UNIT – 4

FINANCIAL ACCOUNTING
 INTRODUCTION TO ACCOUNTING
Accounting can be defined as a process of reporting, recording, interpreting and summarizing economic data.
The introduction of accounting helps the decision-makers of a company to make effective choices, by
providing information on the financial status of the business.
Definition of Accounting:
American Institute of Certified Public Accountants (AICPA): “The art of recording, classifying and summarizing
in a significant manner and in terms of money transactions and events, which are in part at least, of a financial
character and interpreting the results thereof.”
Thus, accounting is an art of identifying, recording, summarizing and interpreting business transactions of
financial nature. Hence accounting is the Language of Business.
 Accounting Principles
Accounting principle refers to common rules or guidelines for accounting financial transactions and preparing
financial statements. Accounting principles are the foundational guidelines for recording and preparing
financial statements.
The accounting principles are commonly referred to as ‘Generally Accepted Accounting Principles (GAAP).

I. Accounting Concepts

1. Money measurement principle: In accounting, all the business transactions are measured in terms of
money as a common unit of measurement. Since money is the common unit of measurement, as an
accounting principle, you are allowed to record only those transactions or events which can be
measured or expressed in terms of money.
 2. Business entity concept: This concept of accounting principle views business and business owner
separately as far as their financial transactions are concerned. Legally, your business can exist
independently of you and your firm can sue or can be sued in its own name.
3. Going-concern principle: This principle applies that all the transactions are recorded on the
assumption that the business will remain in operation for a long time and will be able to carry out its
obligations as per the plan.
4. Cost principle: This accounting principle sets the rules for accounting the fixed assets. According to the
cost principle, all the fixed assets are accounted at the original price i.e. the price paid to procure it and
subsequently, every year, value is depreciated based on usage, wear and tear, accidents, the passage
of time etc.
5. Dual-aspect concept: This accounting principle states that for every debit, corresponding credit is
made. This is the foundation on which the accounting system is carried out. This is important for you to
understand in detail. Read our article ‘Accounting – The Language of Business’ to know more about it.
6. Accounting year concept: This implies that each business chooses a specific time period to complete
the accounting cycle and financial reporting. In short, this principle talks about the periodicity of
accounting. The period can be monthly, quarterly or annually.
7. Matching concept: The concept stress on the Accounting principle that if any revenue is recognized
then expenses related to earn that revenue should also be recognized. This gives a true picture of
profit earned during the accounting period.
8. Realization concept: The accounting concept implies that revenue is reported when it’s earned,
regardless of when payment is received. Anything paid or received is not considered as profit until the
goods or services have been delivered to the buyer.

II. Accounting conventions

After accounting concepts, the next important part of accounting principles is accounting conventions.
Accounting conventions refers to a set of customs and traditions that guide the business in preparing the
accounting statement. These conventions are derived by usage and practice.
The following are the 4 accounting conventions:
1. Consistency: consistency is a fundamental assumption that states accounting practices and policies are
consistent from one period to another.
2. Full disclosure: This convention as part of accounting principles implies that the accounts should be
prepared in a manner that all material information is clearly disclosed.
3. Conservatism: This convention takes into consideration all prospective losses and leaves all
prospective profit until they are earned.
4. Materiality: In the materiality principle, all the items having a significant economic effect on the
business should be disclosed in the financial statement. All unimportant items are either ignored or
merged with other items.
  Fundamentals of Accounting
 Assets- The economic value of an item which is possessed by the enterprise is referred to as Assets. To
put it in other words, assets are those items that can be transformed into cash or that generates
income for the enterprise shortly. It is useful in paying any expenses of the business entity or debt.
 Liabilities- The economic value of an obligation or debt that is payable by the enterprise to other
establishment or individual is referred to as liability. To put it in other words, liabilities are the
obligations that are rising out of previous transactions, which is payable by the enterprise, through the
assets possessed by the enterprise.
 Owner’s Equity- Owner’s equity is one of the 3 vital segments of a sole proprietorship’s balance sheet
and one of the main aspects of the accounting equation: Assets = Liabilities + Owner’s Equity. It depicts
the owner’s investment in the trade minus the owner’s withdrawal from the trade + the net income
since the business concern commenced.
 Characteristics of Accounting:
The following attributes or characteristics can be drawn from the definition of Accounting:
(1) Identifying financial transactions and events
 Accounting records only those transactions and events which are of financial nature.
 So, first of all, such transactions and events are identified.
(2) Measuring the transactions
 Accounting measures the transactions and events in terms of money which are considered as a
common unit.
(3) Recording of transactions
 Accounting involves recording the financial transactions inappropriate book of accounts such as Journal
or Subsidiary Books.
(4) Classifying the transactions
 Transactions recorded in the books of original entry – Journal or Subsidiary books are classified and
grouped according to nature and posted in separate accounts known as ‘Ledger Accounts’.
(5) Summarizing the transactions
 It involves presenting the classified data in a manner and in the form of statements, which are
understandable by the users.
 It includes Trial balance, Trading Account, Profit and Loss Account and Balance Sheet.
(6) Analyzing and interpreting financial data
 Results of the business are analyzed and interpreted so that users of financial statements can make a
meaningful and sound judgment.
(7) Communicating the financial data or reports to the users
  Communicating the financial data to the users on time is the final step of Accounting so that they can
make appropriate decisions.

 Different Branches of Accounting

The following are the main branches of accounting:
(a) Financial accounting:
Financial Accounting is that branch of accounting which involves identifying, measuring, recording, classifying,
summarising the business transactions, i.e. it involves the steps from Identifying, recording of transactions to
Summarisation, and communicating the financial data.
(b) Cost accounting:
Cost Accounting is that branch of accounting which is concerned with the process of ascertaining and
controlling the cost of products or services.
(c) Management accounting
Management accounting refers to that branch of accounting which is concerned with presenting the
accounting information in such a way that helps the management in planning and controlling the operations of
a business and in decision making.
 Procedure for accounting (or) Steps of the Accounting Process:
Accounting process is the process of collecting, recording, classifying, summarizing and communicating
financial information to the users for judgement and decision-making. The following steps are involved in
accounting process:
(1) Identification: It is the process of identifying and analyzing business transactions.
(2) Recording: For recording, we use ‘Journal’ or Subsidiary Books.
(3) Classification of transactions: Classification means segregation of transactions on the basis of nature and
posting them in a format known as Ledger Account.
(4) Summarization: It includes preparation of Trial Balance and Financial Statements.
(5) Analysis & Interpretation: It includes an assessment of the financial reports and making some meaningful
conclusions.
(6) Communicating information to the users: It includes sharing the financial reports and interprets results to
the users of financial statements.

 ACCOUNTING PROCESS/CYCLE
Accounting process involves a sequence of activities which are repeated in every accounting period. So it is
known as accounting cycle.
  Advantages of Accounting
The following are the main advantages of accounting:
1. Provide information about financial performance
 Accounting provides factual information about financial performance during a given period of time
 Like, profit earned or loss incurred over a period and financial position at a particular point of time.
2. Provide assistance to management
 Accounting helps management in business planning, decision making and in exercising control.
 For this, it provides financial information in the form of reports.
3. Facilitates comparative study
 By keeping systematic records and preparation of reports at regular intervals, accounting helps in
making a comparison.
4. Helps in settlement of tax liability
 Systematic accounting records help in settlement of various tax liabilities. Such as – Income Tax, GST,
etc.
5. Helpful in raising loan
 Banks and Financial Institutions grant a loan to the firm on the basis of appraisal of the financial
statement of the firm.
6. Helpful in decision making
 Accounting provides useful information to the management for taking decisions.

 BOOK-KEEPING AND ACCOUNTING

Book – Keeping: Book – Keeping involves the chronological recording of financial transactions in a set of
books in a systematic manner.
Accounting: Accounting is concerned with the maintenance of accounts giving stress to the design of the
system of records, the preparation of reports based on the recorded date and the interpretation of the reports
 Define the term Bookkeeping, Accounting and Accountancy.

Bookkeeping Book Keeping is a part of Accounting and it is the process of identifying, measuring, recording
and classifying the financial transactions.

Accounting Accounting is a wider concept and actually, it begins where Book Keeping ends. It includes
summarizing, interpreting and communicating the financial data to the users of financial
statements.

Accountancy Accountancy refers to systematic knowledge of the principles and the techniques which are
applied in Accounting.

What is the Difference Between Bookkeeping and Accounting?

Parameters Bookkeeping Accounting

Scope Bookkeeping involves identifying, In addition to bookkeeping, Accounting also includes

measuring, recording & classifying summarizing, interpreting and communicating the
financial transactions in the ledger financial data to the users of financial statements.
accounts.

Objective The main aim is to maintain systematic The main aim is to ascertain the profitability and
records of financial transactions. financial position of the business.

Stage It is a primary stage of accounting It is a second stage and begins where book-keeping
ends.

Nature of This job is in routine and repetitive in This job is analytical in nature.
job nature.

Level of Bookkeeping does not require special It requires specialized skill to analyze, so it is
skills skills. It is performed by Junior Staff. performed by senior staff.
 Explain the System of Accounting
System of accounting
 There are following two systems of recording transactions in the books of accounts:
 Double Entry System
 Single Entry System
1. Double-entry system
 The double entry system is based on the Dual Aspect Principle.
 Every transaction has two aspects, ‘a Debit’ and ‘a credit’ of an equal amount.
 This system of accounting recognizes and records both aspects of the transaction.
2. Single entry system
 Under this system, both aspects are not recorded for all the transactions.
 Either only one aspect is recorded or both the aspects are not recorded for all the transactions.

 Advantages of the Double-entry System of Accounting

Following are the main advantages of the double-entry system of accounting:
1. Scientific system
 As compared to the other systems, this system of recording transactions is more scientific and useful to
achieve the objective of accounting.
2. A complete record of the transaction
 Since both the aspects of transactions are considered there is a complete recording of each and every
transaction.
 Using these records, we are able to compute profit or loss easily.
3. Checks arithmetical accuracy of accounts
 Under this system, by preparing a Trial Balance we are able to check the arithmetical accuracy of the
records.
4. Determination of profit/loss and depiction of financial position
 Under this system by preparing ‘Profit & Loss A/c’ we get to know about the profit earned or loss
incurred.
  By preparing the ‘Balance Sheet’ the financial position of the business can be ascertained, i.e. position
of assets and liabilities is depicted.
5. Helpful in decision making
 Administration and management are able to take decisions on the basis of factual information under
the double-entry system of accounting.

 Disadvantages of double entry system of accounting:

1. Not supported by a small business:
In small businesses, businessman maintains simple accounting books such as revenue and expenses and after
the end of the month or year, he/she calculate profit and loss based on expense and revenue voucher in daily
transactions. On the other hand, double entry accounting system needs to maintain many books which are not
suitable for small business.
2. Costly maintenance:
Though double entry system maintains separate books of accounts for every transaction that’s why the
employer wants to hire a bookkeeper or accountant for track these books for preparing the financial
statement.
3. Complicated system:
In this system of accounts maintenance of owner of the company should be knowledgeable about accounting
or bookkeeping. If the owner of the business does not know about double entry system then profit and loss
accounts are not properly calculated. In this case business owner hire an accountant and the process will be
complicated as well.
4. Difficult for corrective actions:
Generally, most of the time we made the transactions in the last day of accounting year and it will effect for
next accounting year as well but the transactions are recorded or adjusted in final accounts during the
accounting years. These types of transactions are more difficult to adjust if you could not track the
transactions.
5. Failure to disclose some error:
In double entry system we can prove our accounts books of the transaction in trial balance but sometimes the
whole transactions were deleted or may be transaction omitted this kind of error detects time-consuming in
double entry system.

 ELEMENTS OF FINANCIAL STATEMENTS

Entity: - An entity is an economic unit which performs economic activities. Ex: Tata Steel, H.M.T. Ltd.
Business transaction: - A transaction is an exchange of goods or services for cash or credit. It involves transfer
of money or money’s worth that brings about change in the financial position of a business.
Trade debtors: - Trade debtors are the persons from whom the amount are due for goods sold or services
rendered on credit basis.
Trade creditors: - Trade creditors are those to whom the amounts are due for goods purchased or services
rendered on credit basis.
Goods: - Goods are those with which the business firm trades. They are meant for resale.
Assets: - Assets are those which yield future economic benefits.
Current Assets: - current assets are those assets which are held in cash or which are likely to be converted into
cash during the financial year.
Fixed Assets: - Fixed assets are those assets which are not held for resale in normal course of business.
Tangible Fixed Assets: - The assets that can be visible, seen and touched are called as “Tangible Fixed Assets”.
Intangible fixed assets: - The assets that cannot be visible, seen and touched are called as “Intangible Fixed
Assets”.
Liabilities: - The financial obligations of the firm are called liabilities.
Current Liabilities: - The liabilities which fall due in a short period are known as “Current Liabilities”.
Long term liabilities: - The liabilities which fall due for payment in a relatively short period are called as long
term liabilities.
Purchases: - The total amount of goods obtained by an enterprise for resale either for cash or credit.
Sales: - The amount for which goods are sold or services are rendered either for cash or credit is called as
sales.
Expenditure: - The amount incurred in the process of acquiring goods, assets or services.
Revenue: - The amount charged for the goods sold or services rendered by an enterprise.
Capital: Capital is the amount invested by the owner/proprietor in the firm. It is a liability to the firm.
Drawings: cash or goods withdrawn by the proprietor from the Business for his personal or Household is
termed to as “drawing”.
Reserve: An amount set aside out of profits or other surplus and designed to meet contingencies.
Account: A summarized statements of transactions relating to a particular person, thing, Expense or income.
Discount: There are two types of discounts.
 cash discount: An allowable made to encourage frame payment or before the expiration of the
period allowed for credit.
 Trade discount: A deduction from the gross or catalogue price allowed to traders who buys them
for resale.

 CLASSIFICATION OF ACCOUNTS
Three classes of accounts are maintained for recording all business transactions. They are:
1. Personal accounts
2. Real accounts
3. Nominal accounts
1. Personal Accounts
These accounts types are related to persons. These persons may be natural persons like Raj’s account,
Rajesh’s account, Ramesh’s account, Suresh’s account, etc.
These persons can also be artificial persons like partnership firms, companies, bodies corporate,
an association of persons, etc.
For example – Rajesh and Suresh trading Co., Charitable trusts, XYZ Bank Ltd, C company Ltd, etc.
There can be personal representative accounts as well.
For example – In the case of Salary, when it is payable to employees, it is known how much amount is payable
to each of the employee. But collectively it is called as ‘Salary payable A/c’.
2. Real Accounts
These account types are related to assets or properties. They are further classified as Tangible real account
and Intangible real accounts.
Tangible Real Accounts
These include assets that have a physical existence and can be touched.
For example – Building A/c, cash A/c, stationery A/c, inventory A/c, etc.
Intangible Real Accounts
These assets do not have any physical existence and cannot be touched. However, these can be measured in
terms of money and have value.
For Example – Goodwill, Patent, Copyright, Trademark, etc.
3. Nominal Accounts
These accounts types are related to income or gains and expenses or losses. For example: – Rent A/c,
commission received A/c, salary A/c, wages A/c, conveyance A/c, etc.

 Rules for Real Account

Debit what comes into the business.
Credit what goes out of business.
For Example – Furniture purchased by an entity in cash. Debit furniture A/c and credit cash A/c.
 Rule for personal Account
Debit the receiver.
Credit the Giver.
For Example – Goods sold to Suresh. In this transaction, Suresh is a personal account as being a natural
person. His account will be debited in the entry as the receiver.
 Rules for Nominal account
Debit all the expenses and losses of the business.
Credit the incomes and gains of business.
For Example – Salary paid to employees of the entity. Salary A/c will be debited when the expenses are
incurred. Whereas, when an entity receives any interest, discount, etc. these are credited whenever these are
received by the entity.

 Identification of the accounts involved in each transaction:

1. Consider that the transaction is committed by the firm and it is being recorded in the books of the firm.
2. see whether it is cash transaction or credit transaction.
a. A transaction that refers to a person and doesn’t refer to the term “cash “is called credit transaction
b. A transaction which is not credit transaction is called cash transaction
3. If the transaction is credit one, first find whether the „ personal A/C‟ is to be debited or credited and
next find which account is to be credited or debited.
4. If it is a cash transaction, first find whether the „ cash A/C‟ is to be debited or credited and next find which
account is to be credited or debited.
5. Debit means entering the amount on the left side of an account.
6. Credit means entering the amount on the right side of account.
  JOURNAL
The first step in accounting therefore is the record of all the transactions in the books of original entry viz.,
Journal and then posting into ledges.
The word Journal is derived from the Latin word „journal‟ which means a day. Therefore, journal means a
„day Book‟ in day-to-day business transactions are recorded in chronological order.
Journal is treated as the book of original entry or first entry or prime entry. All the business transactions are
recorded in this book before they are posted in the ledges.
The journal is a complete and chronological (in order of dates) record of business transactions. It is recorded in
a systematic manner.
The process of recording a transaction in the journal is called “JOURNALISING”. The entries made in the book
are called “Journal Entries”.
PROFORMA OF JOURNAL ENTRIES

DATE PARTICULARS LEDGER DEBIT AMOUNT (RS) CREDIT AMOUNT

FOLIO (RS)

-------------A/C Dr xxx

To ------------A/C xxx

(Being----------------------------)

 Accounting Journal Entries Practice

PROBLEM: 1
Enter the following transactions in the Journal of Rachit 2021: -
April 1 Rachit started business with cash 90,000 and Machinery 40,000.
April 4 Goods purchased for cash 40,000.
April 5 Goods purchased on credit from –Jay & Company 60, Vijay & Company 50,000.
April 10 Furniture Purchased for cash 20,000.
April 12 Goods sold for Cash 70,000
April 15 Goods sold on Credit to sanjoy 95,000
April 16 Rent paid 5,000
April 20 Cash paid to Jay & Company 45,000.
April 25 Cash Received from sanjoy 65,000.
April 30 Salary paid 15,000, Wages paid 10,000.
JOURNAL ENTRIES IN THE BOOKS OF RACHIT

PROBLEM:2
PROBLEM: 3
Jeyaseeli is a sole proprietor having a provisions store. Following are the transactions during the month of January, 2018.
Journalise them.
Jan. 1 Commenced business with cash - Rs. 80,000
2 Deposited cash with bank - Rs. 40,000
3 Purchased goods by paying cash - Rs. 5,000
4 Purchased goods from Lipton & Co. on credit – Rs. 10,000
5 Sold goods to Joy and received cash – Rs. 11,000
6 Paid salaries by cash – Rs. 5,000
7 Paid Lipton & Co. by cheque for the purchases made on 4th Jan. Rs. 10,000
8 Bought furniture by cash – Rs. 4,000
9 Paid electricity charges by cash – Rs. 1,000
10 Bank paid insurance premium on furniture as per standing instructions – Rs. 300
 Solution

PROBLEM: 4

Deri is a sole trader dealing in automobiles. From the following transactions, pass journal entries for the month of
January, 2018.

Jan 1 Commenced business with cash 1,00,000, with goods 2,00,000, with buildings 5,00,000
2 Purchased goods from A and Co. on credit 3,00,000
3 Cash deposited into bank 80,000
4 Purchased goods from B and Co. and payment made through credit card 5,000
5 Paid A and Co. through RTGS 3,00,000
6 Sold goods to C and Co. and cheque received 50,000
7 Deposited the cheque received from C and Co. with the bank 50,000
8 Purchased goods from Z & Co. and paid through debit card 12,000
9 Stationery purchased for and paid through net banking 6,000
10 Income tax of Deri is paid by cheque 10,000

Solution
PROBLEM: 5
From the following transactions in the book of Kapil, pass journal entries for the month of June, 2018.
Jan 1 Started business with cash 45,000
1 Paid into Bank 25,000
2 Purchased goods for cash 15,000
3 Purchase of furniture and payment by cheque 5000
5 Sold goods for cash 8,500
8 Sold goods to Arvind 4,000
10 Purchased goods from Amrit 7,000
12 Goods returned to Amrit 1,000
15 Goods returned by Arvind 200
18 Cash received from Arvind 3,760 and discount allowed to him 40
25 Paid telephone charges 400
30 Paid for Salary 2500

Solution: In the book of Kapil, the Journal entries

 Date Particulars L.F Debit (Rs) Credit (Rs)
Cash A/c Dr 45,000
June-1 To Capital A/c 45,000
(Being Business commenced)
Bank A/c Dr 25,000
June-1 To Cash A/c 25,000
(Being cash deposited in Bank)
Purchases A/c Dr 15,000
June-2 To Cash A/c 15,000
(Being goods purchased by Cash)
Furniture A/c Dr 5,000
June-3 To Bank A/c 5,000
(Being furniture purchased)
Cash A/c Dr 8,500
June-5 To sales A/c 8,500
(Being goods sold for cash)
Arvind A/c Dr 4,000
June-8 To Sales A/c 4,000
(Being goods sold on credit)
Purchase A/c Dr 7,000
June-10 To Amrit’s A/c 7,000
(Being goods purchased on credit)
Cash A/c Dr 1,000
June-12 To purchase returns A/c 1,000
(Being goods returned)
Sales return’s A/c Dr 200
June-15 To Cash A/c 200
(Being goods returned)
Cash A/c Dr 3,760
June-18 Discount A/c Dr 40
To Arvind’s A/c 3,800
(Being cash received & allowed discount)
Telephone charges A/c Dr 400
June-25 To Cash A/c 400
(Being telephone bill paid)
Salaries A/c Dr 2,500
June-30 To Cash A/c 2,500
(Being salaries paid)

PROBLEM:6
FROM PREVIOUS QUESTION PAPER

Record Journal entries for the following

1- Business started with cash 8,000 and plant & machinery 3,000.
2- Stock purchase for sale (cash purchase = 3,000 credit purchase = 5,000)
3- Wages paid 1,20,000 (including 20,000 relating to a future year)
4- Salaries paid 2,00,000 but due 1,10,000.
5- Sales made for cash 6,00,000 and on credit 8,00,000.
6- Depreciation 10 % on Plant & Machinery.
 7- Goods costing 20,000 destroyed by fire.
8- Payment made to creditors to the value of 2,00,000 at 10 % discount.

Solution: Journal entries for the given particulars

Date Particulars L.F Debit (Rs) Credit(Rs)
Cash A/c Dr 8,000
Plant & Machinery A/c Dr 3,000
To Capital A/c 11,000
(Being Business commenced and purchase of plant &
machinery)
Purchase A/c Dr 8,000
To Cash A/c 3,000
To Creditor’s A/c 5,000
(Being purchase’s made by cash)
Wages A/c Dr 1,20,000
Prepaid wages A/c Dr 20,000
To Cash A/c 1,40,000
(Being wages paid)
Salaries A/c Dr 2,00,000
Outstanding Salaries, A/c Dr 1,10,000
To cash A/c 3,10,000
(Being salaries paid)
Cash A/c Dr 6,00,000
Debtor’s A/c Dr 8,00,000
To Sales A/c 14,00,000
(Being Sales made)
Depreciation A/c Dr 300
To Plant and machinery A/c 300
(Being depreciation got on plant & machinery)
Loss by fire A/c Dr 20,000
To stock A/c 20,000
(Being goods destroyed by fire)
Creditor’s A/c Dr 2,00,000
To Cash A/c 1,80,000
To Discount Received A/c 20,000
(Being payment made to creditor’s)

 LEDGER

All the transactions in a journal are recorded in a chronological order. After a certain period, if we want to know whether
a particular account is showing a debit or credit balance it becomes very difficult. So, the ledger is designed to
accommodate the various accounts maintained the trader. It contains the final or permanent record of all the
transactions in duly classified form.
“A ledger is a book which contains various accounts.” The process of transferring entries from journal to ledger is called
“POSTING”.
Posting is the process of entering in the ledger the entries given in the journal. Posting into ledger is done periodically,
may be weekly or fortnightly as per the convenience of the business. The following are the guidelines for posting
transactions in the ledger.
1. After the completion of Journal entries only posting is to be made in the ledger.
2. For each item in the Journal a separate account is to be opened. Further, for each new item a new
account is to be opened.
3. Depending upon the number of transactions space for each account is to be determined in the ledger.
4. For each account there must be a name. This should be written in the top of the table. At the end of the
name, the word “Account” is to be added.
5. The debit side of the Journal entry is to be posted on the debit side of the account, by starting with
“TO”.
6. The credit side of the Journal entry is to be posted on the debit side of the account, by starting with
“BY”.

 Proforma for ledger:

LEDGER BOOK-------------- Account
Dr Cr

Date Particulars JF Amount Date Particulars JF amount

To ---------- xxxx By ----------- xxxx

 Problem: 1
Enter the following transactions in journal and post them into ledger:

2017 . Jan-1 Mr. Rameh started business with cash

Rs.100,000
Jan-2 He purchased furniture for Rs.20,000
Jan-3 He purchased goods for Rs.60,000
Jan-4 He sold goods for cash Rs.80,000
Jan-5 He paid salaries Rs.10,000

Solution: Journal Entries

Date Particular L.F Amount Amount

2017 Cash A/C Dr. 100,000
Jan. 1 To Capital A/c 100,000
(Being business started)
Furniture A/C Dr.
To Cash A/C
(Being furniture purchased for cash)
 2 Purchases A/C Dr. 20,000 20,000
To Cash A/C
(Goods purchased for cash)
3 Cash A/C Dr. 60,000 60,000
To Sales A/C
(Sold goods for cash)
4 Salaries A/C Dr. 80,000 80,000
To Cash A/C
(Salaries paid)
5 10,000 10,000
Ledger

Cash Account
Date Particular J.F Debit Date Particulars J.F Credit
Amount Amount
2017 2017
Jan.1 To Capital A/C 100,000 Jan.2 By Furniture A/C 20,000
Jan.4 To Sales A/C 80,000 Jan.3 By Purchases A/C 60,000
Jan.5 By Salaries A/C 10,000
Jan.31 By Balance c/d 90,000
180,000 180,000

90,000
Feb.1 To Balance b/d

Capital Account
Date Particular J.F Debit Date Particulars J.F Credit
Amount Amount
2017 2017
Jan.31 To Balance c/d 100,000 Jan.1 By Cash A/C 100,000
100,000 100,000
Feb.1 By Balance b/d 100,000

Furniture Account
Date Particular J.F Debit Date Particulars J.F Credit
Amount Amount
2017 2017
Jan.2 To Cash A/C 20,000 Jan.31 By Balance c/d 20,000
20,000 20,000
Feb.1 To Balance b/d 20,000
 Purchases Account
Date Particular J.F Debit Date Particulars J.F Credit
Amount Amount
2017 2017
Jan.3 To Cash A/C 60,000 Jan.31 By Balance c/d 60,000
60,000 60,000
Feb.1 To Balance b/d 60,000

Sales Account
Date Particular J.F Debit Date Particulars J.F Credit
Amount Amount
2017 2017
Jan.31 To Balance c/d 80,000 Jan.4 By Cash A/C 80,000
80,000 80,000
Feb.1 To Balance b/d 80,000

Salaries Account
Date Particular J.F Debit Date Particulars J.F Credit
Amount Amount
2017 2017
Jan.5 To Cash A/C 10,000 Jan.31 By Balance c/d 10,000
10,000 10,000
Feb.1 To Balance b/d 10,000

 Problem: 2
Journalise the following transactions and post them into ledger balance the Accounts on 31st January 2010

Jan-1 Mr. Ravi started business with a capital Rs.10,000

Jan-3 He purchased goods from Mohan Rs.2,000
Jan-8 He paid cash to Mohan Rs.1000
Jan-12 He sold goods to Suresh Rs.2000
Jan-15 He received cash from Suresh Rs.3000
Jan-20 He further purchased goods from Mohan Rs.2000
Jan-22 He paid cash to Mohan Rs. 1000
Jan-26 He further sold goods to Suresh Rs. 2000
Jan-28 He received cash from Suresh Rs.1000

Solution: Journal Entries

 Date Particular L.F Amount Amount
2010 Cash A/C Dr. 10,000
Jan. 1 To Capital A/c 10,000
(Being business commenced)
Purchase A/C Dr. 2,000
Jan.3 To Mohan’s A/C 2,000
(Being purchase of goods on credit)
Mohan’s A/C Dr. 1,000
Jan.8 To Cash A/C 1,000
(Being cash paid to Mohan)
Suresh A/C Dr. 2,000
Jan.1 To Sales A/C 2,000
2 (Being goods sold to Suresh)
Cash A/C Dr.
To Suresh A/C 3,000
Jan.1 (Being cash received from Suresh) 3,000
5
Purchase A/C Dr. 2,000
Jan.20 To Mohan’s A/C 2,000
(Being goods purchased from Mohan)
Mohan’s A/C Dr. 1,000
Jan.22 To Cash A/C 1,000
(Being cash paid to Mohan)
Suresh A/C Dr. 2,000
Jan.26 To Sales A/C 2,000
(Being goods sold to Suresh)
Cash A/C Dr. 1,000
Jan.28 To Suresh A/C 1,000
(Being cash received from Suresh)

Ledger

Cash Account
Date Particular J.F Debit Date Particulars J.F Credit
Amount Amount
2010 2017
Jan.1 To Capital A/C 10,000 Jan.8 By Mohan’s A/C 1,000
Jan.15 To Suresh A/C 3,000 Jan.22 By Mohan’s A/C 1,000
Jan.28 To Suresh A/C 1,000
Jan.31 By Balance c/d 12,000
14,000 14,000

12,000
Feb.1 To Balance b/d

Capital Account
Date Particular J.F Debit Date Particulars J.F Credit
Amount Amount
2010 2010
Jan.31 To Balance c/d 10,000 Jan.1 By Cash A/C 10,000
10,000 10,000
Feb.1 By Balance b/d 10,000

Mohan Account
Date Particular J.F Debit Date Particulars J.F Credit
Amount Amount
2010 2010
Jan.8 To Cash A/C 1,000 Jan.3 By purchase A/C 2,000
Jan.22 To Cash A/C 1,000 Jan.20 By purchase A/C 2,000
Jan.31 To Balance c/d 2,000

4,000 4,000
Feb.1 By Balance b/d 2,000

Purchases Account
Date Particular J.F Debit Date Particulars J.F Credit
Amount Amount
2010 2010
Jan.3 To Mohan’s A/C 2,000 Jan.31 By Balance c/d 4,000
Jan.20 To Mohan’s A/C 2,000

4,000 4,000
Feb.1 To Balance b/d 4,000
 Sales Account
Date Particular J.F Debit Date Particulars J.F Credit
Amount Amount
2010 2010
Jan.31 To Balance c/d 4,000 Jan.12 By Suresh A/C 2,000
Jan.26 By Suresh A/C 2,000
4,000 4,000
Feb.1 To Balance b/d 4,000

Suresh Account
Date Particular J.F Debit Date Particulars J.F Credit
Amount Amount
2010 2010
Jan.12 To Sales A/C 2,000 Jan.15 By Cash A/C 3,000
Jan.26 To Sales A/C 2,000 Jan.28 By Cash A/C 1,000

4,000 4,000

 TRIAL BALANCE
According to double entry system every debit has corresponding credit. All the debit balances are equal to
credit balances. If they don’t agree, it is understood that some mistakes are committed somewhere. Trial
Balance is a statement in which debit and credit balances of all ledger accounts are shown to list the
arithmetical accuracy of the books of accounts.

Features of trial balance

 It is not account.
 It contains debit and credit balances of accounts.
 It helps in preparation of final accounts.
 Both debit and credit side of a trial balances are always equal.
Proforma of the trial balance

Particulars L.F Debit Credit

 Amount(Rs Amount(Rs)
)
________ xxxx xxxx

xxxx xxxx
Total

Trial Balance as on December 31st, Year

Debit balances Rs Credit balances Rs
Debtors xxxx Creditors xxxx
All assets xxxx All liabilities xxxx
All expenses xxxx All incomes and gains xxxx
All losses xxxx Profits account xxxx
Purchases xxxx Loan account xxxx
Sales returns xxxx Bank over draft xxxx
Drawings xxxx Sales xxxx
stock xxxx Purchase returns xxxx
Bills receivables xxxx Provision for doubtful debts xxxx
Prepaid expenses xxxx Provision for discount on debtors xxxx
Incomes receivables xxxx All reserves and surpluses xxxx
All intangible assets xxxx Bills payables xxxx
Outstanding expenses xxxx
Incomes received in advance xxxx
Capital xxxx
xxxx xxxx

 Rules for Trial Balance

Debit Balance Side – All Expenses/losses/Assets

Credit Balance Side – All Incomes/Gains/ Liabilities

Problem: 1

Make a trial balance from the below balances of accounts.

Particulars Rs Particulars Rs
Capital 100000 Machinery 30000
Stock 16000 Wages 50000
Carriage inward 500 Salaries 5000
Factory rent 2400 Repairs 400
Fuel and power 2500 Buildings 40000
Sundry debtors 20000 Sales 203600
 Purchases 122000 Creditors 12500
Returns outwards 2000 Returns inwards 3600
Drawings 2000 Discount allowed 750
Discount received 250 Office expenses 1000
Manufacturing expenses 600 Bills payable 3000
Bills receivable 5000 Cash in hand 2400
Cash at bank 15400 Office rent 1800

Problem: 2
Particulars Rs Particulars Rs
Capital 100000 Machinery 30000
Stock 16000 Wages 50000
Carriage inward 500 Salaries 5000
Factory rent 2400 Repairs 400
Fuel and power 2500 Buildings 40000
Sundry debtors 20000 Sales 203600
Purchases 122000 Creditors 12500
Returns outwards 2000 Returns inwards 3600
Drawings 2000 Discount allowed 750
 Discount received 250 Office expenses 1000
Manufacturing expenses 600 Bills payable 3000
Bills receivable 5000 Cash in hand 2400
Cash at bank 15400 Office rent 1800

Solution:
Trial Balance

Particulars L.F Debit Credit

Amount (Rs) Amount (Rs)
Capital --------- 4,250
Drawings 710 --------
Plant & Machinery 950 ---------
Furniture 1460 --------
Purchases 10,062 --------
Sales ---------- 11,906
Sales returned 210 ---------
Purchase returns ---------- 291
General expenses 440 --------
Rent 120 --------
Rates 200 --------
Interest received -------- 80
Bank overdraft -------- 240
Bad Debts 172 --------
Debtors 4,068 --------
-------- 2,000
Creditors
480 -------
Cash in Hand
-------- 105
Dividend received

Total 18,872 18,872

Problem: 3

The following Balances are extracted from the book of Mr.Kamalakar.

Prepare Trial Balance as on 30/6/2014
Particulars Rs Particulars Rs
Capital 4,70,200 Furniture 11,000
Machinery 1,58,000 Purchases 1,65,000
Cash in Hand 6000
Sundry Debtors 48000 Return to Creditors 10,000
Building 3,20,000 Discount earned 1,100
Repairs 5,300 Salaries 70,600
Stock on commencement 33,000 Loan from Mohan 51,000
Insurance Premium 3,300 Discount Allowed 650
Sundry creditors 26,000 Drawings 5,000
Sales 2,80,000 Bill’s Receivable 8,600
Returns from customers 10,000 Bad Debts 1,350
Commission paid 750 Bill’s payables 26,000
Telephone charges 6,450 Carriage Inwards 2,000
Rent and Taxes 6,300 Carriage Outwards 3,000

Solution:

Trial Balance of Mr. Kamalakar as on

30/6/2014

Particulars L.F Debit Credit

Amount (Rs) Amount (Rs)
Capital --------- 4,70,200
Machinery 1,58,000 --------
Cash in Hand 6,000 ---------
Sundry Debtors 48,000 --------
Building 3,20,00 --------
Repairs 5,300 -------
Stock on commencement 33,000 ---------
Insurance Premium 3,300 -------
Sundry creditors -------- 26,000
Sales -------- 2,80,000
Returns from customers 10,000 --------
Commission paid 750 --------
Telephone charges 6,450 --------
Rent and Taxes 6,300 --------
Furniture 11,000 --------
1,65,000 --------
Purchases
-------- 10,000
Return to Creditors
-------- 1,100
Discount earned
Salaries
70,600 ---------
Loan from Mohan
-------- 51,000
Discount Allowed 650 ----------
Drawings 5,000 ----------
Bill’s Receivable 8,600 ---------
Bad Debts 1,350 ---------
Bill’s payables -------- 26,000
Carriage Inwards 2,000 ---------
Carriage Outwards 3,000 ---------

Total
8,64,300 8,64,300
  FINAL ACCOUNTS

In every business, the business man is interested in knowing whether the business has resulted in profit or loss and
what the financial position of the business is at a given time. In brief, he wants to know (i)The profitability of the
business and (ii) The soundness of the business.

The trader can ascertain this by preparing the final accounts. The final accounts are prepared from the trial balance.
Hence the trial balance is said to be the link between the ledger accounts and the final accounts. The final accounts
of a firm can be divided into two stages. The first stage is preparing the trading and profit and loss account and the
second stage is preparing the balance sheet. Final account preparation involves preparing a set of accounts and
statements at the end of an accounting year.

The final account consists of the following:

1. Trading and Profit and Loss Account

2. Balance Sheet

The preparation of a final accounting is the last stage of the accounting cycle. It determines the financial position of
the business. Under this, it is compulsory to make a trading account, the profit and loss account, and balance sheet.

The term "final accounts" includes the trading account, the profit and loss account, and the balance sheet.

Final accounts gives an idea about the profitability and financial position of a business to its management, owners,
and other interested parties.

 TRADING ACCOUNT

A trading account shows the results of the buying and selling of goods. This sheet is prepared to demonstrate the
difference between the selling price and the cost price. The trading account is prepared to show the trading results
of the business, e.g. gross profit earned or gross loss sustained by the business. It records the direct expenses of a
business firm.

If the total of the credit side is more, it will be the Gross profit. And if the debit side is more, it will be Gross loss.

Gross profit = Net sales – cost of goods sold According to J. R. Batlibboi,

"The Trading Account shows the result of buying and selling goods. In preparing this account, the general
establishment charges are ignored and only the transactions in goods are included."

 PROFIT AND LOSS ACCOUNT

This account is prepared to ascertain the net profit/loss and expenses of a business during an accounting year. It
records the indirect expenses of a business firm, like rent, salaries, and advertising expenses. Profit and loss a/c
includes expenses and losses as well as income and gains, which have occurred in business other than the
production of goods and services.

If the total of the credit side is more, it will be the net profit. And if the debit side is more, it will be net loss.

 BALANCE SHEET
A balance sheet may be considered as a statement of the financial position of the concern firm at a given date. The
financial position of a business is found by tabulating its assets and liabilities on a particular date. The excess of
assets over liabilities represents the capital sunk into the business and reflects the financial soundness of a
company.

 PROCESS OF PREPARING FINAL ACCOUNTS

PROCEDURE FOR PREPARING TRADING ACCOUNT

1. Show opening stock and net purchases (purchases less purchase returns) on the debit side.
2. Show net sales (sales – sales returns) and the closing stock given in the adjustments on the credit side.
3. Show all the direct expenses with adjustments on the debit side.
4. Balance the account and carry forward the balance to P/L A/C (profit and Loss account)
PROCEDURE FOR PREPARING PROFIT AND LOSS ACCOUNT
1. Show all the remaining expenses with adjustments on the debit side.
2. Show all the remaining incomes with adjustments on the credit side
3. See whether all adjustments are taken once in any of the Trading Account and Profit & Loss Account
4. Balance the P/L A/C and transfer the balance to capital in B/S (Balance sheet)
PROCEDURE FOR PREPARING BALANCE SHEET
1. Show all the assets with adjustments on the assets side.
2. Show all the liabilities with adjustments on the liabilities side.
3. See whether all items of trial balance are taken once and whether all adjustments are taken twice.
4. Add both the columns of assets and liabilities.

Format of Trading and Profit & Loss A/C of ………. for the year ending …………….
 Debit Credit
Particulars Amount (Rs) Particulars Amount (Rs)
To Opening stock xxx By sales xxx
To Purchases xxx Less: sales returns xxx xxx
Less: Purchase returns xxx xxx By closing stock xxx
To Direct Expenses
To wages xxx
To carriage inwards xxx
To fuel & power xxx
To gross profit xxx
(transferred to profit and loss
account) xxx
xxx

To Indirect expenses By Gross profit xxx

To salaries xxx By Incomes
To office Rent xxx By dividend received xxx
To insurance & taxes xxx By interest received xxx
To carriage outwards xxx By commission received xxx
To Telephone charges xxx By discount received xxx
To commission paid xxx By Rent received xxx
To depreciation xxx By profit on sale of fixed asset xxx
To bad debts xxx
Add: increase in bad debts xxx xxx
To interest on loan xxx
To discount allowed xxx
To Advertising xxx
To Net Profit xxx
(transferred to capital account) xxx xxx

Balance Sheet of…………….... company as on ……………..

Liabilities Amount (Rs) Assets Amount (Rs)

 Long-term liabilities Fixed Assets

Owner’s Capital xxx Plant & Machinery xxx

Add: Net Profit xxx Less: Depreciation xxx xxx
Less: Drawings xxx xxx
Furniture and fixtures xxx
Bank overdraft xxx Less: Depreciation xxx xxx

Current liabilities Current Assets

Sundry Creditors xxx Stock xxx

Bills payable xxx
Outstanding expenses xxx Sundry Debtors xxx
All Reserves xxx Less: Bad debts xxx xxx

Bills Receivables xxx

Cash in hand xxx
Cash at bank xxx
Investments xxx
Prepaid Expenses xxx
Patents xxx
Copyrights xxx
Trade marks xxx
Goodwill xxx
Securities xxx

Total xxx Total xxx

Rules: For Trading and Profit & Loss Account

Debit- Expenses and Losses
Credit – Incomes and Gains
For balance sheet – Assets and Liabilities

 IMPORTANT ADJUSTMENTS:

1. Outstanding expenses
 a) Add to respective expense account in Trading & Profit & Loss account
b) Show as a liability in Balance Sheet
Note: - If it is given only in trial balance, show as a liability in the balance sheet
2. Prepaid expenses
a) Deduct from the respective expenses account in Trading and P/L account
b) Show as an asset in Balance Sheet
Note: - If it is given only in trial balance, show only as an asset in B/S
3. Accrued incomes or incomes receivables
a) Add to the respective income A/C in P/L Account (profit and loss account)
b) Show as an asset in B/S (Balance sheet)
Note:- If it is only given in trial balance, show as an asset in B/S
4. Incomes received in advance
a) Deduct from the respective income A/C in P/L Account
b) Show as a liability in B/S
Note:- It is given only in trial balance, show as a liability in B/S
5. Closing stock
a) Show on the credit side of trading A/C
b) Show as an asset in B/S
Note:- If it is given only in trial balance, show as an asset in B/S
6. Interest on capital
a) Show on the debit side of P/L A/C
b) Add to capital in B/S
Note:- If it is given only in trial balance, show only in P/L A/C
7. Depreciation
a) Show on the debit side of P/L A/C
b) Deduct from respective asset in B/S
Note:- If it is given only in trial balance, show only on the debit side of P/L A/C)
8. I) Bad debts (when given only in adjustments)
a) Show on the debit side of P/L A/C
b) Deduct from debtors in B/S

II) Bad debts (when given only in trial balance)

Show on the debit side of P/L A/C only
III) Bad debts (when given in both trial balance and adjustments)
a) Add “Bad debts given in adjustments” to “Bad debts in trial balance” on the debit side of P/L A/C
 b) Deduct “Bad debts in adjustments” from the debtors in B/S
9. Provision/Reserve for bad debts (RBD)
A) When RBD is given only in trial balance
Deduct from the debtors in B/S
B) When RBD is given only in adjustments
a) Show on the debit side of P/L A/C
b) Deduct from the debtors in B/S
C)When RBDs are given in both trial balance (RBD old) and adjustments (RBD New)
a) Compare both RBDs, show the difference on the debit side of P/L A/C if RBD new is excess than
RBD old. Show the difference on the credit side of P/L A/C in RBD old is excess than RBD new.
b) Deduct always only RBD new from debtors in B/S

PROBLEM 1:
From the following data and additional information of Mr. Kiran, prepare his final
accounts for the year ending 31-3-2015.

Building 70000 Carriage inwards 1291

Furniture 1640 Establishment expenses 2135
Debtors 15600 Carriage outwards 800
Creditors 18852 Insurance 783
Stock 15040 Interest (Cr) 340
Cash in hand 988 Bad debts 613
Cash at bank 24534 Audit fee 400
Bills receivables 5844 General expenses 3050
Purchases 85522 Discount (Dr) 945
Sales 121850 Investments 8922
Capital 92000 Returns inwards 285
Bills payable 6250 Rent 900

Adjustments:
1. Stock on 31-3-2015 was Rs. 35000.
2. Prepaid insurance Rs. 100.
3. Depreciation on furniture Rs. 10%
4. Interest accrued but not received Rs. 100
Problem 2:

From the following trial balance and additional information, prepare final accounts for the year
ending 31-12-2014.
Particulars Rs Particulars Rs
Sundry debtors 64000 Discount received 9000
Stock (1-1-2014) 44000 Bank over draft 15000
Cash in hand 3160 Long term loan 25300
 Wages 35000 Sales 365000
Trade expenses 2150 Capital 150000
Gas, water, power 4450
Sales returns 800
Bank charges 1800
Purchases 237740
Advertisements 2200
Premises 160000
Drawings 9000

564300 564300
Adjustments:
1. Bank charges outstanding Rs.150,
2.Write off bad debts Rs. 500
3. Provide 5% for doubtful debts.
PROBLEM 3:

From the following data prepare final accounts for the year ending 31-122014.

Particulars Rs Rs
Drawings and capital 12000 80000
Opening stock 12000
Investments 30600
Stationery 12000
Carriage 3000
Returns 6000 2600
Purchases and sales 120000 160000
Loans 2400 10000
Debtors and creditors 60000 25000
Discount allowed 2200
Freight in 10400
Freight out 6000
Charity 28000
Reserve for doubtful debts 2000
Bills payables 25000
304600 304600

Adjustments:
1. Closing stock Rs. 20000
2. Appreciate investment by 10%
3. Maintain reserve for doubtful debts at the rate of 5%
4. Provide 5% as interest on capital
******************** THE END *************************