Paper 2new
Paper 2new
Paper 2new
6
01
-2
US
AB
LL
SY
FUNDAMENTALS OF
ACCOUNTING FOUNDATION
STUDY NOTES
Published by :
Directorate of Studies
The Institute of Cost Accountants of India (ICAI)
CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
www.icmai.in
Printed at :
M/s. Sap Prints Solutions Pvt. Ltd.
28A, Lakshmi Industrial Estate
S.N. Path, Lower Parel (W)
Mumbai - 400 013, Maharashtra
B
20%
A
80%
ASSESSMENT STRATEGY
OBJECTIVES
Learning Aims
2. Accounting
for Special Transactions 20%
3. Preparation
of Final Accounts 25%
1. Accounting Basics
2. Accounting for Special Transactions
3. Preparation of Final Accounts
(a) Meaning, Denition, Signicance of Cost Accounting, its relationship with Financial Accounting &
Management Accounting.
(b) Classication of Costs
(c) Format of Cost Sheet
Contents
SECTION - A: FUNDAMENTALS OF FINANCIAL ACCOUNTING
Study Note 1 : Accounting Basics
3.1 Prot making concern (for sole proprietorship concern only) 191
3.2 Not-for-Prot making concern 214
4.1 Meaning, Denition, Signicance of Cost Accounting, its relationship with Financial
Accounting & Management Accounting 233
4.2 Classication of Costs 245
4.3 Format of Cost Sheet 258
Section A
Fundamentals of Financial Accounting
(Syllabus - 2016)
Study Note - 1
ACCOUNTING BASICS
Objectives of Accounting
(i) Providing Information to the Users for Rational Decision-making
The primary objective of accounting is to provide useful information for decision-making to stakeholders
such as owners, management, creditors, investors, etc. Various outcomes of business activities such as costs,
prices, sales volume, value under ownership, return of investment, etc. are measured in the accounting
process. All these accounting measurements are used by stakeholders (owners, investors, creditors/bankers,
etc.) in course of business operation. Hence, accounting is identified as ‘language of business’.
(ii) Systematic Recording of Transactions
To ensure reliability and precision for the accounting measurements, it is necessary to keep a systematic
record of all financial transactions of a business enterprise which is ensured by bookkeeping. These financial
records are classified, summarized and reposted in the form of accounting measurements to the users of
accounting information i.e., stakeholder.
(iii) Ascertainment of Results of above Transactions
‘Profit/loss’ is a core accounting measurement. It is measured by preparing profit and loss account for a
particular period. Various other accounting measurements such as different types of revenue expenses
and revenue incomes are considered for preparing this profit and loss account. Difference between these
revenue incomes and revenue expenses is known as result of business transactions identified as profit/loss. As
this measure is used very frequently by stockholders for rational decision making, it has become the objective
of accounting. For example, Income Tax Act requires that every business should have an accounting system
that can measure taxable income of business and also explain nature and source of every item reported in
Income Tax Return.
(iv) To Ascertain the Financial Position of Business
‘Financial position’ is another core accounting measurement. Financial position is identified by preparing
a statement of ownership i.e., Assets and Owings i.e., liabilities of the business as on a certain date. This
statement is popularly known as balance sheet. Various other accounting measurements such as different
types of assets and different types of liabilities as existed at a particular date are considered for preparing the
balance sheet. This statement may be used by various stakeholders for financing and investment decision.
(v) To Know the Solvency Position
Balance sheet and profit and loss account prepared as above give useful information to stockholders
regarding concerns potential to meet its obligations in the short run as well as in the long run.
Function of Accounting
The main functions of accounting are as follows:
(a) Measurement: Accounting measures past performance of the business entity and depicts its current financial
position.
(b) Forecasting: Accounting helps in forecasting future performance and financial position of the enterprise
using past data.
(c) Decision-making: Accounting provides relevant information to the users of accounts to aid rational decision-
making.
(d) Comparison & Evaluation: Accounting assesses performance achieved in relation to targets and discloses
information regarding accounting policies and contingent liabilities which play an important role in predicting,
comparing and evaluating the financial results.
(e) Control: Accounting also identifies weaknesses of the operational system and provides feedback regarding
effectiveness of measures adopted to check such weaknesses.
(f) Government Regulation and Taxation: Accounting provides necessary information to the government to
exercise control on the entity as well as in collection of tax revenues.
BOOK-KEEPING
As defined by Carter, ‘Book-keeping is a science and art of correctly recording in books-of accounts all those
business transactions that result in transfer of money or money’s worth’.
Book-keeping is an activity concerned with recording and classifying financial data related to business operation
in order of its occurrence.
Book-keeping is a mechanical task which involves:
� Collection of basic financial information.
� Identification of events and transactions with financial character i.e., economic transactions.
� Measurement of economic transactions in terms of money.
� Recording financial effects of economic transactions in order of its occurrence.
� Classifying effects of economic transactions.
� Preparing organized statement known as trial balance.
The distinction between book-keeping and accounting is given below:
Distinction between Book-keeping and Accounting
Book-Keeping Accounting
1. Output of book-keeping is an input for accounting. 1. Output of accounting permit informed judgments
and decisions by the user of accounting
information.
2. Purpose of book-keeping is to keep systematic 2. Purpose of accounting is to find results of
record of transactions and events of financial operating activity of business and to report
character in order of its occurrence. financial strength of business.
3. Book-keeping is a foundation of accounting. 3. Accounting is considered as a language of
business.
4. Book-keeping is carried out by junior staff. 4. Accounting is done by senior staff with skill of
analysis and interpretation.
5. Objects of book-keeping is to summarize the 5. Object of accounting is not only bookkeeping
cumulative effect of all economic transactions but also analyzing and interpreting reported
of business for a given period by maintaining financial information for informed decisions.
permanent record of each business transaction with
its evidence and financial effects on accounting
variable.
ACCOUNTING CYCLE
When complete sequence of accounting procedure is done which happens frequently and repeated in same
directions during an accounting period, the same is called an accounting cycle.
Steps/Phases of Accounting Cycle
The steps or phases of accounting cycle can be developed as under:
Recording of
Transaction
Financial
Journal
Statement
Closing
Ledger
Entries
Adjustment
Entries
ACCOUNTING CYCLE
(i) Recording of Transaction: As soon as a transaction happens it is at first recorded in subsidiary book.
(ii) Journal: The transactions are recorded in Journal chronologically.
(iii) Ledger: All journals are posted into ledger chronologically and in a classified manner.
(iv) Trial Balance: After taking all the ledger account closing balances, a Trial Balance is prepared at the end of
the period for the preparations of financial statements.
(v) Adjustment Entries: All the adjustments entries are to be recorded properly and adjusted accordingly before
preparing financial statements.
(vi) Adjusted Trial Balance: An adjusted Trail Balance may also be prepared.
(vii) Closing Entries: All the nominal accounts are to be closed by the transferring to Trading Account and Profit
and Loss Account.
(viii) Financial Statements: Financial statement can now be easily prepared which will exhibit the true financial
position and operating results.
ACCOUNTING – CLASSIFICATION
The various sub-fields of the accounting are:
ACCOUNTING
1. Financial Determining the financial results for the period and the state Stewardship Accounting
Accounting of affairs on the last day the accounting period.
2. Cost Accounting Information generation for Controlling operations with a Control Accounting
view to maximizing efficiency and profit.
3. Management Accounting to assist management in planning and decision Decision Accounting
Accounting making.
BASIS OF ACCOUNTING
ACCRUAL BASIS AND CASH BASIS OF ACCOUNTING
Accounting
Accrual Cash
Basis Basis
Accounting
(v) Asset: Asset is a resource owned by the business with the purpose of using it for generating future profits.
Assets can be Tangible and Intangible. Tangible Assets are the Capital assets which have some physical
existence. They can, therefore, be seen, touched and felt, e.g. Plant and Machinery, Furniture and Fittings,
Land and Buildings, Books, Computers, Vehicles, etc. The capital assets which have no physical existence
and whose value is limited by the rights and anticipated benefits that possession confers upon the owner are
known as lntangible Assets. They cannot be seen or felt although they help to generate revenue in future,
e.g. Goodwill, Patents, Trade-marks, Copyrights, Brand Equity, Designs, Intellectual Property, etc.
Assets can also be classified into Current Assets and Non-Current Assets.
Current Assets – An asset shall be classified as Current when it satisfies any of the following:
(a) It is expected to be realised in, or is intended for sale or consumption in the Company’s normal
Operating Cycle,
(b) It is held primarily for the purpose of being traded,
(c) It is due to be realised within 12 months after the Reporting Date, or
(d) It is Cash or Cash Equivalent unless it is restricted from being exchanged or used to settle a Liability for
at least 12 months after the Reporting Date.
Non-Current Assets – All other Assets shall be classified as Non-Current Assets. e.g. Machinery held for long
term etc.
(vi) Liability: It is an obligation of financial nature to be settled at a future date. It represents amount of money
that the business owes to the other parties. E.g. when goods are bought on credit, the firm will create an
obligation to pay to the supplier the price of goods on an agreed future date or when a loan is taken from
bank, an obligation to pay interest and principal amount is created.
Depending upon the period of holding, these obligations could be further classified into Long Term or non-
current liabilities and Short Term or current liabilities.
Current Liabilities – A liability shall be classified as Current when it satisfies any of the following:
(a) It is expected to be settled in the Company’s normal Operating Cycle,
(b) It is held primarily for the purpose of being traded,
(c) It is due to be settled within 12 months after the Reporting Date, or
(d) The Company does not have an unconditional right to defer settlement of the liability for at least 12
months after the reporting date (Terms of a Liability that could, at the option of the counterparty, result
in its settlement by the issue of Equity Instruments do not affect its classification)
Non-Current Liabilities – All other Liabilities shall be classified as Non-Current Liabilities. E.g. Loan taken for 5
years, Debentures issued etc.
(vii) Internal Liability: These represent proprietor’s equity, i.e. all those amount which are payable to the proprietor,
e.g., Capital, Reserves, Undistributed Profits, etc.
(viii) Working Capital: In order to maintain flows of revenue from operation, every firm needs certain amount
of current assets. For example, cash is required either to pay for expenses or to meet obligation for service
received or goods purchased, etc. by a firm. On identical reason, inventories are required to provide the
link between production and sale. Similarly, Accounts Receivable are generated when goods are sold on
credit. Cash, Bank, Debtors, Bills Receivable, Closing Stock, Prepayments etc. represent current assets of firm.
The whole of these current assets form the working capital of a firm which is termed as Gross Working Capital.
Gross Working capital = Total Current Assets
= Long term internal liabilities + long term debts + The current liabilities -
The amount blocked in the fixed assets.
There is another concept of working capital. Working capital is the excess of current assets over current
liabilities. That is the amount of current assets that remain in a firm if all its current liabilities are paid. This
concept of working capital is known as Net Working Capital which is a more realistic concept.
Working Capital (Net) = Current Assets – Currents Liabilities.
(ix) Contingent Liability: It represents a potential obligation that could be created depending on the outcome
of an event. E.g. if supplier of the business files a legal suit, it will not be treated as a liability because no
obligation is created immediately. If the verdict of the case is given in favour of the supplier then only the
obligation is created. Till that it is treated as a contingent liability. Please note that contingent liability is not
recorded in books of account, but disclosed by way of a note to the financial statements.
(x) Capital: It is amount invested in the business by its owners. It may be in the form of cash, goods, or any other
asset which the proprietor or partners of business invest in the business activity. From business point of view,
capital of owners is a liability which is to be settled only in the event of closure or transfer of the business.
Hence, it is not classified as a normal liability. For corporate bodies, capital is normally represented as share
capital.
(xi) Drawings: It represents an amount of cash, goods or any other assets which the owner withdraws from
business for his or her personal use. e.g. if the life insurance premium of proprietor or a partner of business is
paid from the business cash, it is called drawings. Drawings will result in reduction in the owners’ capital. The
concept of drawing is not applicable to the corporate bodies like limited companies.
(xii) Net worth: It represents excess of total assets over total liabilities of the business. Technically, this amount is
available to be distributed to owners in the event of closure of the business after payment of all liabilities.
That is why it is also termed as Owner’s equity. In a profit making business, profit will result in increase in the
owner’s equity whereas losses will reduce it.
(xiii) Non-current Investments: Non-current Investments are investments which are held beyond the current
period as to sale or disposal. e. g. Fixed Deposit for 5 years.
(xiv) Current Investments: Current investments are investments that are by their nature readily realizable and are
intended to be held for not more than one year from the date on which such investment is made. e. g. 11
months Commercial Paper.
(xv) Debtor: The sum total or aggregate of the amounts which the customer owe to the business for purchasing
goods on credit or services rendered or in respect of other contractual obligations, is known as Sundry
Debtors or Trade Debtors, or Book-Debts or Debtors. In other words, Debtors are those persons from whom a
business has to recover money on account of goods sold or service rendered on credit.
These debtors may again be classified as under:
(a) Good debts: The debts which are sure to be realized are called good debts.
(b) Doubtful Debts: The debts which may or may not be realized are called doubtful debts.
(c) Bad debts: The debts which cannot be realized at all are called bad debts.
It must be remembered that while ascertaining the debtors balance at the end of the period certain
adjustments may have to be made e.g. Bad Debts, Discount Allowed, Returns Inwards, etc.
(xvi) Creditor: A creditor is a person to whom the business owes money or money’s worth. e.g. money payable
to supplier of goods or provider of service. Creditors are generally classified as Current Liabilities.
(xvii) Capital Expenditure: This represents expenditure incurred for the purpose of acquiring a fixed asset which
is intended to be used over long term for earning profits therefrom. e. g. amount paid to buy a computer
for office use is a capital expenditure. At times expenditure may be incurred for enhancing the production
capacity of the machine. This also will be a capital expenditure. Capital expenditure forms part of the
Balance Sheet.
(xviii) Revenue expenditure: This represents expenditure incurred to earn revenue of the current period.
The benefits of revenue expenses get exhausted in the year of the incurrence. e.g. repairs, insurance, salary
& wages to employees, travel etc. The revenue expenditure results in reduction in profit or surplus. It forms
part of the Income statement.
(xix) Balance Sheet: It is the statement of financial position of the business entity on a particular date.
It lists all assets, liabilities and capital. It is important to note that this statement exhibits the state of affairs of
the business as on a particular date only. It describes what the business owns and what the business owes to
outsiders (this denotes liabilities) and to the owners (this denotes capital). It is prepared after incorporating
the resulting profit/losses of Income statement.
(xx) Profit and Loss Account or Income Statement: This account shows the revenue earned by the business
and the expenses incurred by the business to earn that revenue. This is prepared usually for a particular
accounting period, which could be a month, quarter, a half year or a year. The net result of the Profit and
Loss Account will show profit earned or loss suffered by the business entity.
(xxi) Trade Discount: It is the discount usually allowed by the wholesaler to the retailer computed on the list price
or invoice price. e.g. the list price of a TV set could be ` 15000. The wholesaler may allow 20% discount
thereof to the retailer. This means the retailer will get it for ` 12000 and is expected to sale it to final customer
at the list price. Thus the trade discount enables the retailer to make profit by selling at the list price. Trade
discount is not recorded in the books of accounts. The transactions are recorded at net values only. In
above example, the transaction will be recorded at ` 12000 only.
(xxii) Cash Discount: This is allowed to encourage prompt payment by the debtor. This has to be recorded in the
books of accounts. This is calculated after deducting the trade discount. e.g. if list price is ` 15000 on which
a trade discount of 20% and cash discount of 2% apply, then first trade discount of ` 3000 (20% of ` 15000)
will be deducted and the cash discount of 2% will be calculated on ` 12000 (` 15000 – ` 3000). Hence the
cash discount will be ` 240 (2% of ` 12000) and net payment will be ` 11,760 (` 12,000 - ` 240)
ACCOUNTING PRINCIPLES
Accounting principles are basic guidelines that provide standards for scientific accounting practices and
procedures. They guide as to how the transactions are to be recorded and reported. They assure uniformity
and understandability. Accounting concepts lay down the foundation for accounting principles. They are ideas
essentially at mental level and are self-evident. These concepts ensure recording of financial facts on sound bases
and logical considerations. Accounting conventions are methods or procedures that are widely accepted. When
transactions are recorded or interpreted, they follow the conventions. Many times, however, the terms-principles,
concepts and conventions are used interchangeably.
Professional Accounting Bodies have published statements of these concepts. Over years, many of these concepts
are being challenged as outlived. Yet, no major deviations have been made as yet. Path breaking ideas have
emerged and the accounting standards of modern days do require companies to record and report transactions
which may not be necessarily based on concepts that are in vogue for long. It is essential to study accounting
from the basic levels and understand these concepts in entirety.
Modifying
Basic Assumptions Basic Principles
Principles
(a) Basic Principles (a) Revenue Realization Concept (a) Materiality Concept
(b) Going Concern Concept (b) Matching Concept (b) Consistency Concept
(c) Money Measurement Concept (c) Full Disclosure Concept (c) Conservatism Concept
(d) Accounting Period Concept (d) Dual Aspect Concept (d) Timeliness Concept
(e) Accrual Concept (e) Verifiable Objective Evidence Concept (e) Industry Practice Concept
(f) Historical Cost Concept
(g) Balance Sheet Equation Concept
A. BASIC ASSUMPTIONS
(a) Business Entity Concept
This concept explains that the business is distinct from the proprietor. Thus, the transactions of business
only are to be recorded in the books of business.
(b) Going Concern Concept
This concept assumes that the business has a perpetual succession or continued existence.
(c) Money Measurement Concept
According to this concept only those transactions which are expressed in monetary terms are to be
recorded in accounting books.
(d) The Accounting Period Concept
Businesses are living, continuous organisms. The splitting of the continuous stream of business events into
time periods is thus somewhat arbitrary. There is no significant change just because one accounting
period ends and a new one begins. This results into the most difficult problem of accounting of how to
measure the net income for an accounting period. One has to be careful in recognizing revenue and
expenses for a particular accounting period. Subsequent section on accounting procedures will explain
how one goes about it in practice.
B. BASIC PRINCIPLES
(a) Realization Concept
This concept speaks about recording of only those transactions which are actually realized. For example
Sale or Profit on sales will be taken into account only when money is realized i.e. either cash is received
or legal ownership is transferred.
(b) Matching Concept
It is referred to as matching of expenses against incomes. It means that all incomes and expenses relating
to the financial period to which the accounts relate should be taken in to account without regard to the
date of receipts or payment.
(c) Full Disclosure Concept
As per this concept, all significant information must be disclosed. Accounting data should properly be
clarified, summarized, aggregated and explained for the purpose of presenting the financial statements
which are useful for the users of accounting information. Practically, this principle emphasizes on the
materiality, objectivity and consistency of accounting data which should disclose the true and fair view
of the state of affairs of a firm.
(d) Duality Concept
According to this concept every transaction has two aspects i.e. the benefit receiving aspect and benefit
giving aspect. These two aspects are to be recorded in the books of accounts.
(e) Verifiable Objective Evidence Concept
Under this principle, accounting data must be verifiable. In other words, documentary evidence of
transactions must be made which are capable of verification by an independent respect. In the absence
of such verification, the data which will be available will neither be reliable nor be dependable, i.e., these
should be biased data. Verifiability and objectivity express dependability, reliability and trustworthiness
that are very useful for the purpose of displaying the accounting data and information to the users.
(f) Historical Cost Concept
Business transactions are always recorded at the actual cost at which they are actually undertaken.
The basic advantage is that it avoids an arbitrary value being attached to the transactions. Whenever
an asset is bought, it is recorded at its actual cost and the same is used as the basis for all subsequent
accounting purposes such as charging depreciation on the use of asset, e.g. if a production equipment
is bought for ` 1.50 crores, the asset will be shown at the same value in all future periods when disclosing
the original cost. It will obviously be reduced by the amount of depreciation, which will be calculated
with reference to the actual cost. The actual value of the equipment may rise or fall subsequent to the
purchase, but that is considered irrelevant for accounting purpose as per the historical cost concept.
The limitation of this concept is that the balance sheet does not show the market value of the assets
owned by the business and accordingly the owner’s equity will not reflect the real value. However, on an
ongoing basis, the assets are shown at their historical costs as reduced by depreciation.
C. MODIFYING PRINCIPLES
(a) The Concept of Materiality
The materiality could be related to information, amount, procedure and nature. Error in description of an
asset or wrong classification between capital and revenue would lead to materiality of information.
Say, If postal stamps of ` 500 remain unused at the end of accounting period, the same may not be
considered for recognizing as inventory on account of materiality of amount. Certain accounting
treatments depend upon procedures laid down by accounting standards. Some transactions are by
nature material irrespective of the amount involved. e.g., audit fees, loan to directors.
(b) Consistency Concept
This Concept says that the Accounting practices should not change or must remain unchanged over a
period of several years.
(c) Conservatism Concept
Conservatism concept states that when alternative valuations are possible, one should select the
alternative which fairly represents economic substance of transactions but when such choice is not clear
select the alternative that is least likely to overstate net assets and net income. It provides for recognising
all known expenses and losses by best estimates if amount is not known with certainty, but does not allow
recognising revenues and gains on the basis of anticipation.
(d) Timeliness Concept
Under this principle, every transaction must be recorded in proper time. Normally, when the transaction
is made, the same must be recorded in the proper books of accounts. In short, transaction should
be recorded date-wise in the books. Delay in recording such transaction may lead to manipulation,
misplacement of vouchers, misappropriation etc. of cash and goods. This principle is followed particularly
while verifying day to day cash balance. Principle of timeliness is also followed by banks, i.e. every bank
verifies the cash balance with their cash book and within the day, the same must be completed.
(e) Industry Practice
As there are different types of industries, each industry has its own characteristics and features. There may
be seasonal industries also. Every industry follows the principles and assumption of accounting to perform
their own activities. Some of them follow the principles, concepts and conventions in a modified way.
The accounting practice which has always prevailed in the industry is followed by it. e.g., Electric supply
companies, Insurance companies maintain their accounts in a specific manner.
Insurance companies prepare Revenue Account just to ascertain the profit/loss of the company and not
Profit and Loss Account. Similarly, non trading organizations prepare Income and Expenditure Account
to find out Surplus or Deficit.
Ans: 1. b 2. c 3. b 4. c 5.d 6. b 7. b 8.c 9.c 10.a 11.a 12.d 13.d 14.c 15.a
True or false:
1. Accounting is an art of recording transactions (TRUE)
2. Consistency is one of the accounting concepts (FALSE)
3. Accounting is concerned with both monetary and non-monetary transactions (FALSE)
4. Joint venture follows the going concern concepts (FALSE)
5. Financial statements are part of Accounting (TRUE)
6. Double entry principle means writing twice the same entry (FALSE)
7. Credit means increase in liability and decrease in asset (TRUE)
8. Goodwill is a Fictitious Asset (FALSE)
1. Debtors j a) Goodwill
2. Asset g b) nominal account
3. Expenses b c) Debentures
4. An increase in asset f d) plant and machinery
5. An increase in liability h e) preliminary expenses
6. Fixed asset d f) Debit
7. Intangible asset a g) real account
8. Fictitious asset e h) Credit
9. Long term liabilities c i) casting
10. Totaling of amount i j) personal account
1.2 CAPITAL AND REVENUE TRANSACTIONS – CAPITAL AND REVENUE EXPENDITURES, CAPITAL AND REVENUE
RECEIPTS
Capital Profits
Capital profit is the profit which is earned on the sale of the fixed assets.
Revenue Profit
The profit which is earned during the ordinary course of business is called revenue profit.
Capital Loss
The loss suffered by a company on the sale of fixed assets is called capital loss.
Revenue Loss
The loss suffered by the business in the ordinary course of business is called revenue loss.
Expenditure on consumable items, on goods and services for resale either in their original or improved form.
Examples are purchases of raw materials, office stationery, and the like. At the end of the year, there may be
some revenue items (stock, stationery, etc.) still in hand. These are generally passed over to the next year though
they were acquired in the previous year.
Expenditures incurred for maintaining fixed assets in working order. For example, repairs, renewals and depreciation.
Some examples of revenue expenditure
(i) Salaries and wages paid to the employees;
(ii) Rent and rates for the factory or office premises;
(iii) Depreciation on plant and machinery;
(iv) Consumable stores;
(v) Inventory of raw materials, work-in-progress and finished goods;
(vi) Insurance premium;
(vii) Taxes and legal expenses; and
(viii) Miscellaneous expenses.
4. Brokerage, Government Stamp Duty and Legal Expenses: All the expenses paid on the purchase of a
property will be regarded as capital expenditure.
5. Raw Materials and Stores: These are generally revenue in nature, but if raw materials and stores are consumed
in the making of a fixed asset, the same should be treated as capital expenditure.
6. Development Expenditure: All the expenditure incurred for the development of mines and plantations should
be treated as capital expenditure.
Illustration: 1
State whether the following are capital, revenue or deferred revenue expenditure.
(i) Carriage of ` 7,500 spent on machinery purchased and installed.
(ii) Heavy advertising costs of ` 20,000 spent on the launching of a company’s new product.
(iii) ` 200 paid for servicing the company vehicle, including ` 50 paid for changing the oil.
(iv) Construction of basement costing ` 1,95,000 at the factory premises.
Solution:
(i) Carriage of ` 7,500 paid for machinery purchased and installed should be treated as a Capital Expenditure.
(ii) Advertising expenses for launching a new product of the company should be treated as a Revenue =
Expenditure. (As per AS-26)
(iii) ` 200 paid for servicing and oil change should be treated as a Revenue Expenditure.
(iv) Construction cost of basement should be treated as a Capital Expenditure.
Illustration: 2
State whether the following are capital or revenue expenditure.
(i) Paid a bill of ` 10,000 of Mr. Kumar, who was engaged as the erection engineer to set up a new automatic
machine costing ` 20,000 at the new factory site.
(ii) Incurred ` 26,000 expenditure on varied advertisement campaigns undertaken yearly, on a regular basis,
during the peak festival season.
(iii) In accordance with the long-term plan of providing a well- equipped Labour Welfare Centre, spent ` 90,000
being the budgeted allocation for the year.
Solution:
(i) Expenses incurred for erecting a new machine should be treated as a Capital Expenditure.
(ii) Advertisement expenses during peak festival season should be treated as a Revenue Expenditure.
(iii) Expenses incurred for Labour Welfare Centre should be treated as a Capital Expenditure.
Illustration: 3
Classify the following items as capital or revenue expenditure:
(i) An extension of railway tracks in the factory area;
(ii) Wages paid to machine operators;
(iii) Installation costs of new production machine;
(iV) Materials for extension to foremen’s offices in the factory;
(v) Rent paid for the factory;
(vi) Payment for computer time to operate a new stores control system,
(vii) Wages paid to own employees for building the foremen’s offices.
Give reasons for your classification.
Solution:
(i) Expenses incurred for extension of railway tracks in the factory area should be treated as a Capital
Expenditure because it will yield benefit for more than one accounting period.
(ii) Wages paid to machine operators should be treated as a Revenue Expenditure as it will yield benefit for the
current period only.
(iii) Installation costs of new production machine should be treated as a Capital Expenditure because it will
benefit the business for more than one accounting period.
(iv) Materials for extension to foremen’s offices in the factory should be treated as a Capital Expenditure because
it will benefit the business for more than one accounting period.
(v) Rent paid for the factory should be treated as a Revenue Expenditure because it will benefit the Company
only during the current period.
(vi) Payment for computer time to operate a new stores control system should be treated as Revenue Expenditure
because it has been incurred to carry on the normal business.
(vii) Wages paid for building foremen’s offices should be treated as a Capital Expenditure because it will benefit
the business for more than one accounting period.
Illustration 4
For each of the cases numbered below, indicate whether the income/expenditure is capital or revenue.
(i) Payment of wages to one’s own employees for building a new office extension.
(ii) Regular hiring of computer time for the preparation of the firm’s accounts.
(iii) The purchase of a new computer for use in the business.
(iv) The use of motor vehicle, hired for five years, but paid at every six months.
Solution:
(i) Payment of wages for building a new office extension should be treated as a Capital Expenditure.
(ii) Computer hire charges should be treated as a Revenue Expenditure.
(iii) Purchase of computer for use in the business should be treated as a Capital Expenditure.
(iv) Hire charges of motor vehicle should be treated as a Revenue Expenditure.
Illustration 5
State with reasons whether the following are capital or revenue expenditure:
(i) Freight and cartage on the new machine ` 150, and erection charges ` 500.
(ii) Fixtures of the book value of ` 2,500 sold off at ` 1,600 and new fixtures of the value of ` 4,000 were acquired.
Cartage on purchase ` 100.
(iii) A sum of ` 400 was spent on painting the factory.
(iv) ` 8,200 spent on repairs before using a second hand car purchased recently, to put it in usable condition.
Solution:
(i) Freight and cartage totaling ` 650 should be treated as a Capital Expenditure because it will benefit the
business for more than one accounting year.
(ii) Loss on sale of fixtures ` (2,500 – 1,600) = ` 900 should be treated as a Capital Loss. The cost of new fixtures
and carriage thereon should be treated as a Capital Expenditure because the fixture will be used for a long
period. So the cost of new fixture will be ` (4,000+100) ` 4,100.
(iii) Painting of the factory should be treated as a Revenue Expenditure because it has been incurred to maintain
the factory building.
(iv) Repairing cost of second hand car should be treated as a Capital Expenditure because it will benefit the
business for more than one accounting year.
Illustration 6
State the nature (capital or revenue) of the following expenditure which were incurred by Vedanta & Co. during
the year ended 30th June, 2015:
(i) ` 350 was spent on repairing a second hand machine which was purchased on 8th May, 2015 and ` 200 was
paid on carriage and freight in connection with its acquisition.
(ii) A sum of ` 30,000 was paid as compensation to two employees who were retrenched.
(iii) ` 150 was paid in connection with carriage on goods purchased.
(iv) ` 20,000 customs duty is paid on import of a machinery for modernisation of the factory production during
the current year and ` 6,000 is paid on import duty for purchase of raw materials.
(v) ` 18,000 interest had accrued during the year on term loan obtained and utilised for the construction of
factory building and purchase of machineries; however, the production has not commenced till the last
date of the accounting year.
Solution:
(i) Repairing and carriage totaling ` 550 for second hand machine should be treated as a Capital Expenditure.
(ii) Compensation paid to employees shall be treated as a Revenue Expenditure.
(iii) Carriage paid for goods purchased should be treated as a Revenue Expenditure.
(iv) Customs duty paid on import of machinery to be treated as a Capital Expenditure. However, import duty
paid for raw materials should be treated as a Revenue Expenditure.
(v) Interest paid during pre-construction period to be treated as a Capital Expenditure.
Illustration 7
State with reasons whether the following items relating to Parvati Sugar Mill Ltd. are capital or revenue:
(i) ` 50,000 received from issue of shares including ` 10,000 by way of premium.
(ii) Purchased agricultural land for the mill for ` 60,000 and ` 500 was paid for land revenue for period after
purchase.
(iii) ` 5,000 paid as contribution to PWD for improving roads of sugar producing area.
(iv) ` 40,000 paid for excise duty on sugar manufactured.
(v) ` 70,000 spent for constructing railway siding.
Solution:
(i) ` 40,000 (50,000 – ` 10,000) received from issue of shares will be treated as a Capital Receipt. The premium
of ` 10,000 should be treated as a Capital Profit.
(ii) Cost of land ` 60,000 to be treated as Capital Expenditure and land revenue of ` 500 to be treated as
Revenue Expenditure.
(iii) Contribution paid to PWD should be treated as a Revenue Expenditure.
10. A motor car which was purchased for ` 20,000 and had its book value ` 12,000 was sold for ` 17,000. The
capital profit will be “` 5000" (TRUE)
Group B
1.3 DOUBLE ENTRY SYSTEM, BOOKS OF PRIME ENTRY, SUBSIDIARY BOOKS, CASH BOOK, JOURNAL, LEDGER,
TRIAL BALANCE
(vii) The businessman can justify the standing of his business in comparison with the previous year's purchase,
sales, and stocks, incomes and expenses with that of the current year figures.
(viii) Helps in decision making.
(ix) The net operating results can be calculated by preparing the Trading and Profit and Loss A/c for the year
ended and the financial position can be ascertained by the preparation of the Balance Sheet.
(x) It becomes easy for the Government to decide the tax.
(xi) It helps the Government to decide sickness of business units and extend help accordingly.
(xii) The other stakeholders like suppliers, banks, etc. take a proper decision regarding grant of credit or loans.
Limitations of Double Entry System
(i) The system does not disclose all the errors committed in the books accounts.
(ii) The trial balance prepared under this system does not disclose certain types of errors.
(iii) It is costly as it involves maintenance of a number of books of accounts.
TYPES OF ACCOUNTS
(i) Transactions relating to owner, e.g., Capital – These are personal accounts
(ii) Transactions relating to other liabilities, e.g., suppliers of goods – These are mostly personal accounts
(iii) Transactions relating to assets, e.g., land, building, cash, bank, stock-in-trade, bills receivable – These are
basically all real accounts
(iv) Transactions relating to expenses, e.g., rent, salary, commission, wages, cartage – These are nominal
accounts
(v) Transactions relating to revenues or income, e.g., interest received, dividend received, sale of goods –
These are nominal accounts
To Sum Up
Illustration 1.
Ascertain the debit and credit from the following particulars under Modern Approach.
(a) Started business with capital.
(b) Bought goods for cash.
(c) Sold goods for cash.
(d) Paid salary.
(e) Received Interest on Investment.
(f) Bought goods on credit from Mr. Y
(g) Paid Rent out of Personal cash.
Solution:
Effect of Transaction Account To be debited/Credited
(a) Increase in Cash Cash A/c Debit
Increase in Capital Capital A/c Credit
(b) Increase in Stock Purchase A/c Debit
Decrease in Cash Cash A/c Credit
(c) Increase in Cash Cash A/c Debit
Decrease in Stock Sale A/c Credit
(d) Increase in Expense Salary A/c Debit
Decrease in Cash Cash A/c Credit
(e) Increase in Cash Cash A/c Debit
Increase in Income Interest A/c Credit
(f) Increase in Stock Purchase A/c Debit
Increase in Liability Y A/c Credit
(g) Increase in Expense Rent A/c Debit
Increase in Liability Capital A/c Credit
Illustration 2.
Ascertain the Debit Credit under British Approach or Double Entry System. Consider previous illustration.
Solution:
ACCOUNTING EQUATION
The whole Financial Accounting depends on Accounting Equation which is also known as Balance Sheet Equation.
The basic Accounting Equation is:
Assets = Liabilities + Owner’s equity
or A = L + P
or P = A – L Where A = Assets, L = Liabilities, P = Capital
or L = A - P
While trying to do this correlation, please note that incomes or gains will increase owner’s equity and expenses or
losses will reduce it.
Students are advised to go through the following illustration to understand this equation properly.
ACCOUNTING EQUATION
Illustration: 3
Prepare an Accounting Equation from the following transactions in the books of Mr. X for January, 2015 :-
1 Invested Capital in the firm ` 20,000
2 Purchased goods on credit from Das & Co. for ` 2,000
4 Bought plant for cash ` 8,000
8 Purchased goods for cash ` 4,000
12 Sold goods for cash (Cost ` 4,000 + Profit ` 2,000) ` 6,000.
18 Paid to Das & Co. in cash ` 1,000
22 Received from B. Banerjee ` 300
25 Paid salary ` 6,000
30 Received interest ` 5,000
31 Paid wages ` 3,000
Solution:
Effect of transaction on Assets, Liabilities and Capital
EXERCISE
1. Show the Accounting Equation on the basis of the following transactions:
(a) Rajesh started business with cash `9,000
(b) Purchased equipment for cash `7,400
(c) Purchased goods on credit `2,650
(d) Paid `300 to creditors
(e) Sold goods for cash `2,000 (cost price `1,200)
(f) Business expenses `700
(g) Goods worth `400 taken from business for personal use
(h) Depreciation on equipment `200
(i) Purchased goods for cash `1,000
(j) Rent outstanding `200
Functions of Journal
(i) Analytical Function: Each transaction is analysed into the debit aspect and the credit aspect. This helps to
find out how each transaction will financially affect the business.
(ii) Recording Function: Accountancy is a business language which helps to record the transactions based on
the principles. Each such recording entry is supported by a narration, which explain, the transaction in simple
language. Narration means to narrate – i.e. to explain. It starts with the word – Being …
(iii) Historical Function: It contains a chronological record of the transactions for future references.
Advantages of Journal
The following are the advantages of a journal:
(i) Chronological Record: It records transactions as and when it happens. So it is possible to get a detailed day-
to-day information.
(ii) Minimizing the possibility of errors: The nature of transaction and its effect on the financial position of the
business is determined by recording and analyzing into debit and credit aspect.
(iii) Narration: It means explanation of the recorded transactions.
(iv) Helps to finalize the accounts: Journal is the basis of ledger posting and the ultimate Trial Balance.
The Trial balance helps to prepare the final accounts.
The specimen of a journal book is shown below.
Illustration 4
Let us illustrate the journal entries for the following transactions:
2015 April
1. Mr. Vikas and Mrs. Vaibhavi who are husband and wife start consulting business by bringing in their personal
cash of ` 5,00,000 and ` 2,50,000 respectively.
Illustration 5
Journalise the following transactions in the books of Mr. Roy
2015
April
1 He started business with a capital of – Plant ` 10,000, Bank ` 8,000, Stock ` 12,000
2 Bought furniture for resale ` 5,000
Bought furniture for Office decoration ` 3,000
3 Paid rent out of personal cash for ` 2,000
8 Sold furniture out of those for resale ` 6,000
12 Paid Salary to Mr. X for ` 1,200
15 Purchased goods from Mr. Mukherjee for cash ` 3,000
18 Sold goods to Mr. Sen on credit for ` 8,000
20 Mr. Sen returned goods valued ` 1,000
22 Received cash from Mr. Sen of ` 6,500 in full settlement
28 Bought goods from Mr. Bose on credit for ` 5,000
30 Returned goods to Mr. Bose of ` 500 and paid to Mr. Bose ` 4,000 in full settlement.
Solution:
In the Books of Mr. Roy
Journal Entries
Sub-division of Journals
Journal is divided into two types -(i) General Journal and (ii) Special Journal.
Compound Journal
If for a single transaction, only one account is debited and one account is credited, it is known as simple journal.
If the transaction requires more than one account which is to be debited or more than one account is to be
credited, it is known as Compound Journal.
The following illustration will make it clear:
Illustration 6
(i) Started business with Cash `50,000; Plant `24,000; Stock `4,000
(ii) Sold Goods for Cash `8,000 and to Ms. Agarwal for `10,000
(iii) Ms. Agarwal settled her account less discount ` 600
Solution:
In the Books of ………
Journal
10. The process of transfer of entries from day book to ledgers is called ___
(a) Simple posting (b) Journal posting (c) Transaction (d) Ledger posting
11. The rent paid to landlord is credited to
(a) Landlord’s A/c (b) Rent A/c (c) Cash A/c (d) None
12. Which financial statement represents the accounting equation-
Assets = Liabilities + Owner’s equity:
(a) Income Statement (b) Statement of Cash flows (c) Balance Sheet (d) None
13. The debts written off as bad, if recovered subsequently are
(a) Credited to Bad Debts recovered A/c (b) Credited to trade receivables Account
(c) Debited to profit and Loss Account (d) None
14. A trial balance will not balance if ____
(a) correct entry is posted twice
(b) The purchase on credit basis is debited to purchases and credited to cash
(c) ` 500 cash payment to creditors is debited to creditors for ` 50 and credited to cash as ` 500
(d) None of the above
15. A trial balance shows
(a) Honesty of accountants (b) Accuracy of account
(c) Only arithmetical accuracy of accounts (d) none of these
Ans: 1.d 2.b 3.a 4.b 5.b 6.b 7.c 8.c 9.c 10.d 11.c 12.c 13.a 14.c 15.c
True or false
1. Ram has assets of ` 20,000/- and liabilities of ` 4,000/- his capital therefore would be ` 16,000/- (TRUE)
2. Depreciation is loss (TRUE)
3. Double accounting system owes its origin to Luca Pacioli (TRUE)
4. Profit or loss have no effect on Net Worth (FALSE)
5. Capital account is a real account (FALSE)
6. Trial balance is a final accounts (FALSE)
7. Trial balance contains the balances of only personal and real accounts (FALSE)
8. After preparation of ledgers, the next step is the preparation of trial balance (TRUE)
9. Journal is the book of final entry (FALSE)
10. Trade discount will be entered in the book of accounts (FALSE)
Match the following
Group –A
SUBSIDIARY BOOKS
Subsidiary Books refers to books meant for specific transactions of similar nature. Subsidiary Books are also known
as Special journals or day books. To overcome shortcoming of the use of the journal only as a book of original
entry, the journal is subdivided into specific journals or subsidiary books.
The sub-division of journal is done as follows:
All bill receivables – these are bills accepted by customers to be honoured at Bills Receivable Book
an agreed date.
All bills payable - these are bills accepted by the business to be honoured by Bills Payable Book
paying to suppliers at an agreed date.
For all other transactions not covered in any of the above categories – i.e. Journal Proper
purchase or sale of assets, expense accruals, rectification entries, adjusting
entries, opening entries and closing entries.
Illustration 7:
Write up a single column Cash Book of Mr. Y for the month of April 2015, April 2015
1. Balance in hand ` 5,000
4. Sold goods to Mr. Z on credit ` 3,000
6. Sold goods for Cash ` 1,000
8. Purchased goods on credit from Mr. P for ` 3,000
12. Paid to Mr. P for ` 2,000 and Received Discount ` 200
15. Returned goods to Mr. P for ` 800
20. Goods Returned by Mr. Z for ` 300
25. Z settled his account for ` 2,500
26. Paid salary by cheque for ` 1,000
30. Received interest for ` 1,000
Solution:
In the books of Mr. Y
Cash Book (as the only Book of Single Entry)
Receipts Payments
Date Particulars L.F. Cash Date Particulars L.F. Cash
Dr. Specimen of Double Column Cash Book Cr.
Receipts Payments
Date Particulars L.F. Cash Disc. Allowed Date Particulars L.F. Cash Disc. Received
Receipts Payments
Date Particulars L.F. Cash Bank D i s c o u n t Date Particulars L.F. Cash Bank Discount
Allowed Received
Is the Cash Book Journal or Ledger?
� Cash Book is a book of original entry since transactions are recorded for the first time from the source
documents.
� The cash book is ledger in the sense that it is designed in the form of a Cash Account and records cash
receipts on the debit side and cash payments on the credit side.
1. Contra Transactions
Transactions which are related to allowing discount or receiving discount in cash after the settlement of the dues
are known as Contra Transactions.
Example:
1. Cash deposited in to Bank
Bank A/c Dr.
To, Cash
2. Cash withdrawn from Bank
Cash A/c Dr.
To, Bank A/c
B. Cheque Transactions
When a cheque is received and no any other information at a later date about the same is given, it will be
assumed that the said cheque has already been deposited into bank on the same day when it was received.
Then the entry should be as under:
Bank A/c Dr.
To Debtors/Party A/c
But if it is found that the said cheque has been deposited into the bank at a later date, then the entry will be:
(i) When the cheque is received
Cash A/c Dr.
To Debtors/Party A/c
(ii) When the same was deposited into bank at a later date
Bank A/c Dr.
To Cash A/c
(iii) When the said cheque is dishonoured by the bank
Debtors/Party A/c Dr.
To Bank A/c
Illustration 8.
Let us see an illustration for the following cash and bank transactions in the books of Mr. Abhishek
January 1 Opening cash balance was ` 3,800 and bank balance was ` 27,500
January 4 Wages paid in cash ` 1,500
January 5 received cheque of ` 19,800 from KBK enterprises after allowing discount of ` 200
January 7 Paid to consultancy charges by cheque for ` 7,500
January 10 Cash of ` 2,500 withdrawn from bank
January 12 Received a cheque for ` 4,500 in full settlement of the account of Mr. X at a discount of 10%
and deposited the same into the Bank.
January 15 X’s cheque returned dishonoured by the Bank
Solution:
Receipts Payments
Date Particulars L.F Cash Bank Dis Date Particulars L.F Cash Bank Dis
(`) (`) Allowed (`) (`) received
(`) (`)
1- Opening 3,800 27,500 4- Wages paid 1,500
Jan Balance Jan
5- Recd from KBK 19,800 200 7- Consultancy fees 7,500
Jan Jan
10- Cash withdrawn 2,500 10- Cash withdrawn 2,500
Jan Jan
12- Mr. X 4,500 500 15- Mr. X 4,500 500
Jan Jan
Closing balance 4,800 37,300
6,300 51,800 700 6,300 51,800 500
Please note that the balance of discount columns is not taken and these are posted directly to the respective
ledger account separately. The balance of cash and bank columns are posted into cash and bank accounts
periodically. The posting into ledger is explained later in this chapter.
Date Name of the Suppliers and details of Goods Purchased Invoice reference L. F. Amount (`) Remarks
The format for Purchase Return is exactly the same; hence separate illustration is not given.
Let us see an illustration for following transactions for a furniture shop:
Illustration 9
1. Bought 20 tables @ ` 500 per table from M.M Appliances on credit @ 12% trade discount as per invoice
number 22,334 on 2nd March.
2. Purchased three dozen chairs @ ` 250 each from Metro chairs as per invoice number 1112 on 4th March.
3. Second hand furniture bought from Golden Furnitures on credit as per invoice number 375 for ` 1200 on 7th
March.
4. Purchased seven book racks from Mayur Furnitures for ` 4,900 paid for in cash on 6th March.
5. Purchased Machinery for ` 30,000 from Kirloskar Ltd on 9th March as per invoice number 37.
Solution:
In the Books of Furniture Shop
The format of sales return book is exactly the same; hence a separate illustration is not given.
Let us see how will be the following transaction recorded in the books of a Cloth Merchant.
Illustration 10.
1st July Sold Tip Top clothing 50 suits of ` 2,200 each on two months credit on invoice number -2
11th July Sold to New India Woolen 100 sweaters @ ` 250 each on invoice number 55
13th July Received an order from Modern clothing for 100 trousers @ ` 500 at trade discount of 10%
17th July Sold 50 sarees to Lunkad brothers @ ` 750 each
25th July Sold T-shirts at exhibition hall for cash for ` 7,500
Solution:
In the books of Cloth Marchant
Sales Day Book
Here again, cash sales at exhibition hall are not recorded. Also, merely getting an order for goods is not a
transaction to be entered in sales book.
OTHER SUBSIDIARY BOOKS – RETURNS INWARD, RETURN OUTWARD, BILLS RECEIVABLE, BILLS PAYABLE
(i) Return Inward Book- The transactions relating to goods which are returned by the customers for various reasons,
such as not according to sample, or not up to the mark etc. contain in this book. It is also known as Sales Return
Book.
Generally when a customer returns good to suppliers he issues a Debit Note for the value of the goods returned by
him. Similarly the supplier who receives those goods issues a Credit Note.
(ii) Return Outward Book- This book contains the transactions relating to goods that are returned by us to our
creditors e.g. goods broken in transit, not according to the sample etc. It’s also known as Purchase Return Book.
(iii) Bills Receivable Book- It is such a book where all bills received are recorded and therefrom posted directly to
the credit of the respective customer’s account. The total amounts of the bills so received during the period (either
at the end of the week or month) is to be posted in one sum to the debit of Bills Receivable A/c.
(iv) Bills Payable Book- Here all the particulars relating to bills accepted are recorded and there from posted
directly to the debit of the respective creditor’s account. The total amounts of the bills so accepted during the
period (either at the end of the week or month) is to be posted in one sum to the credit of Bills Payable Account.
No. Name
Date of To whom Name of Where Date of Due Amount of How disposed
of of the Term L.F.
Acceptance given Drawer Payable Bill Date Bill off
Bills Payee
JOURNAL PROPER
Credit transactions that cannot be entered in any other subsidiary book are entered in journal proper.
It will cover purchase or sale of assets, expense accruals, rectification entries, adjusting entries, opening entries
and closing entries. The format of journal proper is exactly the same as Journal.
LEDGER ACCOUNTS
The book which contains accounts is known as the ledger. Since finding information pertaining to the financial
position of a business emerges only from the accounts, the ledger is also called the Principal Book. As a result, all
the necessary information relating to any account is available from the ledger. This is the most important book of
the business and hence is rightly called the “King of All Books”. Also Known as Book of Final Entry.
Ledger Posting
As and when the transaction takes place, it is recorded in the journal in the form of journal entry. This entry is posted
again in the respective ledger accounts under double entry principle from the journal. This is called ledger posting.
The rules for writing up accounts of various types are as follows:
Assets: Increases on the left hand side or the debit side and decreases on the credit side or the
right hand side.
Liabilities: Increases on the credit side and decreases on the debit side.
Capitals: The same as liabilities.
Expenses: Increases on the debit side and decreases on the credit side.
Incomes or gain: Increases on the credit side and decrease on the debit side.
To summarise
The student should clearly understand the nature of debit and credit.
A debit denotes:
(a) In the case of a person that he has received some benefit against which he has already rendered some
service or will render service in future. When a person becomes liable to do something in favour of the firm,
the fact is recorded by debiting that person’s account : (relating to Personal Account)
(b) In case of goods or properties, that the value and the stock of such goods or properties has increased,
(relating to Real Accounts)
(c) In case of other accounts like losses or expenses, that the firm has incurred certain expenses or has lost
money. (relating to Nominal Account)
A credit denotes:
(a) In case of a person, that some benefit has been received from him, entitling him to claim from the firm a
return benefit in the form of cash or goods or service. When a person becomes entitled to money or money’s
worth for any reason. The fact is recorded by crediting him (relating to Personal Account)
(b) In the case of goods or properties, that the stock and value of such goods or properties has decreased.
(relating to Real Accounts)
(c) In case of other accounts like interest or dividend or commission received, or discount received, that the
firm has made a gain (relating to Nominal Account)
At a glance:
Please observe the following conventions while posting a transaction into ledger accounts. Note that both the
effects of an entry must be recorded in the ledger accounts simultaneously.
1) The posting in the account which is debited, is done on the debit side by writing the name of the account
or accounts that are credited with the prefix ‘To’.
2) The posting in the account which is credited, is done on the credit side by writing the name of the account
or accounts that are debited with the prefix ‘By’.
Illustration 11.
Let us now see how we can create ledger account for the seven journal entries that we passed for Illustration 4.
Folio No. 1
Dr. Cash Account Cr.
Folio No. 2
Dr. Mr. Vikas’s Capital Account Cr.
Folio No. 3
Dr. Mrs. Vaibhavi’s Capital Account Cr.
Folio No. 4
Dr. Furniture Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
10.04.2015 To Cash 1 25,000 30.4.2015 By Balance c/d 25,000
25,000 25,000
1.05.2015 To Balance b/d 25,000
Folio No. 5
Dr. Punjab National Bank Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
11.4.2015 To Cash 1 1,00,000 15.4.2015 By Rent 6 15,000
25.4.2015 To Consultancy Fees 10 2,50,000 20.4.2015 By Motor Car 7 1,50,000
By Balance c/d 2,85,000
3,50,000 3,50,000
1.05.2015 To Balance b/d 2,85,000
Folio No. 6
Dr. Rent Account Cr.
Folio No. 8
Dr. Loan from HH Bank Account Cr.
Please carefully observe the posting of journal entries into various ledger accounts. Do you see some further
calculation in the Cash A/c and Mr. Vikas’s Capital A/c? What is done is that after posting all transactions to
these accounts, the difference between the debit and credit sides is calculated. This difference is put on the
side with smaller amount in order to tally grand totals of both sides. The convention is to write “To Balance c/d” or
“By balance c/d” as the case may be. This procedure is normally done at the end of an accounting period. This
process is called as “balancing of ledger accounts’.
Once the ledgers are balanced for one accounting period, the balance needs to be carried forward to the next
accounting period as a running balance. This is done by writing “To Balance b/d” or “By balance b/d” as the case
may be after the grand totals. This is also shown in the Cash A/c and Mr.Vikas’s Capital Account.
Could you now attempt to balance the other ledger accounts and carry the balances to the next accounting
period?
Important note: Please remember the balances of personal and real accounts only are carried down to the next
accounting period as they represent resources and obligations of the business which will continue to be used
and settled respectively in future. Balances of nominal accounts (which represent incomes or gains and expenses
or losses) are not carried down to the next period. These balances are taken to the Profit and Loss account (or
Income statement) prepared for the period. The net result of the P & L Account will show either net income or net
loss which will increase or decrease the owner’s equity.
In the above example, please note that the balances of Rent Account, Consultancy Fees Account and Salary
Account will not be carried down to the next period, but to the P & L Account of that period. As illustration, we
have shown it for Rent Account.
Posting to Ledger Accounts from Subsidiary books
In the above section, we explained posting to ledger accounts directly on the basis of journal entries.
In practice, however, we know that use of subsidiary books is in vogue. Let us see how the posting to ledger
accounts is done based on these records.
For each of the subsidiary books, there is a ledger account e.g. for purchase book, there is Purchase Account, for
sales book there’s Sales A/c, for cash book there will be Cash A/c as well as Bank A/c and so on.
Illustration 12.
Let us continue with illustration seen in the section Illustrations 8, 9 and 10 above and post the totals into respective
ledger accounts.
Solution:
Dr. Cash Account
Cr.
LEDGER
Personal Ledger: The ledger where the details of all transactions about the persons who are related to the
accounting unit, are recorded, is called the Personal Ledger.
Impersonal Ledger: The Ledger where details of all transactions about assets, incomes & expenses etc. are
recorded, is called Impersonal Ledger.
Again, Personal Ledger may be divided into two groups:
Viz. (a) Debtors’ Ledger, & (b) Creditors’ Ledger.
(a) Debtors’ Ledger: The ledger where the details of transactions about the persons to whom goods are sold,
cash is received, etc. are recorded, is called Debtors’ Ledger.
(b) Creditors’ Ledger: The ledger where the details of transactions about the persons from whom goods are
purchased on credit, cash is paid etc. are recorded, is called Creditors’ Ledger.
Impersonal Ledger may, again be divided into two group, viz, (a) Cash Book; and (b) General Ledger.
(a) Cash Book: The Book where all cash & bank transactions are recorded, is called Cash Book.
(b) General Ledger: The ledger where all transactions relating to real accounts, nominal accounts, details of
Debtors’ Ledger and Creditors’ Ledger are recorded, is called General Ledger.
General Ledger may, again, be divided into two groups. viz, Nominal Ledger; & Private Ledger.
(a) Nominal Ledger: The ledger where all transactions relating to incomes and expenses are recorded is called
Nominal Ledger.
(b) Private Ledger: The Ledger where all transactions relating to assets and liabilities are recorded is called
Private Ledger.
Advantages of sub-division of Ledger:
The advantages of sub-division of ledger are:
(a) Easy to Divide work : As a result of sub-division, the division of work is possible and records can be maintained
efficiently by the concerned employee.
(b) Easy to handle : As a result of sub-division, the size and volume of ledger is reduced.
(c) Easy to collect information: From the different classes of Ledger a particular type of transactions can easily
be found out.
(d) Minimizations of mistakes: As a result of sub-division chances of mistakes are minimized.
(e) Easy to compute : As a result of sub-division, the accounting work may be computed quickly which is very
helpful to the management.
(f) Fixation of responsibility: Due to sub-division, allotment of different types of work to different employees is
done for which concerned employee will be responsible.
TRIAL BALANCE
Trial balance may be defined as a statement or a list of all ledger account balances taken from various ledger
books on a particular date to check the arithmetical accuracy. According to the Dictionary for Accountants
by Eric. L. Kohler, Trial Balance is defined as “a list or abstract of the balances or of total debits and total credits
of the accounts in a ledger, the purpose being to determine the equality of posted debits and credits and to
establish a basic summary for financial statements”. According to Rolland, Trial Balance is defined as “The final list
of balances, totaled and combined, is called Trial Balance”.
As this is merely a listing of balances, this will always be as on a particular date. Further it must be understood
that Trial Balance does not form part of books of account, but it is a report prepared by extracting balances of
accounts maintained in the books of accounts.
When this list with tallied debit and credit balances is drawn up, the arithmetical accuracy of basic entries, ledger
posting and balancing is ensured. However, it does not guarantee that the entries are correct in all respect. This
will be explained later in this chapter.
Although it is supposed to be prepared at the end of accounting period, computerized accounting packages
are capable of providing instant Trial Balance reports even on daily basis, as the transactions are recorded almost
on line.
Let us prepare the trial balance for the ledger accounts from the illustration 4.
Trial Balance as on...
The sum total of both the balances must be equal, for “Every debit has its corresponding and equal credit”.
Purpose of a Trial Balance
It serves the following purposes:
1. To check the arithmetical accuracy of the recorded transactions.
2. To ascertain the balance of any ledger Account.
3. To serve as an evidence of fact that the double entry has been completed in respect of every transaction.
4. To facilitate the preparation of final accounts promptly.
Sl. No. Name of the Account L.F. Debit Balance ` Credit Balance `
2. Ledger Form: This form of a trial balance have two sides i.e. debit side and credit side. In fact, the ledger form
of a trial balance is prepared in the form of an account. Each side of the trial balance will have particulars
(name of the account) column, folio column and the amount column.
Method of Preparation
1. Total Method or Gross Trial Balance.
2. Balance Method or Net Trial Balance.
3. Compound Method.
Disadvantages:
Errors may remain undisclosed irrespective of the agreement of Trial Balance.
3. Compound Method: Under this method, totals of both the sides of the accounts are written in the separate
columns. Along with this, the balances are also written in the separate columns. Debit balances are written
in the debit column and credit balances are written in the credit column of the Trial Balance.
Advantages: It offers the advantage of both the methods.
Disadvantages: Lengthy process and more time is consumed in the preparation of a Trial Balance.
Summary of Rules
Debit Balance — All Assets, Drawings, Debtors, Expenses and losses.
Credit Balance — All liabilities, Capital, Creditors, Gains and Incomes.
Trial Balance
as at / as on …..
Illustration 13.
From the following ledger account balances, prepare a Trial Balance of Mr. Sen for the year ended 31st March,
2015. Capital ` 80,000; Sales `10,00,000; Adjusted Purchase ` 8,00,000; Current A/c(cr) ` 10,000; Petty Cash ` 10,000;
Sales Ledger Balance ` 1,20,000; Purchase Ledger Balance ` 60,000; Salaries `24,000; Carriage Inwards ` 4,000;
Carriage Outward ` 6,000; Discount Allowed ` 10,000; Building ` 80,000; Outstanding Expenses ` 10,000; Prepaid
Insurance ` 2,000; Depreciation ` 4,000; Cash at Bank ` 80,000; Loan A/c (cr) ` 66,000; Profit & Loss A/c(cr) `
20,000; Bad Debts Recovered ` 2,000; Stock at 31.03.2015 ` 1,20,000; Interest Received ` 10,000; Accrued Interest
` 4,000; Investment ` 20,000; Provision for Bad Debts (01.04.2014) ` 6,000; General Reserve ` 20,000.
Solution.
Trial Balance of Mr. Sen
Dr. as on 31st March, 2015 Cr.
Note: Closing Stock will appear in Trial Balance since there is adjusted purchase.
Adjusted purchase = Opening Stock + Purchase - Closing Stock.
It may be noted that if only adjusted purchase is considered then the matching concept is affected. Hence, to
satisfy the matching concept, closing stock is also considered in Trial Balance.
Ans: 1.c 2.b 3.b 4.d 5.c 6.c 7.b 8.c 9.c 10.d 11.c 12.c 13.d 14.d 15.b
True or false:
1. Trade discount allowed at the time of sale of goods – is recorded in cash book (FALSE)
2. The periodic total of sales day book is posted to sales return Account (FALSE)
3. Overcastting of purchases journal would affect purchases account (TRUE)
4. Goods worth ` 5000 sold to varsha @ 10% trade discount and 5% sales tax was charged extra. By this
transaction the sales account will be credited with ` 4500 (TRUE)
5. Credit sale of goods – sale invoice and sales book (TRUE)
6. Due to damage of goods Ravi was sent credit note of `200. It will be recorded in – sale book (FALSE)
7. Salaries due for the month will appear no where in cash book (TRUE)
8. Receipts are recorded on the credit side of cash book (FALSE)
9. The main objective of cash book is to know the cash and bank balance of the business (TRUE)
10. Paid insurance by cheque ` 1000 recorded in cash column in debit side (FALSE)
Illustration 14.
Journalize the following transactions in the books of Gaurav, post them into ledger and prepare trial balance for
June 2015:
June 1: Gaurav started business with `10,00,000 of which 25% amount was borrowed from wife.
June 4: Purchased goods from Aniket worth `40,000 at 20% TD and 1/5th amount paid in cash.
June 10: Sold goods to Vishakha ` 30,000 at 30% TD and received 30% amount in cash.
June 27: Received from Vishakha ` 14,500 and discount allowed ` 200.
June 30: Interest received ` 2,400 directly added in our bank account.
Solution:
In the books of Gaurav
Journal
Date Particulars J.F. Amt. (`) Date Particulars J.F. Amt. (`)
30/6/15 To Balance c/d 7,50,000 1/6/15 By Cash A/c 7,50,000
7,50,000 7,50,000
1/7/15 By Balance b/d 7,50,000
Date Particulars J.F. Amount (`) Date Particulars J.F. Amount (`)
30/6/15 To Balance c/d 2,50,000 1/6/15 By Cash A/c 2,50,000
2,50,000 2,50,000
1/7/15 By Balance b/d 2,50,000
Date Particulars J.F. Amt. (`) Date Particulars J.F. Amt. (`)
4/6/15 To Cash A/c 6,400 15/6/15 By loss by fire 5,500
4/6/15 To Aniket’s A/c 25,600 30/6/15 By Bal c/d 51,500
7/6/15 To Cash A/c 25,000
57,000 57,000
1/7/15 To Balance b/d 51,500
Date Particulars J.F. Amt. (`) Date Particulars J.F. Amt. (`)
22/6/15 To Cash A/c 25,500 4/6/15 By PurchasesA/c 25,600
22/6/15 To Discount A/c 100
25,600 25,600
Date Particulars J.F. Amt. (`) Date Particulars J.F. Amt. (`)
10/6/15 To Sales A/c 14,700 27/6/15 By Cash A/c 14,500
27/6/15 By Discount A/c 200
14,700 14,700
Date Particulars J.F. Amt. (`) Date Particulars J.F. Amt. (`)
30/6/15 To Balance c/d 21,000 10/6/15 By Cash A/c 6,300
10/6/15 By Vishakha’s A/c 14,700
21,000 21,000
1/7/15 By Balance b/d 21,000
Date Particulars J.F. Amt. (`) Date Particulars J.F. Amt. (`)
12/6/15 To Cash A/c 20,000 30/6/15 By Balance c/d 22,400
30/6/15 To Interest A/c 2,400
22,400 22,400
1/7/15 To Balance b/d 22,400
Date Particulars J.F. Amt. (`) Date Particulars J.F. Amt. (`)
15/6/15 To Purchases A/c 5,500 30/6/15 By Balance c/d 5,500
5,500 5,500
1/7/15 To Balance b/d 5,500
Date Particulars J.F. Amt. (`) Date Particulars J.F. Amt. (`)
30/6/15 To Balance c/d 3,500 19/6/15 By Cash A/c 3,500
3,500 3,500
1/7/15 By Balance b/d 3,500
Date Particulars J.F. Amt. (`) Date Particulars J.F. Amt. (`)
27/6/15 To Vishakha’s A/c 200 22/6/15 By Aniket’s A/c 100
30/6/15 By Balance c/d 100
200 200
1/7/15 To Balance b/d 100
Date Particulars J.F. Amt. (`) Date Particulars J.F. Amt. (`)
25/6/15 To Cash A/c 1,000 30/6/15 By Balance c/d 1,000
1,000 1,000
1/7/15 To Balance b/d 1,000
Date Particulars J.F. Amt. (`) Date Particulars J.F. Amt. (`)
30/6/15 To Balance c/d 2,400 30/6/15 By Bank A/c 2,400
2,400 2,400
1/7/15 By Balance b/d 2,400
Illustration 15.
Journalize the following transactions in the books of M/s Kothari & Sons, post them into ledger and prepare trial
balance for April 2015:
Apr. 1: Commenced business with ` 40,000.
Apr. 4: Bought goods for cash ` 4,000
Apr. 7: Sold goods ` 700
Apr. 10: Bought goods from M/s Bhandari Bros. ` 3,000 at 10% trade discount.
Apr. 14: Purchased machinery of ` 5,000 from M/s Kirloskar Bros.
Apr. 16: Paid for transportation of machinery ` 500 & installation charges ` 300 on it.
Apr. 20: Paid quarterly interest on borrowed amount of ` 5,000 at 12% p.a.
Apr. 24: Supplied goods to M/s Kunal & Sons ` 3,500.
Apr. 27: Paid to M/s Bhandari Bros. ` 2600 in full settlement of account.
Apr. 28: M/s Kunal & Sons returned goods worth ` 300 & paid for ` 1,200 on account.
Apr. 29: Received commission ` 250.
Apr. 30: Paid conveyance to manager ` 450.
Solution:
In the books of M/s Kothari and Sons
Journal
Dr. Cr.
Date Particulars L.F. Amt.` Amt.`
2015
1-Apr Cash A/c Dr 40,000
To Capital A/c 40,000
(Being cash introduced as capital)
4-Apr Purchases A/c Dr 4,000
To Cash A/c 4,000
(Being bought goods for cash)
7-Apr Cash A/c Dr 700
To Sales A/c 700
(Being sold goods for cash)
10-Apr Purchases A/c Dr 2,700
To M/s Bhandari Bros. A/c 2,700
(Being purchased goods at 10% TD)
14-Apr Machinery A/c Dr 5,000
To M/s Kirloskar Bros. A/c
5,000
(Being purchased machinery on credit)
Ledger
Date Particulars J.F Amt. (`) Date Particulars J.F Amt. (`)
30/4/15 To Balance c/d 40,000 1/4/15 By Cash A/c 40,000
40,000 40,000
1/5/15 By Balance b/d 40,000
Date Particulars J.F Amt. (`) Date Particulars J.F Amt. (`)
4/4/15 To Cash A/c 4,000 30/4/15 By Balance c/d 6700
10/4/15 To M/s Bhandari Bros. A/c 2,700
6,700 6,700
1/5/15 To Balance b/d 6,700
Date Particulars J.F. Amt. (`) Date Particulars J.F Amt. (`)
30/4/15 To Balance c/d 4,200 7/4/15 By Cash A/c 700
24/4/15 By M/s Kunal & Sons A/c 3,500
4,200 4,200
1/5/15 By Balance b/d 4,200
Date Particulars J.F. Amt. (`) Date Particulars J.F Amt. (`)
27/4/15 To Cash A/c 2,600 10/4/15 By Purchases A/c 2,700
27/4/15 To Discount A/c 100
2,700 2,700
Date Particulars J.F. Amt. (`) Date Particulars J.F Amt. (`)
14/4/15 To M/s Kirloskar Bros. A/c 5,000 30/4/15 By Balance c/d 5,800
16/4/15 To Cash A/c 800
5,800 5,800
1/5/15 To Balance b/d 5,800
Dr. M/s Kirloskar Bros. Account Cr.
Date Particulars J.F. Amt. (`) Date Particulars J.F Amt. (`)
30/4/15 To Balance c/d 5,000 14/4/15 By Machinery A/C 5,000
5,000 5,000
1/5/15 By Balance b/d 5,000
Date Particulars J.F. Amt. (`) Date Particulars J.F Amt. (`)
20/4/15 To Cash A/c 150 30/4/15 By Balance c/d 150
150
1/5/15 To Balance b/d 150
Date Particulars J.F. Amt. (`) Date Particulars J.F Amt. (`)
24/4/15 To Sales A/c 3,500 28/4/15 By Return Inwards A/c 300
28/4/15 By Cash A/c 1,200
30/4/15 By Balance c/d 2,000
3,500 3,500
1/5/15 To Balance b/d 2,000
Date Particulars J.F. Amt. (`) Date Particulars J.F Amt. (`)
30/4/15 To Balance c/d 100 27/4/15 By M/s Bhandari Bros. A/c 100
100 100
1/5/15 By Balance b/d 100
Date Particulars J.F. Amt. (`) Date Particulars J.F Amt. (`)
28/4/15 To M/s Kunal & Sons A/c 300 30/4/15 By Balance c/d 300
300 300
1/5/15 To Balance b/d 300
Date Particulars J.F. Amt. (`) Date Particulars J.F Amt. (`)
30/4/15 To Balance c/d 250 29/4/15 By Cash A/c 250
250 250
1/5/1 By Balance b/d 250
Date Particulars J.F. Amt. (`) Date Particulars J.F Amt. (`)
30/4/15 To Cash A/c 450 30/4/15 By Balance c/d 450
450 450
1/5/15 To Balance b/d 450
Sales Book
Date Particulars J.F. Amt (`) Date Particulars J.F. Amt (`)
9/1/15 To Sales A/c 500 31/1/15 By Balance c/d 5,000
Date Particulars J.F. Amt (`) Date Particulars J.F. Amt (`)
31/1/15 To Sundries as per purchases book 12,950
31/1/15 By Balance c/d 12,950
1/2/15 To Balance b/d 12,950 12,950
Date Particulars J.F. Amt (`) Date Particulars J.F. Amt (`)
31/1/15 To Balance c/d 13,875 9/1/15 By Cash A/c 500
30/1/15 By Cash A/c 4,500
31/1/15 By Sundries as per Sales Book 8,875
13,875 13,875
1/2/15 By Balance b/d 13,875
Date Particulars J.F. Amt (`) Date Particulars J.F. Amt (`)
31/1/15 To Sundries as per return inwards book 500 31/1/15 By Balance c/d 500
500 500
1/2/15 To Balance b/d 500
Date Particulars J.F. Amt (`) Date Particulars J.F. Amt (`)
31/1/15 To Balance c/d 675 31/1/15 By Sundries as per return outwards book 675
675 675
1/2/15 By Balance b/d 675
Date Particulars J.F. Amt (`) Date Particulars J.F. Amt (`)
27/1/15 To Return Outwards A/c 200 1/1/15 By Purchases A/c 6000
31/1/15 To Balance c/d 5,800
6,000 6,000
1/2/15 By Balance b/d 5,800
Date Particulars J.F. Amt (`) Date Particulars J.F. Amt (`)
22/1/15 To Return Outwards A/c 475 7/1/15 By Purchases A/c 3,800
31/1/15 To Balance c/d 3,325
3,800 3,800
1/2/15 By Balance b/d 3,325
Date Particulars J.F. Amt (`) Date Particulars J.F. Amt (`)
31/1/15 To Balance c/d 3,150 12/1/15 By Purchases A/c 3,150
1/2/15 By Balance b/d 3,150
Date Particulars J.F. Amt (`) Date Particulars J.F. Amt (`)
5/1/15 To Sales A/c 2,000 25/1/15 By Return Inwards A/c 500
31/1/15 By Balance c/d 1,500
2,000
1/2/15 To Balance b/d 1,500
Dr. M/s Rajnikant Account Cr.
Date Particulars J.F. Amt (`) Date Particulars J.F. Amt (`)
17/1/15 To Sales A/c 2,375 31/1/15 By Balance c/d 2,375
1/2/15 To Balance b/d 2,375
Dr. M/s Narendrakumar Account Cr.
Date Particulars J.F. Amt (`) Date Particulars J.F. Amt (`)
20/1/15 To Furniture A/c 1,200 31/1/15 By Balance c/d 5,700
30/1/15 To Sales A/c 4,500
5,700 5,700
1/2/15 To Balance b/d 5,700
Dr. Furniture Account Cr.
Illustration 17.
The total of debit side of Trial Balance of a larger boot and shoe repairing firm as on 31.12.2013 is ` 1,66,590 and
that of the credit side is ` 42,470. After several checking and re-checking the mistakes are discovered:
Solution:
Illustration:18.
Record following transactions in the Personal Account of Raman:
`
2015 Sept. 1 Sold goods to Raman 5,420
4 Received from Raman cash 5,150
And allowed him discount 270
15 Raman bought goods 6,000
Solution:
Raman Account
Dr. Cr.
EXERCISE
1. Journalise the following transactions:
2015 ` 2015 `
Jan 3 Received cash from Ram 15,000 Jan. 17 Receive from Hari 1,100
4 Purchased goods for cash 2,500 20 Bought furniture from Ram 2,200
11 Sold goods to Hari 3,200 27 Paid Rent 480
13 Paid Ramesh 1,400 30 Paid salary 1,100
2015 ` 2015 `
Jan 1 Started business with cash 50,000 Jan.15 Paid to M/s Singh & Co. 21,000
2 Paid into bank 36,000 Discount allowed by them 1,000
3 Bought goods from M/s Singh 22,000 25 Sold goods to M/s Ray & Co. 5,000
& Co. on credit
4 Purchased furniture 4,200 26 Received Cheque from M/s Sharda & co. in 4,560
full settlement of amount due by them
2015 ` 2015 `
Jan1 Business started with 50,000 Jan15 Cash paid to Z in full settlement of his account 8,800
Cash deposited in Bank 20,000 16 Cash received from Y in full settlement of his 24,500
account
Goods purchased 10,000 20 Goods sold to B 6,000
2 Furniture purchased for cash 3,000 Goods purchased 9,000
Office Stationary purchased for 2,000 25 Cash withdrawn from bank 5,000
cash
3 Goods purchased from X 20,000 Cash paid to X 4,000
5 Goods sold to Y 25,000 28 Allowed us a discount 100
Paid rent 1,000 Cash received from B 3,000
8 Paid for repairs 800 30 Allowed a discount 200
9 Paid for advertisement 1,500 31 Cash deposited in bank 4,000
Cash paid to X 10,000 Cash paid for electricity 400
discount received 50 Cash paid for Salaries 1,000
10 Good purchased from Z 9,000 Wages paid 500
Goods purchased in cash from A 6,000 Rent paid 400
2014 Purchased from Pathi Silk Kendra, 100 Silk sarees at `250 each.
Aug1
5 Purchased from NSR and company, 200 Kanchi Silk sarees at `1,000 each
7 Sold to Kumar on account, 50 printed sarees at `300 and 100 Kanchi sarees at `1,000 each
8 Claimed for damages from Pathi Silk Kendra `500
9 Returned damaged goods to NSR and Co. 5 Kanchi sarees
12 Purchased from Sudharshan Silks 150 Mysore Silk at `250 each, 100 Handloom sarees at `750 each, less
trde discount at 10%
16 Sold to Kala on account 20 printed sarees at `300 each, 25 Kanchi sarees at `1,300 each, 20 Mysore Silk
sarees at `300 each, less trade discount at 5%.
20 Sold to Kusum sarees, 40 Handloom sarees at `1,000 each
21 Kumar returned, 10 printed sarees and 20 Kanchi sarees
25 Returned to Sudharshan’s Silk, 25 Mysore Silk
27 Returned from Kusum sariees, 10 handloom sarees
30 Purchased from Nandi Silk, 400 Nandi brand sarees at `500 each
6. Enter the following transactions in Simple Cash Book and post them into ledger:
2014 ` 2014 `
Dec.1 Commenced business with cash 50,000 Dec.16 Paid into bank 10,000
2 Brought goods for cash 28,000 18 Cash sales 2,500
5 Received cash from Arun 2,000 20 Purchased stationery for cash 250
7 Paid cash to Sanjay 2900 23 Paid suresh cash 3900
2015 ` 2015 `
Aprl.1 Cash in hand 2,500 Aprl.19 Paid into Bank 400
1 Cash at bank 10,000 23 Withdrew from Bank for private exp. 600
2 Paid into Bank 1,000 24 Received cheque from Patel 1,430
5 Bought furniture and issued cheque 2,000 Allowed him discount 20
8 Purchased goods for cash 500 26 Deposited Patel’s cheque into bank
12 Received from mohinder 980 28 Withdrew cash from Bank for the office 2,000
use
14 Cash sales 4,000 30 Paid rent by cheque 800
16 Paid to Amarnath by cheque 1,450
Discount allowed 50
Ans: Cash = (Dr) `7,580, Bank = (Dr.) `5,980, Discount = (Dr.) `40, Cr. `50
9. Prepare a Three Column Cash Book from following transactions having cash, bank and discount columns:
6 Collected from Sridhar a debtor of last year `8,000 discount allowed `200
29 Drew from the bank and paid salary of office staff `1,500
Ans: Cash in hand `7,870, Bank = (Dr.) `12,150, Discount = (Dr.) ` 200 , (Cr.) ` 65
10. Prepare Columnar Petty Cash Book on imprest system from the following particulars:
2015 ` 2015 `
June 1 Received for petty cash payments 1,000 June 20 Paid for conveyance 44
2 Paid for postage 80 25 Paid for travelling expenses 160
5 Paid for stationery 50 27 Paid for postage 100
8 Paid for advertisement 100 28 Wages to office cleaner 20
12 Paid for wages 40 30 Paid for telegrams 40
16 Paid for carriage 30 30 Sent registered notice to landlord 6
Ans: 1.d 2.b 3.a 4.b 5.b 6.b 7.c 8.c 9.c 10.d 11.c 12.c 13.a 14.c 15.c
Fill in the blanks:
1. Cash account is ____(Real account)
2. Liability account has ____balance(credit)
3. Interest account ___ balance (‘debit or credit’)
4. Opening entries are generally passed through ____(‘General journal’)
5. goodwill account is a/an ____(‘intangible asset’)
6. The debit balance in a nominal account shows (Ans: Expenditure)
7. The allowance made for prompt payment is called( Ans: Cash discounct)
8. The left hand side of an account is called (Ans: Debit )
9. If the debit side of goods account exceeds the credit side the difference will be – (Ans: Closing stock)
10. The balance of ___account will be shown in the debit column of trail balance. (Assets/Expenses)
11. The equality of debit and credit of the ____does not mean that the individual accounts are also accurate.
(“Trial balance”)
12. Trail balance is statement which shows the _____or the totals of all the accounts. (“balances”)
13. ___lists the balance and the title of account in the ledger an given data (Trial balance)
14. Closing stock appearing in the trial balance is shown on the ____balance sheet (asset side of)
15. The balance of liabilities account will be shown in the ___of the trial balance. (credit column)
True or false:
1. Ram has assets of `20,000/- and liabilities of `4,000/- his capital therefore would be `16,000/- (TRUE)
2. Depreciation is loss (TRUE)
3. Double accounting system owes its origin to Luca pacioli (TRUE)
4. Profit or loss have no effect on network (FALSE)
5. Capital account is a real account (FALSE)
6. Trial balance is a final accounts (FALSE)
7. Trial balance contains the balances of only personal and real accounts (FALSE)
8. After preparation of ledgers, the next is the preparation of trial balance (TRUE)
9. Journal is the book of final entry (FALSE)
10. Trade discount will be entered in the book of accounts (FALSE)
Group- B
Depreciation is derived from the Latin word “Depretium”, where “De” – decline “Pretium” – Price. This decline in
price is due to constant use, wear and tear. “Depreciation is the gradual and permanent decrease in the value
of an asset from any cause.
Accounting Standard (AS 10) states that “Depreciation is allocated so as to charge a fair proportion of the
depreciable amount in each accounting period during the expected useful life of the asset.”
Amortization
Intangible assets such as goodwill, trademarks and patents are written off over a number of accounting
periods covering their estimated useful lives.
This periodic write off is known as Amortization and that is quite similar to depreciation of tangible assets.
The term amortization is also used for writing off leasehold premises.
Amortization is normally recorded as a credit to the asset account directly or to a distinct Provision for
Depreciation account.
Though the write off of intangibles that have no limited life is not approved by some Accountants,
Some concerns do amortize such assets on the ground of conservatism.
Depletion
This method is specially suited to mines, oil wells, quarries, sandpits and similar assets of a wasting character.
In this method, the cost of the asset is divided by the total workable deposits of the mine etc., and by
following the above manner rate of depreciation can be ascertained.
Depletion can be distinguishable from depreciation in physical shrinkage or lessening of an estimated
available quantity and the latter implying a reduction in the service capacity of an asset.
Obsolescence
The term ‘Obsolescence’ refers to loss of usefulness arising from such factors as technological changes,
improvement in production methods, change in market demand for the product output of the asset or
service or legal or medical or other restrictions.
It is different from depreciation or exhaustion, wear and tear and deterioration in that these terms refer to
functional loss arising out of a change in physical condition.
Dilapidation
In one sentence Dilapidation means a state of deterioration due to old age or long use. This term refers to
damage done to a building or other property during tenancy.
A. Internal Causes
(i) Wear and tear: Plant & machinery, furniture, motor vehicles etc. suffer from loss of utility due to vibration,
chemical reaction, negligent handling, rusting etc.
(ii) Depletion (or exhaustion): The utility or resources of wasting assets (like mines etc.) decreases with regular
extractions.
C. Time element: With the passage of time some intangible fixed assets like lease, patents. Copy- rights etc.,
lose their value or effectiveness, whether used or not. The word “amortization” is a better term to speak for
the gradual fall in their values.
D. Abnormal occurrences: An accident, fire or natural calamity can damage the service potential of an asset
partly or fully. As a result the effectiveness of the asset is affected and reduced.
1− n Re sidual Value
Cost of the Asset
Example:
If a plant costs ` 16,000 with an estimated salvage value of ` 2,000 at the end of third year of its useful life, compute
the rate of depreciation.
2,000
100 × 1− 3 = 50%
16,000
Illustration 1
Purchase price of a machine `1,80,000; Freight charges `30,000; installation charges `10,000; residual vale `16,000
and useful life 5 years. Calculate the depreciation for third year under the straight line method.
Solution:
Under straight line method, the depreciation for each year
Illustration 2
Calculate the Rate of Depreciation under Straight Line Method (SLM) in each of the following cases:-
Machine No. Cost of Machine (`) Expenses incurred at the Estimated Residual Expected Useful Life
time of purchase to be Value (`) in years
capitalized (`)
1 90,000 10,000 20,000 8
2 24,000 7,000 3,100 6
3 1,05,000 20,000 12,500 5
4 2,50,000 30,000 56,000 10
Solution:
Ma- Cost of Expenses incurred Total Cost Estimated Expected Depreciation= Rate of
chine Machine at the time of of Asset = Residual Useful Life (d-e)/f (`) Depreciation under
No (`) purchase to be (b+c) (`) Value(`) in years SLM = (g/d)×100
capitalized (`)
a b c d e f g h
1 90,000 10,000 1,00,000 20,000 8 10,000 10%
2 24,000 7,000 31,000 3,100 6 4,650 15%
3 1,05,000 20,000 1,25,000 12,500 5 22,500 18%
4 2,50,000 30,000 2,80,000 56,000 10 22,400 8%
Illustration 3
A machine is purchased for ` 7,00,000. Expenses incurred on its cartage and installation ` 3,00,000. Calculate the
amount of depreciation @ 20% p.a. according to Straight Line Method for the first year ending on 31st March, 2015,
if this machine is purchased on:
(a) 1st April, 2014 (b) 1st July, 2014 (c) 1st October, 2014 (d) 1st January, 2015
Solution:
Here, Total Cost of Asset = Purchased Price + Cost of Cartage and Installation
= ` 7,00,000 + ` 3,00,000 = ` 10,00,000
So, Depreciation
Period from the date of purchase of date of closing accounts
= Total Cost of Asset × Rate of Depreciation ×
12
(a) The machine was purchased on 1st April, 2014:
12
Amount of Depreciation = ` 10,00,000 × 20% × 12 = ` 2,00,000
(b) 1st July, 2014
9
Amount of Depreciation = ` 10,00,000 × 20% × 12 = ` 1,50,000
(c) 1st October, 2014
6
Amount of Depreciation = ` 10,00,000 × 20% × 12 = ` 1,00,000
(d) 1st January, 2015
3
Amount of Depreciation = ` 10,00,000 × 20% × = ` 50,000
12
Illustration 4
A company whose accounting year is the calendar year, purchased on 1st April, 2013 Machinery costing ` 30,000.
It purchased further machinery on 1st October, 2013 costing ` 20,000 and on 1st July, 2014 costing ` 10,000. On 1st
January, 2015 one third of the Machinery installed on 1st April, 2013 became obsolete and was sold for ` 3,000.
Show how machinery account would appear in the books of the company, it being given that machinery was
depreciated by fixed installment method at 10% per annum.
Solution:
Dr. Machinery Account Cr.
2015 2015
Jan.1 ToBalance b/d 51,750 Jan. 1 By Bank a/c 3,000
Jan.1 By Profit and Loss A/c (loss on sale) (1) 5,250
Dec.31 By Depreciation (on `50,000 for one year) A/c 5,000
Dec.31 By Balance c/d 38,500
51,750 51,750
2016
Jan.1 To Balance b/d 38,500
Working Note:
(1) Calculation of Loss on sale of 1/3 of the Machinery
` `
Cost of Machinery (30000 X 1/3) 10,000
Less: Depreciation for 2013 for 9 months 750
Depreciation for 2014 1,000
1,750
Written down value of Machinery 1-1-2015 8,250
Less: Amount realized 3,000
Loss transferred to profit and loss A/c 5,250
Illustration 5
On July 1, 2012 Granites Ltd. purchased second hand machine for `40,000 and reconditioned the same by
spending `6,000. On January 1, 2013 a new machine was purchased for `24,000. On June 30, 2014 the machine
purchased on January 1, 2013 was sold for `16,000 and another machine was installed at a cost of `30,000.
The company writes of 10% on original cost every year on March 31. Show the Machinery account update.
Solution:
Dr. Machinery Account Cr.
Working Notes:
1. Calculation of Loss on sale of machinery:
Less: Depreciation till the date of sale of machinery i.e. (30-6-2014) (` 24,000 × 3 × 10 )
12 100
Less: Amount realized on sale of machinery
Depreciation on the machinery sold for 3 months form 1-4-2014 to 30-6-2014 (date of sale) (` 24,000 600
× 3 × 10 )
12 100
On ` 46,000 at 10% 4,600
9 10 2,250
On ` 30,000 at 10% for 9 months (` 30,000 × × )
12 100
7,450
Illustration 6
A company purchased some machineries for `1,00,000 on 1st April, 2011. It charges depreciation @ 10% p.a. on
reducing balance method every year. On 30th September, 2015 a part of machinery was sold for `14,000, the
original cost of the machine was `20,000. Calculate the profit or loss on sale of machinery.
Solution:
Illustration 7
On 1.1.2013 a machine was purchased for `1,00,000 and `50,000 was paid for installation. Assuming that the rate
of depreciation was 10% on Reducing Balance Method, calculate amount of depreciation upto 31.12.2015.
Solution:
Year Opening Book Value (`) Rate Depreciation (`) Closing Book Value (`)
2013 1,50,000 10% 15,000 1,35,000
2014 1,35,000 10% 13,500 1,21,500
2015 1,21,500 10% 12,150 1,09,350
Note: Cost of the machine (i.e. Opening Book Value for the year 2013)
= Cost of Purchase + Cost of Installation
= ` 1,00,000 + ` 50,000 = ` 1,50,000
Illustration 8
A Manufacturing concern whose books are closed on 31st March, Purchased Machinery for `1,50,000 on 1st April
2011. Additional machinery was acquired for ` 40,000 on 30th September, 2012 and for ` 25,000 on 1st April, 2014.
Certain machinery, which was purchased for ` 40,000 on 30th September, 2012, was sold for ` 34,000 on 30th
September, 2014.
Give the Machinery Account for the year ending 31st March, 2015 taking into account depreciation at 10% per
annum on the written-down value.
Solution:
Dr. Machinery Account Cr.
Illustration 9
One lathe machine whose original value was `1,20,000 on 1.4.2013, being the date of installation was sold on
30.9.2015 for `1,00,000. Depreciation is charged at the rate of 10% on reducing balance. Show machinery account
and assets disposable account.
Solution:
Machinery Account
Dr. Cr.
Meaning of Provision:
The term ‘provision’ means any amount written off or retained by way of providing depreciation, renewals or
diminution in the value of assets or retained by way of providing for any known liability the amount of which may
not be determined with substantial accuracy. If the amount of such liability can be ascertained it will be a liability
and not a provision. Provisions for depreciation, provision for bad and doubtful debts, provisions for taxation,
provision for repairs and renewal and provision for contingencies are some examples of provisions. It is a charge
to profit and loss account.
The main purpose of provision for repairs and renewals is to give a uniform charge to profit and loss account in
respect of machinery. This is all the more necessary as the usefulness of the machinery is also uniform form year
to year. Under this method the total repairs over the life of the asset are estimated and then average is found.
This amount is debited to the profit and loss account of every year and credited to the provisions of repairs and
renewals account. The actual amount of repairs and renewals is debited to the provision for repairs and renewals
account, the balance of the account appears on the liabilities side in the balance sheet. As soon as the life of the
asset is over, the account is automatically closed.
Illustration 10
A firm desires to debit its profit and loss account with a uniform figure every year in respect of repairs and renewals.
It expects that considering the life of the asset in question ` 10,000 will be the average amount to be spent per
year. Actual repairs are ` 1,000 in the first year, ` 2,300 in the second year and ` 3,700 in the third year. Show the
provision for repairs and renewals account.
Solution:
Provision for Repairs and Renewals Account
Dr. Cr.
10. Purchase price of machine 8.90,000, freight and cartage 7000, installation charges 30,000, Insurance charges
20000, residual value is 40,000, estimated useful life 5 years. Calculate the amount of annual depreciation
under straight line method?
(a)1,77,400 (b) 181400 (c) 197400 (d) 177900
11. Depreciation of a ten-year lease is best done on the method
(a) WDV (b) SLM (c) Annuity method (d) both a & b
12. Original cost is ` 1,50,000 residual value is 10,000, depreciation for 3rd year @ 10% p.a. under WDV method___
(a) 14.000 (b) 12150 (c) 11,340 (d) 12,240
13. For charging depreciation, on which of the following assets, the depletion method is adopted?
(a) plant & machinery (b) land & building (c) goodwill (d) Wasting assets like mines and quarries
14. The value of an asset after deducting depreciation from the historical cost is known as
(a) Fair value (b) market value (c) net realizable value (d) book value
15. If the original cost of the machine = 1,00,000, life = 5years residual value = 2.000. If the depreciation for 4th
year as per SLM is 19,600, then the rate of depreciation p.a. is
(a) 10% (b) 15% (c) 20% (d) 5%
Answer:
1. (b) 2. (d) 3. (c) 4. (c) 5. (d) 6. (d) 7. (b) 8. (a) 9. (a) 10. (a) 11. (b) 12. (b) 13. (d) 14. (d) 15. (c)
True or false:
1. In case of mineral resources depreciation is not provided, but depletion is charged (TRUE)
2. Under straight line method the cost of the asset written off in equal proportion, during its economic life (TRUE)
3. Depreciation is charged on tangible fixed assets and it is not charged on any current asset (TRUE)
4. Depreciation is a process of allocation and not of valuation (TRUE)
5. An asset is purchased for ` 25,000, depreciation is to be provided annually according to straight line method
useful life if the asset is 10 years and scrap value is ` 5000. The rate of depreciation is 10% (FALSE)
6. If the written down value of the machine on 1-1-95 is 9,72,000 what will be the value of machine on 1-1-93. If
the method is RBM and rate of depreciation is 10%. The value on 1-1-93 is 12,00,000 (TRUE)
7. Under the RBM of depreciation, the value of machinery never comes to zero and, under SLM of depreciation
the value of machinery comes to zero at the end of its useful life. (TRUE)
8. Original cost of a machine was ` 2,52,000. Salvage value was 12,000, Depreciation for 2nd year @ 10% under
WDV method is ` 21,600. (TRUE)
9. The portion of the acquisition of cost of the asset, yet to be allocated is known as written down value (TRUE)
10. Under diminishing balance method, depreciation decreases every year. (TRUE)
1.Patent b a) No depreciation
2.Building d b) Amortization
3.Mineral deposit e c)Wear and tear
4.Land a d)Depreciation
5. Internal cause c e) Depletion
Group - II
Every concern is interested in ascertaining its true profit and financial position at the close of the trading year. But
inspite of the best efforts of the book-keeper and the accountant certain errors are committed in the recording
of the transactions which affect the final accounts of the concern. It, therefore, becomes utmost important for
the book-keeper and the accountant to locate such errors and rectify them so that correct profit and financial
position of the concern may be ascertained. So whenever errors in accounting records come to notice, they
should be rectified without waiting till the end of the accounting year when Trial Balance is to be prepared.
Stages of Errors:
Errors may occur at any of the following stages of the accounting process:
From another point of view, error may be divided into two categories:
a) Those that affect the trial balance –because of the errors that trial balance does not agree; and
(i) Wrong casting of the subsidiary books
(ii) Wrong balancing of an account
(iii) Posting an amount on the wrong side
(iv) Wrong posting, i.e., writing the wrong amount
(v) Omitting to post an amount from a subsidiary book
(vi) Omitting to post the totals of subsidiary book
(vii) Omitting to write the cash book balances in the trial balance
(viii) Omitting to write the balance of an account in the trial balance.
(ix)Writing a balance in wrong column of the trial balance
(x) Totaling the trial balance wrongly.
b) The errors that do not affect the trial balancing are the following:
i) Omitting an entry altogether from the subsidiary book
ii) Making an entry in the wrong subsidiary book
iii) Posting an amount in a wrong account but on the correct side, e.g., an amount to be debited to A is
debited to B, the trial balance will still agree.
A chart of the types of errors is given below:
ERRORS
Rectification of Errors:
Errors should never be corrected by overwriting. If immediately after making an entry it is clear that an error has
been committed, it may be corrected by neatly crossing out the wrong entry and making the correct entry. If
however the errors are located after some time, the correction should be made by making another suitable entry,
called rectification entry. In fact the rectification of an error depends on at which stage it is detected. An error
can be detected at any one of the following stages:
a) Before preparation of Trial Balance
b) After Trial Balance but before the final account are drawn.
c) After final accounts, i.e., in the next accounting period.
(iv) Goods purchased from Vinod for `1,000 was wrongly credited to Vimal account by `100. Again we cannot
pass a complete journal entry for rectifications even through two accounts are involved. The rectification
will be done by the entry “To wrong posting of `100” in the debit of Vimal account and “By omission of
posting of `1,000” in the credit of Vinod account.
After Trial Balance but before Final Accounts
The method of correction of error indicated so far is appropriate when the errors have been located before the
end of the accounting period. After the corrections the trial balance will agree. Sometimes the trial balance is
artificially made to agree inspite of errors by opening suspense account and putting the difference in the trial
balance to the account – the suspense account will be debited if the total of the credit column in the trial
balance exceeds the total of the debit column; it will be credited in the other case.
One must note that such agreement of the trial balance will not be real. Effort must be made to locate the errors.
The rule of rectifying errors detected at this stage is simple. Those errors for which complete journal entries were
not possible in the earlier stage of rectification (i.e., before trial balance) can now be rectified by way of journal
entry(s) with the help of suspense account, for it these errors which gave rise to the suspense account in the trial
balance. The rectification entry for other type of error i.e., error affecting more than one account in such a way
that a complete journal entry is possible for its rectification, can be rectified in the same way as in the earlier stage
(i.e., before trial balance).
In a nutshell, it can be said that each and every error detected at this stage can only be corrected by a complete
journal entry. Those errors for which journal entries were not possible at the earlier stage will now be rectified by a
journal entry(s), the difference or the unknown side is being taken care of by suspense account. Those errors for
which entries were possible even at the first stage will now be rectified in the same way.
Suppose, the sales book for November, 2010 is cast `100 short; as a consequence the trial balance will not agree.
The credit column of the trial balance will be `100 short and Suspense Account will be credited by `100. To rectify
the error the Sales Account will be credited (to increase the credit to the right figure. Since now one error remains,
the suspense Account must be closed – it will be debiting the Suspense Account. The entry will be:
Illustration: 1
Correct the following errors without opening a Suspense Account
a) The Sales Book has been totaled `100 short.
b) Goods worth `150 returned by Green & Co. have not been recorded anywhere.
c) Furniture purchased from Gulab & Bros., `1,000 has been entered in Purchases Day Book.
d) Discount allowed to G. Mohan & Co. `18 has not been entered in the Discount Column of the Cash Book.
The account of G. Mohan & Co. has, however, been correctly posted.
Solution:
If a Suspense Account is not opened:
a) Since sales book has been cast `100 short, the Sales Account has been similarly credited `100 short. The
correcting entry is to credit the Sales Account by `100 as “By wrong totaling of the Sales Book `100”.
b) To rectify omission, the Return Inwards Account has to be debited and the Account of Green & Co. credited.
The entry:
c) By this error Purchases Account has been debited by `1,000 whereas the debit should have been made to
the Furniture Account. The correcting entry will be:
d) In this case the account of the customer has been correctly posted; the discount account has been debited
`18 short since it has been omitted from the discount column on the debit side of the cash book. The
discount account should now be debited by the entry. “To Omission of entry in the Cash Book `18”.
Illustration: 2
Mr. A closed his books of account on September 30, 2014 in spite of a difference in the trial balance. The difference
was `830 the credits being short; it was carried forward in a suspense account. In 2015 following errors were
located:
(i) A sale of `2,300 to Mr. Lala was posted to the credit of Mr. Mala.
(ii) The total of the Returns Inward Book for July, 2014 `1,240 was not posted in the ledger.
(iii) Freight paid on a machine `5,600 was posted to the Freight account as `6,500.
(iv) White carrying forward the total in the Purchase Account to the next page, `65,590 was written instead of
`56,950.
(v) A sale of machine on credit to Mr. Mehta for `9,000 was not entered in the books at all. The book value of
machine was `7,500. The firm has the practice of writing off depreciation @10% on the balance at the end
of the year.
Pass journal entries to rectify the errors. Have you any comments to make?
Solution:
Journal of Mr. A
Date Particulars L.F. Dr. (`) Cr .(`)
2011 Mr. Mala A/c Dr. 2,300
(i) Mr. Lala A/c Dr. 2,300
To Suspense A/c 4,600
(Correction of error by which a sale of `2,300 to Mr. Lala was posted to the
Credit of Mrs. Mala)
(ii) Profit and Loss Adjustment A/c Dr. 1,240
To Suspense A/c 1,240
(Rectification of omission to post the total of Returns Inward Book for July,
2014)
iii) a) Machinery A/c Dr. 5,600
Suspense A/c Dr. 900
To Profit & Loss Adjustment A/c 6,500
(Correction of error by which freight paid for a machine `5,600 was posted to
Freight Account at `6,500 instead of capitalizing it)
b) Profit & Loss Adjustment A/c Dr. 560
To Plant and Machinery A/c 560
(Depreciation @ 10% charged on freight paid on a machine capitalized)
iv) Suspense A/c Dr. 8,640
To Profit & Loss Adjustment A/c 8,640
(Correction of wrong carry forward of total in the purchase Account to the
next page `65,590 instead of `56,950)
v) Mr. Mehta Dr. 9,000
To Plant & Machinery A/c 6,750
To Profit & Loss Adjustment A/c 2,250
(Correction of omission of sale of machine on credit to Mr. Mehta for `9,000
with a book value of `7,500 on which depreciation @10% has been charged
in 2010)
Comments:
The Suspense Account will not appear as shown below:
Suspense Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
` `
2015 To Profit and Loss Adjustment A/c 900 2015 By Balance b/d 830
To Profit and Loss Adjustment A/c 8,640 By Sundries: 2,300
Mr. Mala
Mr. Lala 2,300
By Profit and Loss Adjustment A/c 1,240
By balance c/d 2,870
9,540 9,540
Since the suspense Account still shows a balance, it is obvious that there are still some errors left in the books.
Profit & Loss Adjustment Account
(For Prior Period Items)
Dr. Cr.
17,390 17,390
c) Errors in totaling.
Illustration: 3
Rectify the following errors assuming that the errors were detected
(i) Purchase Plant for ` 10,000 wrongly passed through Purchase Account.
(iii) Cash paid to Mr. X for ` 1,000 was posted to his account as ` 100.
(iv) Purchase goods from Mr. T for ` 3,500 was entered in the Purchase Day Book as ` 500.
(v) Paid salary for ` 3,000 wrongly passed through wages account.
Solution:
In the Books of …………………….
Journal (without narration)
Date Before preparation of Trial Balance After preparation of Trial After preparation of Final Accounts
Balance
Dr. Cr. Dr. Cr. Dr. Cr.
(i) Plant A/c 10,000 Plant A/c 10,000 Plant A/c 10,000
To Purchase A/c. 10,000 To Purchase A/c. 10,000 To P&L Adjustment A/c 10,000
(ii) Sales account will be credited Suspense A/c Dr. 1,000 Suspense A/c Dr. 1,000
with ` 1,000 To Sales A/c. 1,000 To P&L Adjustment A/c 1,000
(iii) X Account will be debited when X A/c Dr. 900 X A/c Dr. 900
` 900 To Suspense A/c. 900 To Suspense A/c 900
(iv) Purchase A/c Dr. 3,000 Purchase A/c Dr. 3,000 P&L Adjustment A/c Dr. 3,000
To T A/c 3,000 To T A/c 3,000 To T’s A/c. 3,000
(v) Salary A/c Dr. 3,000 Salary A/c Dr. 3,000 P&L Adjustment A/c. Dr. 3,000
To Wages A/c 3,000 To wages A/c. 3,000 To P&L Adjustment A/c 3,000
Illustration: 4
A merchant, while balancing his books of accounts notices that the T.B. did not tally. It showed excess credit of `
1,700. He placed the difference to Suspense A/c. Subsequently he noticed the following errors:
(a) Goods brought from Narayan for ` 5,000 were posted to the credit of Narayan’s A/c as ` 5,500
(b) An item of ` 750 entered in Purchase returns book was posted to the credit of Pandey to whom the goods
had been returned.
(c) Sundry items of furniture sold for ` 26,000 were entered in the sales book.
(d) Discount of ` 300 from creditors had been duly entered in creditor’s A/c but was not posted to discount A/c.
Pass necessary journal entries to rectify these errors. Also show the Suspense A/c
Solution:
(a) Goods bought from Narayan are posted to credit of his A/c as ` 5,500 instead of ` 5,000. Here, it is correct
to credit Narayan’s A/c. But the mistake is extra credit of ` 500. This is one sided error, as posting to purchases
A/c is correctly made. So the rectification entry will affect the suspense A/c. This needs to be reversed by the
rectification entry:
Narayan’s A/c Dr. 500
To Suspense A/c 500
(b) Goods bought from Pandey were returned back to him. It should have appeared on the debit side of his A/c.
For rectifying we will need to debit his A/c with double the amount i.e. ` 1500 (` 750 to cancel the wrong credit
and another ` 750 to give effect for correct debit) and the effect will go to Suspense A/c. The correction entry is:
Pandey A/c Dr. 1,500
To Suspense A/c 1,500
(c) Sale of furniture was recorded in sales book. What’s wrong here? Remember that sales book records sale of
goods only and nothing else. Sale of furniture will appear in either cash book (if sold for cash) or journal proper (if
sold on credit). Hence, wrong credit to Sales A/c must be removed and credit should be given to Furniture A/c. It’s
important to note that this rectification entry will not affect the Suspense A/c. The correction entry is:
Dr Suspense Account Cr
Illustration: 5
Pass necessary journal entries to rectify the following errors:
(a) An amount of ` 200 withdrawn by owner for personal use was debited to trade expenses.
(b) Purchase of goods of ` 300 from Nathan was wrongly entered in sales book.
(c) A credit sale of ` 100 to Santhanam was wrongly passed through purchase book.
(d) ` 150 received from Malhotra was credited to Mehrotra.
(e) ` 375 paid as salary to cashier Dhawan was debited to his personal A/c.
(f) A bill of ` 2,750 for extension of building was debited to building repairs A/c
(g) Goods of ` 500 returned by Akashdeep were taken into stock, but returns were not posted.
(h) Old furniture sold for ` 200 to Sethi was recorded in sales book
(i) The period end total of sales book was under cast by ` 100
(j) Amount of ` 80 received as interest was credited to commission.
Solution:
Illustration: 7
Following errors were detected in the Accounts of AA Ram and Sons for the year ended 30th June, 2015:
i) A builder’s bill for `2,700 for the erection of a small shed was debited to repairs account.
ii) A cheque for `300 received from Rahim Bux and Co. was dishonoured and debited to allowances account.
iii) Goods to the value of `150 returned by Chandmal Bros. were included in stock, but no entry was made in
the books.
iv) Repairs to plant amounting to `567 had been charged to plant and machinery account
v) Wages paid to the firm’s own workmen for making certain additionas to machinery amounting to `550 were
posted to wages account.
vi) A cheque for `75 received from Lala Ram was credited to the account of Tika Ram and debited incorrectly
to cash account.
vii) A sum of `100 drawn by the proprietor for personal use was debited to travelling expenses account.
Give journal entries to correct these errors. Which of these errors, if any, will cause disagreement of the trial
balance? Give reasons for your answer.
Solution:
JURNAL ENTRIES
Illustration: 8
On going through the Trial balance of Ball Bearings Co. Ltd. You find that the debit is in excess by `150. This was
credited to “Suspense Account”. On a close scrutiny of the books the following mistakes were noticed:
1) The totals of debit side of “Expenses Account” have been cast in excess by `50
2) The “Sales Account” has been totaled in short by `100.
3) One item of purchase of `25 has been posted from the day book to ledger as `250.
4) The sale return of `100 from a party has not been posted to that account through the Party’s account has
been credited.
5) A cheque of `500 issued to the Suppliers’ account (shown under Trade payables) towards his dues has been
wrongly debited to the purchases.
6) A credit sale of `50 has been credited to the Sales and also to the Trade receivables Account.
i) Pass necessary journal entries for correcting the above;
ii) Show how they affect the Profits; and
iii) Prepare the “Suspense Account” as it would appear in the ledger.
Solution:
JURNAL ENTRIES
Particulars ` Particulars `
To Expenses A/c 50 By Difference in Trial balance 150
To Sales A/c 100 By Trade payables 225
To Balance c/d 425 By Sales Returns A/c 100
By Trade Receivables 100
575 575
By Balance b/d 425
Since the Suspense Account does not balance, it is clear that all the errors have not been traced. As a result of the
above corrections the Net Profit will be:
Particulars ` `
Mistake in totaling in “Expenses” 50
Mistake in totaling in “Sales” 100
Mistake in posting from day book to Ledger under “Purchases” 225
Mistake in wrongly debiting the Purchase A/c 500
Omission in positing under “Sales Returns” 100
875 100
Net Increase 775
As a result of these adjustments, the Profits will be increased by `775 in The books of accounts of A Co. Ltd. for the
year.
Illustration: 9
The books of accounts of A Co. Ltd. for the year ending 31.3.2015 were closed with a difference in books carried
forward. The following errors were detected subsequently:
(a) Return outward book was under cast by ` 100.
(b) ` 1,500 being the total of discount column on the credit side of the cash book was not posted.
(c) ` 6,000 being the cost of purchase of office furniture was debited to Purchase A/c.
(d) A credit sale of ` 760 was wrongly posted as ` 670 to the customers A/c. in the sales ledger.
(e) The Sales A/c. was under casted by `10,000 being the carry over mistakes in the sales day book.
(f) Closing stock was over casted by `10,000 being casting error in the schedule or inventory. Pass rectification
entries in the next year.
Prepare suspense account and state effect of the errors in determination of net profit of last year.
Solution:
In the Books of A Co. Ltd.
Journal
2015 To Profit & Loss Adj. A/c 100 2015 By Difference in Trial Balance 21,510
Apr.1 To Profit & Loss Adj. A/c 1,500 Apr.1 By Debtors A/c. 90
21,600 21,600
(b)………………………………. - 1,500
(c)……………………………….. - 6,000
(d) No effect - -
(e)……………………………….. - 10,000
(f)……………………………….. 10,000 -
10,000 17,600
17,600 17,600
EXERCISE:
1. How will you rectify the following errors discovered before preparation of the trial Balance?
a) `1,000 spent for repairs of buildings has been posted to building account
b) A sale of `730 to mohinder Singh has been entered in the Sales Book as `370.
c) Goods worth `500 purchased from Bankey Lal have been omitted to be recorded in the books.
d) `400 paid as salary to a clerk has been debited to his personal account
e) `75 discount allowed by a creditor has been debited to Discount account
f)The Total of Sales Book has been added `100 too much.
g) Office furniture purchased for `1,800 has been passed through the Purchases Book.
2. Write out the journal entries to rectify the following errors using a suspense account:
i) The total of discount allowed from the cash book for the month of December 2015 amounting to `350 was
not posted
ii) An amount of `175 entered in the sales return book has been posted to the debit of Ram, who had
returned the goods.
iii)Bad debts aggregating to `250 were written off during the year in the sales ledger, but were not adjusted
in the general ledger
iv)Goods of the value of `500 returned to Shyam were entered in the sales day book and posted there from
to the credit of his account.
v) A sale of `800 made to Mohan was correctly entered in the sales day book but wrongly posted to the
debit of Mahesh as `80.
3. The debit side of the Trial Balance Showed `1,000 less than the credit side. The suspense account was debited
with `1,000. Later on following errors were detected. Prepare suspense account passing the necessary
rectification entries without giving narrations:
a)Goods return by a customer `300 entered in the customer’s account but not entered in the sales returns
account.
b) Goods sold to Mahesh on credit for `700 was entered in the sales book but not posted to his account.
c) 580 paid by Varsha traders was credited to their account `508.
d) `260 due from Dinesh was not entered in the schedule of S. Drs.
e) Purchases book was overcast by `188.
vii) While carrying forward the total of one page of the purchases book to the next, the amount of `1,235 was
written as `1,325.
Find out the nature and amount of the Suspense Account and pass entries for the rectification of the above errors
in the subsequent year’s book.
5. Goods worth `272 returned by Lala passed through the books as `722. The rectification entry is
(a) Lala will be debited by `450 (b) Lala will be debited by `272
(c) Lala will be credited by `722 (d) Lala will be credited by `272
6. If a receipt of `200 from rajesh (debtor) has not been recorded in the books the profits would show
(a) An increase of `2,000 (b) A decrease of `200
(c) Neither an increase nor a decrease (d) None of the above
7. A credit purchase of `950 from sudhir was recorded in purchases book as `590. The rectification entry is __
(a) purchases account will be debited by `360 (b) sudhir will be credited by `590
(c) purchases account will be debited by `950 (d) sudihir will be credited by `950
9. If goods worth `1750 returned to supplier is wrongly entered in sales returns book as `1570, then __
(a) net profit will decrease by `3140 (b) Gross profit will increase by `3320
(c) gross profit will decrease by `3500 (d) Gross profit will decrease by `3320
11. Which of the following errors affects the agreement of a trial balance?
(a) Mistake in balancing an account (b) omitting to record a transaction entirely in the subsidiary
books (c) recording of a wrong entry in the subsidiary books
(d) Posting an entry on the correct side but in the wrong account
Ans: 1.b 2.c 3.c 4.d 5.a 6.c 7.a 8.d 9.d 10.b 11.a 12.d 13.d 14.b 15.b
14. ____amount will be credited in Gopal Account when goods purchased from Gopal for `3,600 but way
recorded as `6,300. (`3,600)
15. Rectified entries to be passed in _____(journal proper)
True or false:
2. The discount column of the cash book is not posted is an example of error of omission (TRUE)
4. An error in wrong casting of the sales day book will not affect the personal account of debtors (TRUE)
5. Mistake in balancing an account will affect the agreement of a trial balance (TRUE)
6. Total of purchase journal is short by `1,000 will not affect trial balance (FALSE)
7. Recording a transaction in a wrong book of original entry with wrong amount will affect the trial balance
(FALSE)
9. The mistake of treating a liability as an income or vice versa will affect the trial balance (FALSE)
10. ` 500 purchase of old equipment not recorded in the books of account at all is an one sided error (FALSE)
Group A
3. Error of principle b c) Writing a debit item on the credit side and vice versa.
Group B
Opening Entries: The opening entry is an item which is passed in the Journal proper or General Ledger.
The purpose of passing this entry is to record the opening balances of the accounts transferred from the previous
year to the New Year. The accounts which are appearing on the assets side of balance sheet are debited in the
opening entry while the accounts that are appearing in the liabilities side are credited.
At the end of each accounting period, the books of accounts need to be closed for preparation of final accounts.
Also, in the beginning of the new accounting period, new books of accounts are to be opened. For this purpose,
opening and closing entries need to be passed. These entries are passed in journal proper.
The entry can be given as:
CLOSING ENTRIES:
All the expenses and gains or income related nominal accounts must be closed at the end of the year. In order to
close them, they are transferred to either Trading A/c or Profit and Loss A/c. Journal entries required for transferring
them to such account is called a ‘closing entry’.
The Closing Entries are passed on the basis of trial balance for transferring the balances to Trading and profit and
loss A/c. These entries are mainly for:
a) For transferring purchases and direct expenses (goods related) to Trading A/c
Trading A/c Dr
To Opening stock A/c
To Purchases A/c
To Factory expenses A/c
To Freight & carriage inward A/c
b) For transferring sales and closing stocks
Sales A/c Dr
Closing Stock A/c Dr
To Trading A/c
c) For transferring gross profit or gross loss to P & L A/c
For Gross Profit
Trading A/c Dr
To P & L A/c
For Gross Loss
P & L A/c Dr
To Trading A/c
d) For transferring expenses
P & L A/c Dr
To Respective expense A/c
e) For transferring Incomes
Respective income A/c’s Dr
To P & L A/c
f) For transferring Net profit or Net loss
For Net Profit
P & L A/c Dr
To Capital A/c
For Net Loss
Capital A/c Dr
To P & L A/c
Illustration 2.
Pass closing entries for the following particulars as on 31st March 2015 presented by X Ltd.
Solution:
In the Books of X Ltd.
Journal
Dr. Cr.
Transfer Entries: When it is necessary for an amount or balance of one account to be transferred to some other
account, it is done by means of a transfer journal entry in the Journal Proper.
i.e., Amount withdrawn from Capital
Capital A/c Dr.
To, Drawings A/c
Illustration 3.
Following Balances appeared in the books of Patnayak on 31st March, 2014. Pass the necessary opening entry
for 2014-15:
Credit balances: Capital `30,000; Bills Payable `5,000; Creditors `10,000
Debit balances: Furniture `4,000; Machinery `18,000; Debtors `12,000; B/R `9,000; Cash `2,000
Solution:
OPENING ENTRY IN THE BOOKS OF PATNAYAK
ADJUSTMENT ENTRIES
Under accrual basis of accounting, incomes are recognized when these are earned and not when cash is actually
received. Similarly, expenses are recognized when these are incurred and not when actual payments are made.
This means at the end of the accounting year, there may be certain incomes earned but not received (i.e.,
accrued income) and incomes received but not earned (i.e. income received in advance). Similarly, there may
be certain expenses like wages and salaries which are due but not actually paid (i.e. outstanding expenses) and
certain expenses may have been paid but not due (i.e. prepaid expenses). These accrued incomes, incomes
received in advance, outstanding expenses and prepaid expenses etc. require adjustments at the end of the
year so that true net income is determined on accrual basis. Besides these, there are other items like closing stock,
depreciation etc. which need adjustment.
Adjustment entries are passed either before or after preparation of trial balance. But generally adjustments are
made after trial balance has been prepared. In such a case, i.e., when adjustments are given outside the trial
balance, the dual effect of the adjustment will be in the final accounts itself. In other words, each adjustment will
be treated twice while preparing trading and profit and loss account and balance sheet. For example, if wages
are outstanding, and it is given outside the trial balance, it will be shown on the debit side of the trading account
as an expense and then as a liability in the balance sheet.
However, adjustments are sometimes made before the preparation of the trial balance, in which case adjustments
appear in the trial balance. In such a case, in the preparation of final accounts, these adjustments appear only
once.
Principal type of transactions requiring adjustments are given below along with their adjustment entries.
Common Adjustments
1. Closing stock
2. Outstanding expenses
3. Prepaid
4. Accrued incomes
5. Income received in advance
6. Depreciation on fixed assets
7. Bad debts
8. Provision for bad and doubtful debts
9. Provision for discount on debtors
10. Provision for discount on creditors
11. Interest on capital
12. Interest on drawings
13. Interest on loan/investments/ deposits
14. Manager’s commission
15. Drawing of goods by proprietor for personal use
16. Goods on sale or approval
17. Goods distributed as free samples
18. Loss of stock by fire, theft, etc.
1. Closing Stock:
It was stated earlier in this chapter in relation to trading account items that closing stock generally given outside
the trial balance as an adjustment. The adjustment entry for closing stock is:
Closing stock A/c ……Dr.
To Trading A/c
As it is given outside the trial balance, it is treated twice in final accounts i.e., it appears in trading account on the
credit side and also in the balance sheet asset side.
When closing stock appears in the trial balance:
Sometimes closing stock is recorded in the books before the trial balance is prepared. In such a case purchases
are adjusted for opening and closing stock. The following two entries are passed:
(i) Purchases Account ……Dr.
To opening stock
By this entry, the opening stock account is closed and it has the effect of increasing the amount of purchases.
(ii) Closing stock Account ……Dr.
To purchases
This entry (ii) reduces the amount of purchases and opens a new account i.e. closing stock account. This closing
stock account then appears in the trial balance. In such a case, closing stock will not appear in the trading
account because purchases figure appearing in the trial balance stands adjusted for stocks and is called Adjusted
purchases. This Adjusted purchases appear in the trading account and the closing stock will appear only in the
balance sheet assets side.
2. Outstanding expenses:
These are the expenses like wages, salaries, rent etc. which have been incurred but not paid at the end of the
year. For example, wages of `4,000 which have become due on 31st March but not paid in the financial year, is
termed as outstanding wages. The adjustment entry is:
Wages Account …..Dr. 4,000
To Wages outstanding Account 4,000
It will be added in wages shown in the trading Account and will also be shown as a liability in the balance sheet.
4. Accrued Income:
(Income earned but not received). This is the income which is earned during the current accounting year but is not
received during that year. In may relate to incomes like rent, commission, interest etc. For example, if a business
has purchased 8% Government Bonds of ` 1,00,000 on which interest is payable on 30th June and 31st Dec., then
for the accounting year ending on 31st March, interest for three months i.e. Jan, Feb and March amounting to
`2,000 will be taken as accrued interest because this amount has become due on 31st march but will be payable
on 30th June. The following adjustment entry will be passed on 31st March.
Accrued Interest Account ….Dr. 2,000
To Interest Account 2,000
Accrued interest will be shown on the credit side of profit and loss account and also on the assets side of the
balance sheet.
Illustration 4.
The following items appear in the Trial Balance as on 31st March, 2015.
Dr. ` Cr. `
Sundry debtors 42,000
Bad debts 3,500
Adjustments:
1. After the trial balance was prepared, it was found that a debtor Z will not be able to pay ` 2,000 because of
his insolvency.
2. Create 6% provision for bad debts.
Pass the necessary adjustment entries in journal and show how these would appear in the profit and loss Account
and Balance sheet as on 31st March, 2015.
Solution:
Adjustment Entries
Particulars ` Particulars `
To Bad debts (as given in trial balance) 3,500
Add: Additional bad debts 2,000
Add: provision for bad debts 2,400 7,900
Balance Sheet
As on 31st March, 2015
Liabilities ` Assets `
Sundry debtors 42,000
Less: Additional Bad debts 2,000
40,000
Less: provision for Bad debts 2,400 37,600
The provision for bad debts created is carried forward to the next accounting years. The bad debts that will arise in
the next year will be met out of this provision. In other words, bad debts when written off will be debited to provision
for bad debts where such a provision exists.
Illustration 5.
The following extracts from the trial balance as on 31st March, 2015 are given
Adjustments:
1. Additional bad debts ` 2,000
2. Maintain the provision for bad debts at 10% of debtors.
Show the relevant entries in the profit and Loss Account and Balance Sheet as on 31st March, 2015.
Solution:
Profit and Loss Account
For the year ending 31st March, 2015
Particulars ` Particulars `
To bad debts (as given in trial balance) 3,500
Add: Additional bad debts 2,000
5,500
Add: provision for bad Debts (New) 4,000
9,500
Less: old provision for bad debts 3,800 5,700
Liabilities ` Assets `
Sundry debtors 42,000
Less: bad debts 2,000
40,000
Less: New provision 4,000 36,000
Important Points:
1. When bad debts are given as an adjustment outside the trial balance, then such an amount of bad debts
is deducted from debtors (as given in the trial balance) and the provision for bad debts is calculated on the
balance amount of debtors.
2. Provision for bad debts account in the beginning of the year appears in the trial balance on the credit side.
But the amount of bad debts in the trial balance appears on the debit side.
9. Provision for discount on debtors:
This provision is created for allowing discount to debtors to encourage prompt payments. The amount of this
provision is calculated after deducting bad debts and provision for bad debts from the debtors.
Illustration 6.
Debtors as per trial balance ` 31,000
Adjustments: Provide `1,000 for bad debts, Create 5% provision for bad debts and 2% provision for discount on
debtors. Pass Journal entry for provision for discount on debtors and show how it will appear in the balance sheet.
Solution:
Debtors after providing for bad debts = ` 31,000- 1,000 = `30,000
Provision for bad debts = `30,000 x 5% = `1,500.
Balance amount of debtors = `30,000 – 1,500 = ` 28,500
Provision for discount on debtors = ` 28,500 x 2% = ` 570
The following adjustment entry will be passed
Profit and Loss Account …Dr. 570
To Provision for Discount on Debtors Account 570
This amount of ` 570 appears on this debit side of Profit and Loss Account and in the Balance Sheet it is deducted
from debtors as shown below:
Balance Sheet as on……
Liabilities ` Assets `
Debtors 31,000
30,000
28,500
Total interest for the full year is 60,000 x 10% = `6,000. However, only `4,500 has been paid. The remaining `1,500 is
due for payment at the end of the year i.e. it is outstanding. In the Profit and Loss Account and Balance Sheet it
will appear as follows:
Profit and Loss Account
Dr. Cr.
` `
To Interest on loan 4,500
Add: outstanding 1,500
6,000
Balance Sheet
` `
Loan 60,000
Add: interest outstanding 1,500 61,500
In case interest is on deposit or investment, it will appear in the credit side of P&L Account and in the assets side
of balance sheet.
14. Manager’s Commission:
Sometimes, the manager is entitled to a commission on profits at a fixed percentage. Such commission is calculated
as follows:
(i) Commission on profits before charging such commission:
In such a case, commission is calculated as follows:
Profit before commission ×
Suppose, profit before commission is `1,00,000 and commission is payable at 5%, then the amount of commission
will be: `1,00,000 x 5% = ` 5,000.
Profit after commission will be `1,00,000 – 5,000 = 95,000
(ii) Commission on profits after charging such commission:
In this case, commission is calculated by the following formula:
Rate of Commission
Profit before commission ×
100 + Rate of Commission
In the above example, commission will be:
5
` 1,00,000 × = ` 4,762 (Approx.)
100
Profit after commission will be `1,00,000 – 4,762= ` 95,238
The following entry is passed (with the amount of commission):
Profit and Loss Account …. Dr.
To Commission Outstanding Account
Commission payable is shown as an expense in Profit and Loss Account and in the balance sheet on the liability
side.
Illustration 7.
Pass the necessary entries to make the following adjustment as on 31st Dec. 2015
1. Stock on 31st Dec. 2015 was ` 12,000.
2. Depreciation at 10% on furniture valued at ` 4,500 and machinery valued at ` 50,000.
3. Interest accrued on securities ` 650.
4. Bad debts during the year amounted to ` 450.
5. Unexpired insurance as on 31st Dec. 2015 was ` 290.
6. Salaries outstanding on 31st Dec., 2015 were ` 600.
7. Make provision for discount on debtors and creditors @ 2.5%. The debtors and creditors at the end of the
year were ` 35,000 and ` 24,000.
Solution:
Sl. Particular ` `
No.
1 Stock Account ….Dr. 12,000
To Trading Account 12,000
(being the value of closing stock)
2 Depreciation Account ….. Dr. 5,450
To Furniture Account 450
To Machinery Account 5,000
(Being depreciation at 10% on furniture and machinery for the year)
3 Interest Accrued Account …….Dr. 650
To Interest Account 650
(being interest accrued on securities brought in to account)
4 Bad debts Account ……..Dr. 450
To Debtors Account 450
(being loss on account of non-recovery of debts debited to bad debts account)
5 Unexpired or prepaid Insurance Account .. Dr. 290
To Insurance Account 290
(Being the amount of the unexpired insurance as on the date of the balance
sheet)
Sl. Particular ` `
No.
6 Salaries Account 600
To Salaries outstanding Account 600
(Being the amount of outstanding salaries brought into account)
7(a) Profit and Loss Account …..Dr. 875
To Provision for discount on debtors Account 875
(Being provision made for discount on debtors @ 2.5%)
7(b) Provision for discount of creditors Account… Dr. 600
To Profit and Loss Account 600
(Being provision made for discount on creditors @ 2.5)
When an individual or a firm deposits any money into a bank or withdraw money by issuing a cheque from a bank,
he/it records the transaction in the debit-side of the bank columns of the Cash Book for such deposits and credit
side of the bank column of the Cash book for such withdrawals.
On the other hand, bank also records such transactions in its book i.e. credit such account for deposits and debit
such account for any withdrawals. The Bank issues a book to the account holder after recording such transactions.
The book which is prepared by the bank for accountholder is known as Pass Book. In case of Current Account, the
bank issues Statements and not a Pass Book.
The statement is known as Bank Statement.
A Specimen of a Pass Book is presented below:
UNION BANK OF INDIA
NEW ALIPORE
A/c No. : 104922
Name: Mrs. Mathew
SAVINGS BANK ACCOUNT
PASS BOOK
Date Particulars Cheque No. Withdrawals (`) Deposits (`) Balance (`) Initials
Definition
A statement which is prepared to reconcile the causes of difference between Bank Balance as per Cash Book
and Bank Balance as per Pass Book/ Bank Statement is known as a Bank Reconciliation Statement.
Features of a Bank Reconciliation statement
1. It is a statement.
2. It is not a part of the process of Accounts
3. It is prepared to reconcile the causes of difference between the Bank balance as per Cash Book and the
Bank balance as per Pass Book
4. It can be prepared at any time during the financial year, as and when it is required.
5. Since it is prepared on a particular date, it is written as Bank Reconciliation statement as at/as
on……………………
It is necessary for a beginner to understand the mechanism of how to prepare the Bank Reconciliation statement.
The first milestone on this journey is to understand the various reasons for differences between the two records.
Illustration 1.
On 31.12.14, P. Roy’s Bank Balance as shown by the Cash Book was ` 75,000. On receipt of Bank Statement it was
found that:
(i) Three cheques of `3,000, `4,000 and `1,500 drawn in favour of suppliers respectively on 28th, 29th and 30th
December, 2014 had been debited in the Bank Statement on 2nd January 2015.
(ii) The Bank had credited `8,000 on 30th December, 2014, in respect of collection made by Bank directly from
a customer, the intimation not having yet been received.
(iii) Two cheques of `5,000 and `6,000 were deposited into Bank on 30th December, 2014 had been credited in
the Bank statement on 4th January, 2015.
(iv) The Bank had debited `30 as incidental charges on 30th December, 2014 but not entered in the Cash Book.
Show the reconciliation of the Bank Balance as per Cash Book with the Bank Balance as per Bank Statement as
on 31st December, 2014.
Solution:
Bank Reconciliation Statement of Mr. P. Roy as on 31st December, 2014.
Illustration 2.
On 31-12-2015 your pass book showed a credit balance of `5,000. Before that date you had issued cheques worth
`1,000 of which cheques worth `300 were not yet cashed. On 26th December, you deposited a cheque for `150
in the bank but you did not enter it in cash book. The pass book showed a credit of `40 for interest and a debit of
`10 for bank charges and the cash book had not corresponding entries for them. A cheque for `1,200 deposited
in your account No. 2 was wrongly credited by the bank to this account. Dishonoured bill was debited in the pass
book only `500. Cheques for `700 paid in to the bank were not yet credited in the pass book.
A wrong debit of `100 appears in the pass book. A cheque of `150 received from a customer was entered in the
cash book in December, 2015 but the same was omitted to be paid in to the bank.
Determine the balance as per cash book as on that date.
Bank reconciliation statement as on 31-12-2015
` `
Credit Balance as per pass book 5,000
Add: 10
(1) Bank charges not recorded in cash book 500
Illustration 3.
The Bank Pass Book of Mr. Anil showed an overdraft of `6,000 on 31.12.2015. Prepare the Bank Reconciliation
Statement based on the following details:
(1) Cheques issued but not presented upto 31.12.2015, `5,500
(2) Cheques deposited but not credited upto 31.12.2015, `9,000
(3) Bank commission `30 was entered only in the Pass Book.
(4) A cheque for `6,500 issued in settlement of a debt was encashed on 28.12.2015 but entered in the Cash
Book as `8,500.
Solution:
Mr. Anil Bank Reconcilliation Statement as on 31st December, 2015
Add:
(ii) Cheque for `6,500 issued and encashed but entered in the Cash Book at 2,000
`8,500 (8,500 - 6,500)
7,500
13,500
Less:
(ii) Bank commission entered in the Pass Book only Overdraft as per Cash Book 30 9,030
Illustration 4.
From the following particulars of M/s Suresh enterprises, prepare a Bank reconciliation statement:
(1) Bank overdraft as per Pass Book as on 31st March 2015 was `8,800
(2) Cheques deposited in Bank for `5,800 but only `2,000 were cleared till 31st March
(3) Cheques issued were `2,500, `3,800 and `2,000 during the month. The cheque of `5,800 is still with supplier.
(4) Dividend collected by Bank `1,250 was wrongly entered as `1,520 in Cash Book.
(5) Amount transferred from fixed deposit A/c into the current A/c `2,000 appeared only in Pass Book
(6) Interest on overdraft `930 was debited by Bank in Pass Book and the information was received only on 3rd
April 2015.
(7) Direct deposit by M/s Rajesh Traders `400 not entered in Cash Book.
(8) Corporation tax `1,200 paid by Bank as per standing instruction appears in PB onl
Solution:
Bank Reconciliation Statement as on 31st March, 2015
(d) Prepare Bank Reconciliation Statement by taking the Cash Book balance and rest of the transaction which
are not adjusted against amended Cash Book.
Illustration 5
The Bank Column of the Cash Book showed an Overdraft of `5,000 on 31.3.2015, whereas per Bank Statement the
overdraft is `4,200. The following differences were noticed between the two records:
(a) Cheques of `2,400 issued but not encashed by customers
(b) Cheques deposited but not cleared `1,200
(c) Collection charges debited by Bank not recorded in CB `100
(d) Bank interest charged by the Bank not recorded in CB ` 300
(e) Cheques dishonoured debited by Bank not in CB `400
(f) Interest directly received by Bank not entered in CB `400
Prepare Bank reconciliation statement after amending the CB.
Solution:
Here, please note that amended CB is asked. What it actually means is to record all revenue (expense or income)
items of differences and those items that are recorded in PB only must first be recorded in the CB and then the
reconciliation statement should be prepared by taking the revised balance as per CB. Here is the amended CB.
Cash Book (Bank column only)
Dr. Cr.
Particulars `
Bank OD as per CB 5,400
Add: Cheques deposited, but not cleared 1,200
Less: cheques issued but not encashed (2,400)
Bank OD as per PB 4,200
Illustration 6
The following is a summary from Cash Book of M/s Adarsh Trading for the month of Sept 2015
` `
Balance b/d 1,407 Payments 15,520
Receipts 15,073 Balance c/d 960
16,480 16,480
(a) Bank charges of `35 were not entered in the Cash Book
(b) A cheque of `47 issued to supplier was entered by mistake as a receipt in the Cash Book.
(c) A cheque of `18 was returned by the Bank marked as ‘refer to drawer’ but it’s not entered in Cash Book.
(d) The balance brought forward in Sept 2015 should have been `1,470.
(e) Cheques paid to suppliers `214, `370 and `30 have not been presented for payment.
(f) Deposits of `1542 on 30th Sept were cleared by the Bank on 2nd October.
Show what adjustments will you make in the Cash Book and prepare a Bank reconciliation statement as on 30-
09-2015.
Solution:
As we know, the errors in the Cash Book must first be corrected and entries that have been missed out in the CB
should be recorded.
Cash Book for Sept 2015
Dr. Cr.
EXERCISE:
1. The Bank statement of Mr. J. White dated 31.12.2015 showed a balance with his Bank of `924, when checked
with his Cash Book the following were noted:
(a) During December, the Bank had paid `200 for a yearly contribution of Mr. White, made to a local
charity, as per his standing order. This amount appeared in the Bank statement but not in the Cash
Book.
(b) The Bank had credited his account with `28 interest and had collected on his behalf `230 as dividends.
No corresponding entries were made in the Cash Book.
(c) A cheque of `65 deposited into the Bank on 28.12.2015 was not cleared by the Bank till after 31.12.2015.
(d) A cheque of `150 deposited into and cleared by the Bank before 31.12.2015 was not entered in the
Cash Book, through an oversight.
(e) Cheques drawn by and posted to parties by Mr. White on 31.12.2015 for `73, `119 and `46 were
presented for payment to the Bank only on 3.1.2016.
2. Mr. Suresh request you to ascertain the Bank balance as per the Pass Book for January 2015, as his cash clerk
reported a figure of `11,515 (credit) as on 31.1.2015. Scrutiny revealed the following discrepancies:
(i) Cheques issued and deposited by the cash clerk in January 2015, were `15,000 and `7,000 respectively.
However, against the above, the Bank had paid out and debited cheques worth `9,000 only and cleared
and credited cheques worth `4,000 only, by 31.1.2015.
(ii) A customer had paid in `6,400 directly into Suresh’s Bank account, the effect of which was missing in the
Cash Book
(iii) Bank commission of `45 charged and interest earned `1,400 on investments of Mr. Suresh, where only
recorded in the Pass Book.
(iv) Total cash withdrawals of `3,000 by self and bearer cheques for office use, were recorded erroneously as
`5,000 in the Cash Book.
3. Based on the following information prepare a Bank Reconciliation statement as on 31st December 2015 and
find the balance as per pass book:
(ii) Interest on overdraft for 6 months ending 31-12-2015 `160 is entered in pass book.
(iii) Bank charges amounted to `30 for the above periods were entered in the pass book.
(iv) Cheques issued but not presented upto 31-12-2015 amounted to `1168
(v) Cheques sent for collection to the bank but not collected up to 31-12-2015 amounted `2,170.
(vi) Interest on investments collected by the bank and entered in the pass book `1200.
4. The following is a summary from Cash Book of M/s Adarsh Trading for the month of Sept 2015:
Particulars ` Particulars `
Balance b/d Receipts 1,407 Payments 15,520
15,073 Balance c/d 960
16,480 16,480
On investigation it was found that:
(a) Bank charges of ` 35 were not entered in the cash book
(b) A cheques of ` 47 issued to supplier was entered by mistake as a receipt in the cash book.
(c) A cheques of `18 was returned by the bank marked as ‘refer to drawer’ but it’s not entered in cash book
(d) The balance brought forward in Sept 2014 should have been `1470
(e) Cheques paid to suppliers `214, ` 370 and ` 30 have not been presented for payment.
(f) Deposits of `1542 on 30th Sept were cleared by the bank on 2nd October.
(g) The bank charged a cheque wrongly to Adarsh trading ` 72
(h) Bank statement shows overdraft of `124 as on 30th Sept 2015.
Show what adjustments will you make in the cash book and prepare a bank reconciliation statement as on
30-09-2015.
5. From the following extracts of Cash Book (Bank column only) and bank statement prepare a Bank
Reconciliation Statement as at 30th April, 2015.
Cash Book
30 By H.Bhatta 500*
17,260 17,260
PASS BOOK
2015
1 P. Sur 1,360*
3 D. Singh 450
4 F. Ahmed 1,400*
4 Dividend 200
5 C. Munis 480*
6 K. Nagarajan 700
P. Guha 320*
7 B. Haldar 590*
H. Bhatta 500*
1. When preparing a bank reconciliation statement, if you start with debit balance as per cash book cheques
sent to bank but not collected should be
(a) Added (b) Deducted (c) Not required to be adjusted (d) None
2. Balance as per adjusted cash book `274. Cheques not yet presented `730. Cheques deposited not yet
recorded by bank `477 balance as per pass book will be
(a) A debit balance on the bank statement (b) A credit balance on the bank statement
4. Which of these types of errors are not detected during bank reconciliation?
(a) Cash embezzlement by the cashier (b) cheque deposited but not credited by bank
(d) Interest or commission charged by the bank but not accounted for in cash book.
(a) bank column of cash book (b) bank pass book (c) bank statement (d) trial balance
6. From the following details ascertain the adjusted bank balance as per cash book – overdraft as per cash
book `80,000; cheque received entered twice in the cash book `5,000; credit side of bank column cast short
by `500; bank charges amounting to `200 entered twice; cheque issued but dishonoured `2,000.
7. Which of these items are taken in to consideration for preparation of adjusted cash book
(c) Cheque issued but not presented for payment (d) cheques deposited but not cleared
8. When overdraft as per cash book is the starting point, a cheque of `500 deposited in to bank but not
recorded in cash book will be:
(a) Added by `500 (b) deducted by `500 (c) added by `1000 (d) deducted by `1000
9. Bank has directly paid `1250 for rent as per standing instructions. In BRS starting with pass book overdraft
(a) `1250 will be added to pass book overdraft (b) `2500 will be added to pass book overdraft
(c) This amount will be ignored (d) `1250 will be deducted from pass book overdraft.
10. When credit balance as per pass book is the starting point bank charges are –
(a) Subtracted (b) Added (c) Neither of the two (d) None
(a) to rectify the mistakes in the cash book (b) to arrive at the bank balance
(c) to arrive at the cash balance (d) to bring out the reasons for the difference between the balance as
per cash book and the balance as per bank statement
(a) it brings out any errors committed in preparation of cash book/ bank pass book
(b) highlights under delay in clearance of cheques deposited but not credited
(c) Help known actual bank balance (d) all the three
(a) surplus cash (b) bank overdraft (c) Terms deposits with bank (d) none of these
(a) credit side of cash (b) debit side of cash book (c) debit side of trial balance
15. Difference in bank balance as per pass book and cash book may arise on account of
(a) Cheque issued but not presented (b) cheque issued but dishonored
(c) cheque deposited and credited by bank (d) All of (a) and (b) above
Answers:
1. (b) 2. (b) 3. (b) 4.(a) 5.(d) 6.(d) 7.(a) 8.(b) 9.(d) 10.(b) 11.(d) 12.(d) 13.(b) 14.(a)
15.(d)
(2) The debit side of the pass book was under-cast by `7,000. In the BRS, starting with cash book balance
___(`7,000 will be added to cash book balance.)
(3) Unfavorable balance as per bank pass book means which of____(bank overdraft and debit balance in pass
book.)
(4) Overdraft as per cash book means ____(credit balance in bank column of the cash book.)
(6) Bank balance shown in trial balance ____ (as per cash book)
(7) A debit balance in the depositor’s cash book will be shown as ___ (A credit balance on the bank statement)
(8) The total of payment side of cash book is `700 short. If bank reconciliation statement is started with pass book
over drafts balance then : ___(`700 will be less.)
(9) While preparing bank reconciliation statement from debit balance of cash book cheques paid into bank
but not yet cleared are ____(deducted.)
(10) Cheque of `6,250 deposited on 8.4.2015, realized on 14.4.2015. In the BRS as on 30.4.2015, starting with cash
book balance, this item will be____ (ignored.)
(11) Credit balance in the cash book means ____ (bank overdraft.)
(12) When balance as per pass book is the starting point interest allowed by bank ____ (subtracted)
(14) Debit balance as per bank pass book means _____(bank overdraft)
(15) When debit balance as per cash book is the starting point unpresented cheques are ___(added)
True or False:
1. A credit balance in the pass book indicates excess of deposits over withdrawals (TRUE)
3. Bank charges increase debit balance as per bank pass book (TRUE)
8. Cheque deposited and cleared on the same date will not affect bank and cash balance (TRUE)
10. In arriving at adjusted cash balance errors in the pass book is not taken into account (TRUE)
GROUP-A
1. When cash book favourable balance given cheques issued c (a) Credit balance of pass book
but not yet presented for payment
2. Overcastting bank column of cash book will require adjustment d (b) Is overdraft as per cash book
of
3. Credit balance in the bank column of the cash book b (c) Added
GROUP-B
1. Bank has directly paid `1250 for rent as per standing instructions. c (a) Subtracted
In BRS starting with pass book overdraft
2. A debtor has directly deposited `350 in the bank Account. In e (b) Memorandum statement
BRS starting with pass book overdraft
3. When favourable balance as per cash book is the starting point, a (c) `1250 will be deducted from
wrong debit by the bank to the firm Will be pass book overdraft
5. Debit balance of pass book is equal to d (e) `350 will be added to pass
book overdraft
Introduction
In India, the Negotiable Instruments Act 1881 governs the provisions for bills of exchange. As per this act, the
bill of exchange is defined as “an instrument in writing containing an unconditional order signed by the maker,
directing a certain person to pay a certain some of money only to the order of the certain person or to the bearer
of the instrument”
Advantages:
KK Proof of debt.
KK Easily transferred.
KK Safely transferred.
Based on this definition the following features of a bill of exchange are noticed:
(a) It’s an instrument in writing;
(b) It contains an unconditional order;
(c) It’s signed by the maker;
(d) It’s drawn on a specific person ;
(e) There is an order to pay a specific sum of money;
(f) It must be dated and stamp;
(g) It must bear revenue stamp;
Specimen of a bill of exchange:
2. Payment of bill by drawee to Bank on due date: Payment of the bill on due date :
No entry is passed in the books of the drawer because Bills Payable A/c. Dr.
the bill is duly honoured by the drawee. To, Cash (or Bank) A/c.
(For payment of the bill to bank)
3. Transfer of discount to Profit and Loss Account: No entry
Profit & Loss A/c Dr.
To Discount A/c
Days of Grace
In case the bill is payable on demand, it becomes due immediately on presentation for payment. In the same
way if the bill is not payable on demand it becomes due on the third day from the date of maturity. These three
days are called Days of Grace. For example, if a bill is drawn on 1.4.2015 for 4 months, the due date or date of
maturity will be 4.8.2015. The same can be computed as under:
Example:
Date of Drawing 1.4.2015
Add: Period/Tenure 4 months
1.8.2015
Add: Days of Grace 3
Due Date / Date of Maturity 4.8.2015
Date of Maturity
Date of Maturity is also known as Due Date. The date on which the amount of the bill becomes payable is called
‘Due Date’ or ‘Date of Maturity’. To compute due date, three days (called Grace Period) are included to the
date of maturity of the period of the bill.
The date of maturity of the period of bills depends on whether (a) the bill is payable on date or bill is payable on
sight. If the bill is payable on date, the date of maturity is computed by including tenure of bill to the making of
the bill.
Date of maturity can be understood with the help of the following example:
Date of Drawing 12.12.2013
Tenure +3 Months
12.03.2014
Accounting Treatment
Let us see what accounting entries are passed in the books of the drawer, drawee and the endorsee. These entries
may be thoroughly understood. Here entries only regarding bill transactions are listed. The trade transaction that
precedes the bill of exchange will be accounted for in the usual manner, hence the entries are not given here.
(a) When the drawer retains the bill till maturity
(b)
(b) When the drawer discounts the bill with bank before maturity
(c) When the drawer endorses the bill to a person before maturity
Renewal of Bills
Sometimes the drawee of a bill is not able to meet the bill on due date. He may request the drawer to draw a
new Bill for the amount due. Sometimes he pays a certain amount out and accepts a fresh bill for the balance for
which he has to pay a certain amount of interest which is either paid in cash or is included with the fresh bill. This
bill is known as Renewal of Bills. That, the amount of the new bill will be face value of the original bill minus cash
payment, if any, plus interest for the renewed period.
Entries in the books of Drawer and Drawee are shown below:
On the date of maturity, as the bill is settled by Sohan to bank, there will be no entry in Mohan’s books.
Illustration 2
Sunil owed Anil ` 80,000. Anil draws a bill on Sunil for that amount for 3 months on 1st April 2015. Sunil accepts it and
returns it to Anil. On 15th April 2015, Anil discounts it with CD Bank at a discount of 12% p.a. On the due date the bill
was dishonoured, the bank paid noting charges of `100. Anil settles the bank’s claim along with noting charges in
cash. Sunil accepted another bill for 3 months for the amount due plus interest of ` 3,000 on 1st July 2015. Before
the new bill became due, Sunil retires the bill with a rebate of ` 500. Show journal entries in books of Anil.
Solution
Illustration 3
On 1st April 2015 Mr. Bala draws a bill of `1,20,000 on Mr. Lala for the amount due for 4 months. On getting
acceptance, on 5th April 2015, Bala endorses it to Mr. Kala in full settlement of his claim of `1,40,000 by paying
the difference in cash. Lala approached Bala on 25th July saying that he needed to renew the bill for a further
period of 4 months at an interest of 12% p.a. which Bala accepted. A fresh bill including interest was accepted
by Lala on 1st August 2015. Bala settled his liability to Kala by cheque. This was duly settled on the due date. Pass
journal entries in the books of Bala and Lala. Also show Bills Receivables Account and Bills Payable Account.
Solution:
2,44,800 2,44,800
2015 July, 25 To Bala A/c 1,20,000 2015 April, 1 By Bala A/c 1,20,000
2015 Nov. 30 To Bank A/c 1,24,800 2015 August, 1 By Bala A/c 1,24,800
2,44,800 2,44,800
Illustration 4
On 1st January, 2015, P draws three months bill of exchange for `30,000 on his debtor, Q who accepts it on the
same date. P discounts the bill on 4th January, 2015 with his bankers, the discount rate being 6% p.a. On the
due date, the bill is dishonored, the noting charges being `200. Q immediately makes an offer to P to pay him `
10,000 cash on account and to settle the balance by agreeing to accept one bill of exchange for ` 12,000 at
one month and the other for the balance at three months, the latter including at 12% p.a. for both the bills. P
accepts the arrangement. The bill for ` 12,000 is met on the due date, but the other bill is dishonored. Show Q’s
Account and Bills Receivable Account in the books of P.
Solution:
In the books of P
Q’s Account
Dr. Cr.
Calculation of Interest
On ` 12,000 for 1 month @ 12%: (12,000 x 12% x 1/12) = `120
On ` 8,200 for 3 month @ 12%: (8,200 x 12% x 3/12) = `246
`366
Illustration 5
X bought goods from Y for `4,000. Y draws a bill on 1.1.2015 for 3 months which was accepted by X for this
purpose. On 1.3.2015, X arranged to retire the bill at a rebate of 12% p.a. Show the entries in the books of X and Y.
Solution:
In the books of Y
Journal
In the books of X
Journal
Solution:
EXERCISE:
1. Pass journal entries in the books of Hema for the following transactions:
(a) Hema’s acceptance to Nanda for `5000 renewed for 3 month with interest at 10% p.a.
(b) Nalini’s acceptance to Hema was for `10000 was retired one month before due date at a discount of
12% p.a.
(c)Discounted Natasha’s acceptance to Hema for `4000 with the bank for `3920.
(d) Neela requests Hema to renew her acceptance for `3500 for 3 months. Hema accepted on the condition
that interest of `100 was paid in cash which Neela did.
2. Mohan sold goods on 1st September, 2014 for `2,00,000/- to Sohan. Sohan immediately accepted a 3
months bill. On the due date Sohan requested for the renewal of the bill for a further period of two months.
Mohan agrees to pay interest @ 9% per annum to be included in the new bill. Determine the amount of the
new bill.
Ans: ` 2,03,000
3. On 1-4-15, Mr. A draws a bill for ` 6,000 for 7 months on Mr. B who returned the bill to Mr. A after acceptance.
On 10-4-15, Mr. A endorsed the bill in favour of Mr. C who endorsed the bill on 15-4-15 in favour of Mr. D.
On 1-5-2015, Mr. D discounted the bill at 10%. On maturity, the bill was dishonoured and banker paid ` 50
towards noting charges. Pass necessary journal entries in the books of Mr. D
4. Mr. A draws on Mr. B a bill of exchange for ` 5,000 on 1st Jan, 2015. Mr. A endoreses the bill in favour of Mr.
C Before maturity, Mr. B approaches Mr. A with the request that the bills be renewed for a further period of
3 months at fifteen percent interest per annum. Mr. A pays the sum to Mr. C on due date and agrees to the
proposal of Mr. B pass the journal entries in the books of Mr. A assuming that the second bill is duly met.
Ans:
1. (b) 2.(b) 3.(a) 4.(b) 5.(c) 6.(d) 7.(c) 8. (a) 9.(d) 10.(b) 11.(c) 12.(d) 13.(b) 14.(b) 15.(d)
True or false:
1. Oral bill of exchange is also valid (FALSE)
2. Creditors can draw a bill on debtors (TRUE)
3. Bank will draw a bill on customer at the time of overdraft (FALSE)
4. Retirement of bill means sending the bill for collection (FALSE)
5. A person by whom the bill is endorsed is called endorser(TRUE)
6. Foreign trade is facilitated with the help of foreign bills of exchange (TRUE)
7. If the bill is assigned by the drawer it is invalid (FALSE)
8. In case of endorsement of bill endorser debits endorsee and credits B/R account(TRUE)
9. Endorser or drawer credits endorsee when the payment is received (FALSE)
10. When a bill is retired under rebate the holder of a bill debits B/R account (FALSE)
Group B
2.2 CONSIGNMENT (COST PRICE, INVOICE PRICE, COMMISSION & VALUATION OF STOCK)
Wholesalers and Manufactures find it quite convenient and profitable to sell goods, through the medium of an
agent at home and abroad. An agent sells the goods on behalf of sender of goods and charges commission. The
knowledge of the agent regarding local conditions proves quite useful for increasing the sales. The person who
sells the goods is called ‘consignor’ or ‘principal’, the person to whom the goods are sent is termed as ‘consignee’
or ‘agent’ and the shipment of the goods is known as consignment. Thus, a consignment may be defined as
shipment of goods by a manufacturer or wholesale dealer to an agent for sale on commission basis. An agent
sells the goods on account of consignor and risk is borne by the consignor. It is not transfer of ownership of goods,
but only sending of goods by one person to another at a different place to be sold by the latter on behalf of the
former. When the goods are sent by the consignor, it is known as outward consignment. To the consignee, it is
an inward consignment. Consignee does not become the debtor for the goods received on consignment. The
relationship between both the parties is that of an agent and a principal only. The goods consigned to the agent
are treated as sales only when these are sold by the consignee and he becomes entitled to be reimbursed for
the expenses incurred on behalf of consignor and is also entitled to receive commission for the goods sold by him.
(iii) In case of consignment, the risk of loss or damage to the goods remains with the consignor till the goods
consigned are sold by the consignee. In case of sale, risk attached to the goods passes along with ownership
to the buyer of goods.
(iv) In consignment, the consignor usually bears the expenses incurred by the consignee in connection with the
goods consigned to him. In case of sale, expenses incurred by the buyer, after its completion, will be borne
by him.
(v) In consignment, ‘Account Sales’ is required to be submitted periodically by the consignee to the consignor.
But in case sale, no ‘Account sales’ is required to be submitted by the buyer to the seller.
(vi) In consignment, goods are sold by the consignee against commission, while in case of sale, goods are sold
against price.
(vii) In consignment, unsold goods with the consignee can be returned at any time if he feels that goods cannot
be sold except at a loss, while in case of sale, the goods cannot be returned by the buyer after the sale is
complete.
Diagrammatic representation:
Consignment
Nature of a Consignment
KK If the owner of the goods does not have retail outlets, he can consign the goods to an agent.
KK The agent will sell the goods for him and receive a commission in return.
Main Terms of Consignment
Trade Consignor – He is the person who sends goods to agents e.g. a manufacturer or wholesaler.
Consignee – He is the agent to whom goods are sent for selling.
Ordinary Commission – This is a fee payable by consignor to consignee for sale of goods when the consignee
does not guarantee the collection of money from ultimate customer. The % of such commission is generally lower.
Del Credre Commission – This is additional commission payable to the consignee for taking over additional
responsibility of collecting money from customers. In case, the customers do not pay of the consignee takes over
the loss of bad debts in his books. Although it’s paid for taking over risk of bad debts that arise out of credit sales
only, this commission is calculated on total sales and not on credit sales.
Commission table:
Account Sales – This is a periodical statement prepared by consignee to be sent to the consignor giving details
of all sales (cash and credit), expenses incurred and commission due for sales, goods destroyed-in-transit, or in
godown and deducting the amount of advance remitted by him.
Proforma Invoice:
When the goods are sent by consignor to the consignee, consignor sends a ‘proforma Invoice’ in the form of
an invoice to the consignee, ‘Proforma Invoice’ contains information related to the nature of goods, number
and/ or quantity, weights, other measurements related to the goods and marked price, etc. It is to be noted that
proforma invoice is only in the nature of memorandum invoice and is not a regular invoice. So it does not make
the consignee accountable to pay the amount mentioned therein. Generally, the price shown in such invoice is
not the cost price but it is sometimes the selling price and sometimes the cost price plus an arbitrary percentage
of profit.
The entry is made with the amount difference between cost price and invoice price of the goods sent. If some
goods remain unsold with the consignee, then also the adjustment is required to nullify the effect of higher price
and show the stock on cost price. The journal entry being passed
Illustration 1.
Ram & Co. of Calcutta consigned 50 cases of goods at `200 each to Nathan of Bombay. The consignor pays
`200 for insurance and for freight `300. Nathan sent an account sales showing the gross proceeds at `24,000. The
expenses paid by Nathan were dock dues `20, carriage `50 warehousing expenses `130. He sent the amount due
to the consignor after deducting 4% commission. Give journal entries in the books of both the parties.
Solution:
In the Books of Ram & Co. Journal Entries
Consignor’s books ` `
Consignment A/c Dr. 10,000
To Goods Sent on Consignment A/c 10,000
(Being the cost of 50 cases of goods @ `200 each consigned to consignee)
Consignment A/c Dr. 500
To Cash A/c 500
(Being `200 for Insurance and `300 for freight paid)
Nathan’s A/c Dr 24,000
To Consignment A/c 24,000
(Being the sales proceeds at `24,000)
Consignment A/c Dr 200
To Nathan’s A/c 200
(Being expenses paid by Nathan i.e. dock dues `20, carriage `50 and warehousing expenses
`130)
Consignment A/c Dr 960
To Nathan’s A/c 960
(Being the commission payable to Nathan @4% on `24,000)
Illustration 2.
The Bombay Mills Ltd. of Bombay consign to their Calcutta agent `10,000 worth of piece goods, drawing on
Calcutta for the amount. They pay charges fright and insurance on the consignment amounting to `650 and
discount the bill which costs `200. The goods were received in Calcutta and in due course the account Sales was
received as follows:
Account sales of 200 bales of piece goods from Bombay Mills Ltd. of Bombay.
` `
200 Bales of piece goods at 14,000
Less:
Delivery charges etc., 500
Godown rent 70
Insurance 80
Sundry charges 18
Commission 700 1,368
12,632
Draft paid 10,000
Balance herewith 2,632
Enter these particulars in the ledger of the consignor and complete the transaction showing final profit or the loss
on the consignment.
Solution:
In the Books of Bombay Mills Ltd.
CONSIGNMENT ACCOUNT
Dr. Cr.
Agent Account
Dr. Cr.
Particulars Amount (`) Particulars Amount (`)
To Consignment A/c 14,000 By Bills Receivable A/c 10,000
By Consignment A/c 1,368
By Bank A/c 2,632
14,000 14,000
Illustration 3.
‘A’ sends goods worth `50,000 to ‘B’ for sales for 5% commission. He incurs `1,500 for Freights and `500 for Insurance.
The goods are sold for `60,000, consignee incurs `500 unloading expenses and `500 rent. B sends a draft after
deducting his expenses and commission.
Prepare necessary accounts in the books of A.
Solution:
In the books of A
Consignment Account
Dr. Cr.
Illustration 4.
Usha sent goods costing `75,50,000 on consignment basis to Gayathri on 1.2.2015 @8.5% commission, `8,25,000
was spent on transportation by Usha. Gayathri spent `5,25,000 on unloading. 80% of the goods received were sold
for `90,00,000, 10% of the goods for `10,00,000 and the balance was taken over by Gayathri @10% below the cost
price. She has sent a demand draft to Usha for the amount due show in Usha’s Books.
(i) Consignment Account
(ii) Gayathri’s Account.
Solution:
In the Books of Usha
Consignment Account
Dr. Cr.
Gayathri’s Account
Dr. Cr.
Working Note:
1. Computation of Amount of Sales by Gayathri
2. Computation of Commission
Illustration 5.
Sree Traders of Gujrat purchased 10,000 sarees @ ` 100 per saree. Out of these 6,000 sarees were sent on
consignment to Nirmala Traders of Kolkata at the selling price of ` 120 per saree. The consignor paid ` 3,000 for
packing and freight. Nirmala Traders sold 5,000 sarees @ ` 125 per saree and incurred ` 1,000 for selling expenses
and remitted ` 5,00,000 to Gujrat on account. They are entitled to a commission of 5% on total sales plus a further
of 25% commission on any surplus price realized over ` 120 per saree. 3,000 sarees were sold at Gujrat @ ` 110 per
saree. Owing to fall in market price, the value of stock of saree in hand is to be reduced by 5%. Your are required
to prepare (i) Consignment Account, and (ii) Nirmala Traders Account.
Solution:
i) In the books of Sree Traders
Dr. Consignment Account Cr.
Particulars Amount Particulars Amount
(`) (`)
To, Goods Sent on Consignment A/c 6,00,000 By Nirmala Traders A/c : Sale proceeds 6,25,000
(6,000 × ` 100) (5,000 × ` 125)
To, Bank A/c (Packing and Freight) 3,000 By, Stock on Consignment A/c (W.N.2) 90,250
To, Nirmala Traders A/c
- Selling Expenses 1,000
- Commissions (W.N.1) 37,500
To, Profit & Loss A/c (Profit on Consignment) 73,750
7,15,250 7,15,250
Note:
3,000 sarees which were sold at Gujrat @ `110 per saree are not to be taken into consideration since it is not a
consignment transaction and hence the same is excluded from Consignment Account.
Although the consignor purchased 10,000 sarees, only 6,000 sarees are related to consignment transaction,
balance is not to be taken into Consignment Account at all.
(ii)
Dr. Nirmala Traders Account Cr.
Particulars Amount (`) Particulars Amount (`)
To Consignment A/c: By, Bank A/c (Advance) 5,00,000
Sales Proceeds 6,25,000 By, Consignment A/c (Exp. + Com.) 38,500
By, Balance c/d 86,500
6,25,000 6,25,000
Workings:
1. Calculation of Commission payable to Nirmala Traders:
(`)
Total Sales @ ` 125 per saree 6,25,000
Less: Amount ` 120 per saree 6,00,000
Surplus Price Realised 25,000
Commission: @ 5% on total Sales (` 6,25,000 × 5%) 31,250
Add: 25% on ` 25,000 6,250
37,500
2. Valuation of Unsold Stock:
Since market price has fallen by 5%, valuation of unsold stock on consignment will be calculated as under:
Particulars (`)
Total Cost (1,000 × ` 100) (without Considering expenses) 1,00,000
Less: 5% in reduction 5,000
95,000
Less: Consignee’s Com. @ 5% 4,750
Estimated Selling Price 90,250
Losses on Consignment
There are two types of losses which may arise in case of a consignment transaction, viz.
(a) Normal Loss, and
(b) Abnormal Loss
(a) Normal Loss – Normal Losses arise as a result of natural causes, e.g. evaporation, leakage, breakage etc., and
they are inherent in nature. Since normal loss is a charge against gross profit no additional adjustment is required
for this purpose. Moreover, as the same is a part of cost of goods, when valuation of unsold stock is made in case
of consignment account the quantity of such loss (not the amount) should be deducted from the total quantity of
the goods received by the consignee in good condition. Thus,
Value of closing stock will be
Unsold Quantity
= Total Value of goods sent × Good Quantity Received by Consignee
Illustration 6.
Ram of Patna consigns to Shyam of Delhi for sale at invoice price or over. Shyam is entitled to a commission @ 5%
on invoice price and 25% of any surplus price realized. Ram draws on Shyam at 90 days sight for 80% of the invoice
price as security money. Shyam remits the balance of proceeds after sales, deducting his commission by sight
draft. Goods consigned by Ram to Shyam costing `20,900 including freight and were invoiced at `28,400. Sales
made by Shyam were `26,760 and goods in his hand unsold at 31st Dec, represented an invoice price of `6,920.
(Original cost including freight `5,220). Sight draft received by Ram from Shyam upto 31st Dec was `6,280. Others
were in- transit. Prepare necessary any Ledger Accounts.
Solution:
In the books of Ram
Consignment to Delhi Account
Dr. Cr.
Particulars Amount (`) Particulars Amount (`)
To, Goods Sent on Consignment A/c 28,400 By, Goods Sent on Consignment A/c 7,500
(Loading) `(28,400- 20,900)
To, Y A/c – Commission 2,394 By, Shyam A/c – Sale proceeds 26,760
To, Stock Reserve A/c `(6,920 – 5,220) 1,700 By, Stock on Consignment A/c 6,920
To, Profit and Loss A/c-Profit on 8,686
consignment transferred
41,180 41,180
Shyam Account
Dr. Cr.
Illustration 7.
Ashok sends goods on consignment basis to Srinivas. The terms are that srinivas will receive the 10% commission on
Invoice price and 20% on price realized over and above the Invoice price. Srinivas will meet his expenses himself.
Ashok sent goods whose cost was `16,000 at a proforma Invoice price cost plus 25% and spent `1,500 on fright
charges. Srinivas accepted a bill for 16,000 immediately on receiving the consignment. His expenses were `200
as rent and `100 as insurance. Srinivas sold ¾ of goods for `19,500. Part of sales were on credit and one customer
failed to pay `400. Pass journal entries in the books of Ashok.
Solution:
Journal entries in the books of Ashok
Working Notes:
1. Calculation of commission
10% on invoice price
(i.e., 10% on 15,000 ×3/5) 1,500
20% on excess of invoice price
(i.e., 20% on 19,500 – 15,000) 900
Total commission 2,400
2. Closing stock:
Invoice price of ¼ of the goods
Left unsold, i.e., ¼ x 20,000 5,000
Add: ¼ of freight ¼ x 1,500 375
5,375
EXERCISE:
1. On 1st July, 2006 Radio House of Delhi consigned 200 Radios to Banerjee Bros. of Calcutta. The cost of each
radio was `400. Radio House paid `5,000 for freight and insurance. On 7 July, 2006 Banerjee Bros. accepted
a 3 month bill drawn upon them by Radio House for `50,000. Banerjee Bors. Paid `2,200 as rent and `1,300 for
advertisement and upto 31st December, 2006 (on which date Radio House close their books) they sold 180
radios at `500 each. Banerjee Bros. were entitled to a commission of 5% on sales.
Give Journal entries and prepare necessary accounts to record the above transactions in the books of the
parties.
Ans: Profit = `5,500, Value of Stock = `8,500, Balance due from Banerjee = `32,000
2. A of Sonepat consigned 500 bicycles to B of Cochin to be sold on his account and at his risk. The cost of
one bicycle was `200. A paid `5,500 as freight and insurance and received `40,000 as advance from B. B
paid `1,000 as octroi and carriage, `1,500 as rent and `1,200 as insurance. 410 bicycles were sold by B for
`1,10,000. B was entitled to a commission of 5% on sale @`250 per bicycle and 25% of any surplus price
realized. Give journal entries in the books of A and B.
Ans: Profit = `12,970, Value of Stock = `19,170, Commission = `7,000, Balance due from B = `59,300
3. H Ltd. Forwarded on 1.7.2006, 100 bicycles to Vasu of Hyderabd to be sold on behalf of H Ltd. The cost of
each bicycle was `150 but the invoice price was `200. H Ltd. incurred `1,000 on freight and insurance. Vasu
received the consignment on 14.7. 2006 and accepted a three months draft drawn upon him by H Ltd. For
`10,000. Vasu paid `400 as rent and `250 as insurance and by 31.12.2006 had disposed of 80 bicycles at `205
each. Vasu is entitled to a commission of 5% on sales including del credere commission of 1%. Vasu sold 20
bicycle on credit and was not able to recover sales proceeds of 5 bicycles because of insolvency of the
debtor.
Give journal entries to record the above transactions in the books of H Ltd. and Vasu.
Ans: Profit = `2,130, Value of Stock at invoice price= `4,200
10. Which of these accounts are not opened in the books of consignor?
(a)consignment account (b) commission account
(c)Goods send on consignment account (d) consignees personal account
11. For closing stock held by consignee which account must be debited
(a) consignment stock account (b) sales account (c) consignee account (d) consignment account
12. X of Kanpur sends out 1000 boxes to Y Delhi costing ` 200 each at an invoice price of ` 220 each goods sent
out on consignment to be credited in general trading will be
(a) ` 2,00,000 (b) ` 2,40,000 (c) ` 40,000 (d) None
13. A proforma invoice is sent by
(a) consignee to consignor (b) consignor to consignee
(c) debtor to consignee (d) debtor to consignor
14. Commission will be shared by
(a) consignor and consignee (b) only consignee (c) only consignor (d) third party
15. X of Mumbai sends out certain goods at cost +25%. Invoice value of the goods is `2,00,000. 4/5th of the
goods were sold by consignee at `1,76,000. Commission 2% upto invoice value and 10% of any surplus
above invoice. The amount of commission will be.
(a) 4800 (b) 5200 (c) 3200 (d) 1600
Answers:
1. (d), 2.(d), 3. (a), 4. (a), 5.(c), 6.(c), 7. (a), 8.(a), 9.(c), 10.(b),11. (a), 12. (a), 13. (b), 14. (b) , 15.(a).
13. The balance of consignment stock is shown on the ___side of the balance shet.(asset)
14. Consignment account is ____Account.(nominal)
15. Goods costing `1,80,000 sent out to consignee to show a profit of 20% on the invoice price. Invoice price of the
good will be ____(2,25,000.)
True or false:
1. Goods sent on consignment account is of the nature of real account (TRUE)
2. Goods valued at invoice price refers to valued at lower price than its original cost (FALSE)
3. Balance in consignment account shows profit and loss on consignment (TRUE).
4. Profit and loss on consignment is retained / borne by consignor (TRUE).
5. Commission will be shared between only consignee (TRUE).
6. The details contained in account sales are unsold stock left with the consignee (FALSE)
7. All proportionate consignee’s expenses will be added up for valuation of consignment stock (FALSE)
8. In consignment, the goods are dispatched on the basis that the goods will be sold on behalf of and at the
expenses of and at the risk of the consignee (FALSE)
9. Cost of the goods include all non-recurring expenses incurred till the goods reach the premises of the
consignee’s godown (TRUE)
10. Accounts sales is a statement furnished by consignor to consignee (FALSE)
1. Ownership right of the consignment stock is always with the c a) loss which is unavoidable
2. Consignment stock account is a e b) 2,50,000
3. Goods sent to consignment at cost +33 1/3 %. The Percentage of d c) consignor
loading on invoice price will be
4. Goods costing ` 2,00,000 sent out to consignee at Cost +25% invoice b d) 25%
value of the goods will be
5. Main objective of sending goods at invoice at invoice Price is to f e) real account
6. Normal loss is case of consignment means a f) keep the real profit a secret
Group – B
Introduction
Joint Venture is a temporary form of business organization. There are certain business activities or projects that may
involve higher risks; higher investments and even they demand multi-skills. In such cases, an individual person may
not be able to master all resources. Hence two or more people having requisite skill sets come together to form
a temporary partnership. This is called a Joint Venture. There is a Memorandum of Undertaking (MOU) signed for
this purpose.
KK The business activities for which Joint Ventures (JV) are formed could be : -
- Construction of dams, bridges, roads etc.
- Buying & selling of goods for a particular season
- Producing a film
- Purchasing land selling plots
KK The basic features of a Joint Venture business are :
(i) It is done for a specific purpose and hence has a limited duration.
(ii) The partners are called co-venturers
(iii) The profit or loss on joint venture is shared between the co-venturers in the agreed ratio.
(iv) The co-venturers may or may not contribute initial capital.
(v) The JV is dissolved once the purpose of the business is over.
(vi) The accounts of the co-venturers are settled immediately on dissolution.
(vii) A joint venture has no name.
Difference between Joint Venture and Consignment:
5 For expenses out of joint bank A/c Joint Venture A/c Dr.
To Joint Bank A/c
6 For goods sold for cash Joint Bank A/c Dr.
To Joint Venture A/c
7 Contract / sale price received in form of shares / cash Joint Bank A/c Dr.
Shares A/c Dr.
To Joint Venture A/c
8 Commission / salary to co-venturers Joint Venture A/c Dr.
To Co-Venturers A/c
9 Unsold goods taken over by co-venturers Co-Venturers A/c Dr.
To Joint Venture A/c
10 Shares taken over by co-venturers Co-Venturers A/c Dr.
To Shares
11 If shares are sold in open market Joint Bank A/c Dr.
To Shares
12 For profit on joint venture Joint Venture A/c Dr.
To Co-Venturers A/c
13 For loss on joint venture Co-Venturers A/c Dr.
To Joint Venture A/c
14 For final distribution of funds Co-Venturers A/c Dr.
To Joint Bank A/c
Illustration 1.
Aditya and Amit entered into a joint venture to buy and sale Ganesh idols for the Ganesh festival. They opened a
Joint Bank Account. Aditya deposited `2,00,000 and Amit `1,50,000. Aditya supplied Ganesh idols worth ` 25,000
and Amit supplied decoration material worth `15,000. The following payments were made by the venture:
(a) Cost of Ganesh idols purchased `2,50,000
(b) Transportation charges `12,000
(c) Advertising `7,500 and Sundry Expenses `2,500. They sold idols for ` 4,00,000 for cash. Aditya took over some
idols for `30,000 and Amit took over remaining for `10,000. The profit or losses were to be shared equally between
co-venturers. Prepare Joint Venture Account, Joint Bank Account and each Co-Venturer’s Account.
Solution:
Joint Venture Account
Dr. Cr.
Particulars Amount (`) Particulars Amount (`)
To Aditya A/c (Materials) 25,000 By Joint Bank A/c –sales 4,00,000
To Amit A/c (Materials) 15,000 By Aditya A/c 30,000
To Joint Bank A/c (Materials Purchased) 2,50,000 By Amit A/c 10,000
To Joint Bank A/c (Transport) 12,000
To Joint Bank A/c (Advertising) 7,500
To Joint Bank A/c (Sundry Exp.) 2,500
To Profit on Venture A/c :
Aditya 64,000
Amit 64,000
4,40,000 4,40,000
Aditya’s Account
Dr. Cr.
Particulars Amount (`) Particulars Amount (`)
To Joint Venture A/c – (materials) 30,000 By, Joint Bank 2,00,000
To Joint Bank A/c – (closing) 2,59,000 By, Joint Venture – (materials) 25,000
By, Joint Venture – (profit) 64,000
2,89,000 2,89,000
Illustration 2.
Prabir and Mihir doing business separately as building contractors undertake jointly to build a skyscraper for a
newly started public limited company for a contract price of `1,00,00,000 payable as `80,00,000 in cash and the
balance by way of fully paid equity shares of the new company. A Bank Account was opened for this purpose in
which Prabir paid `25,00,000 and Mihir `15,00,000. The profit sharing ratio was agreed as 2:1 between Prabir and
Mihir.
The transactions were:
(a) Advance received from the company `50,00,000
(b) Wages to contractors `10,00,000
(c) Bought materials `60,00,000
(d) Material supplied by Prabir `10,00,000
(e) Material supplied by Mihir `15,00,000
(f) Architect’s fees paid from Joint Bank Account `21,00,000
The contract was completed and the price was duly paid. The joint venture was duly closed by Prabir taking all the
shares at `18,00,000 and Mihir taking over the balance material for `3,00,000. Prepare the Joint Venture Account,
Joint Bank Account. Co-venturer’s Accounts and Shares Account.
Solution:
Dr. Joint Venture Account Cr.
Illustration 3.
Ram, mohan and Rahim were partners in a joint venture, each contributing ` 5,000. Ram purchased goods for
`13,000 and also supplied goods worth ` 1,000 from his stock, Rahim also supplied goods to the value of ` 1,500
from stock and his expenses in connection with the supplying of goods on account of joint venture amounted to
` 50. Ram paid ` 250 for expenses in connection with the joint venture. There was a sale of ` 20,800 by Ram. Ram
was entitled to a commission of 5 per cent on sales. Unsold goods amounting to ` 500 were taken over by Mohan.
Ram settled accounts of Mohan and Rahim by Bank draft.
Records these transactions in Ram’s journal and also prepare Joint venture account and Rohan and Rahim
accounts in ram’s books.
Solution:
Rama's Journal
` `
To Bank Account (purchase) 13,000 By Bank Account (Sale) 20,800
To Goods Account (Goods Supplied) 1,000 By Mohan (unsold goods taken) 500
To Rahim (goods and expenses) 1,550
To Bank Account (expenses) 250
To Commission Account (5%) 1,040
To Profit on joint venture transferred to:
Profit & Loss Account 1,486
Mohan 1,487
Rahim 1,487 4,460
21,300 21,300
` `
To Joint Venture Account 500 By Bank Account 5,000
To Bank Account 5,987 By Joint Venture Account (profit) 1,487
6,487 6,487
` `
To Bank Account 8,037 By bank account 5,000
By joint venture Account 1,550
By joint venture Account(profit) 1,487
8,037 8,037
Illustration 4.
John and Smith entered into a joint venture business to buy and sale garments to share profits or losses in the
ratio of 5:3. John supplied 400 bales of shirting at `500 each and also paid ` 18,000 as carriage & insurance. Smith
supplied 500 bales of suiting at ` 480 each and paid ` 22,000 as advertisement & carriage. John paid `50,000 as
advance to Smith. John sold 500 bales of suiting at ` 600 each for cash and also all 400 bales of shirting at `650
each for cash. John is entitles for commission of 2.5% on total sales plus an allowance of `2,000 for looking after
business. The joint venture was closed and the claims were settled. Prepare Joint Venture Account and Smith’s
Account in the books of John and John’s Account in the books of Smith.
Solution:
Books of John
Dr. Joint Venture Account Cr.
Particular ` Particular `
To, Goods A/c - shirting (400x500) 2,00,000 By, Cash A/c – sales
To, Bank A/c - carriage & insurance 18,000 shirting (500 x 600) 3,00,000
To, Smith A/c - suiting (500x480) 2,40,000 suiting (400 x 650) 2,60,000
To, Smith A/c - Advt & Carriage 22,000
Particular ` Particular `
To, Cash A/c – advance 50,000 By, Joint Venture A/c – suiting 2,40,000
To, Cash A/c - balance paid 2,36,000 By, Joint Venture A/c – Expenses 22,000
By, Joint Venture A/c - profit 24,000
2,86,000 2,86,000
Books of Smith
Dr. John’s Account Cr.
Particular ` Particular `
To, Joint Venture A/c – sales 5,60,000 By, Cash A/c – advance 50,000
By, Joint Venture A/c – shirting 2,00,000
By, Joint Venture A/c – expenses 18,000
By, Joint Venture A/c – commission 14,000
By, Joint Venture A/c – allowance 2,000
By, Joint Venture A/c – profit 40,000
By, Cash A/c - balance paid 2,36,000
5,60,000 5,60,000
(a) Memorandum Joint Venture Account
When all the parties keep accounts, the method adopted for recording the transactions relating to joint venture, is
called Memorandum Joint venture method. Here each Co-Venturer records only those joint venture transactions
which are affected by him with the help of a personal account designed as ‘Joint Venture with……….(Name of
the other Co-Venturer)……Account’. It is debited with the amount of purchases/supplies made and expenses
incurred by the Venturer. Each Co-Venturer sends a periodic statement of joint venture transactions effected
by him only, to the other Co-Venturer and on receipt of the aforesaid statement, each Co-Venturer prepares
Memorandum Joint Venture Account in order to ascertain the profit/loss on Joint Venture transactions. Since this
account is in fact, not a part and parcel of double entry system the word ‘memorandum’ is prefixed.
Journal Entries:
The journal entries which may be required at any point of time, are summarized below:
5. On payment of expenses:
Joint Venture with …………..A/c Dr. (with total)
To, Cash/Bank A/c (with cash expenses)
To, Creditor’s A/c (with outstanding expenses)
6. On sale of goods:
Cash/Bank A/c Dr. (with cash sales)
Customer’s A/c Dr. (with credit sales)
To, Joint Venture with …………..A/c (with total)
7. On receiving payment from a customer:
Cash/Bank A/c Dr. (with the payment received)
Joint Venture with …………..A/c Dr. (discount allowed/bad debt)
To, Customer’s A/c (with the payment received)
8. On taking away of unsold goods:
Goods Sent on Joint Venture A/c Dr.
To, Joint Venture with …………..A/c
9. On considering some commission/salary to the Co-Venturer:
Joint Venture with …………..A/c Dr.
To, Commission/Salary A/c
10. On recording the share of Profit/Loss:
(a) When profit-
Joint Venture with …………..A/c Dr.
To, Profit & Loss A/c
(b) When loss-
Profit & Loss A/c Dr.
To, Joint Venture with …………..A/c
Illustration 5.
Bharat and Sujit joined together as co-ventures for equal share in profits through sale of television cabinets. On
March 31, 2015. Bharat purchased 2,000 cabinets at `1,250 each for cash and sent 1,500 of these to sujit for sale,
the selling price of each being `1,300. All the cabinets were sold by April 30, 2015 by both and the proceeds
collected.
Each venturer recorded in his books only those transactions concluded by him, final profit and loss being
ascertained through a Memorandum joint venture Account.
The expenses met by the venturer were:
`
Bharat: Freight and insurance 12,000
Selling expenses 5,000
Sujit: Clearing charges 1,000
Selling expenses 12,000
Final settlement between the venturers took place on May 31, 2015. You are required to show:
(a) joint venture with sujit A/c in the books of Bharat
(b) Joint venture with Bharat A/c in the books of sujit; and
(c) Memorandum joint venture Account.
Solution:
Bharat’s books
Joint venture with sujit Account
Dr. Cr.
Sujit’s books
Dr. Joint venture with Bharat Account Cr.
Illustration 6.
M and N decided to work in partnership with the following scheme, agreeing to share profits as under :
M — ¾th share.
N—¼th share.
They guaranteed the subscription at par of 10,00,000 shares of `1 each in U Ltd. And to pay all expenses up
to allotment in consideration of U Ltd. issuing to them 50,000 other shares of `1 each fully paid together with a
commission @ 5% in cash which will be taken by M and N in 3 : 2. M and N introduced cash as follows:
`
M — Stamp Charges, etc., 4,000
Advertising Charges 3,000
Printing Charges 3,000
N — Rent 2,000
Solicitor’s Charges 3,000
Application fell short of the 10,00,000 shares by 30,000 shares and N introduced `30,000 for the purchase of those
shares. The guarantee having been fulfilled, U Ltd. handed over to the venturers 50,000 shares and also paid the
commission in cash. All their holdings were subsequently sold by the venturer N receiving `18,000 and M `50,000.
Write-up necessary accounts in the books of both the parties on the presumption that Memorandum Joint Venture
Account is opened for the purpose.
Solution:
Dr. Memorandum Joint Venture Account Cr.
In the books of M
Dr. Joint Venture with N Cr.
In the books of N
Dr. Joint Venture with M Cr.
Illustration 7.
A and B enter into joint venture sharing profit 3/5ths and 2/5ths. A is to purchase timber in Madhya Pradesh and
forward it to B in Delhi. A purchases timber worth `10,000 and pays `1,000 as expenses. B received the consigned
and immediately accepted A’s draft for `8,000. A gets discounted for `7,850. B sold the timber for `16,000. He had
to spend `350 for fire insurance and `300 for other expenses. Under the agreement he is entitled to a commission
of 5% slaes.
Give ledger accounts in the books of A and B.
Solution:
In the books of ‘A’
Dr. Joint Venture Account Cr.
Particulars ` Particulars `
To Bank: (purchase of timber) 10,000 By B’s A/c (Sales) 16,000
To Bank (Expenses) 1,000
To Bills Receivable A/c (Discount) 150
To B’s A/c:
Fire Insurance 350
Expenses 300
Commission 800 1,450
To Profit & Loss A/c 2,040
To B’s A/c 1,360 3,400
16,000 16,000
Particulars ` Particulars `
To Joint Venture A/c 16,000 By Bills Receivable A/c 8,000
By Joint Venture A/c (Expenses & Commission) 1,450
By Joint Venture A/c (profit) 1,360
By Bank A/c 5,190
16,000 16,000
Particulars ` Particulars `
To A’s A/c: Purchase of timber 10,000 By bank A/c (sales) 16,000
Expenses 1,000
B/R (discount) 150
To Bank: Fire Insurance 350
Expenses 300 650
To Commission 800
To A’s A/c (profit) 2,040
To P. & L. A/c 1,360
3,400
16,000 16,000
Dr. A’s Account Cr.
Particulars ` Particulars `
To Bills Payable A/c 8,000 By Joint Venture A/c 11,150
To Bank A/c 5,190 By Joint Venture A/c (profit) 2,040
13,190 13,190
EXERCISE:
1. A and B were participants in a joint venture, sharing profits and losses in the proportion of 10:9 respectively.
Each party maintains a complete record in his own books. A supplies goods to the value of `25,000 and incurs
an expenditure of `500 on them; and B supplies goods to the extent of `21,000 and his expenses thereon
amounted to `1000. A sells all the goods for `70,000 for which he is entitled to receive a commission at 5
percent. Accounts are settled by bank draft. Give journal entries and prepare necessary accounts in the
books of both parties.
Ans: Profit = `19.000, Amount Paid to B = `31,000
2. Dilip and raj are doing business separately as engineering contractors. They undertake jointly to build and
install new machinery for a company for a contract price of `1,34,000. `84,000 payable in installments in
cash and the balance as fully paid share in the new company. A bank account is opened in joint names.
Dilip paying `45,000 and Raj 20,000. They agree to share profits and losses in the proportion of 3/5 and 2/5
respectively. The transactions were as follows:
Particulars `
Amount advance to suppliers for supply of materials 52,000
Value of materials supplied by suppliers 89,000
Balance amount paid to suppliers in full and final settlement 35,500
Paid wages 36,000
Materials purchased in cash 2,500
Engineering consultant’s fee paid 3,250
Materials supplied by Dilip from stock 9,250
Value of stocks lost by fire and not covered by insurance 3,500
`
Materials 12,26,800
Wages 7,33,200
Sundry expenses 20,000
Plant 60,000
On completion of the venture concrete mixer is sold `50,000 and plant and other implements are sold as
scrap for `10,000. Gupta takes back the motor lorry at `40,000.
Subsequently Das took over the Debentures issued by the company at a valuation of `2,80,000.
Show the necessary ledger accounts for the joint venture.
Ans: `3,54,000, Amount paid to Das `1,70,000, Bose `5,73,000 Gupta = `3,53,000
4. A and B decided to work on a joint venture to sale electric motors. On 21th May 2014. A purchased 200
electric motors at ` 1,750 each and dispatched 150 motors to B incurring ` 10,000 as freight and insurance.
10 motors got damaged in transit. On 1st Feb 2015, insurance company paid ` 5,000 to A in full settlement of
the claim. On 15th March, 2015, A sold 50 motors at ` 2,250 each. He received ` 1,50,000 from B on 1st April
2015.
On 25th M ay 2015, B took delivery of motors and paid ` 1700 for clearing, repairs ` 3,000 and rent of ` 6,000.
B sold motors as on 1st Feb 2015 – 10 damaged motors at ` 170 each, on 15th March 2015 – 40 motors at `
2,000 each, on 1st April 2015 – 20 motors at ` 3150 each and on 1st April 2015, 80 motors at ` 2,500 each. It
was agreed that they would be entitled for a commission of 10% on the respective sales made by them and
that the profit or losses will be shared by A & B in the ratio of 2:1.
On 30th April 2015, B remits the cash to A to close the venture Prepare “Joint venture with B A/c” in the books
of A and the memorandum joint venture A/c.
2. A and B purchased a piece of land for `40,000 and sold it for ` 60,000 in 2015. Originally A had contributed
` 24,000 and B ` 16,000. What will be the profit on venture?
(a) ` 20,000 (b) `16,000 (c) `30,000 (d) Nil
3. A, for joint venture with B, Purchased goods costing `2,00,000. B sold 80% of the goods for ` 2,50,000. Balance
of goods were taken over by B at cost less 25%. Find out profit on venture?
(a) `80,000 (b) `90,000 (c) `50,000 (d) None of these
4. If unsold goods costing ` 20,000 is taken over by venture at `15,000 the Joint venture A/c will be credited by
(a) ` 20,000 (b) ` 15,000 (c) ` 5,000 (d) Nil
5. Memorandum joint venture account is
(a) personal account (b) real account (c) nominal account (d) none of the above
6. A purchased goods costing `42,500. B sold goods of ` 40,000 at ` 50,000. Balance goods were taken over by
A at same gross profit percentage as in case of sale. The amount of goods taken over will be.
(a) ` 3,125 (b) ` 2,500 (c)` 3,000 (d) None
7. What is the nature of joint venture with co-venture account
( a) Nominal account (b) Real account (c) Personal account (d) None of these
8. ‘M’ and ‘N’ enter into joint venture where ‘M’ supplies goods worth `6,000 and spend `100 on various
expenses. ‘N’ sells the entire lot for `7,500 meeting selling expenses amounted to `200 profit sharing ratio
equal. N remits M the amount due. The amount of remittance will be
(a) `6,700 (b) `7,300 (c) `6,400 (d) `6,100
9. A and B purchased a piece of land for ` 20,000 and sold it for ` 60,000 in 2015. Originally A had contributed
` 12,000 and B ` 8,000. The profit on venture will be :
(a) ` 40,000 (b) ` 20,000 (c) ` 60,000 (d) Nil
10. A and B enter in to joint venture sharing profit and loss in the ratio 1:1 A purchased goods costing `20,000.
B sold the goods for ` 25,000. A is entitled to get 1% commission on purchase and B is entitled to get 5%
commission on sales the profit will be
(a) ` 3,550 (b) ` 3,600 (c) `3,400 (d) `3,800
11. Goods costing ` 10,000 destroyed by an accident, insurance claim nil
(a) ` 10,000 will be credited to joint venture account
(b) No entry will be made in the books of joint venture
(c) ` 10,000 will be debited in Joint venture account as loss
(d) ` 8,000 will be credited in joint venture account
12. Which of the following statement is true?
(a) There is no difference between joint venture and partners
(b) Consignment and joint venture is same
(c) There is not separate act for joint venture
(d) In case of joint venture, the number of third party is none only
13. Which of the following accounts are maintained in the joint venture when separate set of books are
maintained
(a) Joint bank A/c (b) Joint venture A/c (c) Co-ventruer A/c (d) All of these
14. If A co-venturer takes away goods under memorandum joint venture method then he will debit these goods
in his books to
(a) Joint venture account (b) personal account (c) Purchases account (d) sales account
15. For opening joint bank account, in case of separate sets of books:
(a) Ventrue a/c will be debited and ventures A/c will be credited
(b) Joint Bank A/c is debited and ventures capital A/c is credited
(c) Joint venture A/c is debited and joint Bank A/c will be credited
(d) Joint Bank A/c will be debited and joint venture A/c will be credited
Ans: 1.b 2.a 3.a 4.b 5.c 6.a 7.c 8.a 9.a 10.a 11.b 12.c 13.d 14.c 15.b
True or False:
1. Expenses incurred by co-venture are debited in joint venture account (TRUE)
2. The profit to be shared between the venture in agreed ratio (TRUE)
3. In joint venture, provisions of partnership act applies (FALSE)
4. The transactions regarding transfer of goods from one venturer to another venturer will affect book-keeping
entries (FALSE)
5. If goods costing Rs. 10,000 destroyed by an accident, insurance claim nil then no entry will be made in the
books of joint venture (TRUE)
6. Joint venture has a definite life (TRUE)
7. Joint venture agreement must be registered (FALSE)
8. Memorandum joint venture account is a real account (FALSE)
9. Contract money received is credited to Joint venture account (TRUE)
10. Joint bank account is a Nominal account (FALSE)
The most important function of an accounting system is to provide information about the profitability of the
business. A sole trader furnishes a Trading and Profit and Loss Account which depicts the result of the business
transactions of the sole trader. Along with the Trading and Profit and Loss Account he also prepares a Balance
Sheet which shows the financial position of the business.
Profitability Statement:
This statement is related to a complete accounting period. It shows the outcome of business activities during that
period in a summarized form. The activities of any business will include purchase, manufacture, and sell.
Balance Sheet:
Business needs some resources which have longer life (say more than a year). Such resources are, therefore, not
related to any particular accounting period, but are to be used over the useful life thereof. The resources do not
come free. One requires finance to acquire them. This funding is provided by owners through their investment,
bank & other through loans, suppliers by way of credit terms. The Balance Sheet shows the list of resources and
the funding of the resources i.e. assets and liabilities (towards owners and outsiders). It is also referred as sources of
funds (i.e. liabilities & capital) and application of funds (i.e. assets). Let us discuss these statements in depth.
Trading Account:
It is an account which is prepared by a merchandising concern which purchases goods and sells the same during
a particular period. The purpose of it to find out the gross profit or gross loss which is an important indicator of
business efficiency.
The following items will appear in the debit side of the Trading Account:
(i) Opening Stock:
In case of trading concern, the opening stock means the finished goods only. The amount of opening stock
should be taken from Trial Balance.
(ii) Purchases:
The amount of purchases made during the year. Purchases include cash as well as credit purchase. The
deductions can be made from purchases, such as, purchase return, goods withdrawn by the proprietor,
goods distributed as free sample etc.
(iii) Direct expenses:
It means all those expenses which are incurred from the time of purchases to making the goods in suitable
condition. This expenses includes freight inward, octroi, wages etc.
(iv) Gross profit:
If the credit side of Trading A/c is greater than debit side of Trading A/c gross profit will arise.
The following items will appear in the credit side of Trading Account:
(i) Sales Revenue:
The sales revenue denotes income earned from the main business activity or activities. The income is earned
when goods or services are sold to customers. If there is any return, it should be deducted from the sales
value. As per the accrual concept, income should be recognized as soon as it is accrued and not necessarily
only when the cash is paid for. The Accounting standard 7 (in case of contracting business) and Accounting
standard 9 (in other cases) define the guidelines for revenue recognition. The essence of the provisions of
both standards is that revenue should be recognized only when significant risks and rewards (vaguely referred
to as ownership in goods) are transferred to the customer. For example, if an invoice is made for sale of goods
and the term of sale is door delivery; then sale can be recognized only on getting the proof of delivery of
goods at the door of customer. If such proof is pending at the end of accounting period, then this transaction
cannot be taken as sales, but will be treated as unearned income.
(ii) Closing Stocks:
In case of trading business, there will be closing stocks of finished goods only. According to convention of
conservatism, stock is valued at cost or net realizable value whichever is lower.
(iii) Gross Loss:
When debit side of Trading A/c is greater than credit side of Trading A/c, gross loss will appear.
Solution:
In the books of M/s. P. Sen
Trading Account
Dr. For the year ended 31st March, 2015 Cr.
Note:
(a) Stock should be valued as per cost price or market price whichever is lower.
(b) The claim which was admitted by insurance company and the loss of stock, will not appear in Trading Account.
Profit and Loss Account:
The following items will appear in the debit side of the Profit & Loss A/c:
(i) Cost of Sales:
This term refers to the cost of goods sold. The goods can be manufactured and sold or can be directly purchased
and sold.
(ii) Other Expenses:
All expenses which are not directly related to main business activity will be reflected in the P&L component.
These are mainly the Administrative, Selling and distribution expenses. Examples are salary to office staff, salesmen
commission, insurance, legal charges, audit fees, advertising, free samples, bad debts etc. It will also include items
like loss on sale of fixed assets, interest and provisions. Students should be careful to include accrued expenses as
well.
The following items will appear in the credit side of Profit & Loss A/c:
(i) Revenue Incomes:
These incomes arise in the ordinary course of business, which includes commission received, discount received
etc.
(ii) Other Incomes:
The business will generate incomes other than from its main activity. These are purely incidental. It will include items
like interest received, dividend received, etc .The end result of one component of the P&L A/c is transferred over
to the next component and the net result will be transferred to the balance sheet as addition in owners’ equity.
The profits actually belong to owners of business. In case of company organizations, where ownership is widely
distributed, the profit figure is separately shown in balance sheet.
Dr. Profit and Loss Account for the year ended Cr.
Illustration 2.
Indicate where the following items will be shown in various components of Trading Account and P & L Account:
Solution:
Illustration 3.
From the following particulars presented by Sri Tirlhankar for the year ended 31st March 2015, Prepare Profit and
Loss Account.
Gross Profit ` 1,00,000, Rent ` 22,000; Salaries, ` 10,000; Commission (Cr.) ` 12,000; Insurance ` 8,000; Interest (Cr.) `
6,000; Bad Debts ` 2,000; Provision for Bad Debts (1.4.2012) ` 4,000; Sundry Debtors ` 40,000; Discount Received `
2,000; Plant & Machinery ` 80,000.
Adjustments:
(a) Outstanding salaries amounted to ` 4,000;
(b) Rent paid for 11 months;
(c) Interest due but not received amounted to ` 2,000
(d) Prepaid Insurance amounted to ` 2,000;
(e) Depreciate Plant and Machinery by 10% p.a.
(f) Further Bad Debts amounted to ` 2,000 and make a provision for Bad Debts @5% on Sundry Debtors.
(h) Commissions received in advance amounted to ` 2,000.
Solution:
In the Books of Sri Tirlhankar
Profit and Loss Account
for the year ended 31st March 2015
Dr. Cr.
Dr. Profit and Loss Appropriation Account for the year ended Cr.
Solution:
Workings:
1. Net Profit before charging Y’s Commission = ` (66,720 – 15,500) = ` 51,220 Less: Y’s Commission @ 4% i.e.
( 4/104 × ` 51,220) = ` 1,970
2. Transfer to General Reserve = ` 49,250 × 10% = ` 4,925
Balance Sheet: Horizontal format of Balance Sheet is also used by the business other than company
A. Liabilities
(a) Capital:
This indicates the initial amount the owner or owners of the business contributed. This contribution could be at the
time of starting business or even at a later stage to satisfy requirements of funds for expansion, diversification etc.
As per business entity concept, owners and business are distinct entities, and thus, any contribution by owners by
way of capital is liability.
(b) Reserves and Surplus:
The business is a going concern and will keep making profit or loss year by year. The accumulation of these profit
or loss figures (called as surpluses) will keep on increasing or decreasing owners’ equity. In case of non-corporate
forms of business, the profits or losses are added to the capital A/c and not shown separately in the balance sheet
of the business.
(c) Long Term or Non-Current Liabilities:
These are obligations which are to be settled over a longer period of time say 5-10 years. These funds are raised by
way of loans from banks and financial institutions. Such borrowed funds are to be repaid in installments during the
tenure of the loan as agreed. Such funds are usually raised to meet financial requirements to procure fixed assets.
These funds should not be generally used for day-to-day business activities. Such loan are normally given on the
basis of some security from the business e.g. against a charge on the fixed assets. So, long term loan are called as
“Secured Loan” also.
(d) Short Term or Current Liabilities:
A liability shall be classified as Current when it satisfies any of the following:
� It is expected to be settled in the organisation’s normal Operating Cycle,
� It is held primarily for the purpose of being traded,
� It is Cash or Cash Equivalent unless it is restricted from being exchanged or used to settle a Liability for at least
12 months after the Reporting Date.
(i) Stocks:
This includes stock of raw material, semi-finished goods or WIP, and finished goods. Stocks are shown at lesser of the
cost or market price. Provision for obsolescence, if any, is also reduced. Generally, stocks are physically counted
and compared with book stocks to ensure that there are no discrepancies. In case of discrepancies, the same are
adjusted to P & L A/c and stock figures are shown as net of this adjustment.
(ii) Debtors:
They represent customer balances which are not paid. The bad debts or a provision for bad debt is reduced from
debtors and net figure is shown in balance sheet.
Credit to customers may be given based on a bill to be signed by them and payable to the business at an agreed
date in future. At the end of accounting period, the bills accepted but not yet paid are shown as bills receivables.
This represents cash actually held by the business on the balance sheet date. This cash may be held at various
offices, locations or sites from where the business activity is carried out. Cash at all locations is physically counted
and verified with the book balance. Discrepancies if any are adjusted.
Dealing through banks is quite common. Funds held as balances with bank are also treated as current asset, as it
is to be applied for paying to suppliers. The balance at bank as per books of accounts is always reconciled with
the balance as per bank statement, the reasons for differences are identified and required entries are passed.
They represent payments made against which services are expected to be received in a very short period.
When amounts are paid to suppliers in advance and goods or services are not received till the balance sheet
date, they are to be shown as current assets. This is because advances paid are like right to claim the business
gets.
Please note that both current assets and current liabilities are used in day-to-day business activities. The current
assets minus current liabilities are called as working capital or net current assets. The following report is usual
horizontal form of balance sheet. Please note that the assets are normally shown in descending order of their
liquidity. Also, capital, long term liabilities and short term liabilities are shown in that order.
Illustration 5.
From the following particulars prepare a Balance Sheet of Mr. X, for the year ended 31st March, 2015. Capital :
` 2,00,000: Drawings : ` 40,000 ; Cash In Hand : ` 15,000 ; Loan from Bank : ` 40,000; Sundry Creditors : ` 40,000; Bills
Payable : ` 20,000; Bank Overdraft : ` 20,000; Goodwill : ` 60,000; Sundry Debtors : ` 80,000; Land and Building :
` 50,000; Plant and Machinery : ` 80,000; Investment : ` 20,000; Bills Receivable : ` 10,000. Cash at Bank : ` 25,000.
The following adjustments are made at the time of preparing final accounts:
(i) Outstanding Liabilities for : Salaries ` 10,000; wages ` 20,000; Interest on Bank Overdraft ` 3,000; and Interest
on Bank Loan ` 6,000.
(ii) Provide Interest on Capital @ 10% p.a.
(iii) Depreciation on Plant and Machinery by 10% p.a.
(iv) Bad Debts amounted to ` 10,000 and make a provision for Bad Debts @ 10% on Sundry Debtors.
(v) Closing stock amounted to ` 1,20,000.
Net profit for the year amounted to ` 96,000 after considering all the above adjustments.
Solution:
Sundry Creditors 40,000 Less: Prov. for bad debts @ 7,000 63,000
10%
4,35,000 4,35,000
Manufacturing Account:
Those concerns which convert raw materials into finished goods are required to find out the cost of goods
manufactured besides gross and net profit of the concern. These are manufacturing cum trading concerns. In
order to have full information about the cost of goods manufactured, these concerns firstly prepare manufacturing
Account and then prepare – Trading and profit and loss account.
The main object of Manufacturing Account is to show:
(i) Cost of finished goods produced and
(ii) Constituent items thereof such as cost of material consumed, productive wages, direct and indirect expenses.
Debit side of manufacturing account starts with the cost of materials consumed, i.e., opening stock of raw
materials plus net purchases less the closing stock of raw materials. Procurement cost e.g., custom duty, landing
charges, excise duty, carriage and freight inwards, insurance on incoming raw materials should also be included
with the cost of raw materials.
Closing stock is taken and valued at lower of cost or net realizable value and is then deducted from the sum of
opening stock and purchases to eliminate the charge to manufacturing account for stock of raw materials in
hand on closing date. Next to raw materials are listed productive wages and direct expenses.
It is followed by debits relating to indirect factory expenses e.g., rents, rates, salaries of supervising staff, power.
Light, heat and fuel, repairs and renewals, depreciation relating to factory property etc.
Total materials, productive wages and direct expenses should be adjusted for opening and closing stock of partly
finished goods or work-in-progress etc. Opening stock of these items should be added at its factory cost value, as
current periods production has benefitted by drawing on the opening stock of partly finished goods. Closing stock
of work in progress should be taken and valued at factory cost and deducted from the resulting total to eliminate
the charge in respect thereof. After this adjustment, the net amount will represent cost of production.
Total of debit side will then represent the cost of production of finished goods which is credited to Manufacturing
Account and debited to trading account.
Trading account will show the cost of production of finished goods, opening and closing stock of finished goods,
purchases and sales of finished goods and gross profit.
A specimen of Manufacturing and Trading Account and Profit and Loss Account is given as follows:
` `
To Work-in-progress (Beginning) Xxx By Cost of goods manufactured transferred to Xxx
To Raw Materials consumed: trading A/c (Bal. Fig) Xxx
(opening stock of raw Materials + purchases By Sale of scrap Xxx
during the year – closing stock of Raw materials) By Closing work-in-progress Xxx
To Direct wages Xxx By sales Xxx
To Direct expenses Xxx By closing stock of finished goods Xxx
(as carriage on purchases) Xxx By Gross profit b/s Xxx
Prime cost By All items of incomes and gains Xxx
To Factory expenses: Xxx
To Factory lighting xxx
Factory rent xxx
Factory wages xxx
Depreciation on
Plant & Machinery xxx
Factory supervisor’s salary xxx
Stores consumed etc. xxx
To Opening stock of Finished goods Xxx
To Cost of goods Manufactured transferred Xxx
trading A/c
Xxx
To Gross profit c/d
To Administration Expenses
Xxx
To Selling expenses
Xxx
To Distribution expenses
Xxx
To Financial expenses
Xxx
To Maintenance expenses
Xxx
To Net profit transferred to capital account
Xxx
Xxx
Xxx Xxx
Illustration 6.
Prepare a Trading Account of trader for the year ending 31st March, 2014 from following data:
`
Stock on 1-4-2013 2,40,000
Cash purchases for the year 2,08,000
Credit purchases for the year 4,00,000
Cash sales for the year 3,50,000
Credit sales for the year 6,00,000
Purchases returns during the year 8,000
Sales returns during the year 10,000
Direct expenses incurred:
Freight 10,000
Carriage 2,000
Import duty 8,000
Clearing charges 12,000
Cost of goods distributed as free samples during the year 5,000
Goods withdrawn by the trader for personal use 2,000
Stock damaged by fire during the year 13,000
The cost of unsold stock on 31st March, 2014 was `1,20,000 but its market value was ` 1,50,000.
Solution:
Trading Account of a trader
For the year ending 31st March, 2014
` `
To Opening stock 2,40,000 By Sales:
To Purchases Cash 3,50,000
Cash 2,08,000 Credit 6,00,000
Credit 4,00,000 9,50,000
6,08,000 Less: Sales returns 10,000 9,40,000
Less: Purchases Returns 8,000 By Stock damaged by fire 13,000
6,00,000 By Closing stock 1,20,000
Less: Goods Distributed as free sample 5,000
5,95,000
Less: Goods withdrawn 2,000 for personal use 5,93,000
To Freight 10,000
To Carriage 2,000
To Import duty 8,000
To Clearing changes 12,000
To Gross profit c/d 2,08,000
10,73,000 10,73,000
Illustration 7.
Prepare Trading and Profit and Loss Account of M/s Suraj Prakash & Sons for the year ending 31st December, 2014
from following information:
` `
Stock (1-1-2014) 2,00,000 Salaries 30,000
Purchases 2,55,000 Rent, rates & taxes 12,000
Wages 1,00,000 Depreciation 3,020
Carriage 5,000 Repairs 6,000
Purchases returns 13,250 Discount allowed 12,505
Export duty 9,000 Bad debts 9,000
Sales 5,75,000 Advertisement 2,500
Coal & coke 25,000 Gas & water 1,500
Sales returns 10,000 Factory lighting 2,500
Printing & stationery 2,250 General expenses 4,000
Stock (31-12-2015) 3,00,000
Solution:
Trading and Profit and Loss Accounts of
M/s Suraj Prakash and Sons
For the year ending 31st December, 2014
` `
To Stock (1-1-2014) 2,00,000 By Sales 5,75,000
To Purchases 2,55,000 Less: Sales returns 10,000 5,65,000
Less: Purchases Return 13,250 2,41,750 By Stock (31-21-2014) 3,00,000
To Wages 1,00,000
To Carriage 5,000
To Coal and coke 25,000
To Gas and water 1,500
To Factory lighting 2,500
To Gross profit c/d 2,89,250
8,65,000 8,65,000
To Salaries 30,000 By Gross profit b/d 2,89,250
To Rent, rates & taxes 12,000
To Printing & stationery 2,250
To Depreciation 3,020
To Repairs 6,000
To Export duty 9,000
To Discount allowed 12,505
To Bad Debts 9,000
To Advertisement 2,500
To General expenses 4,000
To Net profit transferred to capital account 1,98,975
2,89,250 2,89,250
Illustration 8.
Prepare Manufacturing and trading account for the year ending 30th June, 2015 with following figures extracted
from the books of a manufacturing concern:
Opening stock(`) Closing stock(`)
Raw material 1,20,000 80,000
Work-in-progress 24,000 16,000
Finished goods 86,400 64,000
Transactions during the year:
Purchase of Materials 4,00,000
Wages 2,50,000
Stores consumed 30,000
Indirect wages 72,000
Factory rent 24,000
Depreciation on plant & machinery 40,000
Sales 11,20,000
Purchases of finished goods 10,000
Solution:
Manufacturing and Trading Account
For the year ending 30th June, 2015
` `
To Opening Stock: By Closing Stock:
Raw materials 1,20,000 Raw materials 80,000
Work-in-progress 24,000 1,44,000 Work-in-progress 16,000 96,000
To Purchase of materials 4,00,000 By Cost of goods manufactured 8,64,000
trans. to trading A/c
To Wages 2,50,000
To Stores consumed 30,000
To factory rent 24,000
To Depreciation on plant and Machinery 40,000
To Indirect wages 72,000
9,60,000 9,60,000
To Opening stock of finished goods 86,400 By Sales 11,20,000
To Cost of goods manufactured transferred from 8,64,000 By Closing stock of Finished goods 64,000
manufacturing A/c
To Purchase of finished goods 10,000
To Gross profit transferred to profit and loss account 2,23,600
11,84,000 11,84,000
Illustration 9.
Following is the Trial Balance of M/s kasturi Agencies as on 31st March, 2015. Prepare Trading, Profit and Loss
Account for the year ended 31st March, 2015 and a Balance Sheet on that date
Particulars ` `
Capital 1,00,000
Buildings 15,000
Drawings 18,000
Furniture & Fittings 7,500
Motor van 25,000
Loan from Hari @ 12% interest 15,000
Interest paid on above 900
Sales 1,00,000
Purchases 75,000
Opening stock 25,000
Establishment expenses 15,000
Wages 2,000
Insurance 1,000
Commission received 4,500
Sundry debtors 28,100
Bank balance 20,000
Sundry creditors 10,000
Interest 3,000
2,32,500 2,32,500
Adjustments: (a) The value of stock on 31-3-2015 was ` 32,000. (b) outstanding wages ` 500 (c) Prepaid Insurance `
300. (d) Commission received in advance ` 1,300 (e) Allow interest on capital @ 10%. (f) Depreciate building 2 ½%.
Furniture & Fitting 10%, Motor van 10%. (g) charge interest on drawings ` 500. (h) Accrued Interest ` 500.
Solution:
Trading and Profit and Loss Account of Kasturi Agency for the year ending 31.3.2015
Dr. Cr.
` ` ` `
To Opening Stock 25,000 By Sales 1,00,000
To Purchases 75,000 By Closing Stock 32,000
To Wages 2,000
Add: Outstanding 500 2,500
To Gross Profit c/d 29,500
1,32,000 1,32,000
To Insurance 1,000 By Gross profit 29,500
Less: Prepaid 300 700 By Commission 4,500
To Interest on loan 900 Less: Received in Advance 1,300 3,200
Add: Outstanding 900 1,800 By Interest 3,000
To Establishment expenses 15,000 Add: Accrued interest 500 3,500
To Depreciation By Interest on drawings 500
Buildings 375
Furniture & Fittings 750
Motor van 2,500 3,625
To Interest on capital 10,000
To Net profit transferred to capital A/c 5,575
36,700 36,700
Balance sheet
as on 31st March, 2015
Liabilities ` ` Assets ` `
Outstanding wages 500 Cash at bank 20,000
Commission received in advance 1,300 Sundry debtors 28,100
Sundry creditors 10,000 Closing stock 32,000
Loan from Hari 15,000 Prepaid insurance 300
Add: Outstanding Interest 900 15,900 Buildings 15,000
Capital 1,00,000 Less: Depreciation 375 14,625
Add: Net profit 5,575 Furniture & Fittings 7,500
Add: Interest on Capital 10,000 Less: Depreciation 750 6,750
1,15,575 Motor Van 25,000
Less: Drawings 18,000 Less: Depreciation 2,500 22,500
Interest on drawings 500 18,500 97,075 Accrued Interest 500
1,24,775 1,24,775
Illustrations 10.
Following is the Trial Balance of M/s Brijesh and Sons. Prepare final accounts for the year ended on 31st March 2015.
Particulars Debit (`) Credit (`)
Stock as on 01-04-2014 2,00,000
Purchases and Sales 22,00,000 35,00,000
Blils receivables 50,000
Returns 100,000 50,000
Carriage Inwards 50,000
Debtors and Creditors 200,000 4,00,000
Carriage Outwards 40,000
Discounts 5,000 5,000
Salaries and wages 2,20,000
Insurance 60,000
Rent 60,000
Wages and salaries 80,000
Bad debts 10,000
Furniture 4,00,000
Brijesh’s capital 5,00,000
Brijesh’s drawing 70,000
Loose tools 1,00,000
Printing & stationery 30,000
Advertising 50,000
Cash in hand 45,000
Cash at bank 2,00,000
Petty Cash 5,000
Machinery 3,00,000
Commission 10,000 30,000
Total 44,85,000 44,85,000
Adjustments:
(i) Stock on 31st March was valued at Cost price ` 4,20,000 and market price ` 400,000.
(ii) Depreciate furniture @ 10% p.a. and machinery @ 20% p.a. on reducing balance method.
(iii) Rent of ` 5,000 was paid in advance. (iv) Salaries & wages due but not paid ` 30,000.
(iv) Make a provision for doubtful debts @ 5% on debtors.
(v) Commission receivable ` 5,000.
Solution:
Dr. Trading Account for the year ended 31st March 2015 Cr.
Particulars Amount (`) Amount (`) Particulars Amount (`) Amount (`)
To Opening Stock of By Sales 35,00,000
Finished Goods 2,00,000 Less: Sales Returns 1,00,000 34,00,000
To purchases 22,00,000 By Closing Stock of
Less: Purchases returns 50,000 21,50,000 Finished goods 4,00,000
To Carriage inwards 50,000
To Wages & Salaries 80,000
To Gross profit c/d 13,20,000
38,00,000 38,00,000
Dr. Profit & Loss Account for the Year Ended 31st March 2015 Cr.
(4) Commission in debit column mean allowed (expense) and that in credit means received (income)
(5) There are two peculiar items given in the TB. One is Salaries & wages and the other is Wages and salaries. The
interpretation is – where first reference is made to wages, it’s assumed to be directly for goods and taken to
Trading A/c. If the first reference is to salaries, it’s assumed to be related to office and taken to P & L.
EXERCISE:
1. Prepare a Trading Account of Rajesh Kumar for the year ending 31st March, 2015 from the following particulars:
` `
Stock of goods on 1-4-14 2,50,000 Returns to suppliers 25,000
Stock of goods on 31-3-15 4,75,000 Returns by customers 20,000
Purchases – cash 3,70,000 Goods withdrawn by Rajesh Kumar for personal use 21,000
Credit 8,25,000 Goods distributed as free samples during the year 4,000
Sales – cash 5,10,000
Credit 11,50,000
Ans: Gross Profit-`7,20,000
2. From the following balances extracted at the close of the year ended 31st March 2015, prepare profit and loss
Account of M/s. Ashok and Sons:
` `
Gross profit 1,01,000 Discount (Dr.) 500
Carriage outward 2,500 Apprentice premium (Cr.) 1,500
Salaries 5,500 Printing & stationery 250
Rent 4,100 Rates & taxes 350
Fire insurance premium 900 Travelling expenses 200
Bad debts 2,100 Sundry trade expenses 300
Income tax paid 3,500 Rent receive d on sub-letting 1,000
Life insurance premium 3,000
Ans: Net Profit - `86,800/-
3. The following are the balances of Shri Gupta as on 30th June, 2015:
Debit Balance: ` `
Cash in Hand 540 Patents 7,500
Cash at Bank 2,630 Salaries 15,000
Purchases 40,675 General expenses 3,000
Returns Inward 680 Insurance 600
Wages 8,480 Drawings 5,245
Fuel and power 4,730 Sundry debtors 14,500
Carriage on sales 3,200 Credit balances:
Carriage on purchases 2,040 Sales 98,780
Stock (1st July, 2014) 5,760 Returns outwards 500
Buildings 22,000 Capital 62,000
Freehold land 10,000 Sundry creditors 6,300
Machinery 20,000 Rent 9,000
Investments 10,000
Taking into account the following adjustments prepare the Trading and Profit and Loss Account and Balance
Sheet as on 30th June, 2015:
(a) Stock on hand on 30th June, 2015 is `6,800. (b) Machinery is to be depreciated at the rate of 10% and patents
at the rate of 20%. (c) Salaries for the month of June, 2015 amounting to `1500 were unpaid (d) Insurance includes
a premium of ` 170 on a policy expiring on 31st December 2015. (e) Bad Debts are ` 725 (f) rent received in
Advances ` 1,000. (g) Interest on investment of ` 2,000 is accrued.
Ans: Gross Profit = `43,715, Net Profit = `26,360, Balance Sheet Total = ` 91,915
4. Mr. Arvindkumar had a small business enterprise. He has given the trial balance as at 31st March 2015. You are
required to prepare final accounts in the books of Mr. Arvindkumar.
(6) Works manager is to be given a commission at 12% of net profit before charging General Manager’s
commission and his own.
Ans: Gross Profit = `1,81,000, Net Profit = `1,20,000, Balance Sheet Total = `3,39,120
Particulars `
Bad debts (from trial balance) 1,600
Provision for doubtful debts (old) 2,000
Current year’s provision (new) 800
(a) ` 400 (b) `800 (c) `2,000 (d) `2,400
15. Inventory is
(a) Included in the category of fixed assets (b) An investment
(c) A part of current assets (d) An intangible fixed asset.
Ans: 1.d 2.c.3.c 4.a 5.b 6.b 7.b 8.a 9.a 10.a 11.d 12.a 13.c 14.b 15.c
14. Provisions for bad & doubtful debts account will show ___balance.( credit)
15. Loss on sale of old car is shown on debit side of ___(Profit and loss account.)
True or false:
1. Income earned but not received are called accrued incomes. (TRUE)
2. For a shirt factory, cotton is a finished goods. (FALSE)
3. State the following equation is true/false
Gross profit – direct expenses + purchases + opening stock – closing stock = sales. (FALSE)
4. Carriage on goods purchased is shown on Trading Account. (TRUE)
5. The Balance Sheet will not give the information regarding the financial position as on particular date. (FALSE)
6. Preliminary expenses would be included in balance sheet as current asset (FALSE)
7. Fixed assets are kept in the business for use over a long period.(TRUE)
8. Furniture and fittings is a current asset. (FALSE)
9. In sole trade, income tax is recorded as drawings. (TRUE)
10. All revenue receipts and expenditure are shown in trading and profit & loss account (TRUE)
- Libraries
- Cultural clubs like Rotary or Lions club
- Religious institutions
- Charitable trusts
These organisations get their funds in the form of contributions by way of entrance fees, life membership fees, annual
subscriptions, donations, grants, legacies etc. The accounting of such organisations is based on similar principles
followed by the other organisations. Given the nature of these institutions, there are certain items of revenue and
expenses that need special understanding so that accounting treatment could be correctly decided.
Special Items
There are certain items of revenue and expenses that are unique for the non-trading entities. They could be listed
as:
Financial Statements
These non-profit organisations prepare
Receipt and Payment Account – This is similar to cash book. Entries are made on cash basis and items pertaining
to previous year or current year or subsequent years are also recorded. Receipts are shown on debit side and
payments are shown on credit side. Capital as well as revenue items are entered in the R & P Account. This
account is real account in nature. No provisions are recorded in this account. The account has an opening and a
closing balance which is reflected as an asset in the balance sheet.
Balance Sheet – It is prepared as on the last day of the accounting period. It also has assets and liabilities and
prepared based on accounting equation. But, there’s no capital account. Instead there is a capital fund. The
surplus or deficit from Income & Expenditure Account is adjusted against this capital fund at the end of the year.
Difference between Receipts and Payments Account and Income and Expenditure Account
Other Treatments
(a) If the Special Fund is used to meet an expense
Special Fund A/c Dr.
To Bank A/c (amt. of expense)
The balance of the Fund is shown as a liability.
If the balance is transferred to Capital Fund, the entry will be—
Special Fund A/c Dr.
To Capital Fund A/c (Balance of Special Fund)
(b) If the Special Fund is used to purchase an asset
Asset A/c Dr.
To Bank A/c (Cost of the asset)
Special Fund A/c Dr.
To Capital Fund A/c (Special Fund closed)
(iii) Donations
(a) Donation received for a particular purpose should be credited to Special Fund. For example, Donation
received for Building should be credited to Building Fund Account.
(b) For other donations received the by-laws or rules of the concern should be followed.
(c) If there is no such rule, donations received of non-recurring nature should be credited to Capital Fund.
Recurring donations received should be credited to Income & Expenditure Account.
(d) Donation paid by the concern should be debited to Income & Expenditure Account.
(iv) Legacy received: It is to be directly added with Capital Fund after deduction of tax, (if any). It is a kind of
donation received according to the will made by a deceased person.
(v) Entrance Fees or Admission Fees
(a) The rules or by-laws of the concern should be followed.
(b) If there is no such rule, Admission or Entrance Fees paid once by members for acquiring membership
should be added with Capital Fund.
(c) If such fees are of small amounts covering the expenses of admission only, the fees may be credited to
Income & Expenditure Account.
(vI) Subscriptions
(a) Annual subscriptions are credited to Income & Expenditure Account on accrual basis.
(b) Life membership subscription is usually credited to a separate account shown as a liability.
Annual Subscription apportioned out of that is credited to Income & Expenditure Account and deducted from the
liability. Thus the balance is carried forward till the contribution by a member is fully exhausted.
If any member dies before hand, the balance of his life Membership contribution is transferred to Capital Fund or
General Fund.
Illustration 1.
Ujjwal Vavishwa Club was holding a building valuing `10 lakhs as on 31.03.2014. Building Fund stands `8 lakhs and
Cash at Bank is `15 lakhs as on 01.04.2014. During the year 2014-15 donation received for the building fund is `20
lakhs. Give the journal entries and the effect in the Balance Sheet as on 31.03.2015. If
(ii)
Journal entries (` in Lakhs)
Illustration 2.
On 31st December 2013, a club had subscription in arrears of `16,000 and in advance `4,000. During the year
ended 31-12-2014, the club received subscription of `2,08,000 of which `10,400 was related to 2015. On 31st
December 2014, there were 4 members who had not paid subscription for 2014 @ `1,600 per person. Write up
subscription Account for the year 2014.
Solution:
A single subscription account should be prepared to reflect both advance and arrears figures. The balancing
figure will reflect the subscription amount that will be recognised as Income and transferred to I & E A/c as shown
below:
To, Balance c/d (arrears) 16,000 By, Balance c/d (advance) 4,000
To, I & E A/c (income for 2014) (Balance in 1,92,000 By, R & P A/c (received) 2,08,000
figure)
2,18.400 2,18.400
Illustration 3.
The sports club of Orissa had received in 2013-2014 ` 2,000 towards subscription. Subscription for 2012 -13 unpaid
on1.4.2013 were ` 200.
Subscriptions paid in advance on 31.3.2013 were ` 50 and the same on 31.3.2014 was ` 40. Subscriptions for 2013-
2014 unpaid on 31.3.2014 were ` 90.
Show how the subscriptions item will appear in the Income and Expenditure Account.
Solution:
Illustration 4.
The amount of Subscription appears in the Income and Expenditure Account of South Indian Club is ` 3,000.
Adjustments were made in respect of the following:
Subscription for 2013 unpaid at 1st Jan., 2014, ` 400; ` 200 of which was received in 2014.
Subscription paid in advance at 1.1.2014 ` 100.
Subscription paid in advance at 31.12.2014 ` 80.
Subscription for 2013 unpaid at 31.12.2014 ` 140.
Prepare Subscription Account.
Solution:
Dr. Subscription Account Cr.
Illustration 5.
From the following information, prepare the Subscription Account for the year ending on March, 31, 2015
(i) Subscription in arrears on 31.03.2014 ` 1,500
(ii) Subscription received in advance on 31.03.2014 ` 1,000
(iii) Amount of Subscription received during 2014-15 ` 40,000, which includes `1,000 for the year 2013-14, ` 1,500
for the year 2015-16.
(iv) Subscription outstanding ` 1,000.
Solution:
Dr. Subscription Account Cr.
Illustration 6.
From the following particulars, prepare Receipts and Payments Account
`
Cash in hand 2,000
Cash at Bank 6,000
Subscriptions 3,000
Donations received 2,400
Furniture purchased 1,600
General Expenses 1,000
Postage 400
Stationery 600
Lockers Rent Received 1,800
Office Expenses 800
Closing balance of Cash 7,000
Solution:
Dr. Receipts and Payments Account Cr.
Illustration 7.
From the following particulars, prepare Income and Expenditure Account.
`
Fees Collected (including `3,000 on account of last year) 28,000
Meeting Expenses 2,000
Travelling & Conveyance 800
Fees for the year outstanding 5,000
Salary paid (including `300 on account of last year) 2,400
Salary outstanding 400
Entertainment Expenses 500
Tournament Expenses 1,000
Purchase of Books and Periodicals (includes `2,000 for purchase of books) 3,000
Rent 1,200
Postage, Telephone and Telegram charges 1,700
Printing & Stationery 500
Donations received 800
Solution:
Dr. Income and Expenditure Account Cr.
To Rent 1,200
To Surplus 19,600
30,800 30,800
Illustration 8.
From the figures given below, prepare an Income and Expenditure Account for 2014
Dr. Receipts and Payments Account Cr.
Receipts Amount (`) Payments Amount (`)
To Opening Balance in hand 200 By Salaries 4,800
To Balance at Bank 1,600 By Rent 500
To subscriptions By Stationery and Postage 200
2013 500 By Bicycle purchased 300
2014 8,300 To National Saving Certificates 3,000
2015 600 By Help to Needy Students 2,000
To Sale of Investments 2,000 By Balance in hand 300
To Sale of Old furniture 300 By Balance at Bank 2,400 2,700
(Book value `400)
13,500 13,500
Subscriptions for 2014 still receivable were `700, interest due on savings certificates `100 and rent unpaid but due
was `60.
Solution:
Dr. Income and Expenditure Account for the year ended 31.03.2014 Cr.
Expenditure Amount(`) Income Amount(`)
To Loss on sale of furniture (`400 - `300) 100 By Subscriptions 8,300
To Salaries 4,800 Add: Due 700
To Rent 500 9,000
Add: Outstanding 60 560 By accrued Interest on NSC 100
To Stationery & Postage 200
To help to Needy students 2,000
To Surplus – Excess of Income over Expenditure 1,440
9,100 9,100
Illustration 9.
From the following Receipts and Payments Account and other details of Pattabhi Memorial Trust, which
commences its working from 1st January, 2014 with a capital of `40,000 in cash and furniture `20,000, prepare
Income & Expenditure Account.
Dr. Receipts and Payments Account Cr.
Receipts Amount(`) Payments Amount(`)
To Balance b/d 40,000 By Salaries 15,000
To Donations 60,000 By Conveyance 6,000
To Legacies 16,000 By Rent 12,000
To subscriptions 14,000 By Subscriptions to Journals 5,400
To Furniture Sold (on 31.12.2014) 6,000 By Stationery 1,000
By Books 4,000
By Buildings (Purchased on 1.1.2014) 68,000
By Balance 24,600
1,36,000 1,36,000
Additional information:
a) Provide for depreciation on Furniture @10% and on Buildings @10% and on Books `1,000
b) Outstanding subscriptions at the end of the year 2014 `15,000 and subscriptions received in advance for 2015
were `5,000
c) Outstanding expenses: Rent `1,000; Salary `2,000
Solution:
Pattabhi Memorial Trust
Income and Expenditure Account for the year ended 31.12.2014
Dr. Cr.
Subscriptions due on 31st December, 2014 and December, 2015 were `900 and `800 respectively. Subscriptions
received also included subscriptions for the year 2015 `200. Sports equipment in hand on 31st December 2014 was
`1,100. The value placed on his equipment in hand on 31st December 2015 was `1,300. The mowing machine was
purchased on 1st January, 2015 and is to be depreciated @ 20% per annum. Office expenses include `300 for 2014
and `400 are still due for payment.
Prepare Income and Expenditure account and Balance Sheet relating to the year 2015.
Solution:
Shyam Club
Income and Expenditure Account for the year ended 31.12.2015
Dr. Cr.
Working Note:
1) Calculation of Beginning Capital Fund:
Balance Sheet as on 31st December, 2014
EXERCISE
1. From the following details prepare Receipts and Payments Account
`
Opening Cash in hand 3,400
Opening Cash at Bank 23,400
Subscriptions received 25,000
Donations collected 5,000
Salaries paid 6,000
Rent Paid 1,000
Tournament Expenses 3,000
Purchase of Investments 10,000
Interest Received 600
Sundry expenses 1,500
Electricity charges 500
Cash in hand at the end 700
Ans: Receipts and Payments A/c Total = `57,400
2. From the following Receipts and Payments Account of the Venkateswara Society for the year ended
31.12.2014. Prepare income and expenditure account for the year ended 31.12.2014
Dr. Cr.
The Entrance fees and donations are to be capitalized. Sports materials value `4,000 as on 31.12.2014.
Ans: Surplus = `5,495
3. From the following Receipts and Payments Account of the Guntur Sports Club for the year ended 31.3.2014.
Prepare Income and Expenditure Account
Dr. Cr.
4. From the following Receipts and Payments Account prepare Final Accounts of Sports Club Account.
5.
Dr. Cr.
6. From the following Receipts and Payments Account additional information prepare the income and
expenditure account for the year ended 31st Dec. 2013 and a Balance sheet as on that date of Cosmopolitan
club.
Dr. Cr.
7. Laxman Cricket association gives you the following Receipts and payments account for the year ended 31st
March, 2014.
Dr. Cr.
12. The receipts and payments account shows the following details:
Subscription Arrears `500
Current `10,500
Advance `800
There are 1,200 members each paying an annual subscription of `10. The amount to be credited to income
and expenditure account will be
a) `11,800 b) ` 11,300 c) `12,000 d) None of the above
13. Any income arising from special fund will be credited to
a) Special fund in the balance sheet b) Income and expenditure account
c) General fund in the Balance Sheet d) None of the above
14. ncome and expenditure account shows subscriptions at `10,000. Subscriptions accrued in the beginning of
the year and at the end of the year were `1,000 and `1,500 respectively. The figure of subscriptions received
appearing in receipts and payments account will be
a) `9,500 b) ` 11,000 c) `10,000 d) None of the above
15. Which of the following item(s) is (are) shown in the income and expenditure account
a) Only items of capital nature
b) Only items of revenue nature which are received during the period of accounts
c) Only items of revenue nature pertaining to the period of accounts
d) Bothe the items of capital and revenue nature
Ans: 1.a 2.a 3.a 4.c 5.b 6.b 7.a 8.a 9.b 10.a 11.c 12.c 13.a 14.a 15.c
True or False:
1. Receipts and payments account is nothing but a consolidated summary of the Cash Book. (TRUE)
2. Receipts and payments account is a real account. (TRUE)
2. Non-trading concerns collect amount at the time of e b) Income & expenditure account
admission it is known as
4.1 Meaning, Definition, Significance of Cost Accounting, its relationship with Financial
Accounting & Management Accounting
4.2 Classification of Costs
4.3 Format of Cost Sheet
4.1 MEANING, DEFINITION, SIGNIFICANCE OF COST ACCOUNTING, ITS RELATIONSHIP WITH FINANCIAL
ACCOUNTING & MANAGEMENT ACCOUNTING
Origin:
All types of businesses, whether service, manufacturing or trading, require cost accounting to track their activities.
Cost accounting has long been used to help managers understand the costs of running a business. Modern cost
accounting originated during the industrial revolution, when the complexities of running a large scale business
led to the development of systems for recording and tracking costs to help business owners and managers make
decisions.
In the early industrial age, most of the costs incurred by a business were what modern accountants call "variable
costs" because they varied directly with the amount of production. Money was spent on labor, raw materials,
power to run a factory, etc. in direct proportion to production. Managers could simply total variable costs for a
product and use this as a rough guide for decision-making processes.
Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with
volume of work. Over time, these "fixed costs" have become more important to managers. Examples of fixed
costs include the depreciation of plant and equipment, and the cost of departments such as maintenance,
tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering.
In the early nineteenth century, these costs were of little importance to most businesses. However, with the growth
of railroads, steel and large scale manufacturing, by the late nineteenth century these costs were often more
important than the variable cost of a product, and allocating them to a broad range of products led to bad
decision making. Managers must understand fixed costs in order to make decisions about products and pricing.
For example: A company produced railway coaches and had only one product. To make each coach, the
company needed to purchase `60 of raw materials and components, and pay 6 laborers `40 each. Therefore,
total variable cost for each coach was `300. Knowing that making a coach required spending `300, managers
knew they couldn't sell below that price without losing money on each coach. Any price above `300 became a
contribution to the fixed costs of the company. If the fixed costs were, say, `1000 per month for rent, insurance and
owner's salary, the company could therefore sell 5 coaches per month for a total of `3000 (priced at `600 each),
or 10 coaches for a total of `4500 (priced at `450 each), and make a profit of `500 in both cases.
In old times the business concerns were small in size; there was no keen competition; necessity of adjustment
in business outlook due to changes in social, economic and political outlook was rare and the owner/ owners
of the business could maintain personal contact with the business and gather all information relating to the
business whenever necessary. The present-day business is big in size and complex in character and is under keen
competition. So, information relating to the business in detail, appropriate management policy on the basis of
detailed information and proper execution of such policies can only bring about success.
As the successful treatment of a sick person often requires various pathological information, the successful
management of a modern business requires various information regarding the business. The traditional financial
Accounting fails to furnish all information necessary for managing a modern business successfully. Thus, as a branch
of Financial Accounting, cost accounting has evolved and made rapid progress during the last few decades. This
branch of accounting, with its developing techniques and procedures, has been rapidly expanding in the fields
of its application. In recent years, another aspect of accounting, called Management accounting, has been
developed and is being employed in many concerns.
Where Financial accounting limits its activities in determining the financial result of trading during a given period of
time and stating the financial position as on the closing date of the period, Cost Accounting takes the responsibility
of generating information for controlling operations with a view to maximizing efficiency and hence profit, and
Management accounting takes the duty of assisting the management with information for planning and decision
making.
The belief that Cost Accounting developed after the rise of factory systems a result of Industrial Revolution in
England, is not true. Some Cost Accounting principles were found in application as early as 14th century. Some
authorities suggest that, the present day cost Accounting procedure was established at the end of the 19th
Century. However, major developments in the subject were noticed during a quarter century before the end of
the Second World War. The scientific management movement led to the development of standard Costing. After
1945, the need for data in planning for the future was felt and Cost Accounting developed further. The technique
of Cost control is a recent development. Cost Audit also emerged as a branch and it is developing further.
Meaning of Cost:
It is the amount of resources given up in exchange for some goods or services. The resources given up are expressed
in monetary terms. Cost is defined as the amount of expenditure (actual or notional) incurred on or attributable
to a given thing or to ascertain the cost of a given thing. The cost of an article consists of actual outgoings or
ascertained charges incurred in its production and sale. Cost is a generic term and it is always advisable to qualify
the word cost to show exactly what is means e.g., prime cost, factory cost, sunk cost etc., cost is also different from
value as cost is measured in terms of money whereas value is measured in terms of usefulness or utility of an article.
Meaning of Costing
Costing is a technique and process of ascertaining costs. This technique consists of principles and rules which
govern the procedure of ascertaining the cost of products/services. The process of costing includes routines of
ascertaining costs by historical or conventional costing, standard costing or marginal costing.
Meaning of cost accounting:
Cost Accounting is the classifying, recording and appropriate allocation of expenditure for the determination of
the costs of products or services, and for the presentation of suitable arranged data for purposes of control and
guidance of management. It includes the ascertainment of the cost of every order, job contract, process, service
or unit as may be appropriate. It deals with the cost of production, selling and distribution. It is thus the provision of
such analysis and classification of expenditure as will enable the total cost of any particular unit of production or
service to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such
total cost is constituted (i.e., the value of material used, the amount of labour and other expenses incurred) so as
to control and reduce its cost. Thus, cost accounting relates to the collection, classification, ascertainment of cost
and its accounting and control relating to the various elements of cost. It establishers budgets and standard costs
and actual cost of operations, processes, departments or products and the analysis of the variance, profitability
and social use of funds. Accounting to Kohler, “Cost Accounting is the branch of accounting dealing with the
classification, recording, allocation, summarizing and reporting of current and prospective costs.”
6. Analysis of Financial accounts are the accounts of the Cost Accounting is only a part of the financial
profit whole business. They are independent in accounts and discloses profit or loss of each
nature and disclose the net profit or loss of the product, job or service.
business as a whole.
7. Reporting The costs are reported in aggregate in The costs are broken down on a unit basis in cost
of costs financial accounts accounts.
8. Nature of Financial accounts relate to commercial Cost accounts relate to transactions connected
transactions transactions of the business and include all with the manufacture of goods and services and
expenses viz., manufacturing office, selling include only those expenses which enter into
and distribution etc.` production.
9. Monetary information is only used (i.e. only Non-monetary information like units is also used
Information monetary transactions are recorded). (i.e., it deals with monetary as well as non-
monetary information).
10. Figures Financial accounts deal mainly with actual Cost accounts deal partly with facts and figures
facts and figures and partly with estimates
11. In devising or operating a system of financial No such reference is possible. Guidance can be
Reference accounting reference can be made in case of had only from a body of convention followed by
difficulty to the company law, case decisions cost accountants.
and to the canons of sound professional
practice.
12. relative Financial accounts do not provide information Cost accounts provide valuable information on
efficiency on the relative efficiencies of various workers, the relative efficiencies of various plants and
plants and machinery. machinery.
13. Stock Stock are valued at cost or market price Stock are valued at cost
valuation whichever is less
14. Type of Financial accounting is a positive science Cost accounting is not only a positive science
science because it is subject to legal rigidity with but also a normative science because it includes
regard to the preparation of the financial techniques of budgetary control and standard
statements costing.
3. Role It is helpful in collecting costing data for the It is a greater degree of relevance and objectivity
management as the management accountant has a clear idea
of the types of costs and items requiring analysis
and states the specific problems of business.
4. Status The status of cost accountant comes after Management accountant is senior in position to
the management accountant cost accountant.
5. Outlook Cost accountant has a narrow approach. Management accountant reports the effect of
He has to refer to economic and statistical cost on the business along with cost analysis.
data for analyzing cost effects
6.Tools & It has standard costing, variable costing, Along with these, the management accountant
techniques break even analysis etc., as the basic tools has funds and cash flow statements, ratio analysis
and techniques. etc. as his accounting tools and techniques.
7. Scope It does not include financial accounting, tax It includes financial accounting, cost accounting
planning and tax accounting. tax planning and tax accounting.
8. Period of It is concerned with short-term planning It is concerned with short range and long range
planning planning and uses techniques like sensitivity
analysis, probability structure etc. Its special field
is evaluation of capital investment projects.
9. Assistance It merely assists the management in its It assists and evaluates the management
functions. performance.
10. Approach It is historical in its approach It is futuristic in its approach
11. It can be installed without management It needs financial and cost accounting as its base
Installation for its installation.
sector. Public enterprises lack the personal initiative and interest of private enterprises. A good system of
costing ensures efficient and effective control through a proper analysis of their working. It provides for
graded financial control over expenditure and avoids conflict of authority. It measures efficiency and
profitability of the undertaking to justify its running in the public sector. It helps management in fixing a
reasonable selling price for the products manufactured or services rendered.
Cost Accounting Standards:
CAS Title
1 Classification of Cost
2 Capacity Determination
3 Overheads
4 Captive Consumption
5 Average (equalized) Cost of Transportation
6 Material Cost
7 Employee Cost
8 Cost of Utilities
9 Packing Material Cost
10 Direct Expenses
11 Administrative Overheads
12 Repairs & Maintenance Cost
13 Cost of Service Cost Centre
14 Pollution Control Cost
15 Selling and Distribution Overheads
16 Cost Accountings Standard on Depreciation and Amortisation
17 Cost Accountings Standard on Interest and Financing Charges
18 Cost Accountings Standard on Research and Development Costs
19 Cost Accountings Standard on Joint Costs
20 Cost Accountings Standard on Royalty and Technical Know-How Fee
21 Cost Accountings Standard on Quality Control
22 Cost Accountings Standard on Manufacturing Cost
23 Cost Accounting Standard on Overburden Removal Cost
24 Cost Accounting Standard on Treatment of Revenue in Cost Statement
of sales (iii) whether a change in production should be followed (iv) whether or not factory should operate at full
capacity (v) determination of the most profitable levels or production (vi) whether to make or buy a spare part (vii)
whether a new product should be introduced in the market (viii) whether the product should be exported or not
(ix) whether a particular market should be tapped or not (x) whether a product should be discontinued to avoid
the present loss and (xi) whether or not an investment in a particular asset will be worthwhile.
Controlling:
Controlling is that part of the management activity whereby managers compare actual performance against the
planned performance, find out the deviations and take remedial steps to remove the deviations. Immediate action
should be taken to remove the deviations to make an improvement in the performance because promptness is
the essence of an effective control. Thus, control helps correction. Planning and controlling are interlinked with
each other because a manger cannot control unless he has planned a course of action.
The above functions of management cannot be satisfactorily carried out by financial accounting because of its
limitations. Cost accounting is very helpful in performing the functions of planning, decision-making and controlling
effectively.
Cost accounting helps management in carrying out efficiently its functions (i.e. planning budgeting, decision
– making, organizing, control, pricing and evaluation of operating efficiency) by developing practical cost
procedures that provide information useful in controlling the operations of the business enterprise. Cost accounting
does this by analyzing, recoding, standardizing, forecasting, comparing, reporting and recommending. Cost
accounting methods supply the basis of factual information on which management can build up its presentation
of planning and control. In fact, cost accounting is so closely allied to management that it is difficult to indicate
where work of cost accountant ends and managerial control begins. To quote Blocker and Weltmet, “In general,
it may be said that cost accounting is to serve management in the execution of policies and in the comparison
of actual and estimated results in order that the value of each policy be appraised and changed to meet future
conditions.”
A good system of cost accounting serves management in the following ways:
(a) Classification and sub-divisions of costs:
Costs are collected and classified by various ways in order to provide information to the management for control
purposes and to ascertain the profitability of each area of activity. It enables a concern to measure the efficiency,
and then to maintain and improve it. Unprofitable activities are disclosed and steps can be taken to make an
improvement in those activities.
(b) Control of Materials, Labour and overhead costs”
An efficient check is provided on stores and materials, stores ledger and material abstracts are maintained which
provide an effective check on the stores and material used in a business. By adopting the maximum limit for stores
the total capital outlay is controlled and total financial loss due to over-stocking is obviated. Information of stock of
various materials and stores is constantly available. This helps in planning the production according to availability
of materials and fresh stocks can be arranged in time. Loss due to carelessness or pilferage or any other mischief
is detected and steps may thereof, be taken to minimize such loss in future. An efficient check on labour and
machines is provided by giving detailed information about the availability of machine and labour capacity. The
work is so planned that no section is over – worked and no section remains idle. The maintenance of time and
job cards for workers discloses the loss incurred by idle time and indicates the directions in which losses may be
minimized. The relative advantages of remunerating labour on the time or piece work or premium plans may be
ascertained. It also measures the efficiency of the wages system in use. Cost Accounting thus provides a detailed
control of materials and stores and labour costs. Various techniques of materials control are applied in order
to avoid the excessive locking up of capital in stock of materials and stores. Idle time should be kept as low as
possible. By having proper classification of overheads into controllable and uncontrollable or fixed and variable, it
helps to control the overhead costs.
(c) Business policies:
Business policy may require the consideration of alternative methods and procedures and this is facilitated
by cost information correctly presented. For example, by the aid of cost reports management can decide
whether the manufacture of certain products increases overhead expenditure disproportionately or whether to
treat by –product even at a loss to make possible a more important trade in another product. Thus, it helps the
management to take vital decisions such as introduction of a new product, selection of a most profitable product
mix, utilization of spare capacity, exploration of additional market, whether to make or buy, problem of limiting
factor, replacement of existing assets, appraisal of proposed investment to meet expansion programme etc. with
the help of marginal costing techniques and differential cost analysis.
(d) Budgeting:
It provides the use of budgets and performance reports and enables management to correct inefficiencies
before they enter into business. It is a co-ordinated plan of action of every responsible person for comparing
the actual results with the budgets. Two important cost accounting tools for helping managers are budgets and
performance reports. Budgets are financial and/or quantitative statements prepared and approved prior to a
defined period of time, of the policies to be pursued during that period for the purpose of attaining objectives
of the management. Thus, budgets are the formal quantifications of the plans of management. Performance
reports measure actual performance and give accounts of comparisons of budgets with actual results which
facilitate action against those persons whose performance is less than the performance specified in the budgets.
The technique of control through performance reports is technically known as management by exception, which
is the practice of concentrating on areas whose performance is not upto the mark as it was planned and ignoring
areas that are running smoothly as these were planned.
(e) Standards for measuring efficiency:
It provides the use of standards to assist management in making estimates and plans for future and to provide
the basis of management efficiency. Actuals are compared with predetermined standards to determine the
operating efficiency.
(f) Best use of limited resources:
In all varied fields we are concerned to make the best use of limited resources that are available to us. Thus the
intension is to obtain the maximum output from a given input. Cost Accounting provides the reliable data of
costs with regard to materials, wages and other expenses. These help management to get maximum output at
the minimum cost by indicating where economies may be affected, waste eliminated and efficiency increased;
some of the loss occasioned by reduced turnover and falling prices may be avoided.
(g) Instrument of Management Control:
It provides management with valuable data for planning, budgeting and control of costs. The organization and
management or undertaking must be planned and controlled in such a way that the desired volume of production
is achieved at the least possible cost in relation to the scheduled quantity of the product. The measurement of the
degree to which this objective is attained, is provided by cost accounting. An efficient system of cost accounting
is, thus, regarded as an important part in the efforts of any management to secure business stability.
(h) Cost Audit:
The operation of a system of cost audit in the organization will assist in prevention of errors and frauds. It will
help to improve cost accounting methods and techniques to facilitate prompt and reliable information to the
management.
(i) Special Factors:
It informs the management about the special factors such as optimum profitability, seasonal variations in volume
and costs, idle time of labour and idle capacity of the machine etc. It also helps to curtail the losses during the off
season.
(j) Price Determination:
It helps the management to fix the remunerative selling prices of various items of goods in different circumstances
During the period of depression, a businessman has to become very watchful and vigilant in tracking down the
concealed inefficiencies and sources of wastage, so that he may reduce the cost of production to the minimum.
He has to resort to price cutting to such an extent so as to recover variable costs. Cost accounting makes a
distinction between fixed and variable costs and helps the businessmen in the determination of prices in the
depression period. The fixation of prices cannot be properly done unless proper figures of cost are available, If
prices are fixed without costing information, it is possible, that prices quoted may be too high to low. In periods of
depression, it may become necessary to reduce the prices even below total cost. It is only costing which will guide
the businessmen in this matter.
(k) Expansion:
Management is able to formulate expansion policy on the basis of estimates of cost for production at various
levels provided by cost accountant.
Characteristics of an Ideal Costing System:
An ideal system of costing is that which achieves the objectives of a costing system and brings all advantages of
costing to the business. Following are the main characteristics which an ideal system of costing should possess or
the points which should be taken into consideration before installing costing system.
(i) Suitability to the business: A costing system must be devised according to the nature, conditions,
requirements and size of the business. Any system which serves the purposes of the business and supplies
necessary information for running the business efficiently is an ideal system.
(ii) Simplicity: The system of costing should be simple and plain so that it may be easily understood even by a
person of average intelligence. The facts, figures and other information provided by cost accounting must
be presented in the right form at the right time to the right person in order to make it more meaningful.
(iii) Flexibility: The system of costing must be flexible so that it may be changed according to changing
conditions and circumstances. The system without such flexibility will be outmoded because of fast changes
in business and industry. Thus, the system must have the capacity of expansion or contraction without much
change.
(iv) Economical: A costing system is like other economic goods. It costs money just like economic goods. If the
system is too expensive, the management may be unwilling to pay as buyers are not willing to pay for the
goods if these are expensive as compared to their utility. A costing system should not be expensive and
must be adapted according to the financial capacity of the business. The benefits to be derived from the
system must be more than its costs as management will be willing to install the system when its perceived
expected benefits exceed its perceived expected costs. In short, the system must be economical taking
into consideration the requirements of the business.
(v) Comparability: The costing system must be such so that it may provide facts and figures necessary to the
management for evaluating the performance by comparing it with the past figures, or figures of other
concern or against the industry as a whole or other department of the same concern.
(vi) Capability of presenting information at the desired time: The system must provide accurate and timely
information so that it may be helpful to the management for taking decisions and suitable action for the
purpose of cost control.
(vii) Minimum changes in the existing setup: The existing system of delegation and division of authority and
responsibility must not be disturbed with the costing system. As for as possible the system must be such so
that it may least disturb the existing organizational set up.
(viii) Uniformity of forms: All forms and Proformas etc. necessary to the system should be uniform in size and
quality of paper. Higher efficiency can be obtained by using colour of the paper to distinguish different
forms. Printed forms should contain instructions as to their use and disposal.
(ix) Minimum clerical work: The filling of the forms by foremen and workers should involve little clerical work as
possible as most of workers are not well educated. To ensure reliable statistics, every original entry should
be supported by an examiner’s signatures.
(x) Efficient system of material control: There should be an efficient system of stores and stock control as
materials usually account for a greater proportion of the total cost
(xi) Adequate wage procedure: There should be a well defined wage procedure for recording the time
spent by workers on different jobs, for preparing the wage sheets and for the payment of wages. Thus the
introduction of well defined wage system will help to control the cost of labour.
(xii) Departmentalization of expenses: A sound plan should be devised for the collection, allocation,
apportionment and absorption of overheads in order to ascertain the cost accurately.
(xiii) Reconciliation of cost and financial accounts: If possible the cost and financial accounts should be
interlocked into one integral accounting scheme. If this is not possible the systems should be so devised
that the two sets of accounts are capable of easy reconciliation.
(xiv) Duties and responsibilities of the cost accountant: Under a good system of cost accounting the duties and
responsibilities of the cost accountant should be clearly defined. The cost accountant should have access
to all works and departments.
1. By nature or element
- Materials
- Labour
- Expenses
2. By Functions
- Manufacturing and Product Cost
- Commercial Cost
3. By Degree of traceability to product
- Direct Cost
- Indirect Cost
4. By changes in Activity or volume
- Fixed Cost
- Variable Cost
- Semi Variable Cost
5. By controllability
- Controllable Cost
- Un controllable Cost
6. By Normality
- Normal Cost
- Abnormal Cost
7. By Relationship with accounting period
- Capital Cost
- Revenue Cost
8. By Time
- Historical Cost
- Pre-determined Cost
9. According to planning
- Budgeted Cost
- Standard Cost
10. By Association with the product
- Product Costs
- Period Costs
11. For Managerial decisions
- Marginal Cost
- Out of pocket Cost
- Differential Cost
- Sunk Cost
- Imputed or Notional Cost
- Opportunity Cost
- Replacement Cost
Now each classification will be discussed in detail.
1. By Nature or Elements or Analytical classification:
According to this classification, the costs are divided into three categories i.e., Materials, Labour and expenses.
There can be further sub classification of each element: For example, material into raw material components,
spare parts, consumable stores, packing material etc. This classification is important as it helps to find out the total
cost, how such total cost is constituted and valuation of work-in-progress.
2. By Functions (i.e., Functional classification).
According to this classification costs are divided in the light of the different aspects of basic managerial activities
involved in the operation of a business undertaking. It leads to grouping of costs according to the broad divisions
or functions of a business undertaking i.e., production, administration, selling and distribution, According to this
classification costs are divided as follows:
Manufacturing and production cost:
This is the total of costs involved in manufacture, construction and fabrication of units of production.
Commercial cost:
This is the total of costs incurred in the operation of a business undertaking other than the cost of manufacturing
and production. Commercial cost may further be sub-divided into.
(a) Administrative cost, and
(b) Selling and distribution cost.
These terms will be explained in a subsequent chapter
3. By degree of Traceability to the product (Direct and Indirect):
According to this classification, total cost is divided into direct costs and indirect costs. Direct costs are those which
are incurred for and may be conveniently identified with a particular cost centre or cost unit. Materials used and
labour employed in manufacturing an article or in a particular process of production are common examples of
direct costs. Indirect costs are those costs which are incurred for the benefit of number of cost centers or cost units
and cannot be conveniently identified with a particular cost centre or cost unit. Examples of indirect costs include
rent of building, management salaries, machinery depreciation etc. The nature of the business and the cost unit
chosen will determine which costs are direct and which are indirect. For example, the hire of a mobile crane for
use by a contractor at site would be regarded as a direct cost but if the crane is used as a part of the services of
a factory, the hire charges would be regarded as indirect cost because it will probably benefit more than one
cost centre. The importance of the distinction of costs into direct and indirect lies in the fact that direct costs
of a product or activity can be accurately determined while indirect costs have to be apportioned on certain
assumptions as regards their incidence.
4. By changes in Activity or volume:
According to this classification, costs are classified according to their behavior in relation to changes in the level
of activity or volume of production. On this basis, costs are classified into three groups’ viz., fixed, variable and
semi-variable.
(i) Fixed costs:
Fixed costs are commonly described as those which remain fixed in total amount with increase or decrease in the
volume of output or productive activity for a given period of time. Fixed cost per unit decreases as production
increases and increases as production declines. Examples of fixed costs are rent, insurance of factory building,
factory manager’s salary etc. These fixed costs are constant in total amount but fluctuate per unit as production
changes. These costs are known as period costs because these are dependent on time rather than on output.
Such costs remain constant per unit of time such as factory rent of ` 10,000 per month remaining same for every
month irrespective of output of every month.
5. By Controllability:
Under this, costs are classified according to whether or not they are influenced by the action of given member of
the undertaking. On this basis costs are classified into two categories:
(i) Controllable costs are those which can be influenced by the action of a specified member of an undertaking,
that is to say, costs which are at least partly within the control of management. An organization is divided into a
number of responsibility centers and controllable costs incurred in a particular cost centre can be influenced by
the action of the manger responsible for the centre. Generally speaking, all direct costs including direct materials,
direct labour and some of the overhead expenses are controllable by lower level of management.
(ii) Uncontrollable costs are those which cannot be influenced by the action of a specified member of an
undertaking, that is to say, which are not within the control of management. Most of the fixed costs are
uncontrollable. For example, rent of the building is not controllable and so is managerial salaries. Overhead cost,
which is incurred by one service section and is apportioned to another which receives the service, is also not
controllable by the latter.
The distinction between controllable and uncontrollable is sometimes left to the individual judgment and is not
sharply maintained. It is only in relation to a particular level of management or an individual manager that we may
say whether a cost is controllable or uncontrollable. A particular item of cost which may be controllable from the
point of view of one level of management, may be uncontrollable from another point of view. Moreover, there
may be an item of cost which is controllable from long-term point of view and uncontrollable from short-term point
of view. This is partly so in the case of fixed costs.
6. By normality:
Under this, costs are classified according to whether these are costs which are normally incurred at a given level
of output in the conditions in which that level of activity is normally attained. On this basis, it is classified into two
categories.
(a) Normal cost:
It is the cost which is normally incurred at a given level of output in the conditions in which that level of output is
normally attained. It is a part of cost of production.
(b) Abnormal cost:
It is the cost which is not normally incurred at a given level of output in the conditions in which that level of output
is normally attained. It is not a part of cost of production and charged to costing profit and loss account
7. By relationship with accounting period (capital and revenue):
The cost which is incurred in purchasing an asset either to earn income or increasing the earning capacity of
the business is called capital cost, for example, the cost of a rolling machine in case of steel plant. Such cost is
incurred at one point of time but the benefits accruing from it, is spread over a number of accounting years. If
any expenditure is done in order to maintain the earning capacity of the concern such as cost of maintaining
an asset or running a business it is revenue expenditure e.g., cost of materials used in production, labour charges
paid to convert the material into production, salaries, depreciation, repairs and maintenance charges, selling and
distribution charges etc. the distinction between capital and revenue items is important in costing as all items of
revenue expenditure are taken into consideration while calculating cost whereas capital items are completely
ignored.
8. By Time.
Costs can be classified as (i) Historical costs and (ii) predetermined costs
(i) Historical costs:
The costs which are ascertained after being incurred are called historical costs. Such costs are available only
when the production of particular thing has already been done. Such costs are only of historical value and not at
all helpful for cost control purposes. Basic characteristics of such costs are:
with individual parts which make the aggregate. For example, budgeted costs are calculated for different
functions of the business i.e., production, sales, purchases etc. whereas standard costs are compiled for
various elements of costs i.e., materials, labour and overhead.
projects are being evaluated it is necessary to consider the imputed interest on capital before a decision is arrived
as to which is the most profitable project.
Types of costing:
Following are the main types of costing for ascertaining costs:
1. Uniform costing:
It is the use of same costing principles and/or practice by several undertakings from common control or comparison
of costs.
2. Marginal costing:
It is the ascertainment of marginal cost by differentiation between fixed and variable cost. It is used to ascertain
the effect of changes in volume or type of output on profit.
3. Standard costing:
A comparison is made of the actual cost with a pre-arranged standard and the cost of any deviation (called
variance) is analyzed by causes. This permits the management to investigate the reasons for these variances and
to take suitable corrective action.
4. Historical costing:
It is ascertainment of costs after they have been incurred. It aims at ascertaining costs actually incurred on work
done in the past. It has a limited utility, though comparisons of costs over different periods may yield goods results.
5. Direct costing:
It is practice of charging all direct costs, variable and some fixed costs relating to operations, processes or products
leaving all other costs to be written off against profits in which they arise.
6. Absorption costing.
It is the practice of charging all costs, both variable and fixed to probations, processes or products. This differs from
marginal costing where fixed costs are excluded.
Introduction:-
It is necessary to understand the difference between the costing methods and techniques. Costing methods are
those which help a firm to compute the cost of production or services offered by it. On the other hand, costing
techniques are those which help a firm to present the data in a particular manner so as to facilitate the decision
making as well as cost control and cost reduction. Costing methods and techniques are explained below.
Methods of costing: -
The following are the methods of costing.
I. Job Costing: -
Job costing method is used in firms which work on the basis of job work. There are some manufacturing units which
undertake job work and are called as job order units. The main feature of these organizations is that they produce
according to the requirements and specifications of the consumers. Each job may be different from the other
one. Production is only on specific order and there is no predetermining production. Because of this situation, it
is necessary to compute the cost of each job and hence job costing system is used. In this system, each job is
treated separately and a job cost sheet is prepared to find out the cost of the job. The job cost sheet helps to
compute the cost of the job in a phased manner and finally arrives at the total cost of production.
II. Batch Costing:
This method of costing is used in those firms where productions are made on continuous basis. Each unit coming
out is uniform in all respects and production is made prior to the demand i.e., in anticipation of demand. On batch
of production consists of the units produced from the time machinery is set to the time when it will be shut down
for maintenance. For example, if production commences on 1st January 2015 and the machine is shut down for
maintenance on 1st April 2015, the number of units produced in this period will be the size of one batch. The total
cost incurred during this period will be divided by the number of units produced and unit cost will be worked out.
Firms producing consumer goods like television, air-conditioners, washing machines etc use batch costing.
III. Process Costing:
Some of the products like sugar, chemical etc involve continuous production process and hence process costing
method is used to work out the cost of production, The meaning of continuous process is that the input introduced
in the process I travels though continuous process before finished product is produced. The output of process I
becomes input of process II and the output of process II becomes input of the process III. If there is no additional
process, the output of process III will be the finished product. In process costing, cost per process is worked out
and per unit cost is worked out by dividing the total cost by the number of units. Industries like sugar, edible oil,
Chemical are examples of continuous production process and use process costing.
IV. Operating Costing:-
This type of costing method is used in service sector to work out the cost of services offered to the consumers. For
example, operating costing method is used in hospitals, power generating units, Transportation sector etc. A cost
sheet is prepared to compute the total cost and is divided by cost units for working out the per unit cost.
V. Contract Costing:-
This method of costing is used in construction industry to work out the cost of contract undertaken. For example,
cost of constructing a bridge, commercial complex, residential complex, highways etc is worked out by use of this
method of costing. Contract costing is actually similar to job costing, the only difference being that in contract
costing, one construction job may take several months or even years before they are complete while in job
costing, each job may be of a short duration. In contract costing, as each contract may take a long period of
completion, the question of computing of profit, it to be solved with the help of a well defined and accepted
method.
Technique of costing:-
As mentioned above, costing methods are for computation of the total cost of production/services offered by
a firm. On the other hand, costing technique help to present the data in a particular format so that decision
making becomes easy. Costing techniques also help for controlling and reducing the costs. The following are the
techniques of costing.
1. Marginal costing:-
This technique is based on the assumption that the total cost of production can be divided into fixed and variable.
Fixed costs remain same irrespective of the changes in the volume of production while the variable costs vary
with the level of production, i.e. they will increase if the production increases and decrease if the production
decreases. Variable cost per unit always remains the same. In this technique, only variable costs are taken into
account while calculating production cost. Fixed costs are not absorbed in the production units. They are written
off to the costing profit and loss account. The reason behind this is that the fixed costs are period costs and hence
should not be absorbed in the production. Secondly they are variable on per unit basis and hence there is not
equitable basis of charging them to products. This technique is effectively used for decision making in the areas
like make or buy decisions, optimizing of product mix, key factor analysis, fixation of selling price, accepting or
rejecting an export offer, and several other areas.
II. Standard costing:-
Standard costs are predetermined costs relating to material, labour and overheads. Though they are
predetermined, they are worked out on scientific basis by conducting technical analysis. They are computed for
all elements of costs such as material, labour and overheads. The main objective of fixation of standard cost is to
have benchmark against which the actual performance can be compared. This means that the actual costs are
compared with the standards. The difference is called as ‘variance’. If actual costs are more than the standard,
the variance is adverse whereas if actual costs are less than the standard, the variance is favorable. The adverse
variances are analyzed and reasons for the same are found out. Favorable variances may also be analyzed to find
out the reasons behind the same. Standard costing, thus is an important technique of cost control and reduction.
III. Budget and Budgetary control:-
Budget is defined as a quantitative and/ or a monetary statement prepared prior to a defined period of time for
the policies during that period for the purpose of achieving a given objective. If we analyze this definition, it will
be clear that a budget is a statement, which may be either in monetary form or quantitative form or both. For
example, a production budget can be prepared in quantitative form showing the target production, it can also
be prepared in monetary terms showing the expected cost of production. Some budgets can be prepared only
in monetary terms, e.g., cash budget showing the estimated receipts and payments in a particular period can be
prepared in monetary terms only. Another feature of budget is that it is always prepared prior to a defined period
of time which means that budget is always prepared for future and that too for a defined future. For example, a
budget may be prepared for next 12 months or 6 months or even for 1 month, but the time period must be certain
and not vague. One of the important aspects of budgeting is that it lays down the objective to be achieved
during the defined period of time and for achieving the objectives, whatever policies are to be pursued are
reflected in the budget.
Budgetary control involves preparation of budgets and continuous comparison of actual with budgets so that
necessary corrective action can be taken. For example, when a production budget is prepared, the production
targets are laid down in the same for a particular period. After the period is over, the actual production is compared
with the budget and the deviaiotn is found out so that necessary corrective action can be taken.
Budget and budgetary control is one of the important techniques of costing used for cost control and also for
performance evaluation. The success of the technique depends upon several factors such as support from top
management, involvement of employees and coordination within the organization.
Cost Unit
It is a device for the purpose of breaking up or separating cost into smaller sub-divisions attributable to products
and services. It is the unit of product, service or time in relation to which costs may be ascertained, e.g. tonne in
case of coal. It must be clearly defined and selected before the process of cost finding can be started. It must not
be too big or too small and must be so selected that expenditure can be associated with it and is appropriate to
the needs of the business. In case of industries rendering service usually the unit is a compound of two measures
since the single measure may be meaningless.
Cost center:
Commonly understood, cost centers are sub-units of an organization. We use the terms such as departments,
divisions, regions, and zones etc. that convey the same meaning of cost center. Correct identification of these
sub-units is essential for implementing cost accounting system as the costs are ascertained and controlled with
respect to the cost centers. Cost centers are sometimes called as centers that add to costs of the organization
and only indirectly add to the profit of the organization.
The official terminology of CIMA defines a cost centre as “ a location, a person or an item of equipment for a
group of them) in or connected with an undertaking, in relation to which costs are ascertained and used for the
purpose of cost control”.
(a) A cost centre could be a location or locations like a branch, office or MD’s office
(b) If could be identified as a person such as chairman’s office or Md’s office
(c) If could be an equipment or a group thereof such as lathe machines, computers etc.,
(d) It may be a department carrying out a certain activity e.g., production departments like turning fitting,
welding, blending, assembly etc. The activity could be a service activity as well like a stores department,
labour office, accounts departments etc.,
When different responsibility centers are properly setup, cost collection and use of information for control purposes
can be done effectively.
Elements of cost:
Mere knowledge of total cost cannot satisfy the needs of management. For proper control and managerial
decisions, management is to be provided with necessary data to analyse and classify costs. For this purpose, the
total cost is analysed by elements of cost i.e., by the nature of expenses. Strictly speaking, the elements of cost are
three i.e., materials, labour and other expenses. These elements of cost are further analysed into different elements
as illustrated in the following chart.
Element of cost
Overhead
1. Direct Material:
Direct materials are those materials which can be identified in the product and can be conveniently measured
and directly charged to the product. Thus, these materials directly enter the production and form a part of the
finished product. For example, timber in furniture making, cloth in dress making and bricks in building a house.
Following are normally classified as direct materials:
(i) All raw materials like jute in the manufacture of gunny bags, pig iron in foundry, and fruits in canning industry.
(ii) Materials specifically purchased for a specific job, process or order like glue for book binding, starch powder
for dressing yarn.
(iii) Parts or components purchased or produced like batteries for transistor- radios and tyres for cycles.
(iv) Primary packing materials like cartons, wrappings, cardboard boxes, etc. used to protect finished product
from climatic conditions or for easy handling inside the factory.
From the above discussion it becomes clear that indirect materials are those materials which cannot be classified
as direct materials. Examples of indirect materials are: consumables, like cotton waste, lubricants, brooms, rags,
cleaning materials, materials for repairs and maintenance of fixed assets, high speed diesel used in power
generators etc.
Classification of materials into direct and indirect facilitates material control. Direct materials are usually high value
items as compared to indirect materials and need strict control and critical analysis for reducing their cost. On the
other hand, simple control techniques are sufficient in case of indirect materials being low value items.
However, in some cases, though the material is a part of the finished product yet it is not treated as direct
material; for example, sewing thread in dress making and nails in furniture making. This is because they are used in
comparatively small quantities and it would be futile elaboration to make an analysis of them for the purpose of
direct charge. Such materials are treated as indirect materials. Thus, it can be concluded that the ease and the
feasibility with which a material can be traced into the composition of a finished product will determine what is to
be treated as direct material.
2. Direct Labour:
Direct labour is all labour expended in altering the construction, composition, confirmation or condition of the
product. In simple words, it is that labour which can be conveniently identified or attributed wholly to a particular
job, product or process or expended in converting raw materials into finished goods. Wages of such labour are
known as direct wages. Thus, it includes payment made to the following groups of labour.
(i) Labour engaged on the actual production of the product or carrying out of an operation or process.
(ii) Labour engaged in aiding the manufacture by way of supervision, maintenance, tools setting transportation
of material etc.
Inspectors, analysts etc, specially required for such production.
Wages paid to supervisors, inspectors, etc., though not direct labour, can be treated as direct labour if they are
directly engaged on specific product or process and the hours they spend on it can be directly measured without
much of an effort. Similarly where the cost is not significant like the wages of trainees or apprentices, their labour,
though directly spent on a product is not treated as direct labour.
3. Direct Expenses (or chargeable expenses)
All expenses which can be identified to a particular cost centre and hence directly charged to the centre are
known as direct expenses. In other words all expenses (other than direct materials and direct labour) incurred
specifically for a particular product, job, department etc. are called direct expenses. These are directly charged
to the product. Examples of such expenses are royalty, excise duty, hire charges of a specific plant and equipment
cost of any experimental work carried out specially for a particular job, travelling expenses incurred in connection
with a particular contract or job etc.
4. Overheads
Overheads may be defined as the aggregate of the cost of indirect materials, indirect labour and such other
expenses including services as cannot conveniently be charged direct to specific cost units. Thus overheads
are all expenses other than direct expenses. In general terms, overheads comprise all expenses incurred for or
in connection with the general organization of the whole or part of the undertaking i.e., the cost of operating
supplies and services used by the undertaking and including the maintenance of capital assets. The main groups
into which overheads may be sub-divided are (i) manufacturing overheads; (ii) Administration overheads (iii)
selling overheads (iv) distribution overheads and (v) research and development overheads.
Cost sheet is a statement designed to show the output of a particular accounting period along with break-up of
costs. The data incorporated in cost sheet are collected from various statements of accounts which have been
written in cost accounts, either day-to-day or regular records.
There is no fixed form for preparation of a cost sheet but in order to make the cost sheet more useful it is generally
presented in columnar form. The columns are for the total cost of the current period, per unit for the current period,
total cost and per unit cost for a preceding period and total and per unit cost for the budget period and so on.
The information to be incorporated in a cost sheet would depend upon the requirement of management for the
purpose of control.
Advantage of cost sheet:
Main advantages of a cost sheet are:
1. It discloses the total cost and the cost per unit of the units produced during the given period
2. It enables a manufacturer to keep a close watch and control over the cost of production
3. By providing a comparative study of the various elements of current cost with the past results and standard
costs, it is possible to find out the causes of variations in cost and to eliminate the adverse factors and
conditions which go to increase the total cost
4. It acts as a guide to the manufacturer and help him in formulating a definite useful production policy
5. It helps in fixing up the selling price more accurately.
6. It helps the business man to minimize the cost of production, When there is a cut throat competition.
7. It helps the business to submit quotations with reasonable degree of accuracy against tenders for the supply
of goods.
The following items are not included in Cost Sheet
a) Income Tax
b) Dividends to shareholders
c) Premium on redemption of shares and debentures
e) Capital losses i.e., loss out of sales
f) Interest on loan or debentures or bank interest
g) Donations
h) Capital expenditure
i) Discounts on shares and debentures
j) Commission to managing directors
k) Underwriting commission
l) Writing off goodwill and preliminary expenses
m) Reserve for bad debts
n) Transfer to all reserves or appropriation of profits
o) Share premium
p) Interest on capital
q) Drawing of proprietors
r) All personal expenses of owner
Format of Cost Sheet
Particulars Amount Amount
A. Direct Material opening stock
+ Purchases
+ Carriage inwards
- Closing stock
B. Direct wages
C. Direct Expenses
I. Prime cost (A+B+C)
D. Factory overheads- Indirect materials
Loose tools
Indirect wages
Rent and rates (Factory)
Lighting and heating (F)
Power and fuel
Repairs and Maintenance
Drawing office expenses
Research and experiment
Depreciation – plant (F)
Insurance – (F)
Work manger’s salary
Illustration 2.
Prime Cost = `33,500, Depreciation = `1,500. Factory rent is 200% of Depreciation.
Find out the Factory Cost.
Solution:
Particulars `
Prime Cost 33,500
Add: Factory Overheads:
Depreciation 1,500
Factory Rent (`1,500 x 200%) 3,000
Factory Cost 38,000
Illustration 3.
Cost of Sales = `37,416. Advertisement Expenses = `600. Discount on sales = 50% of advertisement Expenses. Find
Cost of Goods Sold.
Solution:
We Know, Cost of Goods Sold + Selling and Distribution Overheads = Cost of Sales.
Both Advertisement Expenses and Discount on sales together constitutes Selling and Distribution Overhead
Particulars `
Cost of Sales 37,416
Less: Selling and Distribution Overheads
Advertisement Expenses 600
Discount on sales( 50% of `600) 300
Cost of Goods Sold 36,516
Illustration 4.
Factory Cost is `3,95,000. Find Office and Administration overheads cost which is 7.315% of factory cost.
Solution:
Office and Administration Overheads = 7.315% of Factory Cost = 7.315% of `3,95,000 = `28,894.25.
Illustration 5.
Gross Factory Cost = `58,000. Net Factory Cost = `54,000.Opening stock of work-in- progress is `8,000. Find closing
stock of work-in-progress.
Solution:
Net Factory Cost = Gross Factory Cost + Opening Stock in WIP – Closing Stock in WIP
`54,000 = `58,000 + `8,000 – Closing Stock in WIP
Closing Stock in WIP = `66,000 - `54,000 = `12,000
Illustration: 6.
Prime Cost is `41,000. Direct labour cost consists of skilled labour `6,000 and unskilled labour `2,000.Variable works
overhead is 100% of direct wages and fixed works overhead is 60% of direct wages. Sale of scrap is `1,800. Find
works cost.
Solution:
Particulars `
Prime Cost 41,000
Works Overhead:
Add: Variable 100% direct wages 8,000
Add: Fixed 60% direct wages 4,800
Less: Sale of scrap (1,800)
Works Cost 52,000
Illustration 7.
From the information, prepare a statement showing expenses which you would disregard in estimating costs. Rent,
rates and insurance of office `2500, Bad Debt `200, Discount Allowed `300, Bank charges `100 and Donations
`150.
Solution:
Illustration: 8.
Calculate the amount of direct material if:
Prime cost = `50,000. Direct labour = 70% of prime cost.
Solution:
Prime Cost = `50,000.
Direct Labour = 70% of prime cost = 70% of `50,000 = `35,000.
Direct Material = ` (50,000 – 35,000) = `15,000.
Illustration: 9.
Direct materials cost is `80,000. Direct labour cost is ` 60,000. Factory overhead is ` 90,000. Beginning goods in
process were ` 15,000. The cost of goods manufactured is ` 245,000. What is the cost assigned to the ending goods
in process?
Solution:
Particulars `
Direct Material 80,000
Direct Labour 60,000
Prime Cost 1,40,000
Add: Factory Overhead 90,000
Add: Opening WIP 15,000
Less: Closing WIP -
Cost of goods manufactured (given) 2,45,000
As cost of goods manufactured is given as `2,45,000 so there will be no closing goods in process.
Illustration 10.
Given data that:
Finished goods Opening Inventory ` 30,000
Finished goods Closing Inventory ` 50,000
Cost of goods sold ` 1,90,000
What will be the value of Cost of Production?
Solution:
We Know, Cost of Goods Sold = Cost of Production + Opening stock of finished goods – Closing stock of finished
goods.
Particulars `
Cost of Goods Sold 1,90,000
Add: Closing Stock of finished goods 50,000
Less: Opening stock of finished goods (30,000)
Cost of Production 2,10,000
Illustration: 11
Prepare a statement of cost from the following data to show material consumed, Prime cost, factory cost, Cost of
goods sold and profit.
1-1-2015(`) 31-12-2015(`)
Raw material 60,000 50,000
Work-in-progress 24,000 30,000
Finished goods 1,20,000 1,10,000
Purchase of materials during the year 9,00,000
Wages paid 5,00,000
Factory overheads 2,00,000
Administration overheads 50,000
Selling and distribution overheads 30,000
Sales 20,00,000
Solution:
Statement of cost and profit
Illustration 12.
From the following particulars, prepare cost statement showing the component of total cost and the profit for the
year ended 31st December, 2015.
1-1-2001(`) 31-12-2001(`)
Stock of finished goods 6,000 Stock of finished goods 15,000
Stock of raw materials 40,000 Stock of raw material 50,000
Work-in-progress 15,000 Work-in-progress 10,000
Purchase of raw materials 4,75,000 General expenses 32,500
Carriage inward 12,500 sales for the year 8,60,000
Wages 1,75,000 Income tax 500
Works manager’s salary 30,000 Dividend 1,000
Factory employees salaries 60,000 Debenture interest 5,000
Factory rent, taxes and Insurance 7,250 transfer to sinking fund for
replacement of machinery 10,000
Power expenses 9,500 goodwill written off 10,000
Other production expenses 43,000 payment of sales tax
Selling expenses 9,250
Solution:
Statement of Cost and Profit
` `
Opening stock of raw materials 40,000
Add: purchase of raw materials 4,75,000
5,15,000
Less: closing stock of raw materials 50,000
4,65,000
Add: Carriage inward 12,500
Materials consumed 4,77,500
Wages 1,75,000
Prime cost 6,52,500
Factory expenses:
Works manager’s salary 30,000
Factory employees salaries 60,000
Factory rent, taxes and insurance 7,250
Power expenses 9,500
Other production expenses 43,000
Opening work-in-progress 15,000 1,64,750
8,17,250
Less: closing work-in-progress 10,000
Works cost 8,07,250
General expenses 32,500
Cost of production 8,39,750
Add: opening stock of finished goods 6,000
8,45,750
Less: opening stock of finished goods 15,000
Cost of goods sold 8,30,750
Selling expenses 9,250
Cost of sales 8,40,000
Profit 20,000
Sales 8,60,000
Illustration 13.
Mr. Gopal furnishes the following data relating to the manufacture of a standard product during the month of
April, 2015:
You are required to prepare a cost sheet from the above, showing: (a) the cost per unit (b) profit per unit sold and
profit for the period.
Solution:
STATEMENT OF COST
Statement of profit
`
Cost of production of 16,000 units @ ` 2 per unit 32,000
Selling overheads @ 50 paise per unit for 16,000 units 8,000
Cost of sales 40,000
Profit for the period 24,000
Sales (16,000 units @ ` 4 unit) 64,000
24,000
Profit per unit sold = = `1.50
16,000
EXERCISE:
1. The following data relate to the manufacture of a standard product during the month of March, 2015.
Ans: (a) `44 per unit (b) `4.5 per unit, Profit `16,200
2. From the following particulars prepare a cost sheet showing the total cost per tone for the period ended 31st
Dec. 2015.
` `
Raw Materials 33,000 Rent and taxes (office) 500
Productive wages 38,000 Water supply (works) 1,200
Unproductive wages 10,500 Factory insurance 1,100
Factory rent and taxes 7,500 Office insurance 500
Factory lighting 2,200 Legal expenses 400
Factory heating 1,500 Rent of warehouse 300
Motive power 4,400 Depreciation of
Haulage (works) 3,000 -Plant and machinery 2,000
Directors fees (works) 1,000 -Office building 1,000
Directors fees (office) 2,000 - Delivery vans 200
Factory cleaning 500 Bad debts 100
Sundry office expenses 200 Advertising 300
Estimating expenses(works) 800 Sales department’s salaries 1,500
Factory stationery 750 Upkeep of delivery vans 700
Office stationery 900 Bank charges 50
Loose tools written off 600 Commission on sales 1,500
The total output for the period has been 14,775 tonnes
Ans: Prime Cost `71,000, Factory Cost `1,08,050, Cost of Production `1,13,600, Total Cost `1,18,100, Cost per ton `8/-
7. Which method of costing is used for determination of costs for printing industry?
(a) process costing (b) operating costing (c) batch costing (d) job costing
8. Over which of the following costs, management is likely to have least control
(a) wages cost (b) building insurance cost
(c) machinery breakdown cost (d) advertisement cost
9. Variable costs are fixed
(a) for a period (b) per unit (c) depends upon the entity (d) for a particular process of production
10. In behavioral analysis’, costs are divided into
(a) production and non-production costs (b) controllable and non-controllable costs
(c) direct and indirect costs (d) fixed and variable costs
11. Prime cost plus factory overheads is known as
(a) factory on cost (b) conversion cost (c) factory cost (d) marginal cost
12. Which of the following items is excluded from cost Accounts?
(a) Income tax (b) interest on debentures (c) cash discount (d) All of these
13. The following is included in financial accounts, but not in cost accounts.
(a) carriage and freight (b) Excise duty (c) Royalty (d) Dividend paid
14. Advertisements are treated as
(a) direct expenses (b) cost of production (c) selling overheads (d) distribution overheads
15. Which cost system description applies to the manufacture of 20 engraved doors for the new club house at
a golf course?
(a) contract (b) process (c) Batch (d) service
16. Prime cost may be correctly termed as
(a) the sum of direct material and labour cost with all other costs excluded.
(b) the total of all cost items which can be directly charged to product units.
(c) The total costs incurred in producing a finished unit.
(d) the sum of the large cost there in a product cost.
17. The guidance and regulation by executive action of the cost of operating an undertaking is said to be
(a) Budgetary control (b) cost control (c) cost analysis (d) None
18. Direct expenses are also known as
(a) Overhead expenses (b) process expenses (c) chargeable expenses (d) None
19. Indirect material cost is a part of
(a) Prime cost (b) Factory overhead (c) chargeable expenses (d) None of these
20. Which of the following is a part of both Prime cost and conversion cost
(a) Direct Material (b) Indirect Labour (c) Indirect Material (d) Direct Labour
21. Statement showing break-up of costs is known as
(a) cost-sheet (b) statement of profit (c) production account (d) Tender
Ans: 1. c 2. b 3. b 4. c 5. c 6. b 7. d 8. d 9. b 10. d 11. c 12. d 13. d 14. c 15. c 16. b 17. b 18. c 19. b 20. d 21.
a 22. b 23. b 24. d 25.b
24. Cost accounting deal partly with facts and figures and partly with ____(estimates)
25. Cost accountant provides the detailed information about ____ of various products, processes services
and operations.(costs)
True or False:
2. Fixed cost per unit remains fixed but variable cost per unit vary with variation in output (False)
4. Cost accounts provide information for ascertainment of the financial position as on a particular date (false)
10. Variable cost per unit varies with increase or decrease in volume of output (false)
16. In the cement industries the unit of cost is per tonne (true)
17. Scrap is a residue which comes out of a manufacturing process but has no recoverable value (false)
19. All the indirect cost related to indirect material, Indirect labour and indirect expenses are termed as
overheads (true)
21. Historical costs are relevant costs for decision making (False)
25. Fixed cost per unit decreases with rise in output and increases with fall in output (True)
Group – II
Group – III
Group – IV
1.2: Capital and Revenue Transactions - Capital and Revenue Expenditures, Capital and Revenue Receipts
1. Insurance claim received on a furniture destroyed by fire is a ____:
(a) Capital receipt
(b) Revenue receipt
(c) Capital expenditure
(d) Revenue Expenditure
2. Purchase of machinery is a
(a) Capital receipt
(b) Revenue receipt
(c) Capital expenditure
(d) Revenue Expenditure
3. An expenditure is treated as revenue expenditure when
(a) Its benefit is exhausted within one accounting period
5. Which of the following accounts doesn’t carry a balance for the next year?
(a) Personal account
(b) Real account
(c) Nominal account
(d) Representative personal account
Answer: 1(d); 2(d); 3(d); 4(d); 5(c)
(b) Omission
(c) Principle
(d) Not an error
2. In the course of locating the reason for the difference in the trial balance, it has been found that an amount
received from a customer has been debited to his account. The error may be classified as _________________
(a) Errors of commission
(b) Errors of omission
(c) Errors of principle
(d) Both errors of commission and omission
3. Errors can be detected ____:
(a) Before the preparation of Trial Balance
(b) After the preparation of Trial Balance, but before the preparation of final accounts
(c) After the preparation of Final accounts (next accounting year)
(d) All of the above
4. Rent received from a tenant ` 10,000 was correctly entered in the cash book but posted to the debit of Rent
a/c. The effect of this error on the trial balance will be
(a) Debit total will be ` 20,000 more than the credit total
(b) Debit total will be ` 10,000 more than the credit total
(c) Subject to other entries being correct, the total will agree
(d) None of these
5. The suspense A/c facilities the preparation of ____________even if the __________has not been balanced
a) Trial Balance and Financial Statements
b) Ledger and Trial Balance
c) Trial Balance and Ledger
d) Financial Statements and Trial Balance
Answer: 1(c); 2(a); 3(d); 4(a); 5(d).
a) ` 3400
b) ` 4000
c) ` 4200
d) ` 4400
3. BRS is a part of _____:
a) Final Accounts
b) Bank Book
c) Cash Book
d) None of these
4. Credit balance of bank pass book will be ___ to the account holder
a)An asset
b) A liability
c) A provision
d) None of these
5. Overdraft balance as per Cash book ` 9000 Cheques issued, but not presented ` 300, ` 150, ` 375 Cheques paid
into bank account, but not cleared ` 1,200 Find the balance as per Pass Book
a) ` 3,300 Dr
b) ` 9375 Dr
c) ` 4,875 Dr
d) ` 4,125 Dr
6. The cash book showed a credit balance of ` 10,000 but the pass book made up the same date revealed that a
cheque of ` 2,000 had not been presented for payment and a cheque of ` 3,000 paid into account had not been
cleared. The balance as per pass book will be:
a) ` 8,000
b) ` 11,000
c) `14,000
d) None
2. A bill drawn and accepted for mutual help is known as ____ bill:
a) Accommodation
b) Trade
c) Ordinary
d) Retired
3. Bill at sight means the instance at which_______________
a) No time for payment is mentioned in the bill
b) The payment is to be made on demand at any time
c) The payment is made after a particular time
d) both a & b
4. X draws a bill for `40,000 on ‘Y’. ‘Y’ accepts it for 2 months. After 1 month ‘B’ paid the bill amount @ 9%. Journal
entry in the Books of ‘B’ will be
a) Bank A/c Dr. 40,000 To Bills payable A/c 40,000
b) Bank A/c Dr. 40,000 To Bills payable A/c 39,700 To Discount A/c 300
c) Bills payable A/c Dr. 40,000 To Bank A/c 40,000
d) Bills payable A/c Dr. 40,000 To Discount A/c 300 To Bank A/c 39700
5. For bills receivable endorsed earlier and then dishonoured, the journal entry in the books of drawer will be
a) Debtors A/c is debited and Creditors A/c is credited
b) Debtors A/c is credited and Creditors A/c is debited
c) Drawer A/c is debited and Creditors A/c is credited
d) Debtors A/c is debited and Drawer A/c is credited
2.2: Consignment (Cost Price, Invoice Price, Commission & Valuation of Stock)
1. When Del-credere commission is paid, bad debts will be borne by
a) Consignee
b) Consignor
c) Customer
d) None of the above
2. Mr. X consigned goods costing ` 3,00,000 to Mr. Y at cost + 33 1/3%. 1/10 of the goods were lost in transit. Mr. Y
sold 3/5th of the remaining goods at 10% above the invoice price. Calculate the amount of sales:
a) ` 200000
b) ` 237600
c) ` 350000
d) ` 400000
3. X sends out goods costing `2,00,000 to Y at 50% above cost price. The goods are sold for ` 400000. Commission
is payable @ 10% on sales plus 20% of the excess of sales over invoice price. The amount of commission will be:
a) 50,667
b) 50,800
c) 60,000
d) 50,600
4. Goods sent on consignment for `1,00,000. During transit 1/10th of goods were destroyed by fire. Again 1/9th of
goods received by consignee were destroyed by fire in godown. Half of the original goods were sold for `30,000.
Freight & insurance paid by consignor `2,500 and `1500 respectively. Calculate closing Stock.
a) `30200
b) `21,600
c) `20,000
d) `26200
5. Consignment account is
a) Personal account
b) Real account
c) Nominal account
d) Representative personal account
5. Amount recovered from debtor, which was earlier written off as bad debt is debited to Cash A/c and credited
to _______________ A/c:
a) Bad Debts
b) Bad debts recovered
c) Debtors
d) Sales
The figures in the margin on the right side indicate the full marks.
This question paper has two parts. Both the sections are to be answered
subject to instructions given against each.
Section-A
1. (a) Choose the correct answer from the given four alternatives: 1×30 =30
(i) Decrease in the amount of creditors results generally
(A) increase in cash
(B) decrease in cash
(C) increase in assets
(D) No change in assets
(ii) Provision for bad debt is made as per the
(A) Entity Concept
(B) Conservatism Concept
(C) Cost Concept
(D) Going Concern Concept
(iii) Capital expenditures are shown in the
(A) Balance Sheet
(B) Profit & Loss A/c
(C) Trading A/c
(D) Manufacturing A/c
(iv) Import duty of raw material purchased is a
(A) Revenue Expenditure
(B) Capital Expenditure
(C) Deferred Revenue Expenditure
(D) None of the above
(xii) The Depreciation Account is closed at the end of the year by transfer to the
(xiii) The original cost of the machine is `19,00,000; machine installation charges are ` 1,00,000; working life
of the machine is 5 years and residual value is `40,000. If the depreciation is charged on Straight Line
basis then 4th year’s depreciation will be
(A) ` 3,72,000
(B) ` 4,00,000
(C) ` 3,92,000
(D) ` 3,52,000
(xiv) Whenever errors are noticed in the accounting records, they should be rectified
(xv) A purchase of `49,500 from Shiva was recorded in Purchases Book as ` 59,400, the profit would show
(xvi) From the following details ascertain the adjusted bank balance as per Cash Book- overdraft as per
Cash Book ` 1,60,000; cheque received entered twice in the Cash Book ` 10,000; credit side of bank
column cast short by `1,000; bank charges amounting to ` 400 entered twice:
(A) `1,61,000
(B) `1,71,000
(C) ` 1,70,000
(D) ` 1,70,600
(xvii) When credit balance as per pass book is the starting point of a Bank Reconciliation Statement then
bank charges are
(A) Subtracted
(B) Added
(xix) At the time of dishonour of an endorsed bill, which account would be credited by the drawee?
(xx) If a bill drawn on 13th July, 2018 for 30 days, payment must be made on
(xxi) At the end of the accounting year bills receivable discounted were `32,000 would be shown
(xxii) X sends out goods to Y, costing `3,60,000. Goods are to be sold at cost plus 25% on sales. The consignor
asked consignee to pay an advance for an amount equivalent to 60% of sales value. The amount of
advance will be
(A) `2,88,000
(B) `2,16,000
(C) `2,70,000
(D) `3,36,000
(xxiii) X sends out certain goods to Y, costing ` 1,50,000 at cost plus 25% on invoice price. ¾ of the goods
were sold by Y at ` 1,76,000. Commission 5% upto invoice value and 10% of any surplus above invoice
value. The amount of commission will be
(A) ` 10,100
(B) ` 11,975
(C) ` 10,568.75
(D) ` 9,350
(xxiv) A purchased goods costing ` 2,60,000 for joint venture with B. B sold a major part of the goods at
cost plus 25% on cost, for ` 2,50,000. Balance of goods were taken over by B at cost less 10%. Find out
profit/loss on Joint Venture.
(B) ` 55,250
(C) ` 44,000
(D) ` 50,000
(xxv) Which of the following account(s) is(are) maintained in the joint venture when separate set of books
are maintained?
(C) to show the sale proceeds from the goods produced during the year.
(xxvii) At the time of preparation of financial accounts, balance of Bad Debts Recovered Account will
be transferred to
(xxviii) In case of not for profit making concern, endowment fund receipt is treated as
(xxx) Income and Expenditure Account shows subscriptions at `2,50,000. Subscriptions accrued
in the beginning of the year and at the end of the year were `25,000 and ` 37,500 respectively. The
amount of subscriptions received appearing in receipts and payments account will be
(A) `2,37,500
(B) `2,75,000
(C) ` 1,87,500
(D) `2,62,500
(b) State whether the following statements are True or False: 1×12= 12
(i) It is generally assumed that the business will not liquidate in the near forcible future because of entity
concept.
(v) Under straight line method of depreciation, the cost of the asset written off in equal proportion during
its economic life.
(vi) Total of Purchase Day Book is short by ` 10,000 will not affect trial balance.
(vii) A credit balance in the pass book indicates excess of deposits over withdrawals.
(viii) In case of endorsement of bill, endorser debits endorsee and credits B/P Account.
(x) At the end of the accounting year outstanding subscription is shown as liability in Balance Sheet.
(xi) The Balance Sheet will give the information regarding the financial position for a particular period.
(xii) Income and Expenditure Account closely resembles the Profit and Loss Account of a trading concern.
Column A Column B
Answer any four questions out of the following six questions: 8× 4=32
2. ABC Ltd. presented the following particulars as on 31st March, 2019, pass the necessary closing entries: 8
Particulars `
1. Sales 1,50,000
2. Return Inward 15,000
3. Purchase 75,000
4. Wages 7,500
5. Return Outward 7,500
6. Salaries 12,000
7. Rent 6,000
8. Bad Debts 1,500
9. Closing Stock 22,500
10. Discount Received 4,500
11. Discount Allowed 6,000
12. Interest Received 4,500
13. Opening Stock 15,000
14. Sale of scrap items 1,000
15. Abnormal loss of material 2,000
16. Profit on sale of old furniture 4,000
3. On 1st July, 2017 KC Limited purchased a machine for `13,30,000. Expenses incurred on its freight ` 45,000
and installation `1,25,000. On 1st May, 2018 another machine was purchased and installed for `15,60,000. The
machine purchased on 1st July, 2017 was sold on 31st May, 2018 for `12,20,000. Depreciation is charged by the
company @ 15% per annum on written down value basis.
Prepare Machinery Account for the years 2017-18 and 2018-19, if the books are closed on 31st March in every
year. 8
4. The bank balance as per bank statement of Agni & Co as on 31st March, 2019, shows a credit balance of
`19,500. On scrutiny with cash book the following point were noted:
(a) Cheques of `15,900 deposited on 29.03.2019 but two cheques of `9,500 credited by the bank on
03.04.2019.
(b) Cheques of `5,900 directly deposited with the bank on 25.03.2019 but not recorded in the cash book.
(c) As per standing instruction, bank has paid ` 2,500 against telephone bill and ` 1,200 for electric bill for the
month of March, 2019 but intimation received on 3rd April, 2019.
(d) Some cheques of ` 16,000 issued to creditors on 30.03.2019, of those cheques cheque of ` 6,200 were
presented by 31.03.2019.
(e) Bank has debited ` 500 for issuing cheque books but not recorded in cash book.
(f) One cheque of ` 2,000 deposited with the bank on 15.03.2019 but the bank credited ` 1,970 on 20.03.2019.
(g) An amount of ` 11,200 on maturity of fixed deposit transferred to current account but no entry was made
in the Cash Book. 8
5. P, Q and R undertake to erect an office building for a Company. The contract price is agreed at ` 25,00,000
to be paid in cash ` 22,00,000 and the balance amount in shares of the company. They agreed to share profit
or loss equally.
They opened a Joint Bank Account with cash contributed by P for `3,00,000; by Q ` 3,75,000 and by R `2,00,000.
P arranges the preparation of building plans and paid ` 32,000 as architect’s fees. Q brings a concrete mixer
and allied machines for `80,000 and R brings a motor van valued at `75,000.
They paid `12,25,800 for material; `7,33,200 for wages; ` 60,000 for plant; and `20,000 for sundry expenses. On
completion of the joint venture, concrete mixer is sold for `50,000 and plant and allied machines are sold as
scrap for ` 10,000. R takes back the van at `40, 000.
Subsequently P took over the shares issued by the company at a valuation of `2,80,000.
Show the
(a) Joint Venture Account
(b) Joint Bank Account 8
6. The following Receipt and Payment account and other details are related to Moon Memorial Trust, this
commences its function from 1st April, 2018 with a capital fund of `50,000 in cash and furniture of ` 10,000:
Particulars ` Particulars `
To, Balance b/d 50,000 By, Salaries 24,000
To, Donation for general purpose 60,000 By, Conveyance 6,000
To, Legacies 16,000 By, Rent 12,000
To, Subscription 14,000 By, Stationeries 2,000
To, Furniture sold 2,000 By, Books and Journals 9,400
By, Building 68,000
By, Balance c/d 20,600
1,42,000 1,42,000
Other information:
(a) Building was purchased on 1st April, 2018.
(b) Books and journals include `4,000 for purchase of books.
(c) Provide depreciation on furniture @10%, on building @ 10% and on books @ 25%.
(d) Outstanding expenses on account of rent are ` 1,000 and salary is `2,000.
(e) An outstanding subscription at the end of the year 2018-19 was `15,000 and subscription received in
advance for 2019-20 was `5,000.
Prepare Income and Expenditure Account for the year ended 31st March, 2019 and the Balance Sheet as at
31st March, 2019. 8
7. Laxmi owed Durga ` 1,20,000. Durga draws a bill on Laxmi for that amount for 3 months on 1st April, 2018.
Laxmi accepts it and returns it to Durga. On 15th April, Durga discounts it with AX Bank at a discount of 10%
per annum. On the due date the bill was dishonoured, the bank paid noting charges of `150. Durga settles the
bank’s claim with noting charges in cash. Laxmi accepted another bill for four months for the amount due plus
interest @ 12% per annum on 1st July, 2018. Before the new bill became due, Laxmi retires the bill with a rebate
of `750. Show the journal entries in the books of Durga.
Section-B
8. Choose the correct answer from the given four alternatives: 1×12=12
(i) All indirect costs are termed as
(A) Prime Cost
(B) Factory Cost
(C) Conversion Cost
(D) Overheads
(ii) CAS-21 is related to
(A) Cost Accounting Standard on Overburden Removal Cost.
(B) Cost Accounting Standard on Interest and Financing Charges.
(C) Cost Accounting Standard on Joint Cost.
(D) Cost Accounting Standard on Quality Control.
(iii) On the basis of “Relationship with accounting period” costs are classified as
(A) Historical Costs and Pre-determined Costs.
(B) Capital Costs and Commercial Costs.
(C) Capital Costs and Revenue Costs.
(D) Product Costs and Period Costs.
(iv) Cost of staff services is an example of
(A) Committed Costs
(B) Policy and Managed Costs
(C) Discretionary Costs
(D) Step Costs
(v) Which of the following is not a method of costing?
(A) Process Costing
(B) Batch Costing
(C) Direct Costing
(D) Operating Costing
(vi) The written down value of the abandoned plant less its salvage value is
(A) Imputed Cost
(B) Sunk Cost
(C) Avoidable Cost
(D) Opportunity Cost
(vii) The costs are differentiated between fixed and variable costs under
(A) Marginal Costing
(B) Direct Costing
(C) Standard Costing
Answer any one question out of the following two questions: 8×1=8
9. Given:
Factory Cost ` 61,50,000; Factory Overhead `10,50,000 (which are 40% of Direct Wages);
Administrative overheads are recovered at 10% of Factory Cost and Selling and Distribution Overheads
would be 5% of sales. If the profit margin is 25% on cost then find out the
Direct Material
Direct Wages
Prime Cost
Cost of Production
Selling and Distribution Overhead
Cost of Sales
Profit
Sales Value 8
10. Prepare a statement of cost from the following data to show the material consumed, prime cost, factory cost,
cost of goods sold and profit for the year 2018-19.
Particulars `
9. Sales 30,00,000
Other Information:
The figures in the margin on the right side indicate the full marks.
This question paper has two parts. Both the sections are to be answered
subject to instructions given against each.
Section – A
1. (a) Choose the correct answr from the given four alternatives: 1×30=30
(D) Cash
(C) an asset
(D) an expense
(v) The amount of yearly depreciation under written down value method
(A) remains same over the years
(B) decreases year by year
(C) increases year by year
(D) fluctuates
(vi) Goods purchased from Mr. A but wrongly entered in the account of Mr. B. The rectification of error
will result in
(A) increase in gross profit
(B) decrease in gross profit
(C) no effect on gross profit
(D) either A or B
(vii) When cash received for services rendered in the past
(A) Owner’s equity increases
(B) Current asset increases
(C) Profit increases
(D) None of the above
(viii) Stock in the hand of the consignee is valued
(A) at market price or cost price whichever is less.
(B) at selling price.
(C) at cost price after inclusion of proportionate non-recurring expenses.
(D) at consignment price.
(ix) Noting charges are paid by
(A) the drawee
(B) the drawer
(C) the payee
(D) the acceptor
(x) The valuation procedure for stock is cost or net realisable value, whichever is lower. The procedure
follows as per
(A) Historical Cost Concept
(B) Going Concern Concept
(C) Money Measurement Concept
(D) Conservatism Concept
(xi) When incomes recognised on cash basis and expenditure recognised on accrual basis, the system
termed as
(A) Accrual basis of accounting
(B) Cash basis of accounting
(C) Mercantile basis of accounting
(D) Hybrid basis of accounting
(xxi) Any revenue expense for which a separate fund is available will be
(xxv) Advertising expenses for launching a new product of the company is____________.
(b) State whether the following statements are True or False: 1×12=12
(i) In case of non-profit organization, excess of income over expenditure is known as surplus.
(ii) Error of omission will not affect trial balance.
(iii) Favourable bank balance means, debit balance in the pass book.
(iv) Balance Sheet covers the position for a period and not the position of a particular day.
(v) Goods bought for ` 25,000 passed through sales day book will result an increase in gross profit.
(vi) Statement of affairs means statement of assets and liabilities.
(vii) A bill of exchange is a conditional order in writing given by a debtor to a creditor.
(viii) Accumulated depreciation account can be located in the debit side of the trial balance.
(ix) Closing stock appeared in the trial balance is taken to Trading Account.
Column A Column B
G Current Liabilities
H Revenue Expenditure
October 1 Chandu started business with ` 25 Lakh of which 20% amount was borrowed from his friend
Shaurabh.
October 5 Office furniture purchased from Furniture Mart for ` 1,25,000 and one Laptop purchased for
`35,500.
October 6 Goods purchased from KC worth ` 4.5 Lakh at 10% trade discount and 40% of the amount
was paid in cash.
October 10 Goods sold to Rajnee for `3.2 Lakh at 20% trade discount and received one-fifth of the
amount in cash.
October 26 Goods costing `4,500 (Net selling price `5,400) taken away by Chandu for personal use.
3. Kush Ltd. purchased a second hand machinery on 01.04.2015 for `65,000, paid `12,400 for its overhauling
and `5,500 for its installation which was completed by 30.6.2015. The company provides depreciation on its
machinery at 15% per annum on the basis of diminishing value method from the date it is put to use and closes
its books on March 31 every year. On 01.10.2016, a repair work was carried out on the machine and `4,000
were paid for the same. The machine was sold on 31.01.2018 for a sum of ` 52,000 and an amount of ` 462 was
paid as dismantling charges. Prepare Machinery Account from 2015-16 to 2017-18.
4. Prepare a bank reconciliation statement as on 31st October, 2018 from the following information and show the
balance of pass book:
(a) Credit balance as per bank column of cash book ` 3,57,500.
(b) Three cheques amounting of `1,20,000 were issued but one cheque for `28,000 was not presented during
the month.
(c) Cheques deposited into bank for `1,50,000 but ` 1,15,000 not yet collected.
(d) Gas bill for ` 12,000 paid directly by bank.
(e) Interest on investment for `15,000 was collected by bank but entered in the cash book as ` 51,000.
(f) Bank charges ` 3,000 not entered in the cash book.
(g) A customer directly deposited `16,500 into bank for which there was no entry in the cash book.
(h) A debit of `7,800 in the pass book in respect of dishonoured cheque but no corresponding entry in the
cash book.
5. The debit side of the trial balance of JP & Associates showed `5,500 less than credit side. Difference of the trial
balance was put in the suspense account. Later the following errors were detected:
(a) Goods returned by a customer for `3,000 entered in the customer’s account but not entered in the sales
return account.
(b) Goods sold to Nayan on credit for `7,000 was entered in the sales book but not posted to his account.
(c) ` 5,800 paid by Mohan Traders was credited to their account as ` 580.
(d) ` 2,600 due from Virat was not entered in the schedule of sundry debtors.
(e) Purchase book was overcast by `1,880.
Pass the necessary rectification entries without giving narration and prepare Suspense Account.
6. Bhatiya Krida Parishad gives you the following Receipts and Payments Account for the year ended 31st March,
2018:
Dr. Cr.
Other information:
7. Bivas sent goods to Arpan on consignment basis. As per terms, Arpan will have to receive 20% commission on
invoice price and 10% on sale value above the invoice price. Arpan will meet all his expenses himself. Bivas
sent goods whose cost were `32,000 at a proforma invoice price cost plus 25% and spent `3,000 on freight
charges. Arpan accepted a bill for `32,000 immediately on receiving the consignment. His expenses were
`400 as rent and ` 200 as insurance. Arpan sold 80% of goods for `41,600. Part of sales were on credit and one
customer failed to pay `800.
You are required to prepare Consignment Account and Arpan’s Account in the books of Bivas.
Section – B
8. Choose the correct answer from the given four alternatives: 1×12=12
(i) A technique and process of ascertaining costs is known as
(A) Cost
(B) Costing
(C) Cost Accounting
(D) Cost Accountancy
(ii) The branch of the accounting dealing with the classification, recording, allocation, summarizing and
reporting of current and prospective costs, is known as
(A) Financial Accounting
(B) Management Accounting
(C) Cost Accounting
(D) Cost Accountancy
(A) CAS-11
(B) CAS-13
(C) CAS-14
(D) CAS-17
(v) Costs are classified between direct and indirect costs according to method of classification by
(B) Functions
(vii) When the volume of output is increased then the per unit fixed cost will be
(D) unchanged.
(viii) Which of the following costing method is suitable for Toy Making Industry?
(xii) Over which the following costs, management is likely to have least control?
Answer any one question out of the following two questions. 8×1=8
9. Classify the following expenses items according to functions such as Factory Overhead, Office & Administrative
Overhead and Selling & Distribution Overhead:
10. Following information gathered from the cost accounting records of ABC Associates for the year 2017-18:
The figures in the margin on the right side indicate the full marks.
This question paper has two parts. Both the sections are to be answered
subject to instructions given against each.
Section – A
1. (a) Choose the correct answer from the given four alternatives: 1×30 =30
(A) Machinery
(B) Rent
(C) Cash
(D) Creditor
(A) The receiver of the amount is going to treat it for the purchase of fixed assets.
(ix) Which financial statement represent the accounting equation______Asset = Liability + owner’s equity:
(x) A debit note issued to a creditor for goods returned is to be recorded in the
(A) Ledger
(B) Journal
(xix) Which of the following errors affects the agreement of a trial balance?
(A) Mistake in balancing an account
(B) Omitting to record a transaction entirely in the subsidiary books
(C) Recording of a wrong entry in the subsidiary book
(D) Posting an entry on the correct side but in the wrong account
(xx) Which one of the following is an error of principle?
(A) `500 being purchase of raw material debited to purchase account as `50.
(B) `500 being paid for wages but debited to Stationary account.
(C) `5,000 received from Ram but credited to Shyam.
(D) `5,000 incurred on installation of a new plant but debited to salary a/c.
(xxi) Difference in Bank Balance as per Pass book and Cash book may arise on account of
(A) Cheque issued but not presented
(B) Cheque issued but dishonoured
(C) Cheque deposited not credited by bank
(D) All of the above
(xxii) Which of these items are taken into consideration for preparation of adjusted cash book?
(A) Mistake in cash book
(B) Mistake in pass book
(C) Cheque issued but not presented for payment
(D) Cheque deposited but not cleared by bank
(xxiii) Kasi draws a bill on Shyam for ` 5,000 and Kasi endorsed it to Ram. Ram endorese it to Rahul. The
payee of the bill will be
(A) Kasi
(B) Ram
(C) Shyam
(D) Rahul
(xxiv) A bill drawn on 3rd July 2017 for 40 days, payment must be made on
(A) 16th August, 2017
(B) 15th August, 2017
(C) 12th August, 2017
(D) 14th August, 2017
(xxv) On receipt of goods from the consignor the consignee debits which of these accounts?
(A) Purchase account
(B) Goods account
(C) Consignor account
(D) None of the above
(b) State whether the following statements are True or False: 1×12=12
(ii) Window dressing of accounts means showing more profits to attract more investment.
(iii) Cost of extension of building occupied on lease for five years is deferred revenue expenditure.
(v) It is generally assumed that the business will not liquidate in near forcible future because of business
entity concept.
(vi) Gratuity and pension paid to employees after retirement is deferred revenue expenditure
Column A Column B
1. Concept relating to Profit & Loss A/c a. Gross profit
2. Salary outstanding b. Total sale
3. Sales minus cost of goods sold c. Memorandum statement
4. Del Credre commission d. Matching concept
5. Honour before due date e. Retirement of bill
6. Bank reconciliation statement f. Current liabilities
2. Following information have been obtained from the trial balance of Shive & Co.
1. Wages 1,54,000
2. Salaries 2,52,000
4. Repairs 16,000
6. 8% Investments 15,00,000
Adjustments:
(1) Wages for March, 2018 is outstanding.
(2) Salaries include prepaid salaries for two months.
(3) Rent received for 18 months.
(4) Outstanding repairs ` 6,000.
(5) Only 2/3 of insurance premium is related to current year.
(6) Interest on investments is accrued for 3 months.
3. N. R. & Sons purchased a second hand machine on 1st April, 2015 and paid ` 1,40,000 for it. On its repairs and
installations he spent `20,000. On 1st October, 2015 another machine costing ` 80,000 was purchased. On 1st
October, 2017 the machine purchased on 1st April, 2015 was disposed off for ` 1,04,000 and a new machine
costing ` 2,00,000 was purchased. Depreciation was provided @ 15% per annum by Straight Line Method on
year ending 31st March. Prepare Machinery Account for 3 years. 8
4. From the following particulars of M/s AB Enterprises, prepare Bank Reconciliation Statement as on 31st March,
2018 when there was overdraft balance of ` 17,600 as per Pass Book:
(i) Three cheques were issued for ` 5,000, `7,600 and ` 4,000 during March, 2018. The cheques of `11,600 are
still with the supplier.
(ii) `4,000 transferred from fixed deposit A/c into current A/c, appeared only in the Pass Book.
(iii) Cheques deposited in bank for `11,600 but only `4,000 were cleared till 31st March, 2018.
(iv) Dividend collected by bank `2,500 was wrongly entered as `5,200 in Cash Book.
(v) Interest on overdraft `1,860 was debited by bank in Pass Book and the information was received only on
4th April, 2018.
(vi) Direct deposit by M/s CD Trading ` 800 not entered in Cash Book.
(vii) Electricity bill `2,400 paid by bank as per standing instruction appear only in Pass Book. 8
5. Mr. X closed his books of accounts on 31st March, 2018 in spite of a difference in the trial balance. The difference
was carried forward in a suspense account. The following errors were detected subsequently.
(i) The total of return inward book for July, 2017 `1,240 was not posted in the ledger.
(ii) Freight paid on a machine `5,600 was posted to the freight account as ` 6,500.
(iii) While carrying forward the total of purchase account to the next page `65,590 was written as `56,950.
(iv) A sale of machine on credit to Mr. Sun for `9,000 at the beginning of the year was not entered in the books
at all. The book value of the machine was ` 7,500. The firm has the practice of writing off depreciation
@ 10% on the balance at the end of the year.
(v) A credit sale of `760 was wrongly posted as `670 to the customer account in the sales ledger.
(vi) Closing stock was over casted by `10,000 in the schedule of inventory.
Pass the rectification Journal Entries with proper Narration in the books of Mr. X. 8
6. From the following particulars, prepare a Balance Sheet of XYZ Enterprise as on 31st March, 2018.
Capital 2,00,000
Drawings 40,000
Goodwill 80,000
Investments 20,000
The following adjustments are made at the time of preparing the Trading and Profit & Loss account:
(a) Outstanding Liabilities for
(i) Salaries `10,000
(ii) Wages `20,000
(iii) Interest on bank overdraft `3,000
(iv) Interest on Bank loan `6,000
(b) Provide interest on capital @ 10% per annum.
(c) Depreciation on Plant and Machinery by 10% per annum.
(d) Bad debt amounted to `10,000 and makes a provision for bad debt @ 10% on Sundry debtors.
(d) Closing stock amounted to ` 1,20,000
(e) Net profit for the year amounted to `1,16,000 after considering all the above adjustments. 8
7. For mutual accommodation of Jaggu and Makkhu, the former draws on the latter a bill on 15th June, 2017 for
three months after date for `6,00,000 which Jaggu discounts on 18th June at 10% per annum and hands over
half the proceeds to Makkhu. On the same day and for a similar purpose Makkhu draws on Jaggu for `9,00,000
for three months after date which discounts on 18th June at 10% per annum and hands over half the proceeds
to Jaggu. On 18th September Makkhu becomes insolvent and pays a first and final dividend of 75 paise in a
rupee to his creditors on 15th December, 2017.
Prepare Jaggu’s Account in Makkhu’s books and Makkhu’s Account in Jaggu’s books. 8
Section – B
8. Choose the correct answer from the given four alternatives: 1×12=12
(i) The works cost plus administration expenses represents
(A) Total cost
(B) Cost of production
(C) Cost of sales
(D) Factory cost
(A) The sum of direct material and labour cost with all other cost excluede.
(B) The total of all cost items which can be directly charged to production units.
(v) Which method of costing is used for determination of costs for printing industry?
(viii) Which one of the following item is excluded from cost accounts?
(xi) From the following information, find out purchases when raw material consumed is ` 26,500, closing stock
`4,500 and opening stock `3,000:
(A) `26,500
(B) `25,000
(C) ` 28,000
(D) ` 34,000
Answer any one question out of the following two questions: 8×1=8
9. Mr. Anand, the Factory Manager of A. B. Enterprises furnishes the following data relating to the manufacture of
a product during the month of December, 2017, wherefrom you are required to prepare a cost sheet showing
(i) The cost per unit
(ii) Profit per unit sold
(iii) Profit for December, 20 17.
10. Classify the following expenses items in their respective groups, such as Production; Administrative; Selling
and Distribution and costs excluded from Cost Accounts:
Fuel and Power; Office Salaries; Foreman’s Wages; Drawing Office Expenses; Depreciation of Plant; Donations;
Hospital and Dispensary Expenses of Workers; Bank Charges; Holiday and Leave pay of Workers; Market
Research Expenses; Dividend Paid; Technical Director’s Fees; Wages of Idle Time; Cash Discount Allowed;
Stores Expenses; and Carriage Outwards. 8
The Directorate of Studies is committed to keep abreast of CMA Students with the
latest amendments/notifications/advancements on each subject on regular basis.
Students are requested to visit CMA Students’ Portal [https://icmai.in/studentswebsite/]
regularly to view the updates.