous year helps the management
taking some important decisions. This is possible by using the Trial Balances of
the two years.

174 ACCOUNTANCY
 Trial Balance MODULE - 2
Trial Balance and
(v) Helps in Making Adjustments : While making financial statements adjustments Computers
regarding closing stock, prepaid expenses, outstanding expenses etc are to be
made. Trial balance helps in identifying the items requiring adjustments in preparing
the financial statements.
Trial Balance is generally prepared at the end of the year. However it can be prepared
at any time during the accounting year to check the accuracy of the posting.

Notes
INTEXT QUESTIONS 9.1
Fill in the blanks with suitable word or words :
(i) Trial balance has ................. column and ................. column of balances of
accounts.
(ii) If totals of two columns of Trial Balance are equal it means the ................. is
correct.
(iii) Trial Balance proves only the ................. accuracy of ledger posting.
(iv) One of the objectives of preparing Trial Balance is helping to locate ................. .
(v) While preparing ................. the ledger account balances are carried from the
Trial Balance.

9.2 PREPARATION OF TRIAL BALANCE

Trial Balance is not an account. It is only a list or schedule of balances of ledger accounts
including cash and bank balances. It is prepared on a particular date. The accounts
having a debit balance are entered in the debit amount column and credit balance
accounts are entered in the credit amount column. The totals of the two sides of the
accounts may also be used to prepare trial balance. The sum of each column should be
equal. The standard format of a trial blance is given below :
Trial Balance of .................
As at .................(closing date)
Dr. Cr.
Name of the Account LF Balance Balance
(`) (`)

ACCOUNTANCY 175
MODULE - 2 Trial Balance
Trial Balance and
Computers The name of the business firm is written on the top of the statement with Trial Balance.
Under this we write the date on which Trial Balance is prepared.

Trial Balance has three columns : Name of the Ledger Account, Debit Amount and
Credit Amount.

In the ledger account column we write the name of the account. In the Debit amount
column we write the amount of debit balance of the account (or the total of the debit
Notes side of the account). Similarly in the credit amount column we write the amount of
credit balance of the account (or the total of the credit side of the account.

Finally, columnar total is done and compared.

Steps to prepare Trial Balance

(i) At first ascertain the balance account wise of all the ledger accounts.

(ii) Write the name of the ledger account in the ledger account column.

(iii) Write against the name of the ledger account, the balance amount/total amount,
debit balance/total in the debit column; and credit balance/total in the credit column.

(iv) Add the debit balance/total amount column and credit balance/total amount column.

There are three methods of preparing Trial Balance

(i) Balance Method : In Balance method, the balance of each account (which may
be debit balance or credit balance) is extracted and written against each account;
we write debit balance in the debit column and credit balance in the credit column.

(ii) Total Method : In this method the total of both sides of every account in the
ledger is written against the name of the respective account without balancing
them in the form of debit and credit balances respectively.

(iii) Balance Total Method : Trial Balance is prepared by combining the first and
second methods.

However, in practice the trial balance is prepared with debit and credit balances of
various accounts in the ledger. Normally balance method is used.

Illustration 1

From the following ledger accounts of a trader closed as on 31st January, 2014, prepare
Trial Balance.

176 ACCOUNTANCY
 Trial Balance MODULE - 2
Trial Balance and
Capital A/c
Computers
Dr. Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
` `
2014 2014
Jan .31 Balance c/d 1,00,000 Jan.31 Bank A/c 1,00,000
1,00,000 1,00,000
Notes
Feb. 1 Balance b/d 1,00,000
Sales A/c
Dr. Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
` `
2014 2014
Jan .31 Balance transferred Jan. 8 Bank A/c 24,000
to Trading A/c 70,000
Jan. 15 Vikram’s A/c 46,000
70,000 70,000
Purchases A/c
Dr. Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
` `
2014 2014
Jan. 5 Pranaya’s A/c 40,000 Jan. 31 Stock A/c 15,000
Jan. 14 Bank A/c 55,000 Jan. 31 Balance
transferred to
Trading A/c 80,000
95,000 95,000
Vikram’s A/c
Dr. Cr
Date Particulars JF Amount Date Particulars JF Amount
` `
2014 2014
Jan. 15 Sales A/c 46,000 Jan. 31 Balance cld 46,000
46,000 46,000

Feb. 1 Balance b/d 46,000

ACCOUNTANCY 177
MODULE - 2 Trial Balance
Trial Balance and
Computers Pranaya’s A/c
Dr. Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

` `

2014 2014

Jan. 31 Balance cld 40,000 Jan. 5 Purchases A/c 40,000

Notes 40,000 40,000

Feb. 1 Balance b/d 40,000

Rent Received A/c

Dr. Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

` `

2014 2014

Jan. 31 Balance transferred to Jan. 31 Bank A/c 1,500

Profit and Loss A/c 1,500

1,500 1,500

Bank A/c
Dr. Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

` `

Capital A/c 1,00,000 Purchases A/c 55,000

Sales A/c 24,000 Commission A/c 1,800
Rent received 1,500 Drawings A/c 2,000
Balance c/d 66,700

1,25,500 1,25,500

Commission A/c
Dr. Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

` `

2014 2014

Jan. 20 Bank A/c 1,800 Jan. 31 Balance transferred to 1,800

Profit and Loss A/c

1,800 1,800

178 ACCOUNTANCY
 Trial Balance MODULE - 2
Trial Balance and
Stock A/c Computers
Dr. Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

` `

2014 2014

Jan. 31 Purchases A/c 15,000 Jan. 31 Balance cld 15,000

15,000 15,000 Notes

Feb. 1 Balance b/d 15,000

Drawings A/c
Dr. Cr

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan. 31 Bank A/c 2,000 Jan. 31 Balance cld 2,000

2,000 2,000

Feb. 1 Balance b/d 2,000

Solution :
Trial Balance as on 31 Jan. 2014
Dr. Cr.
Name of the Ledger Account Balance Balance
(` ) (`)
Capital 1,00,000
Sales 70,000
Purchases 80,000
Vikram 46,000
Pranaya 40,000
Commission 1,800
Rent received 1,500
Drawings 2,000
Closing Stock 15,000
Cash at Bank 66,700
2,11,500 2,11,500

ACCOUNTANCY 179
MODULE - 2 Trial Balance
Trial Balance and
Computers Illustration 2
From the following ledger accounts of Rohan Bros prepare Trial Balance by (i) total
method (ii) combined method (both balance method and total method) :
Cash A/c
Dr. Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

Notes ` `

2014 2014
Jan. 1 Capital A/c 50,000 Jan. 2 Bank A/c 40,000
Jan. 28 Ranjeet 9,900 Jan. 12 Freight A/c 200
Jan. 31 Salary A/c 3,000
Jan.31 Rent A/c 2,400

59,900 45,600

Bank A/c
Dr. Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

` `

2014 2014
Jan.2 Cash A/c 40,000 Jan. 8 Furniture A/c 12,000
Jan.14 Sales A/c 16,000 Jan. 10 Purchases A/c 20,000
Jan.20 Vikas 12,000
Jan.31 Drawings 4,000

56,000 48,000

Furniture A/c
Dr. Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

` `

2014 2014

Jan. 8 Bank A/c 12,000

12,000

180 ACCOUNTANCY
 Trial Balance MODULE - 2
Trial Balance and
Capital A/c Computers
Dr. Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

` `

2014

Jan. 1 Cash A/c 50,000

50,000
Notes

Purchases A/c
Dr. Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

` `

2014

Jan. 10 Bank A/c 20,000

Jan.12 Vikas 15,000

35,000

Sales A/c
Dr. Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

` `

2014

Jan. 14 Bank A/c 16,000

Jan.20 Ranjeet 14,000

30,000

Vikas A/c
Dr. Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

` `

2014 2014

Jan. 20 Bank A/c 12,000 Jan. 12 Purchases A/c 15,000

12,000 15,000

ACCOUNTANCY 181
MODULE - 2 Trial Balance
Trial Balance and
Computers Ranjeet A/c
Dr. Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
` `
2014 2014
Jan. 20 Sales A/c 14,000 Jan. 25 Cash A/c 9,900
Jan.28 Discount A/c 100
Notes 14,000 10,000

Freight A/c
Dr. Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
` `
2014 2014
Jan. 12 Cash A/c 200
200

Salary A/c
Dr. Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
` `
2014
Jan. 31 Cash A/c 3,000
3,000

Rent A/c
Dr. Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
` `
2014
Jan. 31 Cash A/c 2,400
2,400

Drawings A/c
Dr. Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
` `
2014 2014
Jan. 31 Bank A/c 4,000
4,000

182 ACCOUNTANCY
 Trial Balance MODULE - 2
Trial Balance and
Discount A/c Computers
Dr. Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
` `
2014
Jan. 28 Ranjeet 100
100
Notes
Solution.

i. (Total Method) Trial Balance of Rohan Brothers

as on 31st January, 2014

Dr. Cr.
Name of the Ledger Account Balance Balance
(`) (`)

Cash 59,900 45,600

Bank 56,000 48,000

Furniture 12,000 –

Capital – 50,000

Purchases 35,000 –

Sales 30,000

Vikas 12,000 15,000

Ranjeet 14,000 10,000

Freight 200 –

Salary 3,000

Rent 2,400

Drawings 4,000

Discount 100

1,98,600 1,98,600

ACCOUNTANCY 183
MODULE - 2 Trial Balance
Trial Balance and
Computers ii. (Combine Method) Trial Balance of Rohan Brothers
as on 31st January, 2014

Dr. Cr.

Name of the Ledger Account Total Amounts Balance Amounts

(` ) (`) (`) (`)

Cash 59,900 45,600 14,300 –

Notes
Bank 56,000 48,000 8,000 –

Furniture 12,000 – 12,000 –

Capital – 50,000 – 50,000

Purchases 35,000 – 35,000 –

Sales 30,000 – 30,000

Vikas 12,000 15,000 – 3,000

Ranjeet 14,000 10,000 4,000 –

Freight 200 – 200 –

Salary 3,000 – 3,000 –

Rent 2,400 – 2,400 –

Drawings 4,000 – 4,000 –

Discount 100 – 100 –

1,98,600 1,98,600 83,000 83,000

INTEXT QUESTIONS 9.2

Fill in the blanks with suitable word/words :

(i) Trial Balance has .................. columns.

(ii) There are .................. methods of preparing Trial Balance.

(iii) In practice, method of preparing Trial Balance is .................. used.

(iv) The last step of preparing trial balance is to ascertain the .................. of its two
amount columns.

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9.3 TRIAL BALANCE AND ERRORS Computers
You have learnt that if the sum of the two columns of Trial Balance is equal i.e. the Trial
Balance is in agreement, it can be assumed that the accounting entries have been
arithmetically correct and correctly posted in the ledger. If the totals do not tally it
means there are some errors in recording and/or in posting in the ledger of the business
transactions.
The reasons due to which the totals of the two columns of Trial balance may not agree
Notes
can be listed as follows :
(i) The totals of the Special Purpose Books like Sales Book, Purchases Book, etc
are not done correctly or there is some mistake in the posting of these totals in
their respective accounts in the ledger.
(ii) The items from different Special Purpose Books and Journal may be posted to
the wrong side of the account or a wrong amount is posted or posted to the
wrong account.
(iii) The balancing of an account is not done correctly.
(iv) There may be mistake in carrying balance from the ledger account to the Trial
Balance.
You may conclude that if the trial balance is in agreement, the business transactions
have been correctly recorded or posted into ledger. However, the agreement of Trial
Balance is not a conclusive proof of the correctness of recording and posting of business
transactions. There can be errors and the sum of each column of the Trial Balance may
still be equal. As you have learnt that business transactions are so recorded that all
debits have the credits for the same amount and vice-a-versa. So the Trial Balance
must necessarily agree. But if the debits are matched by credits though there are mistakes
in recording and posting the Trial balance will still agree. For example, if goods have
been purchased from Surender, and if not entered in the Purchases Book, this error
will not affect the agreement of the Trial Balance.
Trial Balance and Suspense A/c
Now suppose the Trial Balance does not agree i.e. there is a difference of some amount
in the totals of the two columns of the Trial Balance. What will you do with this difference?
A different account i.e Suspense Account is opened with the difference in amount put in
this account. This will result in agreement of Trial Balance. The suspense account with
the amount of difference will be put on the shorter side of the Trial Balance. For example
total of the debit column exceeds the total of the credit column by Rs.500. This amount
of Rs 500 will be written on the credit column against Suspense Account to make the
Trial Balance agree.

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Computers The suspense A/c is however a temporary arrangement to make the Trial Balance
agree. This account will show balance till the error or errors are rectified, this account
will disappear as soon as all the errors are rectified.
Illustration 3
From the following Cash Book and Accounts prepare the Trial Balance as on 31st
Jaunary 2014.
Cash Book
Notes
Dr. Cr
Date Particulars L.F. Amount Date Particulars L.F. Amount
` `
2014 2014
Jan. 1 Capital A/c 75,000 Jan. 10 Furniture A/c 15,000
Jan. 10 Sales A/c 25,000 Jan. 15 Purchases A/c 25,000
Jan. 31 Rent A/c 2,000
Jan. 31 Telephone
expenses A/c 1,000
Balance cld 57,000
1,00,000 1,00,000
Ledger
Capital A/c
Dr. Cr
Date Particulars L.F. Amount Date Particulars L.F. Amount
` `
2014 2014
Jan. 31 Balance cld 75,000 Jan. 1 Amount as per
Cash Book 75,000
75,000 75,000
Feb. 1 Balance b/d 75,000
Sales A/c
Dr. Cr
Date Particulars L.F. Amount Date Particulars L.F. Amount
` `
2014 2014
Jan. 31 Trading A/c 25,000 Jan. 10 Amount as per
Cash Book 25,000

25,000 25,000

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Purchases A/c Computers
Dr. Cr

Date Particulars L.F. Amount Date Particulars L.F. Amount

` `

2014 2014

Jan. 15 Amount as per Jan. 31 Trading A/c 25,000

Cash Book 25,000 Notes
25,000 25,000

Furniture A/c
Dr. Cr

Date Particulars L.F. Amount Date Particulars L.F. Amount

` `

2014 2014

Jan. 10 Amount as per Jan. 31 Balance cld 15,000

Cash Book 15,000

15,000 15,000

Rent A/c
Dr. Cr

Date Particulars L.F. Amount Date Particulars L.F. Amount

` `

2014 2014

Jan. 31 Amount as per Jan. 31 Profit and Loss 200

Cash Book 200 A/c

200 200

Telephone charges A/c

Dr. Cr

Date Particulars L.F. Amount Date Particulars L.F. Amount

` `

2014 2014

Jan. 31 Amount as per 1,000 Jan. 31 Profit and Loss 1,000

Cash Book A/c

1,000 1,000

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Computers Solution
Trial Balance
As on 31st Jan. 2014
Dr. Cr.
Name of the Account Balances Balances
(`) (` )
Capital 75,000
Notes
Sales 25,000
Purchases 25,000
Furniture 15,000
Commission
Rent 200
Telephone charges 1,000
Cash in hand 57,000
Suspense 1,800
1,00,000 1,00,000
In the above example we see that the totals of the two columns of the Trial Balance do
not tally. Credit side is more than that of debit side by `1800. It is to make the two
columns of the trial balance equal, suspense A/c is written in the column against it is
written the amount of `1800 in the debit column. As soon as error/errors are detected
and rectified, this suspense A/c will show no balance.
Illustration 4
From the following balances extracted from the books of a trader, prepare Trial Balance
as on 31st March, 2014.
`
Cash in hand 4,200
Cash at Bank 16,800
Bills Receivable 18,000
Bills payable 16,000
Sundry debtors 24,600
Sundry creditors 32,400
Capital 50,000

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Drawings 18,000 Computers
Sales 1,05,000
Purchases 75,000
Carriage Inward 2,700
Salaries 12,000
Advertisement 2,400
Insurance 1,600 Notes
Furniture 7,500
Stock 18,600
Office Rent 2,000
Solution :
Trial Balance
Dr. Cr.
Name of the Account Balances Balances
(` ) (`)
Cash 4,200
Bank 16,800
Bills Receivable 18,000
Bills payable 16,000
Sundry Debtors 24,600
Sundry creditors 32,400
Capital 50,000
Drawings 18,000
Sales 1,05,000
Purchases 75,000
Carriage Inward 2,700
Salaries 12,000
Advertisement 2,400
Insurance 1,600
Furniture 7,500
Rent 2,000
Stock 18,600
Total 2,03,400 2,03,400

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Computers
INTEXT QUESTIONS 9.3
Answer the following in one or two words :
(i) If the totals of two amount columns of trial balance do not agree, in which account
the difference amount is written?
(ii) If the total of the debit column of a trial balance is more than the total of its credit
Notes column in which of the two amount of columns of the trial balance will you write
the difference in amount?
(iii) If the total of the Purchases Book is posted to Purchases Account wrongly,. will
the trial balance still agree?
(iv) When the accounting error or errors are rectified what happens to the suspense
A/c?

WHAT YOU HAVE LEARNT

z Trial balance is a statement containing balances of all ledger accounts of a business
concern on a particular date.
z Trial Balance is prepared to check the arithmetical accuracy of the ledger posting,
it helps in preparing financial statements; it helps in locating accounting errors;
helps in management as it enables comparison of account balances of different
periods and helps in making adjustments while preparing financial statements.
z The totals of two columns of a trial balance should be equal because for each
transaction there is debit and credit for the same amount.
z If the totals of two columns of trial Balance tally it means the ledger posting has
been correctly done.
z If the totals of two columns of Trial Balance do not agree, it means there is some
mistake in the ledger posting.
z If the totals of two columns of Trial Balance do not agree the amount of difference
is put to suspense A/c and the totals of Trial Balance are equated.

TERMINAL EXERCISE
1. State the meaning of Trial Balance.
2. Explain in brief the objective of preparing Trial Balance.

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3. Why do the totals of two sides of Trial Balance are equal ? Explain. Computers
4. ‘Agreement of Trial Balance is not the conclusive proof of the accuracy of accounts’.
Comment.
5. What is Suspense A/c ? What is its role in preparing Trial Balance ?
6. Explain the steps that are taken to prepare a Trial Balance.
7. List the various reasons because of which the totals of two columns of Trial Balance
do not tally. Notes

8. Prepare Trial Balance of M/s Multiplying enterprise as on 31st December, 2014.

Accounts Balances Accounts Balances
(` ) (` )
Cash in hand 2,500 Debtors 18,200
Cash at Bank 14,500 Creditors 16,600
Capital 70,000 Opening stock 8,700
Drawing 9,000 Wages 6,700
Purchases 60,000 Rent 5,000
Sales 82,000 Salary 8,400
Machine 35,000 Bills Payable 11,400
Furniture 12,000
9. Prepare Trial Balance as on 31st March, 2014 from the following balances of
Sabana :
Dr. Cr.
Accounts Balances Balances
(` ) (` )
Cash in hand 3,100
Bank overdraft 18,250
Opening stock 24,600
Purchases 59,800
Sales 72,350
Sabana’s Capital 50,000
Drawings 12,000
Carriage Inward 1,600
Rent 2,400
Commission 2,100

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Trial Balance and
Computers Interest 780
Furniture 5,220
Creditors 13,600
Debtors 27,800
Building 20,000 1,000
Suspense 1,57,300 1,57,300
Notes

ANSWERS TO INTEXT QUESTIONS

9.1 (i) debit, credit (ii) ledger posting (iii) arithmetical
(iv) accounting errors (v) financial statements
9.2 (i) Three (ii) Three (iii) balance (iv) sum
9.3 (i) Suspense A/c (ii) Credit side (iii) No (iv) Suspense A/c disappears

ANSWERS TO TERMINAL QUESTIONS

8. Total of two columns are ` 180000 each
9. Total of Dr column ` 157300
Total of Cr column ` 156300
Suspense A/c Cr ` 1000

ACTIVITY
Talk to your friends who are working as accounts clerk in various firms, and seek
answers of the following questions :
1. Do they prepare trial balance?
2. How many times they prepare it in a year and at what intervals?
3. Which method they use total method or balance method?
4. What do they do if Trial Balance does not agree?
5. How many of them prepare the financial statements without preparing Trial balance?
On the basis of the answers prepare a report.

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Computers

10
BANK RECONCILIATION
Notes
STATEMENT

You operate a bank account in which you deposit money and withdraw money from
time to time. You maintain a record with yourself of these deposits and withdrawals.
One day when you got your pass-book (statement issued by the bank) updated you
were surprised to find that the balance shown by the pass book was different from
what it should have been as per your records. What will you do in this case? It is
obvious that you will compare the two sets of records and find out items which are
recorded in one but not in the other. Similar situation may arise in case of a business
concern which operates a bank account. These business concerns maintain record of
all of their banking transactions in their bank column of the cash book. On any particular
date the bank balance shown by the bank column of cash book and that shown by the
pass book should be the same. But if there is difference between the two, the business
concern will find out the reasons to reconcile the balance. In this lesson you will learn
about reasons for difference and prepare the reconciliation statement called Bank
Reconciliation Statement.

OBJECTIVES
After studying this lesson, you will be able to:
z state the meaning and need of preparing Bank Reconciliation Statement;
z explain the reasons for difference between the balances of Cash Book and Pass
Book and
z prepare the Bank Reconciliation Statement.
10.1 BANK RECONCILIATION STATEMENT - MEANING AND NEED
Business concern maintains the cash book for recording cash and bank transactions.
The Cash book serves the purpose of both the cash account and the bank account. It

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Trial Balance and
Computers shows the balance of both at the end of a period. Bank also maintains an account for
each customer in its book. All deposits by the customer are recorded on the credit side
of his/her account and all withdrawals are recorded on the debit side of his/her account.
A copy of this account is regularly sent to the customer by the bank. This is called ‘Pass
Book’ or Bank statement. It is usual to tally the firm’s bank transactions as recorded by
the bank with the cash book. But sometimes the bank balances as shown by the cash
book and that shown by the pass book/bank statement do not match. If the balance
shown by the pass book is different from the balance shown by bank column of cash
Notes book, the business firm will identify the causes for such difference. It becomes necessary
to reconcile them. To reconcile the balances of Cash Book and Pass Book a statement
is prepared. This statement is called the ‘Bank Reconciliation Statement. It can be said
that :
Bank Reconciliation Statement is a statement prepared to reconcile the
difference between the balances as per the bank column of the cash book and
pass book on any given date.
Need of preparing Bank Reconciliation Statement
It is neither compulsory to prepare Bank Reconciliation Statement nor a date is fixed
on which it is to be prepared. It is prepared from time to time to check that all transactions
relating to bank are properly recorded by the businessman in the bank column of the
cash book and by the bank in its ledger account. Thus, it is prepared to reconcile the
bank balances shown by the cash book and by the bank statement. It helps in detecting,
if there is any error in recording the transactions and ascertaining the correct bank
balance on a particular date.

INTEXT QUESTIONS 10.1

Fill in the blanks with suitable word/words :
i. The copy of customer’s account with the Bank is called ....................
ii. The cheques deposited are entered on the .................... of the bank column of
cash book.
iii. Bank Reconciliation statement is prepared to .................... the bank balance as
shown by the cash book and the bank statement.
iv. Cheques issued are posted on the ........... side of the bank column of Cash Book.
v. The credit column of pass book should be equal to .................... column of cash
book and debit column of pass book should equal to ................... column of cash
book, if there are no differences.

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10.2 REASONS FOR DIFFERENCE Computers
When a businessman compares the Bank balance of its cash book with the balance
shown by the bank pass book, there is often a difference. As the time period of posting
the transactions in the bank column of cash book does not correspond with the time
period of posting in the bank pass book of the firm, the difference arises. The reasons
for difference in balance of the cash book and pass book are as under :
i. Cheques Issued By The Firm But Not Yet Presented For Payment : When
cheques are issued by the firm, these are immediately entered on the credit side Notes
of the bank column of the cash book. Sometimes, receiving person may present
these cheques to the bank for payment on some later date. The bank will debit
the firm’s account when these cheques are presented for payment. There is a
time period between the issue of cheque and being presented in the bank for
payment. This may cause difference to the balance of cash book and pass book.
ii. Cheques Deposited into Bank But Not Yet Collected : When cheques are
deposited into bank, the firm immediately enters it on the debit side of the bank
column of cash book. It increases the bank balance as per the cash book. But,
the bank credits the firm’s account after these cheques are actually realised. A
few days are taken in clearing of local cheques and in case of outstation cheques
few more days are taken. This may cause the difference between cash book
and pass book balance.
iii. Amount Directly Deposited in The Bank Account : Sometimes, the debtors
or the customers deposit the money directly into firm’s bank account, but the
firm gets the information only when it receives the bank statement. In this case,
the bank credits the firm’s account with the amount received but the same amount
is not recorded in the cash book. As a result the balance in the cash book will
be less than the balance shown in the Pass book.
iv. Bank Charges : The bank charge in the form of fees or commission is charged
from time to time for various services provided from the customers’ account
without the intimation to the firm. The firm records these charges after receiving
the bank intimation or statement. Example of such deductions is : Interest on
overdraft balance, credit cards’ fees, outstation cheques, collection charges, etc.
As a result, the balance of the cash book will be more than the balance of the
pass book.
v. Interest and Dividend Received by the Bank : Sometimes, the interest on
debentures or dividends on shares held by the account holder is directly
deposited by the company through Electronic Clearing System (ECS). But the
firm does not get the information till it receives the bank statement. As a
consequence, the firm enters it in its cash book on a date later than the date
it is recorded by the bank. As a result, the balance as per cash book and pass
book will differ.

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Computers vi. Direct Payments Made By The Bank On Behalf Of The Customers :
Sometimes, bank makes certain payments on behalf of the customer as per
standing instructions. Telephone bills, rent, insurance premium, taxes, etc are
some of the expenses. These expenses are directly paid by the bank and debited
to the firm’s account immediately after their payment. but the firm will record
the same on receiving information from the bank in the form of Pass Book or
bank statement. As a result, the balance of the pass book is less than that of
the balance shown in the bank column of the cash book.
Notes
vii. Dishonour of Cheques/Bill discounted : If a cheque deposited by the firm
or bill receivable discounted with the bank is dishonoured , the same is debited
to firm’s account by the bank. But the firm records the same when it receives
the information from the bank. As a result, the balance as per cash book and
that of pass book will differ.
viii. Errors Committed in Recording Transactions by the Firm : There may be
certain errors from firm’s side, e.g., omission or wrong recording of transactions
relating to cheques deposited, cheques issued and wrong balancing etc. In this
case, there would be a difference between the balances as per Cash Book and
as per Pass Book.
ix. Errors Committed in Recording Transactions by the Bank : Sometimes,
bank may also commit errors, e.g., omission or wrong recording of transactions
relating to cheques deposited etc. As a result, the balance of the bank pass book
and cash book will not agree.

INTEXT QUESTIONS 10.2

Given below are some statements. Some of these statements are true statements
and some of these are false statements. Write ‘T’ for True and ‘F’ for false
statements.
i. Bank credits firm’s account as soon as it receives cheques from the firm.
ii. Bank charges are never entered in the Cash Book.
iii. Banks make certain payments on behalf of the customer under his standing
instructions.
iv. In case of cheques issued but not encashed, the balance of pass book will be less
than the balance of Cash Book.
v. Direct deposits in the bank by a customer would increase the balance shown by
the Pass Book.

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10.3 PREPARATION OF BANK RECONCILIATION STATEMENT Computers
To reconcile the bank balance as shown in the pass book with the balance shown by
the cash book, Bank Reconciliation Statement is prepared. After identifying the reasons
of difference, the Bank Reconciliation statement is prepared without making change in
the cash book balance.
We may have the following different situations with regard to balances while preparing
the Bank Reconciliation statement. These are: Notes
1. Favourable Balances
(a) Debit balance as per cash book is given and the balance as per pass book is to be
ascertained.
(b) Credit balance as per pass book is given and the balance as per cash book is to
be ascertained.
2. Unfavourable Balance/Overdraft Balance
(a) Credit balance as per cash book (i.e. overdraft) is given and the balance as per
pass book is to be ascertained.
(b) Debit balance as per pass book (i.e. overdraft) is given and the balance as per
cash book is to be ascertained.
The following steps are taken to prepare the bank reconciliation statement:
Favourable Balances : When debit balance as per cash book or credit balance as
per pass book is given :
(a) Take balance as a starting point say Balance as per Cash Book.
(b) Add all transactions that have resulted in increasing the balance of the pass book.
(c) Deduct all transactions that have resulted in decreasing the balance of pass book.
(d) Extract the net balance shown by the statement which should be the same as
shown in the pass book.
In case balance as per pass book is taken as starting point all transactions that have
resulted in increasing the balance of the Cash book will be added and all transactions
that have resulted in decreasing the balance of Cash book will be deducted. Now
extract the net balance shown by the statement which should be the same as per the
Cash book.
The following illustration helps to understand dealing with the favourable balance as
per cash book or pass book.

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Trial Balance and
Computers Illustration 1
From the following particulars of M/s Ananaya Industries, prepare bank reconciliation
statement as on December 31, 2014
1. Bank balance as per cash book ` 32,500
2. Cheques deposited into bank but not credited upto December 31, 2014 `8,900.
3. Cheques issued but not presented for payment ` 12,500.
Notes
4. Bank credited ` 5,000 for receiving dividend through Electronic Clearing System.
5. Bank charges debited by Bank ` 400.
Solution
Bank Reconciliation statement of M/s Ananaya Industries
as on December 31, 2014
Particulars Plus Minus
Amount Amount
(` ) (` )
1. Balance as per cash book 32,500
2. Cheques deposited but not credited by the bank 8,900
3. Cheques issued but not presented for payment 12,500
4. Dividend received through ECS 5,000
5. Bank charges debited by bank 400
Balance as per pass book 40,700
50,000 50,000
Illustration 2
Take the figures given in illustration number 1. prepare bank reconciliation statement
taking balance as per pass book i.e. ` 40,700 as the starting point,
Solution
Bank Reconciliation statement of M/s Ananava Industries
as on December 31, 2014
Particulars Plus Minus
Amount Amount
(` ) (`)
1. Balance as per pass book 40,700

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2. Cheques deposited but not credited by the bank 8,900 Computers
3. Cheques issued but not presented for payment 12,500
4. Dividend received through ECS 5,000
5. Bank charges debited by bank 400
Balance as per Cash book 32,500
50,000 50,000
Notes
Illustration 3
From the following particulars of Reema Traders, prepare a bank reconciliation statement
on June 30,2014
1. Balance as per the cash book ` 35,750
2. ` 250 charges for Credit card fee is debited by bank, which is not recorded in
cash book.
3. Cheques for ` 7,550 are deposited in the bank but not yet collected by the Bank.
4. There was also a debit in the pass book of ` 3,500 in respect of a discounted bill
dishonoured.
Solution
Bank Reconciliation statement of M/s Reema Traders
as on June 30, 2014
Particulars Plus Minus
Amount Amount
(` ) (`)
1.Balance as per Cash book 35,750
2.Cheques deposited but not credited by the bank 7,550
3.Credit card fee charges debited by the bank 250
4.Discounted bill dishonoured recorded only in Pass Book 3,500
Balance as per Pass book 24,450
35,750 35,750
Illustration 4
Bank Pass book of M/s. Brham Industries showed a credit balance of ` 27,350 on
July 31,2014. The following differences were found on that date between the cash
book and the pass book:

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Computers 1. Cheques issued before July 31, 2014, amounting to ` 19,000 had not been
presented for payment.
2. Two cheques of ` 5,000 and ` 3,500 were deposited into bank on July 31, but
the bank gives credit for the same in August.
3. Insurance premium directly paid by bank ` 5,000.
4. ` 2,000 wrongly debited to the firm account by the bank.

Notes Prepare Bank Reconciliation Statement as on July 31, 2014.

Solution:
Bank Reconciliation statement of M/s Brahm Industries
as on July 31, 2014
Particulars Plus Minus
Amount Amount
(` ) (`)
1. Balance as per pass book 27,350
2. Cheques issued but not presented for payment 19,000
3. Cheques deposited but credited by the bank in August 8,500
4. Insurance premium directly paid by bank 5,000
5. Wrongly debited by the bank. 2,000
Balance as per Cash book 23,850
42,850 42,850

INTEXT QUESTIONS 10.3

You are given the balance as per Pass Book as the starting point and balance as per
Cash Book has to be ascertained by you. Out of the following transactions, write ‘A’
against those amounts which will be added to the balance of Pass Book and ‘R’ against
those by which balance of Pass Book will be reduced :
1. Interest allowed by Bank
2. Cheques deposited with bank and dishonoured
3. Cheques issued but not encashed
4. Bank charges
5. Insurance premium paid by bank
6. Dividends on share collected by bank.

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10.4 UNFAVOURABLE BALANCE/OVERDRAFT BALANCE Computers
Sometimes a businessman withdraws excess amount from the bank account and the
closing bank balance of a month is a debit balance. This balance amount is called
‘overdraft balance’ as per Pass Book. This is shown in the cash book as a credit
balance.
Credit balance as per cash book/Debit balance as per Pass Book.
Overdraft balance is shown in the minus column of statement as the starting point. The Notes
other steps shall remain same.
The following illustration will help to understand dealing with the unfavourable balance
as per cash book and pass book.
Illustration 5
On December 31, 2014, the cash book of the M/s. Mona Plastics shows the credit
balance ` 6,500. Cheques amounting to ` 3,500 deposited into bank but were not
collected by the bank. Firm issued cheques of ` 1,000 which were not presented for
payment. There was a debit in the pass book of ` 200 for interest and ` 400 for bank
charges. Prepare Bank Reconciliation Statement.
Solution:
Bank Reconciliation statement of M/s Mona Plastics
as on December 31,2014
Particulars Plus Minus
Amount Amount
(` ) (`)
1. Overdraft as per cash book 6,500
2. Cheques issued but not presented for payment 1,000
3. Cheques deposited but not credited by the bank 3,500
4. Bank charges and interest charged 600
Overdraft balance as per Bank Pass book 9,600
10,600 10,600
Illustration 6
Prepare Bank Reconciliation Statement of M/s Ashima Travels, from the following
informations:
Bank overdraft as per Cash Book on 31st July, 2014 ` 45,000

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Trial Balance and
Computers Cheques issued but not presented for payment ` 17,500

Cheques deposited but not yet collected by the bank ` 9,600

Interest on investment collected by the bank ` 2,300

Bank charges ` 350 debited by the bank not yet entered in the cash book.

Solution:
Notes Bank Reconciliation statement of M/s Ashima Travels
as on July 2014

Particulars Plus Minus

Amount Amount
(` ) (`)

1. Overdraft as per cash book 45,000

2. Cheques issued but not presented for payment 17,500

3. Cheques deposited but not credited by the bank 9,600

4. Interest on investment collected by the bank 2,300

5. Bank charges 350

Overdraft balance as per Bank Pass book 35,150

54,950 54,950

Illustration 7

From the following particulars of Neha and Co. prepare Bank Reconciliation Statement
on March 31,2014

Overdraft as per pass book 16,500

Interest on overdraft 1,600

Insurance premium paid by the bank 800

Cheques deposited but not yet credited 5,500

Cheques issued but not present for payment 6,000

Wrong credit to firm account by the bank 1,000

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Solution: Computers
Bank Reconciliation Statement of M/s Neha & Co
as on March 31, 2014
Particulars Plus Minus
Amount Amount
(` ) (`)
1. Overdraft as per pass book 16,500
Notes
2. Interest on overdraft 1,600
3. Insurance premium paid by bank 800
4. Cheques deposited but not credited by the bank 5,500
5. Cheques issued but not presented for payment 6,000
6. Wrongly credited by the bank 1,000
Overdraft balance as per cash book 15,600
23,500 23,500

INTEXT QUESTIONS 10.4

Fill in the blanks choosing correct word from the words given in brackets:
i. Overdraft means ................. balance. [Favourable/unfavourable].
ii. The balance of cash book is ................. in case of overdraft.
[debit/ credit].
iii. Bank charges will ................. in case of overdraft as per Cash Book
[increase/decrease].
iv. Cheques issued but not encashed will ................. in case of the overdraft as per
Pass Book. [increase/decrease]
v. Interest allowed by bank ................. in case of the favourable balance of cash
book. [adds to/reduces]

WHAT YOU HAVE LEARNT

z Bank Reconciliation Statement is a statement prepared to reconcile the difference
between the balances as per the bank column of the cash book and pass book on
any given date.

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Computers z There are certain reasons due to which a difference in the balance of Pass Book
and Cash Book take place. These are as follows:
(a) Cheques issued by the firm but not yet presented for payment.
(b) Cheques deposited into bank but not yet collected.
(c) Amount directly deposited in the bank account.
(d) Bank Charges
Notes
(e) Interest and dividend received by the bank.
(f) Direct payments made by the bank on behalf of the customer.
(g) Cheques/discounted bills dishonoured.
(h) Errors committed in recording transactions by the firm.
(i) Errors committed in recording transactions by the Bank
z Different situations for preparing the Bank Reconciliation statement. These are:
Favourable balances
(a) Debit balance as per cash book is given and the balance as per pass book is
to be ascertained.
(b) Credit balance as per pass book is given and the balance as per cash book
is to be ascertained.
Unfavourable balance/overdraft balance
(a) Credit balance as per cash book (i.e. overdraft) is given and the balance as
per pass book is to be ascertained.
(b) Debit balance as per pass book (i.e. overdraft) is given and the balance as
per cash book is to be ascertained.

TERMINAL EXERCISE
1. What is meant by a Bank Reconciliation statement?
2. What is the need of preparing Bank Reconciliation statement?
3. Enumerate the causes of difference in the balance of cash book and pass book.
4. From the following particulars, prepare Bank Reconciliation statement as on
December 31, 2014.
(i) Balance as per Cash Book ` 4,200

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(ii) Cheques issued but not presented for payment ` 2,000 Computers
(iii) Cheques deposited but not collected ` 3,000
(iv) Bank charges debited by the bank ` 250.
5. Prepare Bank Reconciliation statement as on March 31, 2014. On this date the
passbook of M/s Noopur Industries showed a balance of ` 27,500.
(a) Cheques of ` 14,000 directly deposited by a customer.
Notes
(b) Cheques for ` 13,500 were issued during the month of March but of these
cheques for ` 1,500 were not presented by the end of March.
(c) The bank collected ` 2,500 as dividend on shares.
(d) Cheques of `17500 were paid into bank but of ` 8500 were realised in the
month of April.
6. On April 1, 2014, Rohan had an overdraft of `16,000 as shown by the cash
book. Cheques amounting to ` 6,000 had been paid by him but not collected by
the bank till date. He issued cheques of ` 8,000 which were not presented to the
bank for payment. There was a debit in his passbook of ` 500 for interest and `
200 for bank charges and a cheque of ` 5000 was paid into bank but the same
was debited twice in the cash book. Prepare Bank Reconciliation Statement.
7. Overdraft shown by the passbook of M/s.Mohit traders is ` 40,000. Prepare
Bank Reconciliation statement on December 31,2014.
(a) Bank charges debited as per pass book ` 1,000
(b) Received a payment directly from customer ` 7,000
(c) Cheques wrongly recorded in debit side of cash book ` 4,000
(d) Cheques issued but not presented for payment ` 9,800
(e) Cheques deposited with the bank but not collected ` 12,500
(f) Insurance premium paid by the bank `3,500

ANSWERS TO INTEXT QUESTIONS

10.1 (i) Pass Book (ii) Debit side (iii) reconcile
(iv) credit (v) Debit, credit
10.2 (i) F (ii) F (iii) T (iv) F (v) T
10.3 (i) R (ii) A (iii) R (iv) A (v) A (vi) R

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Computers 10.4 (i) Unfavourable (ii) Credit (iii) Increase
(iv) Decrease (v) Adds to

ANSWERS TO TERMINAL QUESTIONS

4. Balance as per pass Book ` 2,950
Notes 5. Balance as per Cash Book ` 9,500
6. Overdraft as per pass Book ` 23,200
7. Overdraft as per cash book ` 40,800

ACTIVITY

You know that businessman generally visit their banks to get updated position regarding
their bank account. Visit any bank and enquire from the bank officer what discrepencies
generally they notice in the items. They have recorded or not recorded the items or not
recorded by their customers. Make a list of the discrepencies and show the effect on
the bank balance.
S.No. Reason of discrepency/actual Effect on account
difference in the bank balance
and the balance expected by Plus Minus
the customer
1.
2.
3.
4.
5.
6.
7.

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Computers

11
BILLS OF EXCHANGE
Notes

You know that now-a-days in business transactions on credit are on the rise. When
goods are sold on credit a huge amount of capital is blocked. Then there is no certainity
when the amount will be paid. A solution of the problem is giving this fact in writing in
proper form so that the buyer or debtor has to pay a definite sum to the seller/creditor
on demand or after the expiry of a certain period. Such a formal document duly signed
by both the parties is called a Bill of Exchange.
When such a document is given by the debtor/buyer from his own side it is called a
promisory note. These two documents when prepared as per provisions of the
Negotiable Instruments Act, 1881 attains the position of money and are used for
settlement of the amount due. In this lesson you will learn about these two instruments
and their accounting treatment in the books of parties concernced.

OBJECTIVES
After studying this lesson you will be able to:
z define the terms ‘Bill of Exchange’ and ‘Promissory Notes’;
z distinguish between ‘Bill of Exchange’ and ‘Promisory Note’;
z define the terms such as drawer, drawee, days of grace, noting charges etc;
z make enteries in the books of drawer and drawee/payee with respect to drawing
& accepting the bill of exchange and meeting the bill of exchange on maturity;
z dishonour of a Bill;
z renewal of Bill;
z insolvency of the acceptor;

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Computers z retiring a bill under rebate;

z discounting the bill from bank; and

z dishonour of bill in various conditions.

11.1 BILLS OF EXCHANGE - MEANING

According to section 5 of the Negotiable Instruments Act, 1881, a bill of exchange is
Notes an instrument is writing containing an unconditional order signed by the maker, directing
a certain person to pay a certain sum of money only to, or to the order of, a certain
person, or to the bearer of the instrument.

Features of Bill of Exchange

1. It is an instrument drawn by the creditor upon his debtor.

2. It contains an unconditional order to pay a specified amount.

3. The specified amount is payable to the person named in the bill or to his order or to
the bearer.

4. The bill must be signed/accepted by the maker.

5. The bill specifies the date by which the amount should be paid.

6. It can be payable to the bearer.

Parties to a Bill of Exchange

1. Drawer : Drawer is a person who writes/makes the Bill of Exchange. He is generally

the creditor who had sold goods on credit.

2. Drawee : Drawee is a person upon whom the bill is drawn. He is generally the
debtor to whom goods have been sold on credit. Bill is generally signed and accepted
by the Drawee.

3. Acceptor : He is the person who accepts the bill of exchange. Generally debtor/
drawee is the acceptor but sometimes a bill of exchange may be accepted by some
one also on behalf of the debtor/drawee. Normally the drawee and acceptor are
the same parties.

4. Payee : Payee is the person named in the Bill of exchange. The amount in the bill
is paid to the payee. In most cases Drawer and the payee will be the same.

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SPECIMEN OF A BILL OF EXCHANGE Computers
New Delhi, June 17, 2014
` 45,000
Three months after date pay Sh. Raj Kumar or
Stamp order the sum of Rupees Forty Five Thousand only,
value received.
To Rohit Banerji Notes
Shri Nand Kishor
Shakarpur, Delhi
11.1.1. Promissory Note
According to secton 4 of the Negotiable Instruments Act, 1881, A Promissory Note is
an instrument in writing (not being a bank note or a currency note) containing an
unconditional undertaking signed by the maker to pay a certain sum of money only to
or to the order of a certain person.
Promissory Note is an unconditional undertaking in writing by the maker to pay the
specified amount to the specified person or to the bearer of the promissory note.
Features of a Promissory Note
1. It is an unconditional written undertaking to pay the specified amount.
2. It is drawn and signed by the maker/promisor.
3. It specifies the name of the payee.
4. The specific amount is payable to the specified person or to his order or to the
bearer.
5. Proper stamp duty is paid on Promissory Note.
6. It is not payable to the bearer.
Parties of a Promissory Note
1. Drawer : He is the person who makes the promise to pay the amount. He is the
debtor.
2. Drawee : He is the person in whose favour the promissory note is drawn. Generally
he is the creditor. In a promissory note the drawee and payee are the same parties.
3. The Payee : The payee is a person to whom payment is to be made. He is the
creditor.

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Computers SPECIMEN OF A PROMISSORY NOTE
New Delhi, June 17, 2014
` 25,000
Three months after date we promise to pay
Stamp M/s Rajesh Enterprises or order a sum of Rupees
Twenty Five Thousand only with interest at ten
percent per annum, value received.
Notes
Rahim Brothers
11.1.2 Difference between Bill of Exchange and Promissory Note
Bill of Exchange Promissory Note
1. It contains an order to pay. 1. It contains a promise to pay.
2. It requires acceptance. 2. It does not need acceptance.
3. Creditor is the Drawer. 3. Debtor is the drawer.
4. The liability of the drawer 4. The promisor has the primary
arises only if the acceptor liability to pay.
does not pay.
5. The drawer, and payee are 5. Drawee and Payee are the
generally the same parties. parties
Acceptor and draweer is the
Same party.

INTEXT QUESTIONS 11.1

Fill in the blanks :
i. Acceptance is not required in ________________.
a) Bill of Exchange b) Promissory Note
c) Receipt d) None of the above
ii. _____________ prepares the bill of exchange
a) Drawer b) Drawee c) Endorsee d) Bank
iii. Payment of the bill is made to _____________.
a) Drawee b) Endorsee c) Payee d) Bank

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11.2 TERMS OF BILL Computers
1. Due Date : It is the date on which the payment of the bill becomes due.
2. Days of Grace : To ascertain the period of the bill, three extra days are added,
which can be called as ‘Days of Grace’ to calculate the date of maturity.
3. Bill at Sight : Bills which are payable on presentation to the Drawee are known
as ‘Bill at Sight or Demand’.
4. Bill After Date : The period is counted from the date of acceptance of the bill in Notes
‘Bill After Date’.
5. Discounting of Bill : The process of receving the bill amount at a date earlier
than the due date from the bank, is known as ‘Discounting the Bill’. When the bill
is discounted the bank credits the trader’s account after decucting some discount.
The discount is calculated at the lending rate of the bank for the period that extends
between the date of discounting of the bill to the date of maturity.
6. Endorsement of the Bill : The drawer may transfer the bill in favour of his
creditor to settle the creditor’s account. The process of transferring the ownership
of the bill in favour of somebody by putting the signature of the holder at the back
of the instrument and delivering the same to transferee is known as endorsing the
bill. The person who delivers it is endorser and the person to whom it is delivered
is called the endorsee.
7. Terms of the Bill : Bills is generally drawn for a certain period, say for two
months or three months. Bills may be drawn payable at sight on demand, on
presentation, after date and so on.
8. Date of Maturity : It is the date of which the payment of the bill is due. It is
calculated by adding three days of grace. For example a bill drawn on 1.1.2013
for a period of two months will mature on (2 months + 3 days) 3rd March, 2013.
9. Dishonour of a Bill : Dishonour means that the bill is not paid by a Drawee on
the due date. It arises when the acceptor refuses or is unable to pay the amount of
bill, i.e., Bill of Exchange, Promissory Note or cheque.
10. Notary Public : Notary Public is an officer appointed by the Central or State
Government to exercise the power and functions relating to noting and protesting
of negotiable instruments for dishonour. ‘Noting’ authenticates the fact of dishonour.
11. Noting Charges : Noting Charges is the fee paid to the Notary Public for noting
and protesting the Bill of Exchange of it’s dishonour.
12. Renewal of Bill : When the acceptor of a bill is not in a position to meet the bill
on due date, he may, with the consent of the holder accept a fresh bill in place of

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Computers the old bill, it is called Renewal of a Bill. The fresh bill may include interest for
the extended period (or it may be paid separately), stamp duty and other incidental
expenses incurred by the holder.
13. Retirement of Bill : When the Drawee pays the bill before its due date, it is
called Retirement of a Bill. The holder allows him a rebate of certain amount
calculated at a certain rate per cent per annum, from the date of retirement to the
date of maturity.
Notes 11.3 RECORDING OF BILL TRANSACTIONS
Before starting recording the bill transactions there are certain important aspects related
to recording that you must understand clearly. A bill transaction can be recorded in the
books of all the parties related to a bill of exchange if that transaction affects the
concerned party in any way. As you know that the person who draws the bill of exchange
is called the drawer. He is generally a creditor of the person upon whom the bill of
exchange is drawn. The person upon whom bill of exchange is drawn is called the
drawee. He is generally the debtor of the person who draws the bill of exchange. For
the drawer who receives the bill of exchange after its acceptance by the drwee, the bill
of exchange is a bills receivable since he will receive the payment on the maturity of the
bill. Bills receivables are assets. For the drawee upon whom the bill of exchange is
drawn and who accepts it, the bill of exchange becomes a bills payable because he has
to make the payment of the amount on the maturity of the bill when the bill will be
presented to him. Bills payables are liabilities. The following procedure is followed for
recording the bill transactions boths in the books of the drawer/creditor and drawee/
acceptor/debtor in a comparative form.
Books of Seller/Creditor/Drawer Books of Buyer/Drawee/Acceptor/Debtor
i. For Sale of goods i. For purchase of goods
Buyer’s A/c Dr. Purchases A/c Dr.
To Sales A/c To Seller’s A/c
ii. For drawing and receiving bill ii. For accepting bill
Bills Receivables A/c Dr. Seller’s A/c Dr.
To Buyer’s A/c To Bills Payable A/c
A bills receivable can be treated by its receiver in any of the following ways before its
maturity.
i. He may retain the bill with him till the date of its maturity and present the same to
the acceptor for payment on the date of its maturity.
ii. He may discount the bill with his bank.
iii. He may endorse the bill in favour of his creditor.

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iv. A few days before the maturity he may send the bill to his bank for the purpose of Computers
collection.
The following accounting treatment will be done under the different situations given
above.
(i) When the bill in retained by the drawer till its maturity and presented to the drawee/
acceptor on its maturity.
Books of drawer/creditor Books of drawee/acceptor/payee Notes
Bank A/c Dr. Bills Payable A/c Dr.
To Bills Receivable A/c To Bank
(ii) On Discounting the Bill : The receiver of the bill may get the bill discounted from
its bank at any time before its maturity. The bank charges discount at the pervailing
rate of lending and credits the remaining amount in the account of the customer.
The following entry will be passed.
Books of drawer/creditor Books of drawee/acceptor/debtor
Banks A/c Dr. No entry will be made since he is not
Discount A/c Dr. affected on the discounting of the bill.
To Bills Receivable A/c
On the date of maturity the bill, will be presented by the bank to the acceptor for
payment.
Books of drawer Books of acceptor/drawee
No entry Bills Payable A/c Dr.
Since he had already discounted To Bank
the bill from the bank, hence no
entry will be passed.
(iii) When the bill is endorsed by the receiver in favour of his creditor.
Books of Receiver/Drawer Books of Acceptor/Drawee
Creditor’s A/c Dr. No entry. Since he will not be affected
To Bills Receivable by the endorsement of the bill.
On maturity of the bill, the bill will be presented by the creditor, to the acceptor for
money payment. The following entry will be made.
Books of drawer
No entry. Bills Payable A/c Dr.
Since he is not affected To Bank

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Computers (iv) When the bill is sent to the bank for collection a few days before maturity.
Books of Receiver/Creditor Banks of drawee/acceptor
a) For sending No entry.
Bill sent for collection Dr. Since he is not effected.
To Bills Receivable
b) For collection of bill by bank Bills Payable A/c Dr.
Notes Bank A/c Dr. To Bank
To Bills sent for collection.

INTEXT QUESTIONS 11.2

I. Choose the correct option from the following alternatives:
i. Which account is debited in the books of drawer when a bill is drawn.
a) Endorsee b) Bills Receivable
c) Drawee d) Bank
ii. When the acceptor pays the bill amount, which account is credited in the
books of drawee.
a) Bills Payable b) Bills Receivable
c) Bank d) Name of the above
II. Fill in the blanks with correct word:
i. The status of acceptor of a bill is that of a ________.
a) Debtor b) Creditor
c) Maker d) None of the above
ii. The drawer of a bill of exchange is the __________.
a) Debtor b) Creditor
c) Endorsee d) All of the above
iii. _________ is the person to whom payment is made.
a) Buyer b) Drawee
c) Payee d) None of the above
Illustration 1
Ravi sold goods ` 5000 to Mohan on credit. He drew a bill of exchange for the same
amount upon Mohan payable after date two months. Mohan accepted the bill and
returned the same to Ravi. On the due date the bill was presented to Mohan who met
the same.

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Pass the necessary journal entries in the books of Ravi and Mohan under the following Computers
circumstances.
i. When the bill was retained by Ravi till the date of its maturity.
ii. When Ravi discounted the bill from the bank on the same day at 6% p.a.
iii. When Ravi endorsed the bill in favour of his creditor Mukesh.
iv. When Ravi sent the bill a few days before its maturity to its bank for collections.
Notes
Solution :
Books of Ravi
Journal
Date Particulars Debit Credit
L.F. Amount Amount
` `
(a) (i)
Mohan’s Ac. Dr. 5,000
To Sales 5,000
(Sold goods to Mohan)
(ii)
Bills Receivables A/c Dr. 5,000
To Mohan’s A/c 5,000
(Received Mohan’s acceptance
payable after two months)
Cash/Bank A/c Dr. 5,000
To Bills eceivable 5,000
(Mohan met his acceptance
on maturity)
(b) Entry (i) & (ii) will be same
Bank A/c Dr. 4,950
Discount A/c Dr. 50
To Bill Receivable A/c 5,000
(Mohan’s acceptance discounted
with Bank)
(c) Entry (i) & (ii) to will be
same as in (a) above.

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Computers Mukesh A/c Dr. 5,000
To Bills Receivable A/c 5,000
(Mohan’s acceptance in our
favour endorsed in favour
of Mukesh)
(d) Entry (i) & (ii) will be
same as in (a) above
Notes
Bills sent for collection Dr. 5,000
To Bills Receivable A/c 5,000
(Mohan acceptance in our
favour sent to bank for
collection)
Books of Mohan
Journal
(a) (b) (c) & (d)
Purchases A/c Dr. 5,000
To Ravi’s A/c 5,000
(Purchased goods)
Ravi’s A/c Dr. 5,000
To Bills Payable 5,000
(Accepted Ravis draft)
Bills Payable A/c Dr. 5,000
To Cash/Bank 5,000
(Our acceptance in favour
of Ravi met on maturity)
Note : Whatever may happen to the bill before the date of maturity the acceptor is not
affected. He will meet the bill on maturity & pass the same entry is all the cases.
11.4 DISHONOUR OF A BILL
If the acceptor fails to pay the amount of the bill on the due date, the bill is said to have
been dishonored. When the bill is dishonoured all the previous transactions in connection
with the bill are treated as cancelled. Hence, the acceptor is liable to the drawer, the
drawer to the endorsee and the endorsee to the bank, with which it is discounted.
The dishonoured bill must be noted with the Notary Public. When the dishonoured bill
is noted with the Notary Public, it is a valid evidence of dishonour. The fees charged by
the Notary Public is termed as ‘Noting Charges.’

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On Dishonour of a bill the journal entries will be as under : Computers
In the books of Drawer
a) When the bill was retained by drawer and dishonoured and noting charges are paid
Drawee Dr.
To Bills Receivable
To Cash
(Being B/R dishonoured on due date and noting charges paid) Notes
b) When the bill was endorsed and dishonoured and noting charges are paid by
endorsee.
Drawee Dr.
To Endorsee
(Being B/R received from drawee and endorsed
is dishonoured, noting charges ` .........)
c) When the bill was discounted with the bank and dishonoured and bank paid noting
charges
Drawee Dr.
To Bank
(Being discounted bill is dishonoured and noting charges being ` ........)
d) When the bill was sent to bank for collection and dishonoured and bank paid
noting charge.
Drawee Dr.
To Bills sent for collection
To Bank
(Being B/R sent to bank for collection is dishonoured and noting
charges Rs .......... paid by bank)
In the books of Drawee, the journal entry will be as under in all the four conditions:
Bills Payable Dr.
Noting Charges Dr.
To Drawer/creditor
(Being B/P dishonoured and noting charges ` .........)
11.5 RENEWAL OF BILL
If the acceptor finds it difficult to honour the bill on the due date, he can request the
drawer or the holder of the bill to substitute the old bill with a new one i.e., to extend
the period of the bill. When the drawer agrees to extend the period of the bill, the old

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Computers bill is cancelled and a new bill is drawn. When the old bill is cancelled, it is treated as
dishonoured. Drawee will be charged with interest for the extended period. If the
interest is not paid in cash, the new bill amount will include interest also. Therefore, the
cancellation of the existing bill and drawing a new bill in its place to allow more time to
the acceptor is known as renewal of the bill. On renewal of a bill the entries will be as
under :
In the books of Drawer In the books of Drawee
Notes i. Drawee Dr. i. Bill Payable Dr.
To Bills Receivable To Drawer
(Being old bill cancelled) (Being cancellation of bill payable)
ii. Drawee Dr. ii. Interest Dr.
To Interest To Drawer
(Being interest charged for (Being interest due to Drawer for
the extended period) the extended period)
iii. Bills Receivable Dr. iii. Drawer Dr.
To Drawee To Bills Payable
(Being a new bill received from (Being a new bill issued for the
Drawee including the interest) amount plus interest)
Illustration 2
A sold goods to B for ` 10,000 and drew a bill on him for the same amount for 3
months. Before the due date, B requests A to cancel the bill, to accept ` 3,000 as part
payment and to draw a fresh bill on him for ` 7,200 for a further period of 2 months -
` 200 being the interest for the extended period. A agrees to the proposal. The new bill
is duly honoured. Pass the necessary Journal entries and other party’s account in the
books of both the parties.
Solution :
In the Books of A
JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
B ...Dr. 10,000
To Sales A/c 10,000
(Being the goods sold to B on credit)
Bills Receivable A/c ...Dr. 10,000
To B 10,000
(Being the bill drawn on B for 3 months)

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B ...Dr. 10,000 Computers
To Bill Receivable A/c 10,000
(Old bill cancelled)
Cash/Bank A/c ...Dr. 3,000
To B 3,000
(Being cash received as a part-payment)
B ...Dr. 200
To Interest A/c 200 Notes
(Being the interest charged for the
extended period)
Bills Receivable A/c ...Dr. 7,200
To B 7,200
(Being a new bill drawn for the balance
plus interest)
Cash/Bank A/c ...Dr. 7,200
To Bills Receivable A/c 7,200
(Being the new bill honoured)
Dr. B’s Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

To Sales A/c 10,000 By Bills Receivable A/c 10,000

To Bills Receivable A/c 10,000 By Cash/Bank A/c 3,000
To Interest A/c 200 By Bills Receivable A/c 7,200

20,200 20,200

In the Books of B
JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
Purchases A/c ...Dr. 10,000
To A 10,000
(Being the goods pruchased on credit from A)
A ...Dr. 10,000
To Bills Payable A/c 10,000
(Being the acceptance of a bill from A)
Bills Payable A/c ...Dr. 10,000
To A 10,000
(Being the bill cancelled for renewal)

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Computers A ...Dr. 3,000
To Cash/Bank A/c 3,000
(Being a part payment made)
Interest A/c ...Dr. 200
To A 200
(Being the interest payable to A for the
extension period)
Notes A ...Dr. 7,200
To Bills Payable A/c 7,200
(Being the acceptance of a new bill for the
balance plus interest)
Bills Payable A/c ...Dr. 7,200
To Cash/Bank A/c 7,200
(Being the new bill honoured by payment)
Dr. A’s Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `

To Bills Payable 10,000 By Purchases 10,000

To Bank 3,000 By Bills Payable 10,000

To Bills Payable 7,200 By Interest 200

20,200 20,200

Illustration 3 : (When the bill is renewed)

B owed to A ` 60,000 on 1st January, 2009. On the same date, A drew upon B a bill
for the amount at 2 months and B returned the bill duly accepted. A got the bill discounted
at his bank @ 15% p.a. Before the bill was due for payment, B told A that he was not
able to pay the full amount and requested A to accept ` 20,000 immediately and drew
upon him another bill for the remaining amount for 2 months together with interest @
18% p.a. A agreed. The second bill was duly met. Give the Journal entries in the books
of both A and B.
Solution :
A’s JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
2009
Jan. 1 Bills Receivable A/c ...Dr. 60,000
To B 60,000
(Being the receipt of B’s acceptance to clear
the amount due from him)

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Jan. 1 Bank A/c ...Dr. 58,000 Computers
Discount on Bill A/c ...Dr. 1,500
To Bills Receivable A/c 60,000
(Being discounting of the bill @ 15% p.a.)
Mar. 4 B ...Dr. 60,000
To Bank A/c 60,000
(Being the dishonour [for renewal] of B’s Bill)
Mar. 4 Cash/Bank A/c ...Dr. 20,000 Notes
To B 20,000
(Being the receipt of ` 20,000 from B)
Mar. 4 B ...Dr. 1,200
To Interest A/c 1,200
(Being the interest due from B for 2 months on
` 40,000 @ 18% p.a.)
Mar. 4 Bills Receivable A/c ...Dr. 41,200
To B 41,200
(Being the new acceptance received from B
for ` 40,000 balance, plus ` 1,200 interest)
May 7 Cash/Bank A/c ...Dr. 41,200
To Bill Receivable A/c 41,200
(Being the amount of the bill received)
B’s JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
2009
Jan. 1 A ...Dr. 60,000
To Bills Payable A/c 60,000
(Being the acceptance of A’s draft)
Mar. 4 Bills Payable A/c ...Dr. 60,000
To A 60,000
(Being the entry required to got the
bill renewed)
Mar. 4 A ...Dr. 20,000
To Cash/Bank/A/c 20,000
(Being the amount paid to A as per
arrangement)

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Computers Mar. 4 Interest A/c ...Dr. 1,200
To A 1,200
(Being the amount of interest due to
A on ` 40,000 for 2 months @ 18%)
Mar. 4 A ...Dr. 41,200
To Bills Payable A/c 41,200
(Being the new acceptance in favour of A)
Notes May 7 Bills Payable A/c ...Dr. 41,200
To Cash/Bank A/c 41,200
(Being the payment of the bill due this day)

INTEXT QUESTIONS 11.3

Fill in the blanks :
i. Acceptance is not required in __________.
a) Bill of Exchange b) Promissory Note
c) Receipt d) None of the above
ii. __________ prepares the bill of exchange.
a) Drawer b) Drawee c) Endorsee d) Bank
iii. Payment of the bill is made to _________.
a) Drawee b) Endorsee c) Payee d) Bank
iv. The number of days allowed as Days of Grace of Bill of Exchange is ______.
a) One b) Two c) Three d) Five
v. When the amount in a bill of exchange is received from the bank on a date earlier
than the due date, it is called ________.
a) Retiring the bill b) Renewing the bill
c) Discounting the bill d) None of the above
vi. The process in which the drawer puts his signature in the bill indicating that the bill
should be paid to the person whose name is written at the back of bill is called
_________.
a) Discounting the bill b) Endorsing the bill
c) Retiring the bill d) Renewing the bill

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11.6 INSOLVENCY OF THE ACCEPTOR Computers
If the acceptor is unable to meet his liabilities, the court declares him as insolvent. In
case the acceptor becomes bankrupt, his bills payable are considered as
dishonoured.Any amount received from the insolvent person’s property, will be debited
in the cash account and credited in the Acceptor’s Account. Any balance in his account,
which is irrecoverable, is written off as bad debts. The Acceptor will transfer the balance
in the account of the drawer to Deficiency Account.
Notes
The entries relating to insolvency are as follows :
In the books of Drawer In the books of Drawee
Drawee Dr. Bills Payable A/c Dr.
To Bill Receivable To Drawer’s A/c
(Cancellation of bill) (Cancellation of own acceptance)
Cash Dr. Drawer Dr.
Bad Debts Dr. To Cash
To Drawee To Deficiency A/c
or
To Profit & Loss A/c
(Being the amount received and (Being the final payment to drawer
the amount written off on ___’s and the balance transferred to
insolvency) deficiency A/c)
Illustration 4
Journalise the following in the books of Mohan :
(i) Mohan’s acceptance to Sohan for ` 20,000 renewed at 3 months together with
interest @ 18%.
(ii) Shyam requests Mohan to renew his acceptance for ` 15,000 for 2 months.
Mohan agrees to it, provided interest is paid @ 10% in cash.
Solution :
JOURNAL OF MOHAN
Date Particulars L.F. Dr. (`) Cr. (`)
(i) Bills Payable A/c ...Dr. 20,000
To Sohan 20,000
(Being cancellation of acceptance in favour of
Sohan for purposes of renewal)

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Computers Interest A/c ...Dr. 900
To Sohan 900
(Being interest due to Sohan @ 18% for
3 months on ` 20,000)
Sohan ...Dr. 20,900
To Bills Payable A/c 20,900
(Being new bill accepted in favour of Sohan)
Notes (ii) Shyam ...Dr. 15,000
To Bills Receivable A/c 15,000
(Being cancellation of Shyam’s acceptance for
purpose of renewal)
Shyam ...Dr. 250
To Interest A/c 250
(Being interest due from Syam @ 10% for
two months, the period of the new bill)
Bills Receivable A/c ...Dr. 15,000
Cash/Bank A/c ...Dr. 250
To Shyam 15,250
(Being cash ` 250 and new bill for ` 15,000
received from Shyam)

11.7 RETIRING A BILL UNDER REBATE

Sometimes the acceptor pays the amount of his bills payable before the due date. The
payment of bill amount by the acceptor to the holder before the due date, is known as
‘retiring the bill’. In such cases, the holder of the bill would grant some concession to
the acceptor. This concession is called as rebate. Rebate is a loss to the holder. It will
be a gain to the acceptor.
Entries for rebate are
In the books of Drawer In the books of Drawee
Cash Dr. Bills Payable Dr.
Rebate Dr. To Cash
To Bills Receivable To Rebate
(Being the B/R retired under rebate) (Being B/P retired)
Illustration 5
Rohit draws a bill on Vikram for ` 10,000 payable 3 months after date. The bill is duly
accepted by Vikram. One month before due date Vikram meets the bill and gets a
rebate @ 12% p.a. Make Journal entries in the books of Rohit and Vikram.

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In the books of Rohit In the books of Vikarm Computers
Bills Receivable ...Dr. 10,000 Rohit ...Dr. 10,000
To Vikram 10,000 To B/P A/c 10,000
(Received Vikram’s acceptance) (Accepted Rohit’s draft)
Cash A/c ...Dr. 9,900 B/P A/c ...Dr. 10,000
Rebate A/c ...Dr. 100 To Cash A/c 9,900
To B/R A/c 10,000 To Rebate A/c 100
Notes

INTEXT QUESTIONS 11.4

Fill in the blanks :
i. ___________ acount is debited in the books of drawer when bill is duly met and
the bill is retained up to the maturity date.
a) Cash b) Cash and Discount
c) Discount d) Bills Receivable
ii. In the books of endorsee when endorsement occurs _______ account is credited.
a) Bills Receivable b) Bills Payable
c) Endorsee d) Endorser
iii. The balance in the Bills sent for collection Account is shown in Balance Sheet as
__________.
a) Asset b) Liability
c) Capital d) None of the above
iv. If the payment of the bill is not made on the due date, it is called _________.
a) Discounting the bill b) Dishonour of a bill
c) Retiring the bill d) Renewal of a bill
v. In the books of drawer, when a bill is dishonoured ________ account is debited.
a) Drawee’s b) Cash
c) Discount d) None of the above
vi. When the acceptor request the holder to extend the period of bill, it is called.
a) Retiring the bill b) Discounting the bill
c) Renewing the bill d) Endorsing the bill

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Computers vii. When the acceptor is declared as insolvent, the entry in the books of drawer is
debited with __________.
a) Cash b) Bad debt
c) Cash and bad debt d) Drawee
viii. If the acceptor pays the bill amount before the due date, it is called _________.
a) Discounting the bill b) Retiring the bill
Notes
c) Renewing the bill d) Endorsing the bill

WHAT YOU HAVE LEARNT

z A Bill of Exchange is an instrument in writing containing an unconditional order
signed by the maker, directing a certain person to pay a certain sum of money only
to, or to the order of, a certain person or to the bearer of the instrument.
z Parties to a Bills of Exchange are :
i. The Drawer : The party who makes the bill.
ii. The Drawee : The party upon whom the bill is drawn.
iii. The Payee : The party to whom the amount is to be paid.
iv. The Acceptor : The person who accepts the bill. Generally the drawee and
acceptor may be the same parties.
z There may be four situations of a bill drawn :
i. It may be retained till due date.
ii. It may be discounted with bank.
iii. It may be endorsed.
iv. It may be sent to bank for collection.

TERMINAL EXERCISE
1. What do you mean by a bill of exchange. Distinguish between Bill of Exchange
and Promissory Note.
2. Define Bill of Exchange. What are the features of Bill of Exchange?
3. Explain Bill of Exchange along with its advantages and disadvantages.

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4. Who are the parties to bill of exchange? Explain them. Computers
5. Explain the following terms :
i. Renewal of a bill ii. Retirement of a bill
iii. Noting charges iv. Days of grace
6. What is meant by a Promissory Note? Describe the parties to a Promissory Note.
7. Briefly explain the characteristics of a Promissory Note.
Notes
8. On 1st January, 2008, A sold goods to B for ` 5,000 and drew upon him a bill for
this amount payable 3 months after date. The bill was duly accepted by B. A
retained the bill till due date. On the due date, the bill was paid.
Pass the Journal entries in the books of A and B. Also, show the necessary accounts
in the books of both parties.
9. Dinesh received from Shridhar an acceptance for ` 3,000 on 1st September,
2008 at 3 months. Dinesh got the acceptance discounted at 9% p.a. from his
bank. On the due date, Shridhar paid the required amount.
Give the Journal entries in the books of Dinesh and Shridhar.
10. A sold goods to B for ` 20,000 on credit of 3 months. He drew on the latter a bill
for the amount. The bill was endorsed in favour of C, who got the payment on
maturity. Give the Journal entries in the books of A.
11. A sold goods to B for ` 2,000. B accepts two bills of ` 1,000 each for 3 months.
A endorsed one bill to C. On due date both bills are met.
Pass the entries in the books of A and B.
12. Mohan Singh draws a bill on Jagat for ` 1,000 payable 2 months after date.
Immediately after its acceptance, Mohan Singh sends the bill to his bank for
collection. On due date, bank gets the payment. Make the entries in the books of
all the parties.
13. On 1st March, 2009 R accepted a Bill of Exchange of ` 20,000 from S payable
3 months after date in full settlement of his dues. On the same day S endorsed the
Bill of Exchange to T together with a cheque for ` 5,000 in settlement of his debt
to the latter. On 2nd March, 2009, T discounted the bill of exchange @ 6% p.a.
with his bankers. On maturity the Bill of Exchange was dishonoured.
Pass the Journal entries in the books of S and R.
14. Record the following transactions in the books of Mehra :
i. Ram’s acceptance for ` 20,000 renewed for 3 months, plus interest at 5%
p.a.

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Computers ii. Shyam’s acceptance for ` 4,500, due this day, returned dishonoured. Noting
charges, ` 10.
15. A sold goods to the value of ` 12,000 to B, taking a bill at 3 months, therefore
dated 1st July, 2009. On 4th August, A discounted the bill at 5% p.a. with his
bankers. At maturity the bill was renewed and drew another bill dishonoured, B
paid Rs. 3,000 and noting charges and accept another bill at 3 months for ` 9,000
at 6% interest, but before maturity he had become insolvent, and ultimately paid
Notes his creditors 75 paise in the rupee.
Make the entries in A’s Journal recording the above transactions.

ANSWERS TO INTEXT QUESTIONS

11.1 (i) b (ii) a (iii) c
11.2 I. (i) b (ii) c
II. (i) a (ii) b (iii) b
11.3 (i) b (ii) a (iii) c
(iv) c (v) c (vi) b
11.4 (i) a (ii) b (iii) d (iv) a (v) b
(vi) a (vii) c (viii) c (ix) b

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Computers

12
ERRORS AND THEIR
Notes
RECTIFICATION

You did not take your studies seriously that is why you could not get good marks. You
committed an error. You fell in some bad company. You may commit many such errors
in your day to day life. Similarly, an accountant can also commit errors while recording
business transactions in books of accounts, in their posting or balancing the accounts
and so on. These errors should be located and corrected as soon as possible so that
accounts give true and fair results of the operations of the business enterprise. You have
learnt that in case Trial Balance does not agree it means there are some accounting
errors. There can be some errors which do not affect the Trial Balance i.e. trial balance
still tallies. In this lesson you will learn about locating, classifying and analysing accounting
errors and their rectification.

OBJECTIVES
After studying this lesson you will be able to :
z state the meaning of accounting error and method of location of the accounting
error/errors;
z classify the accounting errors;
z explain the meaning and methods of rectification of errors and
z prepare suspense account.
12.1 MEANING OF ACCOUNTING ERRORS AND THEIR
LOCATION
In our life we make many mistakes. As soon as these are detected, he/she corrects
them. In the similar manner, an accountant can also make mistakes or commit errors
while recording and posting transactions. These are called ‘Accounting Errors’. So

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Computers accounting errors are the errors committed by persons responsible for recording and
maintaining accounts of a business firm in the course of accounting process. These
errors may be in the form of omitting the transactions to record, recording in wrong
books, or wrong account or wrong totalling and so on.
Accounting errors can take the following forms:
z Omission of recording a business transaction in the Journal or Special purpose
Books
Notes
z Not posting the recorded transactions in various books of accounts to the respective
accounts in ledger
z Mistakes in totalling or in carrying forward the totals to the next page
z Mistake in recording amount wrongly, writing it in a wrong account or on the
wrong side of the account.
Again there may be two types of accounting errors (i) That cause the disagreement of
trial balance, (ii) That do not affect the agreement of Trial Balance.
Locating Errors
It is obvious that if there are errors they must be located at the earliest. After locating
the errors, they are to be rectified. In accounting also once it is established there are
some accounting errors these need to be located and detected as early as possible.
How to locate the errors?
Steps to be taken to locate the accounting errors can be stated as follows:
(A) When the Trial Balance does not Agree
(i) Check the columnar totals of Trial Balance
(ii) Check that the balances of all accounts (including cash and bank balances) in the
ledger have been written and are written in the correct column of trial balance i.e.
debit balance in the debit column and credit balance in the credit column.
(iii) Find the exact figure of difference with trial balance and see that:
(a) No account of a similar balance has been omitted to be shown in the Trial
Balance or
(b) A balance amount which is half of the amount of difference amount but is
written on the wrong side of the trial Balance.
(iv) Recheck the totals of Special Purpose Books.
(v) Check the balancing of the various accounts in the ledger.

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(vi) If difference is still not traced, check each and every posting from the Journal and Computers
various Special Purpose Books, one by one in the ledger.
(B) When the Trial Balance Agrees
You have already learnt that if the totals of the two amount columns of trial balance tally
it is no conclusive proof of the accuracy of accounts. There may still be some accounting
errors. These errors may not be immediately traced but may be detected at much later
stage. These are rectified as and when detected.
Notes
Following are the errors which don’t affect the trial balance :
(i) Omission to record a transaction in a journal or in a Special Purpose Book. For
example, goods purchased on credit but are not recorded in the Purchases Book
at all.
(ii) Recording a wrong amount of an item in journal or in a Special Purpose Book.
For example, sale of ` 2550 on credit entered in the Sales Book as ` 5250.
(iii) Posting the correct amount on the correct side but in wrong account. For example,
cash received from Jagannathan was credited to Vishvanathan.
(iv) An item of Capital Expenditure recorded as an item of Revenue Expenditure and
vice-a-versa. For example, Repairs to Building was debited to Building A/c.
Why does the trial balance still agree though there may be above stated errors? Reason
is that in the above cases the debits and credits are affected simultaneously by the same
amount.

INTEXT QUESTIONS 12.1

Do the following errors affect the trial balance or do not affect the trial balance?
Write ‘Yes’ if it affects and ‘No’ if does not affect.
i. Sold goods of ` 3200 to Anil Nayar, but it is not entered in the Sales Book.
ii. Purchased goods of ` 2400 from Simran and is correctly entered in the Purchases
Book but posted to the credit of her account in the ledger as `3400.
iii. Total of the Purchases Book is incorrect.
iv. An amount of repair to building is debited to Building Account.

12.2 CLASSIFICATION OF ACCOUNTING ERRORS

Various accounting errors can be classified as follows :
A. On the basis of their nature

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Computers (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.
Notes
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 :
z 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.
z Recording in the book correctly but wrong amount is written. For
example, goods sold to Shalini of ` 4200 was recorded in the Sales
Book as ` 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 ` 44800
while actual total is ` 44300, the total of Sales Day Book is written as `52500
while it is ` 52900.

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It is a case of an error affecting one account hence it affects trial balance. Computers
(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 Mohan’s A/c is ` 8,600 and
that of credit column is ` 6,800. The balance calculated is as ` 1,600 while
the actual balance is `1,800.
It has affected one account only, therefore, the Trial Balance gets affected. Notes

(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 ` 35,600 is carried
to next page as ` 36,500.
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 ` 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, Sohan’s A/c
is debited by ` 2500 while it was to be debited by ` 3500 and Mohan’s A/c is debited
by ` 3500 while the same was to be debited by ` 2500. Thus, excess debit of Mohan’s
A/c by `1000 is compensated by short credit of Sohan’s A/c by `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
receipts and capital expenditure should be recorded as capital item and revenue

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Computers 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, ` 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.
Notes
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 : 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 ` 1000. In this case only Sales A/c is wrongly
credited by excess amount of ` 1000 while the corresponding account of the
various debtors have been correctly debited. Another example of one sided error
is ` 2500 received from Ishita is wrongly debited to her account. In this case, only
Ishita’s account is affected, amount in the cash-book is correctly written. This
type of error does affect the trial balance.
(b) Two sided errors : The error that affects two separate accounts, is called two
sided error. Example of such error is purchase of machinery for ` 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.

INTEXT QUESTIONS 12.2

Following are some accounting errors. Write against each error the type i.e. error of
omission, error of principle, compensatory error, error of commission as per the nature
of error:
(i) Purchase of Furniture is entered in the Purchase Book (Error of ............)
(ii) Repairs of building is debited to Building A/c. (Error of ............)
(iii) Sales Book is totalled ` 15,000 instead of its ` 14,600. (Error of ............)

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(iv) Mohan’s A/c was to be debited by ` 4500 and Sohan A/c was to be debited by Computers
` 5500 while Mohon’s A/c was debited by ` 5500 and that of Sohan’s A/c by `
4500. (Error of ............)

12.3 RECTIFICATION OF ACCOUNTING ERRORS

By now you must have understood well that every business enterprise prepares its
financial statements to provide information of profit earned or loss incurred by it during
an accounting period and its financial position on the relevant date. This information will Notes
be most useful only if the information is accurate. How can the business concern achieve
this objective if there are number of errors in the accounting? Your immediate response
will be that errors in accounts should be detected at the earliest and be corrected
before preparing the financial statements.
It should be clear in your mind that the errors should never be rectified by erasing or
overwriting because it will encourage manipulations and frauds in accounts.
In accounting practice there are some definite methods to rectify the accounting errors.
These are based on accounting practices and procedures. Rectification of errors using
these methods is called rectification of accounting errors. So it is a process of rectification.
It is generally done by passing an entry to nullify the effect of error.
Methods of rectification of accounting errors :
I. Before preparing Trial Balance
(i) instant correction (ii) correction in the affected account
II. After preparing Trial Balance
I. Before preparing Trial Balance
(i) Instant correction : If the error is detected immediately after making an
accounting entry, it may be corrected by neatly crossing out the wrong entry
and making the correct entry and the accountant should put his initials. For
example, an amount of ` 3,500 is written as ` 5,300. This can be corrected
as ` 3,500.
(ii) Correction in the affected accounts : In case error is detected on a date
later than the date on which the transaction was recorded but before the Trial
Balance, the rectification will be made by making a correction in the affected
account. A few Illustrations of accounting errors corrected by this method
are as follows :
Illustration 1
Purchases book is overcast for the month of July, 2014 by ` 8,000.

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Computers Solution
Accounts Affected : The total of the Purchase Book is posted to the debit of Purchase
A/c. Therefore Purchase A/c is affected.
Rectification : To nullify the effect of the error, the entry of ` 8,000 will be made on
the credit side of the Purchase A/c. With the words written as. “The amount of Purchase
Book is overcast for the month of July 2014.”
Purchase A/c
Notes
Dr Cr

Date Particulars F Amount Date Particulars F Amount

(` ) (` )

Amount as per
Purchase Book for
the month of July, 2014 8,000

Illustration 2
A sum of ` 1,200 paid to Ashok has been wrongly credited to his account.
Solution
Accounts Affected : Ashok A/c is affected because his account has been credited
instead of being debited.
Rectification : In this case Ashok A/c is to be debited to nullify the effect of its being
wrongly credited at the same time it is to be debited for cash payment. Rectification is
done as under :
Ashok A/c
Dr Cr

Date Particulars F Amount Date Particulars F Amount

(` )

Amount paid Cash A/c 1,200

wrongly credited 2,400

Illustration 3
Purchase of furniture of ` 5,000 was entered in the Purchases Book.
Solution
Accounts Affected : Furniture Account and Purchases account have been affected.
Furniture Account has been omitted to be debited while Purchases account is wrongly
debited.

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Rectification : In this case Purchases account is credited to nullify as it is wrongly Computers
debited as furniture account is debited in it was to be debited but was omitted.
Furniture A/c
Dr Cr

Date Particulars F Amount Date Particulars F Amount

(` ) (` )

2014 Notes
Jan 15 Amount transferred
Purchase A/c 5,000

Purchases A/c
Dr Cr

Date Particulars F Amount Date Particulars F Amount

(` ) (` )

2014
Jan 15 Amount transferred to
Furniture A/c 5,000

Rectification Through Journal entry

In case of the above illustration journal entry for rectification made is :
Dr. Cr.
Date Particulars L.F. Amount Amount
` `
2014
Jan 15 Furniture A/c 5,000
To Purchases A/c 5,000
(Furniture purchased on credit is wrongly
entered in the purchases Book is now
corrected)
Illustration 4
Amount of ` 15,000 received from Govind was credited to Har Govind.
Solution
The two accounts affected are Govind’s A/c which is not credited and Har Govind’s
A/c which is wrongly credited.

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Computers Rectification entry in Journal is :
Har Govind’s A/c Dr 15,000
To Govind’s A/c 15,000
(Amount received from Govind wrongly credited
to Har Govind is now rectified.)
Illustration 5
Notes Following are some accounting errors. Rectify them by making journal entries :
(i) Sales for ` 20,000 made to Malvika was not entered in the Sales Book.
(ii) Salary of ` 7,500 paid to Accountant Raman was debited to his personal account
(iii) Old furniture sold for ` 2,800 was entered in the Sales Book.
(iv) Carriage paid ` 500 on purchase of a Machine was debited to Carriage A/c
(v) Cash ` 50,000 paid to the creditor Atulya Ghosh was debited to Praful Ghosh’s
A/c
Solution
Journal
Date Particulars L.F. Amount Amount
` `
(i) Malvika Dr 20,000
To Sales A/c 20,000
(Sale to Malvika omitted to be entered
in Sales Book is corrected)
(ii) Salary A/c Dr 7,500
To Raman 7,500
(Salary paid to Raman was debited
to his personal account is now corrected)
(iii) Sales A/c Dr 2,800
To Furniture A/c 2,800
(Old furniture sold was entered in the
sales Book is now corrected)
(iv) Machine A/c Dr 500
To Carriage A/c 500
(Amount paid for carriage on purchase
of machine is debited to carriage A/c is
now corrected)

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(v) Atulya Ghosh Dr 50,000 Computers
To Praful Ghosh 50,000
(Amount paid to Atulya Ghosh was
debited to Praful Ghosh is corrected)

INTEXT QUESTIONS 12.3

i. Cash received from Ashok ` 2,500 were posted to his account as Notes
` 5,200. Accountant erased amount of ` 5,200 and wrote ` 2,500 in its place. Is
he justified in doing so?
ii. Accountant corrected an error of writing ` 7,200 instead of ` 5,200 in the following
manner, is he justified to do so?
` 7,200
` 5,200
iii. Total of the Sales Book was overcast by ` 1,000. Accountant corrected the error
in the following manner :
Amount as per Sales Book ` 1,000
On which side of the Sales A/c he should write the above amount?
iv. Wages paid ` 1,200 were omitted to be recorded in the Cash Book. What journal
entry will be made to rectify the error?

12.4RECTIFICATION OF ERRORS THROUGH SUSPENSE

ACCOUNT
You have learnt that the Trial Balance prepared at the end of a period by the business
concern must agree. It means the sum of its debit column and sum of credit column
should agree. But if the totals do not agree the difference amount is written in a new
account. This account is called Suspense Account. If the total of the debit side of the
Trial Balance is more than the total of its credit side, the difference amount will be
written in Suspense A/c on its credit side i.e. Suspense A/c is credited and vice-versa.
You have also learnt that the two sides of the Trial Balance do not agree because there
is some error or errors in the accounts, which is reflected in the Suspense Account.
Thus, Suspense A/c is a summarised account showing net effect of errors.
Opening of a Suspense Account is a temporary arrangement. As soon as the errors
that has led to creation of Suspense Account are rectified, this account will disappear.
One point needs to be noted that balance shown in Suspense Account is the net result
of one sided errors. So one sided errors are corrected through Suspense A/c. Completing

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Computers the double entry when an error is corrected by placing the correct amount on the debit of
the proper account, the credit is placed in Suspense Account or vice-versa. For example,
Gopal’s Account was debited short by ` 100. The error will be rectified through Suspense
A/c by debiting Gopal A/c and crediting Suspense A/c by ` 100.
Journal entry for the same is as follows :
Gopal’A/c Dr. 100
To Suspense A/c 100
Notes
(Gopal’s A/c debited short is now corrected)
Similarly, while correcting as one sided error the proper account is credited with the
correct amount, the debit is placed in the Suspense A/c. For example, Sales Book for
December, 2014 is undercast by ` 500. The error will be rectified by debiting Suspense
A/c and crediting Sales A/c.
Journal Entry for the same will be as follows :
Suspense A/c Dr. 500
To Sales A/c 500
(Sales Book undercast is rectified)
Illustration 6
Following are some accounting errors. Rectify the same through Suspense A/c
(i) Purchases Book has been overcast by ` 200
(ii) Goods purchased from Manohar of ` 2,500 have been posted to the debit of his
account.
(iii) Cash of ` 4,500 paid to Munish was credited to Manish.
(iv) Discount ` 100 allowed to Anthony was not debited to discount account.
Solution
(i) Accounting Effect : Purchases A/c has been debited in excess by ` 200
Rectification : Purchases A/c is credited by ` 200 and Suspense A/c is debited
by ` 200.
Journal Entry
Suspense A/c Dr 200
To Purchases A/c 200
(Purchases Book overcast is now corrected)

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(ii) Accounting Effect : Manohar A/c has been debited by ` 2,500 instead of it Computers
being credited by the same amount.
Rectification : Manohar A/c is credited by ` 5,000
Journal Entry
Suspense A/c Dr 5,000
To Manohar A/c 5,000
(Goods purchased from Manohar wrongly Notes
debited to his account now rectified)
(iii) Accounting Effect : Manish A/c is credited by ` 4,500 while Manish A/c was
to be debited by the same amount.
Rectification : Manish A/c is to be debited by ` 4,500 and Manish A/c is also
be debited by ` 4,500 and Suspense A/c to be credited by ` 9,000
Journal Entry
Manish Dr 4,500
Manish Dr 4,500
To Suspense A/c 9,000
(Cash paid to Manish was wrongly credited
to Manish, now corrected)
(iv) Accounting Effect : Discount A/c is omitted to be debited by ` 100. This account
is debited and Suspense A/c is credited.
Journal Entry
Discount A/c Dr 100
To Suspense A/c 100
(Discount allowed is not debited to discount A/c.)
Illustration 7
Rectify the following accounting errors through Suspense Account by making journal
entries :
1. Purchase of goods from Mohit for ` 2,500 was entered in the Sales Book, however
Mohit’s Account was correctly credited.
2. Cash received from Anil a debtor ` 3,200 was correctly entered in the Cash
Book but was omitted to be posted to his account.
3. Sales Book was overcast by ` 1,500.

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Computers 4. Cash of ` 4,000 paid to Hanif was credited to Rafique A/c as ` 1,400.
5. The total of Purchase Returns Book of ` 3,150 was carried forward as `1,530.
6. Namita was paid cash ` 6,500 but Sumita was debited by ` 6,000.
Solution
Date Particulars L.F. Amount Amount
Dr. (`) Cr. (`)
Notes
1. Purchases A/c Dr 2,500
Sales A/c Dr 2,500
To Suspense A/c 5,000
(Purchase of good was entered in the
the sale book now corrected)
2. Suspense A/c Dr 3,200
To Anil A/c 3,200
(Anil’s account omitted to be credited
now rectified
3. Sales A/c Dr 1,500
To Suspense A/c 1,500
(Sales Book overcast is corrected)
4. Hanif A/c Dr 4,000
Rafique A/c Dr 1,400
To Suspense A/c 5,400
(Cash paid to Hanif was wrongly credited
to Rafique the error is now rectified)
5. Suspense A/c Dr 1,620
To Purchases Returns A/c 1,620
(Purchase Return Book undercast is
now rectified)
6. Namita A/c Dr 6,500
To Sumita A/c 6,000
To Suspense A/c 500
(Cash paid to Namita ` 6,500 was debited
to Sumita by ` 6,000 the error is rectified)
Rectification of Two Sided Errors
Error which affects two different accounts on the same sides or different sides is called
two sided error.

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Illustration 8 Computers
Furniture purchased from M/s Furniture House on 15th January, 2014 for
` 5000 was wrongly entered in the Purchases Book.
Solution
Accounts affected are Furniture A/c which is omitted to be debited and Purchase A/c
which is wrongly debited.
Rectification through Journal Entry Notes

Furniture A/c Dr 5000

To Purchases A/c 5000
(Furniture purchased wrongly entered in the
Purchases Book now rectified)

INTEXT QUESTIONS 12.4

Answer the following in one sentence :
i. When is Suspense A/c opened?
ii. When does Suspense A/c disappear?
iii. What are two sided errors?
iv. What type of errors are rectified through Suspense A/c?

WHAT YOU HAVE LEARNT

z Accounting errors are the errors committed by persons responsible for recording
and maintaining accounts of a business firm in the course of accounting process.
z Errors can be in the form of omission of recording of transaction in various books
or posting in ledger or mistake in totalling or recording wrong amount or in wrong
account.
z There can be accounting errors which affect the agreement of trial balance and
errors which do not affect the agreement of Trial Balance.
z On the basis of nature accounting errors can be
(a) Errors of omission (b) Errors of commission
(c) Errors of principle (d) Compensating errors.

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Computers z On the basis of impact on ledger accounts errors can be :
(a) one sided errors (b) two sided errors
z Errors should never be rectified by erasing or overwriting.
z Methods of rectification of errors are
(a) Before preparing trial balance, instant correction and correction in the affected
account.
Notes
(b) After preparing trial balance through passing a rectifying journal entry.

TERMINAL EXERCISE
1. State the meaning of Accounting Errors.
2. Explain the following types of errors with suitable examples:
(a) Error of omission
(b) Compensating errors
(c) Error of principle
3. A businessman has prepared trial balance of his business firm that has agreed? He
is satisfied that now there are no accounting errors. Do you agree with him? If not
list the errors that do not affect the agreement of the trial balance.
4. When is a suspense Account opened? How are errors rectified through Suspense
A/c?
5. Rectify the following errors :
(i) Goods purchased on credit for ` 8,200 not recorded in the Purchases Book.
(ii) Purchase Returns Book is overcast by ` 1,000.
(iii) Salary of ` 3,200 paid to Gopal the accountant was debited to his personal
account
(iv) Sales to Shakila of ` 2,400 was posted to her account
(v) Cash received from Suresh ` 2,000 was not entered in the books.
6. Rectify the following errors :
(i) Purchases Book is undercast by ` 1,500
(ii) Sales Return Book is overcast by ` 1,000
(iii) Sales Book is added short by ` 100

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(iv) The total of Purchases journal of ` 7,580 has been posted to Purchases Computers
Account as ` 5,780

(v) The total of the page of Sales journal of ` 24,750 was carried to next page
as ` 27,450

7. Pass necessary journal entries to rectify the following errors :

(i) Sale of an old machine for ` 4,500 was posted to Sales account
Notes
(ii) Rent of proprietors residence of ` 12,000 was posted to Rent Account.

(iii) A credit to Brij Mohan of ` 6,750 was posted to his account as `4,750

(iv) Furniture purchased from M/s Decorates for ` 22,500 was entered in the
Purchases Book

(v) Salary paid to the accountant Sushil Gupta of ` 6,500 was debited to his
personal Account.

8. The Book keeper of a firm found that his trial balance did not agree. Its credit
total exceeded the debit total by ` 2,850. He placed the amount in Suspense A/c
and subsequently found the following errors.

(i) A credit item of ` 3,490 has been debited to his personal Account as `
4,390.

(ii) A sum of ` 2,650 written off as depreciation on machine has not been posted
to Depreciation A/c.

(iii) Goods of ` 5,300 sold were returned by the customer and were taken into
stock before closing the books but were not entered in the books.

(iv) ` 4,800 due from Lakhan Pal which had been written off as bad debt in a
previous year was unexpected recorded and had been posted to the personal
account of Lakhan Pal.

(v) Sales Book is undercast by ` 1,500.

(vi) ` 4,000 withdrawn for domestic use by the proprietor was debited to General
Expenses A/c.

(vii) Machine Purchased from Machine Mart for ` 18,000 were entered in the
Purchases Book.

(viii) Cash paid ` 1,200 to Lakshman was credited to Ram as ` 2,100.

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ANSWERS TO INTEXT QUESTIONS
12.1 (i) No (ii) Yes (iii) Yes (iv) No
12.2 (i) Principle (ii) Principle
(iii) Commission (iv) Compensating Error
12.3 (i) No (ii) Yes (iii) Debit side
Notes
(iv) Wages A/c Dr. 1200
To Cash A/c 1200
12.4 (i) When trial Balance does not agree.
(ii) When errors responsible for suspense account are rectified.
(iii) Errors which affect two different accounts on same sides or different sides.
(iv) One sided errors.

ACTIVITY
Your father has appointed a person to maintain accounts of his business but he is not
very competent due to which offen he commits accounting errors. Your father has
asked you to look into the accounts and make a list of various errors he commits. Find
out which type of errors he commits more frequently. Classify these errors and explain
to him how not to make such errors in future.

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Computers

13
COMPUTER AND COMPUTERISED
Notes
ACCOUNTING SYSTEM

With the expansion of business the number of transactions increased. The manual method
of keeping and maintaining records was found to be unmanageable. With the introducton
of computers in business, the manual method of accounting is being gradually replaced.
And finally, the database technology has revolutionised the accounts department of the
business. organisations. In this lesson, we will study about characteristics of computer,
role of computers in accounting, need of computerised accounting, etc.

OBJECTIVES
After studying this lesson, you will be able to:
l state the meaning and characteristics of computer;
l describe the components of Computer and limitations of computer;
l explain the role of computer in accounting;
l explain the meaning and features of computerised Account.
l differentiate between manual accounting and computerised accounting;
l explain the Accounting Information System;
l describe the basic requirements of computerised accounting and
l understand the sourcing of accounting system.
13.1 COMPUTER AND ITS CHARACTERISTICS
Computer is an electronic device that can perform a variety of operations in accor-
dance with a set of instructions called programme. It is a fast data processing electronic
machine. It can provide solutions to all complicated situations. It accepts data from the
user, converts the data into information and gives the desired result. Therefore, we may

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Computers define computer as a device that transforms data into information. Data can be any-
thing like marks obtained in various subjects. It can also be name, age, sex, weight,
height, etc. of all the students, savings, investments, etc., of a country. Computer is
defined in terms of its functions.
Computer is a device that accepts data, stores data, processes data as desired,
retrieves the stored data as and when required and prints the result in desired
format.

Notes Characteristics of Computer

A Computer is better than human being. It possesses some characteristics. These are
as follows:
i. Speed : It can access and process data millions times faster than humans can.
It can store data and information in its memory, process them and produce the
desired results. It is used essentially as a data processor. All the computer
operations are caused by electrical pulses and travels at the speed of light. Most
of the modern computers are capable of performing 100 million calculations per
second.
ii. Storage : Computers have very large storage capacity. They have the capability
of storing vast amount of data or information. Computers have huge capacity
to store data in a very small physical space.
Apart from storing information, today’s computers are also capable of storing
pictures and sound in digital form.
iii. Accuracy : The accuracy of computer is very high and every calculation is
performed with the same accuracy. Errors occur because of human beings rather
than technological weakness; main sources of errors are wrong program by the
user or inaccurate data.
iv. Diligence : A computer is free from tiredness and lack of concentration. Even
if it has to do 10 million calculations, it will do even the last one with the same
accuracy and speed as the first.
v. Versatility : Computer can perform wide range of jobs with speed, accuracy,
and diligence. In any organisation, often it is the same computer that is used for
diverse purposes such as accounting, playing games, preparing electric bills,
sending e-mail and so on.
vi. Communication : Computers are being used as powerful communication tools.
All the computers within an office are connected by cable and it is possible to
communicate with others in the office through the network of computer.
vii. Processing Power : Computer has come a long way today. They began as mere
prototypes at research laboratories and went on to help the business organisations,

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and today, their reach is so extensive that they are used almost everywhere. In Computers
the course of this evolution, they have become faster, smaller, cheaper, more
reliable and user friendly.
13.2 COMPONENTS OF COMPUTER
A computer consists of the major components i.e., Input Unit, Central Processing Unit
and Output Unit. Diagrammatically, these components may be presented as follows:

Notes
Secondary Storage

Input Output
Input Output
Memory Unit

Arithmetic Logic Unit

Control Unit
(ALU)

Components of Computer

z Input Unit : Input unit is controlling the various input devices which are used
for entering data into the computer. The mostly used input devices are keyboard,
mouse, and scanner. Other such devices are magnetic tape, magnetic disk, light
pen, bar code reader, smart card reader, etc. Besides, there are other devices
which respond to voice and physical touch. Physical touch system is installed
at airport for obtaining the online information about departure and arrival of flight.
The input unit is responsible for taking input and converting it into binary system.
z Central Processing Unit (CPU) : The CPU is the control centre for a
computer. It guides, directs and governs its performance. It is the brain of the
computer. The main unit inside the computer is the Central Processing Unit.
Central Processing Unit is to computer as the brain is to human body. This is
used to store program, photos, graphics, and data and obey the instructions in
program. It is divided into three subunits :
(a) Control Unit : Control unit controls and co-ordinates the activities of all
the components of the computer. This unit accepts input data and converts it
into computer binary system.
(b) Memory Unit : This unit stores data before being actually processed. The
data so stored is accessed and processed according to instructions which
are also stored in the memory section of computer well before such data
is transmitted to the memory from input devices.

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Computers (c) Arithmetic and Logic Unit : It is responsible for performing all the
arithmetical calculations and computations such as addition, subtraction, division,
and multiplication. It also performs logical functions involving comparisons among
variable and data items.
z Output Unit : After processing the data, it ensures the convertibility of output
into human readable form that is understandable by the user. The commonly used
output devices include monitor also called Visual Display Unit, printer etc.
Notes

INTEXT QUESTIONS 13.1

Fill in the blanks with correct word/words
i. Computer is a fast data ..................... electronic machine.
ii. All the computer operations are caused by ..................... pulses and travels at the
speed of light.
iii. A computer is free from ..................... and lack of concentration.
iv. Computers are being used as powerful ..................... tools.
v. The mostly used input devices are keyboard, ..................... and scanner.
vi. Central Processing Unit is to computer, as the ..................... is to human body.
vii. The commonly used output devices include ..................... printer etc.

13.3 LIMITATIONS OF A COMPUTER AND COMPURISED

ACCOUNTING
The limitations of computer are depending upon the operating environment they work
in. These limitations are given below as :
z Cost of Installation : Computer hardware and software needs to be updated
from time to time with availability of new versions. As a result heavy cost is
incurred to purchase a new hardware and software from time to time.
z Cost of Training : To ensure efficient use of computer in accounting, new
versions of hardware and software are introduced. This requires training and cost
is incurred to train the staff personnel.
z Self Decision Making : The computer cannot make a decision like human
beings. It is to be guided by the user.
z Maintenance : Computer requires to be maintained properly to help maintain
its efficiency. It requires a neat, clean and controlled temperature to work
efficiently.

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z Dangers for Health : Extensive use of computer may lead to many health Computers
problems such as muscular pain, eyestrain, and backache, etc. This affects
adversely the working efficiency and increasing medical expenditure.
13.4 ROLE OF COMPUTERS IN ACCOUNTING
The most popular system of recording of accounting transactions is manual which re-
quires maintaining books of accounts such as Journal, Cash Book, Special purpose
books, ledger and so on. The accountant is required to prepare summary of transac-
tions and financial statements manually. The advanced technology involves various Notes
machines capable of performing different accounting functions, for example, a billing
machine. This machine is capable of computing discount, adding net total and posting
the requisite data to the relevant accounts.
With substantial increase in the number of transactions, a machine was developed which
could store and process accounting data in no time. Such advancement leads to num-
ber of growing successful organisations. A newer version of machine is evolved with
increased speed, storage, and processing capacity. A computer to which they were
connected operated these machines. As a result, the maintenance of accounting data
on a real-time basis became almost essential. Now maintaining accounting records
become more convenient with the computerised accounting.
The computerised accounting uses the concept of databases. For this purpose an ac-
counting software is used to implement a computerised accounting system. It does
away the necessity to create and maintain journals, ledgers, etc., which are essential
part of manual accounting. Some of the commonly used accounting softwares are Tally,
Cash Manager, Best Books, etc.
Accounting software is used to implement computerised accounting. The computer-
ised accounting is based on the concept of database. It is basic software which allows
access to the data contained in the data base. It is a system to manage collection of
data ensuring at the same time that it remains reliable and confidential.
Following are the components of Computerised accounting software:
1. Preparation of Accounting Documents : Computer helps in preparing
accounting documents like Cash Memo, Bills and invoices etc., and preparing
accounting vouchers.
2. Recording of Transactions : Every day business transactions are recorded
with the help of computer software. Logical scheme is implied for codification
of account and transaction. Every account and transaction is assigned a unique
code. The grouping of accounts is done from the first stage. This process
simplifies the work of recording the transactions.

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Computers 3. Preparation of Trial Balance and Financial Statements : After recording
of transaction, the data is transferred into Ledger account automatically by the
computer. Trial Balance is prepared by the computer to check accuracy of the
records. With the help of trial balance the computer can be programmed to
prepare Trading, Profit and Loss Account and Balance Sheet. These components
can be shown as:
Recording of Transaction
In respective Voucher
Notes

Sales Purchases

Ledger

Trial Balance

Trading and Profit & Balance Sheet

Loss Account
Components of Computerised Accounting Software

13.5 SALIENT FEATURES OF CAS

Following are the salient features requied for CAS software:
1. Simple and Integrated : CAS is designed to automate and integrate all the
business operations, such as sales, finance, purchase, inventory and manufacturing.
CAS is integrated to provide accurate, up-to-date business information rapidly.
The CAS may be integrated with enhanced MIS (Management Information
System), Multi-lingual and Data Organisation capabilities to simplify all the business
processes of the organisation easily and cost-effectively.
2. Transparency and Control : CAS provides sufficient time to plan, increases
data accessibility and enhances user satisfaction. With computerised accounting,
the organisation will have greater transparency for day-to-day business operations
and access to the vital information.
3. Accuracy and Speed : CAS provides user-definable templates (data entry screens
or forms) for fast, accurate data entry of the transactions. It also helps in generalising
desired documents and reports.
4. Scalability : CAS enables in changing the volume of data processing in tune with
the change in the size of the business. The software can be used for any size of the
business and type of the organisation.

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5. Reliability : CAS makes sure that the generalised critical financial information is Computers
accurate, controlled and secured.
6. Performing various Functions with Accuracy : Accounting software is used to
perform the function of accounting. The software functions on the concept of
database. As discussed above, accounting software eliminates the process of
posting a transaction into the Ledger Account, that is, when a transaction is entered
in the computer system, the posting in the Ledger Account is automatic. The
software is so designed that a transaction, once entered, is automatically transported
Notes
to the Ledger Account also. In the present times, a number of accounting packages
are available off-the-shelf in the market. They do a variety of jobs, listed below,
for the end users :
i. Online Input and Storage of Accounting Data;
ii. On Screen or Physical Output Generation;
iii. Printout of Vouchers and Invoices;
iv. Printout of Ledgers and other books of accounts;
v. Updating of customer accounts in Sales Ledger and supplier accounts
in Purchase Ledgers;
vi. Recording of Suppliers Invoices;
vii. Recording of Bank Receipts;
viii. Making payments to supplier and for the expenses;
ix. Writing Day Books and General Ledger;
x. Maintenance of Stock Accounts;
xi. Aged Debtor Summary (who owes what and since when);
xii. Preparation of Trial Balance, Profit and Loss Accounts and Balance
Sheet;
xiii. Stock Valuations;
xiv. Payroll Analysis; and
xv. Statutory Returns, such as VAT and Service Tax.
13.6 GROUPING OF ACCOUNTS
The increase in the number of transaction changes the volume and size of the business.
Therefore, it becomes necessary to have proper classification of data. The basic
classifications of different accounts embodied in a transaction are resorted through
accounting equation.

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Computers Accounting Equation
The modern accounting is based on double-entry system, which implies equality of
assets and equities (liabilities and capital), i.e.
A = E
Where E = L + C
Now A = L + C
Notes
Where A = Assets
E = Equities
C = Capital
L = Liabilities
Thus, Assets = Liabilities + Capital
In this equation the Liabilities means claims on the firm by creditors and the Capital
means claims of owners. The claims of owners keep on changing due to success (profit)
or failure (loss) of the firm. This is reflected by the income statement, which provides
the summary of income and expenses of business for a given accounting period. Keeping
this in view, the above equation can be re-written as :
Assets = Liabilities + Capital + (Revenues - Expenses)
Each component of the above equation can be divided into group of accounts as follows:
Revenue means inflow of resources, which results from the sale of goods
or services in the normal course of business and increase in capital.
Expenses imply consumption of resources in generating revenues.
ASSETS
„ Fixed Assets
Î Land
Î Buildings
Î Plant and Machinery
Î Equipments
Î Furniture and Fixtures
Î Others

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„ Current Assets Computers
Î Cash
Î Bank
Î Debtors
Î Inventories
Î Loans and Advances Notes
CAPITAL
„ Share Capital
„ Reserve and Surplus
Î Capital Reserve
Î General Reserve
Î Balance of Profit and Loss Account
LIABILITIES
„ Secured Loans
„ Unsecured Loans
„ Creditors
„ Provisions
REVENUES
„ Sales
„ Other Income
EXPENSES
„ Material Consumed
„ Salary and Wages
„ Manufacturing Expenses
„ Depreciation
„ Administrative Expenses
„ Interest
„ Selling and Distribution Expenses

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Computers There is a hierarchical relationship between the groups and its components. In order to
maintain the hierarchical relationships between a group and its sub-groups, proper
codification is required to ensure neatness of classification.
Main Sub- Account Main Sub Account
Code Code Code Head Head Head
1 Assets
1 Fixed
Notes Assets
001 Land
002 Buildings
003 Plant and Machinery
004 Electrical Installation
005 Vehicles
006 Furniture and Fixtures

007 Computers

As an example, code for Land Account will be 11001. In the above codification. It has
been considered that the enterprise is a single unit enterprise. If the enterprise has more
than one unit, then a code may be given for the unit also. Codes may similarly be given
for investments, current assets, etc., in the assets side.
Let us take an example of codification of liabilities, say Secured Loan:
Main Sub- Account Main Sub Account
Code Code Code Head Head Head

2 Liabilities

1 Secured
Loan

001 State Bank of India

002 Punjab Natonal Bank

003 ICICI Bank Ltd.

004 Axis Bank Ltd.

As an example, a transaction with State Bank of India will be given accounting code of
21001. For example, a cheque is deposited in State Bank of India and therefore, State
Bank of India is to be debited. Account with code 21001 will be debited.
Same procedure is followed when codification is done for items of Trading, Profit and
Loss Account.

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Let us take an example of codification of Incomes Head, say Sales for a dealer in Computers
electronic goods:
Main Sub- Account Main Sub Account
Code Code Code Head Head Head
3 Income
1 Sales
001 Refrigerator Sale
002 Air-Conditioner Sale
Notes

003 Video Camera Sale

004 Digital Camera Sale
005 Plasma TV Sale

006 TV Sale

As an example, a sale transaction of refrigerator will be given a code 31001.

Let us take an example of codification of Expense Head, say Administration and General
Expenses:
Main Sub- Account Main Sub Account
Code Code Code Head Head Head
4 Expenses
6 Administration and
General Expenses
001 Telephone Expenses
002 Postage and Telegram
003 Internet Expenses
004 Newspaper and Periodicals
005 Conveyance Expenses

006 Travelling Expenses

As an example, an expense on telephone will be given a code 46001.

It is not necessary that codification be done using numerical number only it can be using
alphabet as codes or even alphanumeric codes. For example, Assets sides may be
given a code say ‘A’. Fixed Assets may be given ‘F’ and individual assets accounts be
given numeric codes as are given in the illustration. The code for Land Account in the
above illustration will be ‘AF001’.
Account if wrongly coded, will lead to errors of principle whereby an item of liability
may be treated as income and vice versa. Similarly, an item of asset may be treated as

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Computers expense and vice versa. The financial statements prepared without rectifying such errors
will reveal incorrect financial results and position. Therefore, extreme caution needs to
be exercised when grouping of accounts is done and also when the transaction is
recorded using computers.

The process of ‘Grouping of Accounts’ is the basic or fundamental requirement for

producing financial statements. The second stage of application of computers in
accounting is to record individual transactions using the accounting software. But always
Notes bear in mind that accounting concepts shall always be followed.

Using Software of CAS

There are two basic activities in using software of CAS - One time activities and recurring
activities. One time activities include creation of Organisation details, accounting year,
type of ledger (also called “creation of master files”), et. While recurring activities
include entry of transactions and generation of reports. The transactions are recorded
on the basis of Cash Vouchers, Bank Vouchers, Purchase Vouchers, Sales Vouchers,
Journal Vouchers, etc. Reports include generation of Day books, Ledger, Trial Balance,
Profit and Loss Account, Balance Sheet, and Cash Flow Statement.

Security Features of CAS Software

Every accounting software ensures data security, safety and confidentiality. Therefore
every, software provides the following:
z Password Security : Password is a mechanism, which enables a user to access
a system including data. The system facilitates defining the user rights according to
organisation policy. Consequently, a person in an organisation may be given access
to a particular set of a data while he may be denied access to another set of data.

Password is the key (code) to allow the access to the system.

z Data Audit : This feature enables one to know as to who and what changes have
been made in the original data thereby helping and fixing the responsibility of the
person who has manipulated the data and also ensures data integrity. Basically,
this feature is similar to Audit Trial.
z Data Vault : Software provides additional security through data encryption.

Encryption essentially scrambles the information so as to make its

interpretation extremely difficult (almost impossible). Thus, Encryption
ensures security of data even if it lands in wrong hands, because the
receiver of data will not be able to decode and interpret it.

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13.7 SOFTWARES OF COMPUTERISED ACCOUNTING SYSTEM Computers
Computers, with the help of Application Software, perform the same functions that are
carried out when accounting is done manually. Let us discuss these.
i. Payroll Processing : Payroll Procesing means preparation of salaries and wages,
accounting along with the leave records, deduction of provident fund, ESI, etc.
Leave records are part of payroll as salaries and wages are prepared taking into
account the leaves taken. ESI and Provident Fund are statutory deductions out of
Notes
salaries and wages and also contribution by the employers.
Computer takes the data such as Employee’s Name, Father’s Name, Employee
code, Basic Salary, Perquisites, Percentage of deduction for Provident Fund, ESI
and advance, etc., from the Master Data and the number of days from the
attendance record. It not only produces the salary and wages sheet timely but
also accurately. The entry in the financial books of account is recorded from the
payroll processing.
ii. Transaction Recording : Transactions are recorded using the utility or application
software. Transaction recording under the computerised environment is not only
accurate but is also less time consuming. It is so because two time consuming
processes under the manual system namely posting of entries into ledger accounts
and casting (totalling and balancing) are automated by the software. Software are
designed in the manner that the process of posting and casting is carried out
simultaneously with recording of transaction.
A functional key is provided to record transactions relating to cash, purchase, sale
and journal. It means that if cash transactions are to be recorded the functional
key when operated will open the cash book.
iii. Ledger : The software is designed in such a manner that the transaction is posted
to the ledger account and the ledger account is casted simultaneously with the
recording of transaction. We had discussed in this chapter about grouping of
accounts. Posting of transaction into ledger account is carried out as guided by
the account code given to the transaction.
iv. Trial Balance : Posting of transaction into ledger account and also casting of
ledger account is carried out simultaneously with the recording of transaction. It
means that a trial balance can be extracted even after every transaction without
any efforts.
v. Financial Statements : Financial Statements, i.e., Trading, Profit and Loss
Account and the Balance Sheet like extracting a trial balance can also be extracted
after every transaction.

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Computers 13.8 ADVANTAGES OF COMPUTERISED ACCOUNTING SYSTEM
A computerised accounting system has many advantages, as discussed below:
i. Large Volume of Transactions : In the present-day business environment, the
transactions of a business are normally large in volume. The computerised
accounting system can store and process such voluminous transactions with speed
and accuracy.
Notes ii. Scalability : A computerised accounting system is scalable to handle the growing
transactions.
iii. Security : The accounting data under the computerised environment is safer than
the accounting data under the manual system. The data can be kept secure by
using a password, i.e., allowing only authorised users to access the data.
iv. Timely Reporting : Availability of reports on time enables the management to
take quick decisions, which is an important element for the success of an enterprise.
A computerised accounting system makes these reports available as and when
required.
v. Lower Cost : The cost of maintaining books of accounts under the computerised
process is lower than in comparison to the manual process.
vi. Less Paper Work : Under the computerised process, there is less paper work
as compared to the paper work in the manual process.
vii. Flexible Reporting : Reporting under the computerised process is flexible in
comparison to the manual process. The database can be processed further to
obtain the desired report. For example, data relating to debtors can be analysed
to ascertain the list of customers to whom sales above Rs. 1,00,000 has been
made in an accounting year or of the regular customers of the enterprises and so
on.
viii. Queries : Replies to queries based on external factors can be obtained easily
under a computerised process. For example, list of debtors who have not paid on
time can be taken out by processing the database.
ix. Accurate : Computer statements are far more accurate in comparison to manual
statements.
x. Updating : Updating and treatment of wrong transactions are easily done.
xi. Financial Statements : From the day book, the Voucher Posting software can
manage the General Ledger, Trial Balance and Balance Sheet.

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13.9 LIMITATIONS OF COMPUTERISED ACCOUNTING SYSTEM Computers
However, computerised accounting suffers from the following limitations :
i. Controls : If adequate controls are not built and, where build, are not followed,
it can lead to loss of data. It is important to take back-ups at regular intervals to
avoid such a situation.
ii. Data Corruption : The data can get corrupted through viruses that may come in
through the internet or the use of external input devices without scanning them for Notes
viruses.
iii. Trained Computer Operators : Untrained computer operators can lead to loss
of data.
iv. Limitations of Software : The software is developed on the basis of the
experiences of the team of developers. As such, it may not be able to deal with a
specific problem that may arise.
13.10 ACCOUNTING INFORMATION SYSTEM (AIS)
Accounting Information System (AIS) and its various sub-systems may be implemented
through Computerised Accounting System. The subsystems of AIS are briefly described:
Management
Information System

Tax Accounting Sales & Receivable

System Sub-system

Cash Sub-system
Budget

Accounting Purchase & Accounts

Final Accounts Sub- Information System Payable Sub-system
system

Inventory Accounting
Costing Sub-system Sub-system

Fixed Asset Accounting

Excise Accounting Sub-system
Sub-system

Payroll Accounting
Sub-system

i. Cash and Bank Sub-System : It deals with the receipt and payment of cash
both physical cash and electronic fund transfer. Electronic fund transfer takes
place without having the physical entry or exit of cash by using the credit cards or
electronic banking.
ii. Sales and Accounts Receivable Sub-system : It deals with recording of sales,
maintaining of sales ledger and receivables. It generates periodic reports about
sales, collections made overdue accounts and receivables position as also ageing
schedule or receivables/debtors.

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Computers iii. Inventory Sub-system : It deals with the recording of different items purchased
and issued specifying the price, quantity and date. It generates the inventory position
and valuation report.
iv. Purchase and Accounts Payable Sub-system : It deals with the purchase and
payments to creditors. It provides for ordering of goods, sorting of purchase
expenses and payment to the creditors. It also generates periodic reports about
the performance of suppliers, payment schedule and position of the creditors.
Notes v. Payroll Accounting Sub-system : It deals with payment of wages and salary to
employees. A typical wage report details information about basic pay, dearness
allowance, and other allowances and deductions from salary and wages on account
of provident fund, taxes, loans, advances and other charges. The system generates
reports about wage bill, overtime payment and payment on account of leave
encashment, etc.
vi. Fixed Assets Accounting Sub-system : It deals with the recording of purchases,
additions, deletions, usage of fixed assets such as land and buildings, machinery
and equipments, etc. it also generates reports about the cost, depreciation, and
book value of different assets.
vii. Expense Accounting Sub-system : This sub-system records expenses under
broad groups such as manufacturing administrative, financial, selling and
distributions and others.
viii. Tax Accounting Sub-system : This sub-system deals with compliance
requirement value-added tax (VAT), excise, customs and income tax. This sub-
system is used in large size organisation.
ix. Final Accounts Sub-system : This subsystem deals with the preparation of Profit
and Loss accounts, Balance Sheet and cash flow statements for reporting purposes.
x. Costing Sub-system : It deals with the ascertainment of cost of goods produced.
It has linkages with other accounting sub-systems for obtaining the necessary
information about cost of material, labour, and other expenses. This system
generates information about changes in the cost that takes place during the period
under review.
xi. Budget Sub-system : It deals with the preparation of budget for the coming
financial year as well as comparison with the current budget of the actual
performances.
xii. Management Information System : Management Information System (MIS)
deals with generation and processing of reports that are vital for management
decision-making. The Information system should be so flexible as to provide

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customised reports to support various managerial functions such as planning, Computers
organising, staffing, oversight, control and decision-making including operational,
functional and strategic nature.
On the basis of the discussions, these are the following differences between manual
accounting and computerised accounting.
13.11 COMPARISON OF THE MANUAL AND COMPUTER-
ISED ACCOUNTING SYSTEMS
Notes
Accounting is a process of identifying, recording, classifying and summarising financial
transactions to produce financial statements. Let us discuss the processes of under the
two accounting processes, i.e., manual process and computerised process, for the
purpose of comparison.
z Identifying Financial Transactions : Identifying Financial Transactions and
recording them in the books of accounts by applying the principle of accounting is
a manual process carried out by an authorised person or on the basis of the
accounting manual. This process is, thus, common under both the processes.
z Recording : The process of Recording transaction in the books of original entry,
posting them in the ledger accounts, performing mathematical functions, i.e., adding,
subtraction and totalling, are carried out manually under the manual process. In
the computerised process, transactions are recorded in the books of accounts
and the remaining functions are performed without any further process or command
being carried out manually.
z Classification : In the manual process, the transactions are recorded in the book
of original entry and are posted into the ledger accounts. It means that, after
recording the transaction, another process of posting process is carried out by
internal sorting of data, i.e., with the help of utility or application software, without
any further process.
z Summarising : In the manual system of accounting, the data under each Ledger
is summarised and a balance of each account is ascertained to prepare a Trial
Balance. As a result, preparing ledger accounts is essential to prepare a Trial
Balance. In the computerised process, a transaction or event, once recorded, is
stored in the database and can be processed to produce a Trial Balance directly.
z Adjustments Entries : Adjustment Entries are passed to rectify an error or to
follow the matching concept of accounting, i.e., matching the cost with revenue,
The process of passing adjustment entries can be equated with the recording
process. These entries are identified and recorded in the books of accounts. The
remaining process is the same as discussed above.

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Computers z Grouping of Accounts : One of the basics of correct accounting is determining
whether a transaction is capital or revenue in nature and, accordingly, which account
head is to be debited or credited. Once this decision is taken, the account is
grouped as an asset, a liability, an income or an expense at the time of preparing
the financial statements. The above process is followed when the manual system
of accounting is adopted. However, in computerised accounting, whether an
account head is an asset, a liability, an income or an expense, is decided at the
Notes time the transaction takes place, as in the case of manual accounting. It is also
defined whether the particular head of account shall be shown as an asset or
liability, or an income or expense.
z Financial Statements : In the manual process, availability of the Trial Balance is
essential to prepare the Financial Statements. In the computerised process, financial
statements are generated from the system itself and, hence, there is no need to
have a Trial Balance.
Difference between Manual Accounting and Computerised Accounting
Point of Difference Manual Accounting Computerised Accounting

1. Recording Recording of financial Data content of these transactions

transactions is through books is stored in well designed data base.
of original entry.

2. Classification Transactions recorded in the No such data duplications is made.

books of original entry are In order to produce ledger accounts
further classified by posting the stored transaction data is
them into ledger accounts. processed to appear as classified
This results in transaction so that same is presented in the
data duplicity. form of report.

3. Summarising Transactions are summarised The generation of ledger accounts

to produce trial balance by is not necessary condition for
ascertaining the balances of trial balance.
various accounts.

4. Adjusting Adjusting entries are made There is nothing like making

entries to adhere the principle of adjusting entries for errors and
matching. rectifications.

5. Financial The preparation of financial The preparation of financial

statements statements assumes the statements is independent of
availability of trial balance. producing the trial balance.

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13.12 ACCOUNTING SOFTWARES Computers
Accounting Software can be categorised into :
1. Readymade Software : Readymade Softwares are the softwares that are
developed not for any specific user but for the users in general. Since, the
readymade softwares are for general user, it is not necessary that all the modules
of such softwares are of use for every user. It is likely that a particular module say
‘Payroll’ may not be used because the enterprise has very few employees. Similarly,
Notes
a service enterprise will not require VAT module while a retail enterprise will not
require Service Tax module. Some of the Readymade Software available are
Tally, Ex, Busy and Professional Accountant. Out of these, Tally is very widely
used.
Readymade Software has its own advantages and disadvantages. The advantages
are :
i. Readymade Softwares are economical : Readymade Software are
prepared not for particular user but for the user in general. It means
development cost of the software is not loaded on a single software for
determining the cost and thus selling price. The price of the software is
determined on the basis of number of pieces expected to be sold. On the
other hand, user specific softwares are expensive as the development cost is
loaded on one software.
ii. Readymade Software are Available off-the-shelf : It therefore, saves
time that may be required for development of tailor-made softwares or for
customisation. Development of a software consumes considerable time both
at the user end and software development end. User will have to explain its
requirements to software developer who on the basis of his understanding
will develop software, test it with a dummy data, debug the software to the
best of his understanding before handing it to the user. All these activities
consume time. On the other hand, Readymade Software requires only
installation and are ready for use.
iii. Readymade Software are Development by a Group of Experienced
Professionals : It therefore, addresses the problem that may get overlooked
if the user specific software is developed.
iv. Software Like Any Other Product, Requires Maintenance : Readymade
Softwares being sold to a number of users, has better and economical after
sales maintenance service. After sales maintenance service, in the case of
user specific softwares will not only be expensive but time consuming as
well.

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Computers v. Readymade Softwares are Used by a Number of Users : Therefore,
trained accounting persons are easily available. On the other hand, in the
case of tailormade softwares, every time a new person is recruited, training
will have to be imported.
The disadvantages of Readymade Softwares are :
i. Readymade Softwares are Window-based softwares, which support only
Laserjet printers for-outputs in physical form (printout). Printing by laserjet
Notes printers is more expensive than Dot-Matrix printers.
ii. Normally, Readymade Softwares do not have the facility of secondary back-
up. It means, in case of data loss, the entire data may not be recovered. But,
this limitation can be overcome by taking regular back-up of accounting data.
2. Customised Software : The term Customised Software means making changes
in the readymade software to suit the specific requirements of the user, i.e., making
it user-specific. The software available off-the-shelf is modified to suit the
requirements of the user. For example, the design of the invoice is changed to
specifications of the user. The developer, to meet specific user requirements, can
modify all the readymade softwares. However, the user has to bear the cost of
such changes. The advantages and disadvantages of readymade software are
also the advantages of Customised Software.
3. Tailor-made Software : The term Tailor-made Software refers to designing and
developing user-specific software. These softwares, being user-specific, are not
available off-the-shelf but are developed to meet the requirement of the user on
the basis of discussion between the user and developers.
Advantages of Tailor-made Software are :
i. It, being user specific, takes care of the accounting reports and MIS that
may be required by the user and the management of the enterprise.
ii. The software being tailor-made, the enterprise may have to engage a software
engineer to maintain it. In other words, the problem faced can be countered
immediately.
iii. Well-trained users use the softwares and, therefore, they can maximise
software utilization.
Disadvantages of Tailor-made Software are :
i. The development cost of the software is much higher than the cost of
readymade or customised software.
ii. In case the accounting person leaves the job, it takes some time before the
new person becomes fully conversant with the software.

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iii. Development and maintenance costs are higher than in the case of readymade Computers
or customised software.
13.13 FACTORS AFFECTING THE DECISION OF
SELECTION AN ACCOUNTING SOFTWARE
It is essential to consider some factors before Sourcing an Accounting Software, i.e.,
i. Flexibility : A computerized accounting system must be flexible in respect of
data entry, retrieval of data and generating designs of report. The user should be Notes
able to run the software on a variety of computer environments and machines, that
is, on any configuration of computers and available operating systems.
ii. Cost of Installation and Maintenance : It is a must to consider that the cost of
the accounting software, its relevant hardware and the maintenance, cost of addition
of dodules, training of staff, updating of versions and data recovery in case of data
failure are negotiable and within the ability of the organization to afford it.
iii. Size of Organization : An accounting system must be according to the size of the
organization, i.e., volume of business transactions, multi-user requirements.
iv. Ease of Adaptation and Training Needs : Some accounting softwares are
user-friendly and require a simple training to the users. However, some other
complex software packages, linked to other information systems, require intensive
training on a continuous basis. The software must be capable of attracting users.
v. Expected Level of Secrecy (Software and Data) : Security features of an
accounting system software are also important. Software should ensure that it
prevents unauthorized access and manipulation of data. In tailored software, the
user rights may be restricted according to the departments and their relevant
accounting software functions.
vi. Exporting/Importing Data Facility : The software should allow easy data transfer
option for flexible reporting, such as transfer of information directly from the ledger
into the spreadsheet software like Lotus or Excel.
13.14 COMPUTERISED ACCOUNTING
Transaction processing system (TPS) is the first stage of computerised accounting
system. The purpose of any TPS is to record, process, validate and store transactions
that occur in various functional areas of a business for subsequent retrieval and usage.
TPS involves following steps in processing a transaction: Data Entry, Data Validation,
Processing and Revalidation, Storage, Information and Reporting.
It is one of the transaction processing systems which is concerned with financial
transactions only. When a system contains only human resources it is called manual

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Computers system; when it uses only computer resources, it is called computerised system and
when it uses both human and computer resources, it is called computer-based system.
These steps can be explained with an example making use of AutomatedTeller Machine
(ATM) facility by a Bank-Customer.
1. Data Entry : Processing presumes data entry. A bank customer operates an
ATM facility to make a withdrawal. The actions taken by the customer constitute
data which is processed after validation by the computerised personal banking
Notes system.
2. Data Validation : It ensures the accuracy and reliability of input data by comparing
the same with some predefined standards or known data. This validation is made
by the ‘Error Detection’ and ‘Error Correction’ procedures. The control
mechanism, wherein actual input data is compared with predetermined norm is
meant to detect errors while error correction procedures make suggestions for
entering correct data input. The Personal Identification Number (PIN) of the
customer is validated with the known data. If it is incorrect, a suggestion is made
to indicate the PIN is invalid. Once the PIN is validated, the amount of withdrawal
being made is also checked to ensure that it does not exceed a pre-specified limit
of withdrawal.
3. Processing and Revalidation : The processing of data occurs almost
instantaneously in case of Online Transaction Processing (OLTP) provided a valid
data has been fed to the system. This is called check input validity. Revalidation
occurs to ensure that the transaction in terms of delivery of money by ATM has
been duly completed. This is called check output validity.
4. Storage : Processed actions, as described above, result into financial transaction
data i.e. withdrawal of money by a particular customer, are stored in transaction
database of computerized personal banking system. This makes it absolutely clear
that only valid transactions are stored in the database.
5. Information : The stored data is processed making use of the Query facility to
produce desired information.
6. Reporting : Reports can be prepared on the basis of the required information
content according to the decision usefulness of the report.

INTEXT QUESTIONS 13.2

Fill in the blanks with correct word/words :
i. Computer hardware and ....................... need to be updated from time to time.

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ii. The ....................... cannot make a decision itself like human beings. Computers
iii. ....................... requires a neat, clean and controlled temperature to work efficiently.
iv. The most popular system of recording of accounting transactions is .......................
v. The computerised accounting uses the concept of .......................
vi. Accounting ....................... is used to implement a computerised accounting.

13.15 NEED AND REQUIREMENTS OF COMPUTERSIED Notes

ACCOUNTING
The need for computerised accounting arises from advantages of speed, accuracy and
lower cost of handling the business transactions.
z Numerous Transactions : The computerised accounting system is capable of
handling large number of transactions with speed and accuracy.
z Instant Reporting : The computerised accounting system is capable of offering
quick and quality reporting because of its speed and accuracy.
z Reduction in Paper Work : A manual accounting system requires large physical
storage space to keep accounting records/books and vouchers/ documents. The
requirement of stationery and books of accounts along with vouchers and
documents is directly dependent on the volume of transactions beyond a certain
point. There is a dire need to reduce the paper work and dispense with large
volumes of books of accounts. This can be achieved by introducing computerised
accounting system.
z Flexible Reporting : The reporting is flexible in computerised accounting system
as compared to manual accounting system. The reports of a manual accounting
system reveal balances of accounts on periodic basis while computerised
accounting system is capable of generating reports of any balance as when required
and for any duration which is within the accounting period.
z Accounting Queries : There are accounting queries which are based on some
external parameters. For example, a query to identify customers who have not
made the payments within the permissible credit period can be easily answered
by using the structured query language (SQL) support of database technology in
the computerised accounting system. But such an exercise in a manual accounting
system is quite difficult and expensive in terms of manpower used. It will still be
worse in case the credit period is changed.
z On-line Facility : Computerised accounting system offers online facility to store
and process transaction data so as to retrieve information to generate and view
financial reports.

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Computers z Scalability : Computerised accounting system are fully equipped with handling
the growing transactions of a fast growing business enterprise. The requirement of
additional manpower in Accounts department is restricted to only the data operators
for storing additional vouchers. There is absolutely no additional cost of processing
additional transaction data.
z Accuracy : The information content of reports generated by the computerised
accounting system is accurate and therefore quite reliable for decision-making. In
a manual accounting system the reports and information are likely to be distorted,
Notes inaccurate and therefore cannot be relied upon. It is so because it is being processed
by many people, especially when the number of transactions to be processed to
produce such information and report is quite large.
z Security : Under manual accounting system it is very difficult to secure such
information because it is open to inspection by any eyes dealing with the books of
accounts. However, in computerised accounting system only the authorised users
are permitted to have access to accounting data. Security provided by the
computerised accounting system is far superior compared to any security offered
by the manual accounting system.
Basic Requirements of the Computerised Accounting System
The basic requirements of any computerised accounting system are the followings:
z Accounting Framework : It is the application environment of the computerised
accounting system. A healthy accounting framework in terms of accounting
principles, coding and grouping structure is a pre-condition for any computerised
accounting system.
z Operating Procedure : A well-conceived and designed operating procedure
blended with suitable operating environment of the enterprise is necessary to work
with the computerised accounting system.
The computerised accounting is one of the database-oriented applications wherein the
transaction data is stored in well- organized database. The user operates on such
database using the required interface and also takes the required reports by suitable
transformations of stored data into information. Therefore, the fundamentals of
computerised accounting include all the basic requirements of any database-oriented
application in computers.

INTEXT QUESTIONS 13.3

I. Fill in the blanks with correct word/words :
i. In a manual accounting system, transactions recorded in the books of
.....................

270 ACCOUNTANCY
 Computer & Computerised Account System MODULE - 2
Trial Balance and
ii. The generation of ledger accounts is not a necessary condition for making Computers
..................... in a computerised accounting system.
iii. The computerised accounting system is capable of handling .....................
of transactions.
iv. The ..................... accounting system is capable of offering quick and quality
reporting.
v. Computerised accounting system offers ..................... facility to store Notes
transaction data.
vi. Computerised accounting system is ..................... to the manual accounting
system.
vii. The computerised accounting is one of the ..................... oriented applications
II. Give any two advantages & two limitations of Computerised Accounting System.
III. Define Management Information System.

WHAT YOU HAVE LEARNT

z Computer is an electronic device that can perform a variety of operations in
accordance with a set of instructions called programme. It is a fast data processing
electronic machine. It can provide solutions to all complicated situations.
z Characteristics of Computer

Speed Storage Accuracy Diligence Versatility Communication Processing

Power

z Components of Computer

Input Unit Central Processing Unit Output unit

Control unit Memory Arithmetic

unit and logic unit

z Limitations of a Computer

Cost of Cost of Self-Decision Maintenance Dangers

Installation Training Making for Health

ACCOUNTANCY 271
MODULE - 2 Computer & Computerised Account System
Trial Balance and
Computers z Salient features of CAS simple & Integrated Transparency and Control Accuracy
& Speed Scalability Reliability.
z Accounting Equation is A = L + C
z Computerised Accounting : Transaction Processing System (TPS) is the first
stage of computerised accounting system.
z Need for Computerised Accounting
Notes
Numerous Instant Reduction Flexible Online Accuracy Security
transactions reporting in paper reporting facility
work

z Advantages of CAS include speed, efficiency, arithmetic accuracy, cost saving,

confidentiality of data.
z Limitation of CAS include provision for (a) fast obsolescence of technology, (b)
data loss due to either power interruption or damage to hard disk, (c) virus and
other security hazards.
z Accounting Information System is an integration of various sub-systems such as :
(i) cash sub-system, (ii) sales and accounts receivable sub-system, (iii) inventory
sub-system, (iv) purchase and accounts payable sub-system, (v) payroll accounting
sub-system, (vi) fixed asset accounting sub-system, (vii) expense accounting sub-
system, (viii) tax accounting sub-system, (ix) final accounts sub-system, (x) costing
sub-system, (xi) budget sub-system, (xii) management information sub-system.
z Difference between manual accounting and computerised accounting

Recording Classification Summarising Adjusting Financial

entries statement

TERMINAL EXERCISE
1. State the meaning and characteristics of Computer.
2. Explain the components of computer.
3. Explain the limitations of a Computer.
4. Explain the role of Computers in Accounting.
5. Differentiate between Manual accounting and Computerised accounting system.
6. Enumerate the basic requirements of any computerised accounting system.

272 ACCOUNTANCY
 Computer & Computerised Account System MODULE - 2
Trial Balance and
7. Explain the components of Computerised Accounting Software. Computers
8. Describe the salient features of Computerised Accounting Software.
9. How does Computerised Accounting Software ensures data security, safety
and confidentiality ? Explain.
10. Explain in brief various softwares of Computerised Accounting Software.
11. Describe any six sub systems of Accounting Informations Systems.
Notes

ANSWERS TO INTEXT QUESTIONS

13.1 (i) processing (ii) electrical (iii) tiredness

(iv) communication (v) mouse (vi) brain (vii) monitor
13.2 (i) software (ii) computer (iii) computer
(iv) manual (v) databases (vi) software
13.3 I. (i) original entry (ii) trial balance (iii) large number
(iv) computerised (v) online (vi) superior
(vii) database
II. a) Limitations of Computer : High cost of installation, High cost of
training, Dangers for Health.
b) Components of Computerised Accountancy System : Recording
of transactions, Preparation of Trial Balance & Financial statement.
c) 1. Accuracy & Speed 2. Scalability 3. Reliability
d) Fixed Asset (i) Land (ii) Building
Current Asset (i) Cash (ii) Debtors
Revenue & surplus (i) Sales (ii) Other Incomes

ACCOUNTANCY 273
 APPENDIX-B

QUESTION PAPER DESIGN

Class : Senior Secondary
Subject : Accountancy
Time : 3 Hours Marks : 100

1. Weightage by Objectives

Objective K U A Total
Percentage of marks 20% 30% 50% 100%

2. Weightage to form questions

Total no. of questions 27 (core – 22 + optional – 5) for 100 marks paper
Form of questions VLA LA SA2 SA1 MCQ
10 6 5 3 1
3. Distribution of marks
100 marks paper CORE MODULES OPTIONAL MODULE
1 × 9 = 09 1 × 1 = 01
3 × 3 = 09 3 × 1 = 03
5 × 6 = 30 5 × 2 = 10
6 × 2 = 12 6 × 1 = 06
10 × 2 = 20
22 80 5 20

4. Time allocation
Total time 180 minutes
LA2 (10 marks) 30 minutes
LA1 (6 marks) 30 minutes
SA2 (5 marks) 60 minutes
SA1 (3 marks) 35 minutes
MCQ (1 marks) 15 minutes
Reading & revision 10 minutes
180

5. Weightage by Content
Weightage allocated to each module in curriculum.
Core Modules Optional Modules
I Basic Accounting 10 VI. Analysis of Financial Statements 20
II. Trial Balance and Computers 10 VII. Application of Computers in Financial
III. Financial Statements 20 Accounting 20
IV. Partnership Accounts 20
V. Company Accounts 20
80
Total Marks 100
 CURRICULUM IN ACCOUNTANCY
(320)

RATIONALE course in Accountancy will prepare learners to logically

The last decade has witnessed tremendous changes in analyse, evaluate and respond to changes which affect
business operations. It opens the doors for higher
business education. The liberalisation and globalisation
have been the primary cause for such changes. With the education as well as sharpens the skills for those who
are going for self-employment.
fast changing economic scenario, the elementary business
education along with Accountancy ‘as a language of
business’ is gaining its importance. The curriculum in COURSE OBJECTIVES
Accountancy provides a firm foundation in basic This course aims at enabling the learners to:
accounting concepts and also keeps them informed of
= familiarise towards the usage of basic accounting
changes in its methodology concerning particular aspects
terminology;
of the subject.
= develop the skills of recording of business
The thrust of the course follows new trends in accounting transactions and preparation of the financial
practices and developing a basic understanding of the statements and their analysis thereof;
nature and purpose of the accounting information and
reporting. Further, information technology has occupied = provide firm base for higher education;
a vital place in business activities. Therefore, a lesson = inculcate values and ethics of accounting system;
designed on computer and computerised accounting = make aware about the utility of computers in the
shall expose the learners to the basic knowledge about business world;
the utility of computers in the business world. The
= join professional courses in Accounting.
COURSE STRUCTURE
S.No. Modules Study hours Marks
Core Modules
1. Basic Accounting 25 10
2. Trial Balance and Computers 25 10
3. Financial Statements 50 20
4. Partnership Accounts 50 20
5. Company Accounts 50 20
Sub total 200 80
Optional Module
6. Analysis of Financial Statements 50 20
or or or
7. Application of Computers in Financial Accounting 50 20
Grand Total 250 100
Note : The learner will prepare Tutor Marked Assignment in module 1 & 2 for 20 marks and TMA will have
20 percent weightage. 80 percent weightage will be for Module 3 to 7 and will be of 100 marks and
for a duration of 3 hours.
COURSE DESCRIPTION 1.2 Accounting Concepts
PART - A = Fundamental Accounting Assumptions: Going
MODULE 1 : BASIC ACCOUNTING concern, Consistency, Accrual.

25 Hrs. 10 Marks = Accounting Principles: Accounting Entity,

Money Measurement, Accounting Period, Full
Approach
Disclosure, Materiality, Prudence, Cost
Accounting is the language of business. It helps the Concept, and Dual Aspect.
busines not only in finding out profits/losses for a period
1.3 Accounting Conventions and Standards
and its financial position on a particular date but also
helps in management of business. It has its own well = Accounting conventions : consistency, Full
designed and established principles which are guided by Disclosure, Materiality, Conservatism.
some concepts and conventions Accounting is recording = Accounting Standards: Concept & objective
of transactions in a systematic manner in various types
of books and their posting to a master book called 1.4 Accounting for Business Transactions
ledger. = Accounting Equation: Meaning, Analysis of
This module has been designed to introduce accounting transactions using Accounting Equation.
to the learners. This familiarises the learners with some = Rules of Debit and Credit: For Assets,
basic accounting terms, accounting concepts conventions Liabilities, Capital Revenue and Expenses.
and standards. This enables them to prepare Journal,
Cash Book and Special Purpose Books and their = Origin of transaction-Source Documents
posting to Ledger. (Invoice, Cash memo, Pay in slip, Cheque),
Preparation of Vouchers-cash (Debit &
1.1 Accounting - An Introduction
Credit), Non Cash (Transfer).
= Accounting : Meaning, Objectives, Types of
1.5 Journal
accounting information, advantages and limitations.
Users of Accounting information and their needs. = Journalising the simple and compound
Double Entry system. Basis of accounting-Cash transactions, classification of journal into
basis, accrual basis and hybrid basis. special journal & journal proper.

= Basic Accounting Terms: Business transaction, = Books of Original Entry : Meaning, Format
Event, Account, Capital, Drawings, Liability : and Process of Journalising
Internal & External, Long term & Short term, Asset
1.6 Ledger
(Intangible & Tangible, Fixed Current, Liquid,
Fictitious) Receipts (Capital & Revenue), = Meaning, Utility, Format, Posting from Journal
Expenditure (Capital, Revenue & Deferred into ledger.
Revenue), Expense, Income, Profits, Losses,
1.7 Cash book
Purchases, Sales, Stock, Debtors,Bills Receivables,
Creditors, Bills Payables, Goods, Cost, Vouchers, = Simple, Cash book with Bank Column, Petty
Discount (Trade, Cash, Received & Allowed). Cash Book.
1.8 Special Purpose Books 2.1 Trial balance
= Purchases Book , Sales Book, Purchases = Meaning, Objectives and Preparation
Returns Book, Sales Returns Book, Bills
2.2 Bank Reconciliatation Statement
Receivable Book, Bills Payable Book and
Journal Proper, with formats & recording of = Meaning, Objectives, Causes of differences
transactions. between Cash Book and Balances as per
Pass Book/Bank Statement and Methods of
MODULE 2 : TRIAL BALANCE AND COMPUTERS
Preparing Bank Reconciliatation Statement.
25 Hrs. 10 Marks
2.3 Bills of Exchange
Approach
= Bills of Exchange and Promissory Note:
Our important element of accounting process is Definition, Feature, Parties, Specimen and
summarising for which ledger accounts are prepared Distinction.
which are finally balanced and are shown in the form of = Important Terms: Term of Bill, Due date, Days
a statement called trial balance. Businessman want to of Grace, Date of Maturity, Bill at Sight, Bill
know the correct bank balance on a particular date for after Date, Discounting of Bill, Endorsement
which bank reconciliation statement is prepared. Business of Bill, Bill Sent for Collection, Dishonour of
is mostly on credit which means involvement of more Bill, Noting of Bill, Insolvency of Acceptor,
capital, solution lies in the use of credit instruments like Retirement and Renewal of a bill, Accounting
Bills of Exchange. Knowledge of their accounting is thus Treatment of bill transactions.
very important.
2.4 Errors and Their Rectification
Accounting is another name of accuracy but then to err
= Errors and their types: Errors not affecting trial
is human and there can be accounting errors. Knowledge
balance and Errors affecting trial balance.
of their rectification, necessary so as to enable achieving
the aim of presenting correct, true and fair view of = Rectification of errors before and after the
business. preparation of financial statements.

Growing use of computer has actually revolutionalised = Suspense account: Meaning, preparation and
the accounting of business transactions and computers treatment of suspense account balance in final
are fast replacing the mannual accounting. True statements.
knowledge of computerised accounting has become our 2.5 Computers and Computerised Accounting
cherished goal. System
This module has been designed to prepare trial balance = Introduction to Computer Accounting System:
and detect accounting errors and their rectifications. The Components of CAS, Features, Grouping of
learner will also know the meaning and purpose of Accounts, Using Software of CAS,
preparing Bank Reconcilation statement and its Advantages & Limitations CAS, Accounting
preparation. It contains accounting of bills of exchange. Information System.
This will also expose the learner to the utility of computers = Application of computers in Accounting –
in accounting. Automation of accounting process, designing
 accounting reports, data exchange with other Thus this module is so designed that it trains the learners
information systems. how to prepare final accounts from incomplete records,
of business entities following double entry system and of
= Comparison of accounting processes, manual
not for profit organisations. It exposes the learners to the
and computerized accounting highlighting
concepts of depreciation, provisions and reserves.
advantages and limitations of automation.
3.1 Depreciation
= Sourcing of accounting system: Readymade,
customized, tailor-made accounting system. = Depreciation: Meaning, Need and Factors
Advantages and Disadvantages of each option. affecting depreciation.
MODULE 3 : FINANCILA STATEMENTS = Methods of computation of Depreciation:
50 Hrs. 20 Marks Straight Line Method, Written Down Value
Method (Excluding Change in method)
Approach
= Accounting Treatment of Depreciation: By
One of the basic functions of preparing accounts is to
charging to asset account, by creating Provision
know the financial results of business for a particular
for depreciation/accumulated depreciation
period which is generally one year and ascertaining
account, Preparation of Asset Disposal
financial position on a particular date. For this financial
Account.
statements are prepared called income statement and
position statement. These are called Final accounts. Small 3.2 Provision and Reserves
business enterprises generally donot follow double entry
= Meaning, Objective and Difference between
system hence the method of accounting followed by them
Provisions and Reserves.
is called single entry system. Their method of preparing
final accounts (financial statements) is different from = Types of Reserves: Revenue Reserve, Capital
business entities whose accounts are based on double Reserve, General Reserve, Specific reserves,
entry system. They prepare trading and profit & loss Secret reserves.
account to know the performance results of business
3.3 Financial Statement - An Introduction
and Balance Sheet to know the net capital employed in
business. = Financial Statements: Meaning, Objective and
Not for profit organisations like clubs, hospitals, schools Importance.
etc too prepare final accounts such as Income and = Trading and Profit and Loss account: Gross
Expenditure account to know the result of these activities Profit, Operating Profit and Net Profit.
in the form of surplus or deficit and Balance Sheet to
= Balance Sheet
ascertain the financial position. While preparing financial
statements some adjustments are required to be made. 3.4 Financial Statements - I
Prominent among them are depreciation-position of the
= Preparing Trading Account and Profit & Loss
value of fixed asset to be appropriated to are accounting
Account
year and provision and reserves - position of profits to
be appropriated to provisions for some expected = Balance Sheet: Need, Grouping, Marshalling
expenses and losses and regime to meet contingencies. of Assets and Liabilities.
3.5 Financial Statements - II MODULE 4 : PARTNERSHIP ACCOUNTS

= Adjustments in Preparation of Financial 50 Hrs. 20 Marks

Statements: With respect to closing stock, Approach
outstanding expenses, prepaid expenses,
You are well aware that one important form of
accrued income, income received in advance,
organisation which is widely practiced in our country is
depreciation, Bad debts, provision for doubtful
‘partnership’. While the learner should know the
debts, provision for discount on debtors,
meaning, and features of partnership. They should also
manager’s commission, abnormal loss, goods know about the partnership deed and its provisions
taken for personal use, goods distributed as affecting accounting a partnership firm such as calculating
free Sample. interest on drawings and capitals, preparing capital
= Preparation of Trading and Profit and Loss accounts of partners when their capitals are fixed and
when these are fluctuating. When ever there is
Account and Balance Sheet of Sole
reconstitution of a partnership firm due to admission of a
Proprietorship Concerns.
partner, retirement of a partner, death of a partner, the
3.6 Not for Profit Organisations - An Introduction effect of this is to be reflected in accounts in the form of
goodwill, revaluation of assets and liabilities and
= Not For Profit Organisations: Concept.
adjustment of partners capitals. If a firm is dissolved that
= Receipts and Payment Account: Meaning and too requires special accounting treatment.
Features. This module has been so designed that the learner will
= Balance Sheet: Meaning and Features be able to understand the meaning of partnership and
partnership deed, accounting treatment of certain items
= Income and Expenditure Account: Meaning if there is no provision in partnership deed such as
and Features, Preparation of Income and partners salary, profit sharing ratio etc. The learner will
Expenditure Account and Balance Sheet from know the accounting procedure regarding admission,
the given Receipt and payment Account with retirement, and death of a partner and dissolution of the
additional information. partnership firm.

3.7 Accounts From Incomplete Records 4.1 Partnership - An Introduction

= Incomplete Records: Meaning, Uses and = Meaning: Partnership, Partners, Firm,

Limitations. Partnership Deed.

= Ascertainment of Profit/Loss by Statement of = Provisions of The Indian Partnership Act 1932

affecting Accounts in the absence of
Affairs Method.
Partnership Deed.
= Preparation of Trading and Profit and Loss
= Fixed v/s Fluctuating Capital Accounts,
Account and Balance Sheet (with reference
Division of Profit among partners, Guarantee
to missing figures in total debtors account, total of profits, Past adjustments (Relating to interest
creditors account, Bills Receivable A/C, Bills on capital, interest on drawing, salary and
Payable A/C, Cash Book and Opening Profit sharing Ratio), Preparation of P & L
Statement of Affairs). Appropriation Account.
 = Goodwill: Nature, Factors affecting and MODULE 5 : COMPANY ACCOUNTS
Methods of valuation – Average profit, super 50 Hrs. 20 Marks
profit, and capitalization.
Approach
4.2 Admission of a Partners
While sole proprietorship and partnership are the old
= Change in the Profit Sharing Ratio among the forms of organisations, to meet the organisational needs
existing partners – sacrificing ratio, Gaining of the modern day business run on large scale requiring
Ratio, Accounting for Revaluation of Assets and huge amount of capital, joint stock company form of
Re-assessment of Liabilities and Distribution of organisation was designed. The most important methods
of raising finance by a company are issue of shares, and
Reserves and Accumulated profits.
debentures. The present module of the Company
= Admission of a Partner-Effect of admission of Accounts explain about the company with its brief
a Partner on: change in the Profit Sharing Ratio, introduction and how the company issues shares to raise
Treatment of goodwill (As per AS 26), capital from capital market and in case the shareholders
treatment for Revaluation of Assets and Re- failed to pay calls on due date the company forfeit those
assessment of Liabilities, Treatment of shares & reissue them again an another date. It also
explains about the issue of debentures by company and
Reserves and Accumulated profits, Adjustment
its entries in the books of accounts.
of Capital Account and Preparation of Balance
Sheet. 5.1 Company - An Introduction

4.3 Retirement and Death of a Partner = Meaning of company form of business

organisation, characteristics of company, types
= Effect of Retirement/Death of a partner – of companies, difference between public &
change in Profit Sharing Ratio, Treatment of private company, various types of shares
goodwill, treatment for Revaluation of Assets issued by company with the type of share
and Re-assessment of Liabilities, Adjustment capital.
of Accumulated Profit and Reserves. 5.2 Issue of Shares
Calculation of deceased partner’s share of
= Meaning, Nature and Types
profit till the date of death. Preparation of
Deceased partner’s Executor’s account and = Accounting for Share Capital: Issue and
Preparation of Balance Sheet. Allotment of Equity shares, Private placement
of Shares. Public Subscription of shares-over
4.4 Dissolution of Partnership Firm subscription and Under subscription of shares.
= Meaning and Types of Dissolution of firm. Issue at Par and Premium, calls in advance
and arrears, Issue of shares for consideration
Settlement of accounts –Preparation of
other than cash.
Realization account, and related accounts as
Capital, Cash & Bank (excluding piecemeal 5.3 Forfeiture of Shares
distribution, sale to a company and insolvency = Meaning of forfeiture shares, Various situations
of partners). in which share can be forfeited.
5.4 Reissue of Forfeited Shares relationships and interpretation thereof to understand the
= Meaning of reissue of Shares, Minimum price working and financial position of a business is Analysis
of which a company can reissue its forfeited of Financial Statements.
shares and accounting treatment of reissue of 6.1 Financial Statements Analysis -
shares in different situations.
An Introduction
= Disclosure of Share capital in Company’s
= Balance Sheet of a Company in the prescribed
Balance Sheet (Vertical form)
Vertical Form with major headings and sub
5.5 Issue of Debentures headings (As per Schedule VI of The
= Meaning & types of debentures, procedure Companies Act 1956).
of Issue of debentures and its accounting
= Financial Statement Analysis: Meaning,
treatment. Issue of debentures for
Objectives and Limitations.
consideration other than cash, Debentures as
collateral security accounting treatment for = Tools for Financial Statement Analysis:
writing off discount & loss on Issue of Comparative Statements, Common Size
debentures. Interest on Debentures. Statements, Cash Flow Analysis, Ratio
PART B Analysis.

MODULE 6 : ANALYSIS OF FINANCIAL 6.2 Accounting Ratios - I

STATEMENTS
= Accounting Ratios: Objectives and
50 Hrs. 20 Marks Classification of Ratios.
Approach = Liquidity ratios: Current and Quick Ratio.
Analysis of Financial Statement is a systematic process 6.3 Accounting Ratios - II
of analysing the financial information in the financial
statements to understand and make decision regarding = Solvency Ratios: Debt to Equity Ratio, Total
the operations of the enterprise. The analysis of Financial Asset to Debt Ratio, Proprietory Ratio,
Statements is a study of relationship among various Interest Coverage Ratio.
financial figures as set out in the financial statements i.e.,
= Activity ratios: Stock Turnover Ratio, Debtors
Balance Sheet and Statements of Profit & Loss. The
Turnover Ratio, Creditors Turnover Ratio,
complex data given in the Financial Statement is
Working Capital Turnover Ratio.
bifircuated, divided and broken into simple and valuable
elements and relationships are established between the = Profitability Ratios: Gross Profit Ratio,
elements of the same statements or different financial Operating Ratio, Operating Profit Ratio, Net
statement. Profit Ratio.
This module deals with the tools and teachniques of 6.4 Cash Flow Statement
analysing the financial statement such as Ratios, Cash
Flow Statements, Comparative Statements etc. Using = Meaning Objective and preparation of Cash
these tools, the process of division, establishing, Flow Statement.
 PART - C Reports, Preparation of Reports Using Pivot
table, Common Errors in Spread Sheet.
MODULE 7 : APPLICATION OF COMPUTERS
IN FINANCIAL ACCOUNTING 7.2 Use of Spreadsheet in Business Application

50 Hrs. 20 Marks = Payroll Accounting, Asset Accounting.

Approach 7.3 Graphs And Charts for Business

In the modern world of machines, computers are the = Data Graphs and Charts, Preparation of
part and parcel of Human being. We cannot imagine any Graphs and Charts using Excel, Advantages
organisation working without the use of computers. The of using Graphs and Charts.
same is the case with business, Due to various
7.4 Data Base Management System for
advantages, computers are very widely used in Business
Accounting
Organisation. This module of Application of Computers
in Financial Accounting is designed to explain as how = Defining Database Requirements,
the computers can be effectively used in accounting of Identification of data to be stored in Tables,
business transactions. Computerised Accounting System Structuring of Data.
refers to the processing of accounting transactions, the = Creating data tables for accounting, Using
use of hardware and software in order to produce queries, forms and reports for generating
accounting records and reports. accounting information with the help of
In modern business accounting transactions are Microsoft Access Software.
processed through computers. Usage of Computers and Scheme of Evaluation
Information Technology (IT) enables a business to
quickly, accurately and timely access the information that The learner will be evaluated through Public examination
helps in decision making. This sharpens the competitive as well as continuous, and comprehensive. Evaluation in
edge and enhances profitability. The computer systems the form of Tutor Marked Assignments (TMA’s)
work with the data which is processed by the hardware Exanination Marks Duration Paper Assessment
commanded by the users through software. This module
Public Exam 100 3 Hrs. One External
explains the use of Electronic Spread Sheet & its
applications in Business, together with how to prepare TMA 20 Self paced One By tutor of
Graphs & Charts for Business and as how to use Data
Study Centre
Base Management System for Accounting.
There are three parts in Accountancy (320). Part A is
7.1 Electronic Spread Sheet
compulsory to all, while the learner has to choose any
= Concept, Data Entry Text Management and one part from B or C respectively, during Public
Cell formatting, Data Formatting, Output Examination.