CHAPTER

ACCOUNTING PROCESS
UNIT -1 BASIC ACCOUNTING PROCEDURES –
JOURNAL ENTRIES

LEARNING OUTCOMES

After studying this unit, you will be able to:

♦ Understand meaning and significance of Double Entry System.
♦ Familiarize with the term ‘account’ and understand the classification
of accounts into personal, real and nominal.
♦ Note the utility of such classification and sub-classifications.
♦ Understand how debits and credits are determined from transactions
and events.
♦ Observe the points to be taken care of while recording a transaction
in the journal.

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UNIT OVERVIEW

•All documents in records which contain financial records and

Source Documents act as evidence of transactions.

•Purchase day book, Cash book, Sales day book and Purchases
Books of original
return book
entry and Ledger
•Accounts where information relating to a particular
Accounts asset/liability, capital, income and expenses are recorded.

•It contains the totals from various ledger accounts and act as
Trial Balance preliminary check on accounts before producing financial
statements.

Accounts

Personal Impersonal
Accounts Accounts

Artificial Real Nominal

Natural Representative
(Legal) Accounts Accounts

1.1 DOUBLE ENTRY SYSTEM

Double entry system of accounting is more than 500 years old. “Luca Pacioli” an Italian friar &
mathematician published Summa de Arithmetica, Geometria, Proportioni, et Proportionalita
(“Everything about Arithemetic Geometry and proportions”). The first book that described a
double entry accounting system. Double entry system of book-keeping has emerged in the
process of evolution of various accounting techniques. It is the only scientific system of
accounting. According to it, every transaction has two-fold aspects–debit and credit and both
the aspects are to be recorded in the books of accounts. Therefore, in every transaction at
least two accounts are effected.

For example, on purchase of furniture either the cash balance will be reduced or a liability to
the supplier will arise and new asset furniture is acquired. This has been made clear already,
the Double Entry System records both the aspects. It may be defined as the system which
recognises and records both the aspects of transactions. This system has proved to be

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systematic and has been found of great use for recording the financial transactions for all kind
of entities requiring use of money.

1.2 ADVANTAGES OF DOUBLE ENTRY SYSTEM

This system affords the under mentioned advantages:
(i) By the use of this system the accuracy of the accounting work can be established,
through the device of the trial balance.
(ii) The profit earned or loss incurred during a period can be ascertained together with
details.
(iii) The financial position of the entity or the institution concerned can be ascertained at
the end of each period, through preparation of the financial statements.
(iv) The system permits accounts to be kept in as much details as necessary and, therefore
provides significant information for the purpose of control and reporting.

(v) Result of one year may be compared with those of previous years and reasons for the
change may be ascertained.
In view of the above, the advantages of double entry system has been used extensively in all
countries.

1.3 ACCOUNT
We have seen how the accounting equation becomes true in all cases. A person starts his
business with say, ` 10,00,000 as capital with corresponding balance of cash ` 10,00,000. For
example, transactions entered into by the entity will alter the cash balance in two ways, one
will increase the cash balance and other will reduce it. Payment for goods purchased, salaries
paid and rent expense paid, etc., will reduce the cash balance whereas sales of goods for cash
and collection from customers will increase it.
We can change the cash balance with every transaction but this will be cumbersome. Instead
it would be better if all the transactions that lead to an increase are recorded in one column
and those that reduce the cash balance in another column; then the net result can be
ascertained. If we add all increases to the opening balance of cash and then deduct the total
of all decreases, we shall know the closing balance. In this manner, significant information will
be available relating to cash.
The two columns which we referred above are put usually in the form of an account, called
the ‘T’ form. This is illustrated below by taking imaginary figures:

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CASH

Particular Increase Particular Decrease

(Receipt) (Payment)
` `
Opening Balance (1) 10,00,000 (7) 1,00,000
(2) 2,50,000 (8) 3,00,000
(3) 2,00,000 (9) 2,00,000
(4) 5,00,000 (10) 5,00,000
(5) 1,35,000
(6) 4,00,000 (11) 12,00,000
New or Closing Balance 1,85,000
24,85,000 24,85,000

Since, each T-account shows only amounts and not transaction descriptions, we record each
transaction in some way, such as by numbering used in this illustration. However, one can use
date also for this purpose.
What we have done is to record the increase of cash on the left hand side and the decrease
on the right hand side; the closing balance has been ascertained by deducting the total of
payments, ` 23,00,000 from the total of the left - hand side. Such a treatment of receipts and
payments of cash is very convenient.
Here we talked about only one account namely cash, now let us see how to make T-accounts
when assets as well as liabilities are effected from a particular transaction.

Now, let us take some more examples:-

Transaction 1:
Initial investment by owners ` 25,00,000 in cash.

This will effect two accounts namely cash and capital. The asset cash increases and the stock
holders’ equity paid up capital also increases.
CASH
Increase Decrease
(1) 25,00,000

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 ACCOUNTING PROCESS 2.5

CAPITAL

Decrease Increase
(1) 25,00,000

Transaction 2:

Paid cash to the creditors ` 14,00,000

This will effect cash account which will decrease and creditors account which is a liability will
also decrease.

CASH
Increase Decrease
(2) 14,00,000
CREDITORS

Decrease Increase
(2) 14,00,000

The proper form of an account is as follows:

Account

Date Particulars Amount Date Particulars Amount

`

The columns are self-explanatory.

1.4 DEBIT AND CREDIT

We have seen that in T-accounts increase and decrease entries are made on the left and right
side of the accounts for assets respectively and vice-versa for liabilities. But, formally
accountants use the term Debit (Dr.) to denote an entry on the left side of any account and
Credit (Cr.) to denote an entry on the right side of any account.

We know that by deducting the total of liabilities from the total of assets the amount of capital
is ascertained, as is indicated by the accounting equation.

Assets Liabilities Capital

or

Assets Liabilities Capital

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To understand the equation better, let us expand it:-

Stockholders'
Assets Liabilities
Equity

(contributed
capital +
beginning
Assets Liabilities retained
earnings+revenue
-expenses -
dividends)

Here,
Contributed capital = the original capital introduced by the owner.
Beginning retained earnings = previous earnings not distributed to the shareholders.
Revenue = generated from the ongoing activities of the business
Expenses = cost incurred for the operations of the company.

Dividends = earnings distributed to the shareholders of the company

We have also seen that if there is any change on one side of the equation, it is bound to be
similar change on the other side of the equation or amongst items covered by it or an opposite
change on the same side of the equation. This is illustrated below:

Transactions Total = + Owner’s

Assets Liabilities Capital
` ` `
(1) Started business with cash ` 10,00,000 10,00,000 10,00,000
(2) Borrowed ` 5,00,000 + 5,00,000 + 5,00,000
(3) Withdrew cash from business ` 2,00,000 - 2,00,000 - 2,00,000
(4) Loan repaid to the extent of ` 1,00,000 - 1,00,000 - 1,00,000
(5) Bought furniture worth ` 3,00,000 with +3,00,000
Cash - 3,00,000
Balance 12,00,000 = 4,00,000 + 8,00,000

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As has been seen previously, what has been given above is suitable only if the number of
transactions is small. But if the number is large, a different procedure of putting increases and
decreases in different columns will be useful and this will also yield significant information.
The transactions given above are being shown below according to this method.

Total Assets = Liabilities + Owner’s Capital

Increase Decrease Decrease Increase Decrease Increase
` ` ` ` ` `

(1) 10,00,000 10,00,000

(2) 5,00,000 5,00,000
(3) 2,00,000 2,00,000
(4) 1,00,000 1,00,000

Total 15,00,000 3,00,000 1,00,000 5,00,000 2,00,000 10,00,000

Balance 12,00,000 4,00,000 + 8,00,000

It is a tradition that:
(i) increases in assets are recorded on the left-hand side and decreases in them on the right-
hand side; and
(ii) in the case of liabilities and capital, increases are recorded on the right-hand side and
decreases on the left-hand side.
When two sides are put together in T form, the left-hand side is called the ‘debit side’
and the right hand side is ‘credit side’. When in an account a record is made on the
debit or left-hand side, one says that one has debited that account; similarly to record
an amount on the credit or right-hand side, it is said the account has been credited.
From the above, the following rules can be obtained:

(i) When there is an increase in the amount of an asset, its account is debited; the
account will be credited if there is a reduction in the amount of the asset
concerned: Suppose a firm purchases furniture for ` 8,00,000, the furniture
account will be debited by ` 8,00,000 since the asset has increased by this
amount. Suppose later the firm sells furniture to the extent of ` 3,00,000 the
reduction will be recorded by crediting the furniture account by ` 3,00,000.

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FURNITURE

Increase Decrease

(1) To Cash 8,00,000 (2) By Cash 3,00,000

Balance 5,00,000

(ii) If the amount of a liability increases, the increase will be entered on the credit
side of the liability account, i.e. the account will be credited: similarly, a liability
account will be debited if there is a reduction in the amount of the liability.
Suppose a firm borrows ` 5,00,000 from Mohan; Mohan’s account will be
credited since ` 5,00,000 is now owing to him. If, later, the loan is repaid,
Mohan’s account will be debited since the liability no longer exists.
MOHAN
Decrease Increase

(2) To Cash 5,00,000 (1) By Cash 5,00,000

(iii) An increase in the owner’s capital is recorded by crediting the capital account:
Suppose the proprietor introduces additional capital, the capital account will
be credited. If the owner withdraws some money, i.e., makes a drawing, the
capital account will be debited.

(iv) Profit leads to an increase in the capital and a loss to reduction: According to
the rule mentioned in (iii) above, profit & incomes may be directly credited to
the capital account and losses & expenses may be similarly debited.

However, it is more useful to record all incomes, gains, expenses and losses
separately. By doing so, very useful information will be available regarding the
factors which have contributed to the year’s profits and losses. Later the net
result of all these is ascertained and adjusted in the capital account.
(v) Expenses are debited and Incomes are credited: Since incomes and gains
increase capital, the rule is to credit all gains and incomes in the accounts
concerned and since expenses and losses decrease capital, the rule is to debit
all expenses and losses. Of course, if there is a reduction in any income or gain,
the account concerned will be debited; similarly, for any reduction in an
expenses or loss the concerned account will be credited.

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 ACCOUNTING PROCESS 2.9

The rules given above are summarised below:

Increases in assets are debits; decreases are credits;

Increases in liabilities are credits; decreases are debits;

Increases in owner’s capital are credits; decreases are debits;

Increases in expenses are debits; decreases are credits; and

Increases in revenue or incomes are credits; decreases are debits.

The terms debit and credit should not be taken to mean, respectively, favourable and
unfavourable things. They merely describe the two sides of accounts.

Whether an entry is to the debit or credit side of an asset depends on the type of account and
the transactions

Debit Credit
Increase in Purchases Increase in Sales
Increase in Expenses Increase in revenue and Incomes
Increase in Assets Increase in Liabilities and Owners’ Capital

In the same way, decrease in purchases, expenses and assets are credits and decrease in sales,
income, liabilities and owners’ capital are debit.
ILLUSTRATION 1
Following are the transactions entered into by R after he started his business. Show how various
accounts will be affected by these transactions:

2022 (` in 000)
April
1. R started business with 5,000
2. He purchased furniture for 1,200
3. Paid salary to his clerk 1,100
4. Paid rent 1,150
5. Received interest 2,000

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SOLUTION

2022 Explanation Accounts Nature of How Debit Credit

April Involved Accounts affected (` in 000) (` in 000)
1. ` 5,000 cash Bank and Asset Increased 5,000
invested in R’s Capital Capital Increased 5,000
business
2. Purchased Furniture Asset Increased 1,200
furniture for and Bank Asset Decreased 1,200
` 1,200
3. Paid ` 1,100 to Salary & Expense Increased 1,100
employee for Bank Asset Decreased 1,100
salary
4. Paid Rent Rent & Expense Increased 1,150
` 1,150 Bank Asset Decreased 1,150
5. Received Cash & Asset Increased 2,000
interest ` 2,000 Interest Income Increased 2,000

1.5 TRANSACTIONS
In the system of book-keeping, students can notice that transactions are recorded in the
books of accounts. A transaction is a type of event, which is generally external in nature and
can be determined in terms of money. In an accounting period, every business has huge
number of transactions which are analysed in financial terms and then recorded individually,
followed by classification and summarisation process, to know their impact on the financial
statements. A transaction is a two-way process in which value is transferred from one party to
another. In it either a party receives a value in terms of goods etc. and passes the value in
terms of money or vice versa. Therefore, one can easily make out that in a transaction, a party
receives as well as passes the value to other party. For recording transaction, it is very
important that they are supported by a substantial document like purchase invoices, bills, pay-
slips, cash-memos, passbook etc.
Transactions analysed in terms of money and supported by proper documents are recorded
in the books of accounts under double entry system. To analyse the dual aspect of each
transaction, two approaches can be followed:
(1) Accounting Equation Approach.

(2) Traditional Approach.

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1.6 ACCOUNTING EQUATION APPROACH

The relationship of assets with that of liabilities and owners’ equity in the equation form is
known as ‘Accounting Equation’. Basic accounting equation comes into picture when sum
total of capital and liabilities equalises assets, where assets are what the business owns and
capital and liabilities are what the business owes. Under double entry system, every business
transaction has two-fold effect on the business enterprise where each transaction affects
changes in assets, liabilities or capital in such a way that an accounting equation is completed
and equated. This accounting equation holds good at all points of time and for any number
of transactions and events except when there are errors in accounting process.
Let us suppose that an individual started business by contributing ` 50,00,000 and taking loan
of `10,00,000 from a bank to be repayable, after 5 years. He purchased furniture costing
` 10,00,000, and merchandise worth ` 50,00,000. For purchasing the merchandise he paid
` 40,00,000 to the suppliers and agreed to pay balance after 3 months.
The contribution by the owner is termed as capital; the loans are termed as liabilities.
Whenever the loan is repayable in the short-run, say within one year, it is called short-term
loan or liability. On the other hand, if the loan is repayable atleast after one year, it would be
termed as long term loan or liability.
Some other short-term liabilities relating to credit purchase of merchandise are popularly
called as trade payables, and for other purchases and services received on credit as expense
payables. The short-term liabilities are also termed as current liabilities and long term
liabilities are termed as non-current liabilities.
On the other hand, money raised has been invested in two types of assets–fixed assets and
current assets. Furniture is a fixed asset, if it lasts long, say more than one year, and has utility
to the business, while inventory and cash balance will not remain fixed for long as soon as the
business starts to roll-these are current assets.
Often the owner’s claim or fund in the business is called equity. Owner’s claim implies capital
invested plus any profit earned minus any loss incurred.
Now we have an equation:
Equity + Liabilities = Assets or, Equity + Long-Term Liabilities = Fixed Assets + Current Assets
- Current Liabilities

Check : L.H.S. (` in ‘000)

Equity ` 5,000
Long–term Liabilities ` 1,000
Current Liabilities ` 1,000
` 7,000

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Check : R. H. S. (` in ‘000)
Assets
Fixed Assets:
Furniture ` 1,000
Current Assets:
Inventory ` 5,000
Cash ` 1,000
` 7,000

Cash = Capital + Loan - Furniture - Payment to Trade payables (`’ 000 )

= ` 5,000 + ` 1,000 - ` 1,000 - ` 4,000 = ` 1,000

Let us use E0, L0 and A0 to mean Equity, Liabilities and Assets respectively at t0. Thus the basic
accounting equation becomes
E 0 + L0 = A0
or E0 = A0 - L0 ...(Eq. 1)
(`’ 000 )
Now, let us suppose that at the end of period inventory valuing ` 2,500 is in hand, cash
` 2,000; trade payables ` 500; bank loan ` 1,000 (interest was properly paid); furniture ` 800
{` 200 is taken as loss of value due to use (also known as depreciation)}. So at t1 -

Assets: (`’ 000)

Fixed assets
Furniture ` 800
Current assets
Inventory ` 2,500
Cash ` 2,000
(A1) ` 5,300
Liabilities:
Long-term Liabilities ` 1,000
Current Liabilities ` 500
(L1) ` 1,500
Equity (A1 - L1) ` 3,800

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 ACCOUNTING PROCESS 2.13

Equity = Assets - Liabilities

i.e., E1 = A1 - L1

or E1 + L1 = A1 ...(Eq. 2)
Let us compare E1 with E0. Equity is reduced by ` 12,00,000 (50,00,000 - 38,00,000). Reduction
in equity is termed as loss incurred.
Since the business has incurred loss during the period, E1 becomes less than E0.
E1< E0 implies loss during t01
Similarly, E2< E1 implies loss during t12 and so on.

On the other hand, E1> E0 implies profit earned by business during t01, E2> E1 implies profit
earned during t2&1 and so on.
So if En> En-1, in general terms, equity has increased, while En< En-1 implies that equity has
decreased. Increase in equity is termed as profit while decrease in equity is termed as loss.
ILLUSTRATION 2
Develop the accounting equation from following information available at the beginning of
accounting period:

Particulars (` in ‘000)
Capital 51,000
Loan 11,500
Trade payables 5,700
Fixed Assets 12,800
Inventory 22,600
Trade receivables 17,500
Cash and Bank 15,300

At the end of the accounting period the balances appear as follows:

`
Capital ?

Loan 11,500

Trade payables 5,800

Fixed Assets 12,720

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Inventory 22,900

Trade receivables 17,500

Cash at Bank 15,600

(a) Reset the equation and find out profit.

(b) Prepare Balance Sheet at the end of the accounting period.
SOLUTION

(All the figures in solution are in ‘000)

(a) Accounting equation is given by
Equity + Liabilities = Assets
Let us use E0, L0 and A0 to mean equity, liabilities and assets respectively at the
beginning of the accounting period.
E0 = ` 51,000
L0 = Loan + Trade payables
= ` 11,500 + ` 5,700 = ` 17,200

A0 = Fixed Assets + Inventories + Trade receivables + Cash at Bank

= ` 12,800 + ` 22,600 + ` 17,500 + ` 15,300 = ` 68,200

So, at the beginning of accounting period

E 0 + L0 = A0
i.e., ` 51,000 + ` 17,200 = ` 68,200
Let us use E1, L1, A1 to mean equity, liabilities and assets respectively at the end of the
accounting period.

L1 = Loan + Trade payables

= ` 11,500 + ` 5,800 = ` 17,300

A1 = Fixed Assets + Inventories + Trade receivables + Cash at Bank

= ` 12,720 + ` 22,900 + ` 17,500 + ` 15,600 = ` 68,720

E1 = A1 - L1 = ` 68,720 - ` 17,300 = ` 51,420

Profit = E1 - E0 = ` 51,420 - ` 51,000 = ` 420

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(b) Balance Sheet

Liabilities ` ` Assets `
Capital Fixed Assets 12,720
Balance 51,000 Inventories 22,900

Add: Profit 420 51,420 Trade receivables 17,500

Loan 11,500 Cash at Bank 15,600
Trade payables 5,800

68,720 68,720

ILLUSTRATION 3
Mr. Dravid. has provided following details related to his financials. Find out the missing figures:

Particulars (` in’000)
Profits earned during the year 5,000
Assets at the beginning of year A
Liabilities at the beginning of year 12,000
Assets at the end of the year B
Liabilities at the end of the year C
Closing capital 35,000
Total liabilities including capital at the end of the year 50,000

SOLUTION
Computing opening capital: (All figure in `’ 000 )
Closing capital - profits earned during the year (35,000 - 5,000) = 30,000

We also know:
Assets = liabilities + capital
Therefore, opening assets (A) (12,000 + 30,000) = 42,000

Computation of liabilities at the end of the year:

Total liabilities including capital - closing capital (C) (50,000 – 35,000) = 15,000
Also assets at the end of the year (B)= closing capital + liabilities at the end of the year
= 35,000 + 15,000 = 50,000

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1.7 TRADITIONAL APPROACH

Under traditional approach of recording transactions one should first understand the term
debit and credit and their rules. The term debit and credit have already been explained in para
1.4 of this Unit.
Transactions in the journal are recorded on the basis of the rules of debit and credit only. For
the purpose of recording, these transactions are classified in three groups:

(i) Personal transactions.

(ii) Transactions related to assets and properties.
(iii) Transactions related to expenses, losses, income and gains.

1.7.1 Classification of Accounts

(i) Personal Accounts: Personal accounts relate to persons, trade receivables or trade
payables. Example would be the account of Ram & Co., a credit customer or the
account of Jhaveri & Co., a supplier of goods. The capital account is the account of the
proprietor and, therefore, it is also personal but adjustment on account of profits and
losses are made in it. This account is further classified into three categories:
(a) Natural personal accounts: It relates to transactions of human beings like Ram,
Rita, etc.
(b) Artificial (legal) personal accounts: For business purpose, business entities are
treated to have separate entity. They are recognised as persons in the eye of
law for dealing with other persons. For example: Government, Companies
(private or limited), Clubs, Co-operative societies etc.
(c) Representative personal accounts: These are not in the name of any person or
organisation but are represented as personal accounts. For example: outstanding
liability account or prepaid account, capital account, drawings account.
(ii) Impersonal Accounts: Accounts which are not personal such as machinery account,
cash account, rent account etc. These can be further sub-divided as follows:

(a) Real Accounts: Accounts which relate to assets of the firm but not debt. For
example, accounts regarding land, building, investment, fixed deposits etc., are
real accounts. Cash in hand and Cash at the bank accounts are also real.
(b) Nominal Accounts: Accounts which relate to expenses, losses, gains, revenue,
etc. like salary account, interest paid account, commission received account.
The net result of all the nominal accounts is reflected as profit or loss which is
transferred to the capital account. Nominal accounts are, therefore, temporary.

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1.7.2 Golden Rules of Accounting

All the above classified accounts have two rules each, one related to Debit and one related to
Credit for recording the transactions which are termed as golden rules of accounting, as
transactions are recorded on the basis of double entry system.

Types of Account Account to be Debited Account to be Credited

Personal Account Receiver Giver
Real Account What comes in What goes out
Nominal Account Expense and losses Income and gains

Example:-
From the following information, state the nature of account and state which account will be
debited and which will be credited.
1. Started business with a capital of ` 50,00,000.

2. Wages and salaries paid ` 50,000

3. Rent received ` 2,00,000
4. Purchased goods on credit ` 9,00,000

5. Sold goods for ` 8,16,000 and received payment in cheque.

SOLUTION

Transaction ACCOUNTS NATURE DEBIT OR Journal Entry

INVOLVED CREDIT
Started business Bank account Personal Debit (Receiver) Bank A/c Dr.
with capital of Capital account Personal Credit (giver) To Capital A/c
` 50,00,000
Wages and Wages/salaries Nominal Debit (expense) Wages/ Salaries Dr.
salaries paid Bank Personal Credit (giver) To Bank A/c
Rent received Bank Personal Debit (Receiver) Bank A/c Dr.
Rent Nominal Credit (income) To Rent A/c
Purchases made Purchases Nominal Debit (expense) Purchases A/c Dr.
on credit Creditor Personal Credit (giver) To Creditor A/c
Goods sold and Bank Personal Debit (Receiver) Bank A/c Dr.
payment Sales Nominal Credit (gains) To Sales A/c
received in
cheque

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1.8 MODERN CLASSIFICATION OF ACCOUNTS

Real, nominal and personal accounts is the traditional classification of accounts. Now, let us
see the modern and more acceptable classification of accounts:-

Types of account Normal balance Account to be Account to be

of account debited when there credited when there
is: is:
Asset account Debit Increase Decrease
Liabilities account Credit Decrease Increase
Capital account Credit Decrease Increase
Revenue account Credit Decrease Increase
Expenditure account Debit Increase Decrease
Withdraw account Debit Increase Decrease

Let us solve the same example with the modern approach now:-

Accounts involved Nature Debit/Credit Reason

Cash Asset Debit Increase
Capital Liability Credit Increase
Wages/salaries paid Expense Debit Increase
Cash Asset Credit Decrease
Rent received Revenue Credit Increase
Purchase Expense Debit Increase
Creditor Liability Credit Increase
Cash Asset Debit Increase
Sales Revenue Credit Increase

1.9 JOURNAL
Transactions are first entered in this book to show which accounts should be debited and
which credited. Journal is also called subsidiary book. Recording of transactions in journal is
termed as journalizing the entries. It is the book of original entry in which transactions are
entered on a daily basis in a chronological order.

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1.9.1 Journalising Process

All transactions may be first recorded in the journal as and when they occur; the record is
chronological; otherwise it would be difficult to maintain the records in an orderly manner.
Debits and credits are listed along with the appropriate explanations. There are basically two
types of journals:-
1. General journal
2. Specialized journal

The latter is used when there are many repetitive transactions of the same nature. The form
of the journal is given below:
JOURNAL

Date Particulars Ledger Amount Amount

Folio Dr. Cr.
(L.F.)
` `
(1) (2) (3) (4) (5)

The columns have been numbered only to make clear the following but otherwise they are
not numbered. The following points should be noted:
(1) In the first column the date of the transaction is entered-the year is written at the top,
then the month and in the narrow part of the column the particular date is entered.
(2) In the second column, the names of the accounts involved are written; first the account
to be debited, with the word “Dr” written towards the end of the column. In the next
line, after leaving a little space, the name of the account to be credited is written
preceded by the word “To” (the modern practice shows inclination towards omitting
“Dr.” and “To”). Then in the next line the explanation for the entry together with
necessary details is given-this is called narration.
(3) In the third column the number of the page in the ledger on which the account is
written up is entered.
(4) In the fourth column the amounts to be debited to the various accounts concerned are
entered.
(5) In the fifth column, the amount to be credited to various accounts is entered.

© The Institute of Chartered Accountants of India

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1.9.2 Points to be taken into account while recording a transaction

in the Journal
1. Journal entries can be single entry (i.e. one debit and one credit) or compound entry
(i.e. one debit and two or more credits or two or more debits and one credit or two or
more debits and credits). In such cases, it is important to check that the total of both
debits and credits are equal.
2. If journal entries are recorded in several pages then both the amount column of each
page should be totalled and the balance should be written at the end of that page and
also that the same total should be carried forward at the beginning of the next page.

An entry in the journal may appear as follows:

` `

May 5 Bank Account Dr. 14,50,000

To Mohan 14,50,000

(Being the amount received from Mohan in

payment of the amount due from him)

We will now consider some individual transactions.

(i) Mohan commences business with ` 50,00,000 in his bank account. This means that the
firm has ` 50,00,000 in bank. According to the rules given above, the increase in an
asset has to be debited. The firm also now owes ` 50,00,000 to the proprietor, Mohan
as capital. The rule given above also shows that the increase in capital should be
credited. Therefore, the journal entry will be:

Bank Account Dr. ` 50,00,000

To Capital Account ` 50,00,000

(Being capital introduced by Mohan)

(ii) Out of the above, ` 25,000 is withdrawn from the bank. By this transaction the bank
balance is reduced by ` 25,000 and another asset, cash account, comes into existence.
Since increase in assets is debited and decrease is credited, the journal entry will be:

Cash Account Dr. ` 25,000

To Bank Account ` 25,000

(Being cash withdrawn in Bank)

© The Institute of Chartered Accountants of India

 ACCOUNTING PROCESS 2.21

(iii) Furniture is purchased for ` 12,00,000. Applying the same reasoning as above the entry
will be:

Furniture Account Dr. ` 12,00,000

To Bank Account ` 12,00,000

(Being Furniture purchased vide voucher No....)

(iv) Purchased goods for ` 4,00,000. The student can see that the required entry is:

Purchases Account Dr. ` 4,00,000

To Bank Account ` 4,00,000

(Being goods purchased vide voucher No....)

(v) Purchased goods for ` 10,00,000 on credit from M/s Ram Narain Bros. Purchase of
merchandise is an expense item so it is to be debited. ` 10,00,000 is now owing to the
supplier; his account should therefore be credited, since the amount of liabilities has
increased. The entry will be:

Purchases Account Dr. ` 10,00,000

To M/s Ram Narain Bros. ` 10,00,000

(Being goods purchased on credit vide Bill

No.....)

(vi) Sold goods to M/s Ram & Co. for ` 6,00,000. Amount is received in cheque. The amount
of bank increases and therefore, the bank amount should be debited; sale of
merchandise is revenue item so it is to be credited. The entry will be:

Bank Account Dr. ` 6,00,000

To Sales Account ` 6,00,000

(Being goods sold vide sales invoice No....)

(vii) Sold goods to Ramesh on credit for ` 13,00,000. The Inventories of goods has
decreased and therefore, the goods account has to be credited. Ramesh now owes
` 13,00,000; that is an asset and therefore, Ramesh should be debited. The entry is:

Ramesh Dr. ` 13,00,000

To Sales Account ` 13,00,000

(Being goods sold vide Bill No....)

© The Institute of Chartered Accountants of India

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(viii) Received cheque from Ramesh ` 13,00,000. The amount of bank increased therefore
the bank account has to be debited. Ramesh’s liability towards firm has decreased in
fact in this case he no longer owes any amount to the firm now, i.e., this particular form
of assets has disappeared; therefore, the account of Ramesh should be credited. The
entry is:

Bank Account Dr. ` 13,00,000

To Ramesh ` 13,00,000

(Being amount received vide cheque

No.......against sales invoice No….)

(x) Paid rent ` 1,00,000. The bank balance has decreased and therefore, the bank account
should be credited. No asset has come into existence because the payment is for
services enjoyed and is an expense. Expenses are debited. Therefore, the entry should
be:

Rent Account Dr. ` 1,00,000

To Bank Account ` 1,00,000
(Being rent paid for the month of .......)

(xi) Paid ` 22,000 to the clerk as salary. Applying the reasons given in (x) above, the
required entry is:

Salary Account Dr. ` 22,000

To Bank Account ` 22,000

(Being salary paid to Mr..... for the month of ...........)

(xii) Received ` 2,20,000 interest. The bank account should be debited since there is an
increase in the bank balance. There is no increase in any liability; since the amount is
not returnable to any one, the amount is an income, incomes are credited. The entry
is:

Bank Account Dr. ` 2,20,000

To Interest Account ` 2,20,000
(Being interest received from………for the period
............)

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 ACCOUNTING PROCESS 2.23

When transactions of similar nature take place on the same date, they may be
combined while they are journalised. For example, entries (x) and (xi) may be combined
as follows:

Rent Account Dr. ` 1,00,000

Salary Account Dr. ` 22,000
To Bank Account ` 1,22,000
(Being expenses done as per detail attached)

When journal entry for two or more transactions are combined, it is called composite
journal entry. Usually, the transactions in a firm are so numerous that to record the
transactions for a month will require many pages in the journal. At the bottom of one
page the totals of the two columns are written together with the words “Carried
forward” in the particulars column. The next page is started with the respective totals
in the two columns with the words “Brought forward” in the particulars column.
ILLUSTRATION 4
Analyse transactions of M/s Sahil & Co. for the month of March, 2022 on the basis of double
entry system by adopting the following approaches:

(A) Accounting Equation Approach.

(B) Traditional Approach.
Transactions for the month of March, 2022 were as follows (figures are in ‘000):

1. Sahil introduced capital through bank of ` 4,000.

2. Cash withdrawn from the City Bank ` 200.
3. Loan of ` 500 taken from Mr. Y.

4. Salaries paid for the month of March, 2022, ` 300 and ` 100 is still payable for the month
of March, 2022.
5. Furniture purchased ` 500.
Required
What conclusions one can draw from the above analysis?
SOLUTION

(A) Analysis of Business Transaction: Accounting Equation Approach

The accounting equation is
Assets = Liabilities + Capital

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(` in ‘000)

ASSETS = CAPITAL + LIABILITIES

CASH + BANK + FURNITURE = CAPITAL + LIABILITIES
(a) - + 4,000 + - = 4,000 + -
(b) +200 + -200 + - = - + -
(c) - + 500 + - = - + 500
(d) - + -300 + - = -400 + 100
(e) - + -500 + 500 = - + -
Balance 200 + 3,500 + 500 = 3,600 + 600
4,200 4,200

(B) Analysis of Business Transactions: Traditional Approach

Transaction Analysis Account Rule Entry

Affected
and Nature of
Account
Introduction Bank has Bank–Personal Debit the Debit Bank
of ` 4,000 received the Capital– receiver Credit Credit
through bank money; Owner Personal the giver Capital
by the has given Bank
proprietor balance
Cash Cash comes into Cash–Real Debit what Debit Cash
Withdrawn business; Bank Bank–Personal comes in
from Bank gives out cash Credit the
Credit Bank
` 200 giver
Loan from Y Bank receives the Bank–Personal Debit the Debit Bank
` 500 amount : Y pays Y’s Loan– receiver Credit Y’s
through bank Personal Credit the Loan
giver
Salary paid Cost of services Salary Debit all Debit Salary
` 300 and used ` 400; Bank Nominal expenses (` 400)
still payable gives out `300; Bank–Personal Credit the Credit Bank
` 100 Still payable or giver (` 300)
Salary
outstanding for
Outstanding- Credit Salary
services received
Personal Credit the outstanding
` 100
giver (` 100)

© The Institute of Chartered Accountants of India

 ACCOUNTING PROCESS 2.25

Furniture Furniture is Furniture Real Debit what Debit

purchased purchased; Bank–Personal comes in Furniture
` 500 Bank gives out Credit the Credit Bank
money giver

Conclusion:
It is evident from above analysis that procedure for analysis of transactions, classification of
accounts and rules for recording business transactions under accounting equation approach
and traditional approach are different. But the accounts affected and entries entered/passed
remains the same under both approaches. Thus, the recording of transactions in affected
accounts on the basis of double entry system is independent of the method of analysis
followed by a business enterprise. In other words, accounts to be debited and credited to
record the dual aspect remains the same under both the approaches.
ILLUSTRATION 5
Journalise the following transactions. Also state the nature of each account involved in the
Journal entry.

Following figures are given in (‘00)

1. December 1, 2022, Ajit started business with capital ` 4,00,000
2. December 3, he withdrew cash for business from the Bank ` 2,000.
3. December 5, he purchased goods by making payment through bank ` 15,000.
4. December 8, he sold goods for ` 16,000 and received payment through bank.
5. December 10, he purchased furniture and paid by cheque ` 2,500.
6. December 12, he sold goods to Arvind ` 2,400.
7. December 14, he purchased goods from Amrit ` 10,000.
8. December 15, he returned goods to Amrit ` 500.
9. December 16, he received from Arvind ` 2,300 in full settlement.
10. December 18, he withdrew goods for personal use ` 1,000.
11. December 20, he withdrew cash from business for personal use ` 2,000.
12. December 24, he paid telephone charges ` 110.
13. December 26, amount paid to Amrit in full settlement ` 9,450.
14. December 31, paid for stationery ` 200, rent `5,000 and salaries to staff ` 2,000 from
bank.

© The Institute of Chartered Accountants of India

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15. December 31, goods distributed by way of free samples ` 2,000.

SOLUTION

JOURNAL (` in ‘00)
Dr. Cr.
Sl. Date Particulars Nature of L.F. Debit Credit
No Account (` ) (` )
1. Dec. 1 Bank Account Dr. Personal A/c 4,00,000
To Capital Account Personal A/c 4,00,000
(Being
commencement of
business with capital)
2. Dec. 3 Cash Account Dr. Real A/c 2,000
To Bank Account Personal A/c 2,000
(Being cash withdrawn
from the Bank)
3. Dec. 5 Purchases Account Dr. Nominal A/c 15,000
To Bank Account Personal A/c 15,000
(Being purchase of
goods for cash)
4. Dec. 8 Bank Account Dr. Personal A/c 16,000
To Sales Account Nominal A/c 16,000
(Being goods sold for
cash)
5. Dec. 10 Furniture Account Dr. Real A/c 2,500
To Bank Account Personal A/c 2,500
(Being purchase of
furniture, paid by
cheque)
6. Dec. 12 Arvind Account Dr. Personal A/c 2,400
To Sales Account Nominal A/c 2,400
(Being sale of goods
on credit)

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 ACCOUNTING PROCESS 2.27

7. Dec. 14 Purchases Account Dr. Nominal A/c 10,000

To Amrit Account Personal A/c 10,000
(Being purchase of
goods from Amrit)
8. Dec. 15 Amrit Dr. Personal A/c 500
To Purchases Nominal A/c 500
Returns Account
(Being goods returned
to Amrit)
9. Dec. 16 Bank Account Dr. Personal A/c 2,300
Discount Account Dr. Nominal A/c 100
To Arvind Account Personal A/c 2,400
(Being amount
received from Arvind
in full settlement and
allowed him ` 100 as
discount)
10. Dec. 18 Drawings Account Dr. Personal A/c 1,000
To Purchases Nominal A/c 1,000
Account
(Being withdrawal of
goods for personal
use)
11. Dec. 20 Drawings Account Dr. Personal A/c 2,000
To Cash Account Real A/c 2,000
(Being cash withdrawal
from the business for
personal use)
12. Dec. 24 Telephone Expenses Dr. Nominal A/c 110
Account
To Bank Account Personal A/c 110
(Being telephone
expenses paid)

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13. Dec 26 Amrit Account Dr. Personal A/c 9,500

To Bank Account Personal A/c 9,450
To Discount Nominal A/c 50
Account
(Being cash paid to
Amrit and he allowed
` 50 as discount)
14. Dec. 31 Stationery Expenses Dr. Nominal A/c 200
Rent Account Dr. Nominal A/c 5,000
Salaries Account Dr. Nominal A/c 2,000
To Bank Account Personal A/c 7,200
(Being expenses paid)
15. Dec. 31 Advertisement Dr. Nominal A/c 2,000
Expenses Account
To Purchases Nominal A/c 2,000
Account
(Being distribution of
goods by way of free
samples)

ILLUSTRATION 6
Show the classification of the following Accounts under traditional and accounting equation
approach:
(a) Building; (b) Purchases; (c) Sales; (d) Bank Fixed Deposit; (e) Rent; (f) Rent Outstanding; (g)
Cash; (h) Adjusted Purchases; (i) Closing Inventory; (j) Investments; (k) Trade receivables; (l) Sales
Tax Payable, (m) Discount Allowed; (n) Bad Debts; (o) Capital; (p) Drawings; (q) Interest
Receivable account; (r) Rent received in advance account; (s) Prepaid salary account; (t) Bad
debts recovered account; (u) Depreciation account, (v) Personal income-tax account.
SOLUTION
Nature of Account

Sl. Title of Account Traditional Approach Accounting Equation

No. Approach
(a) Building Real Asset
(b) Purchases Nominal Expense
(c) Sales Nominal Revenue

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 ACCOUNTING PROCESS 2.29

(d) Bank Fixed Deposit Personal Asset

(e) Rent Nominal Expense
(f) Rent Outstanding Personal Liability
(g) Cash Real Asset
(h) Adjusted Purchases Nominal Expense
(i) Closing Inventory Real Asset
(j) Investment Real Asset
(k) Trade receivables Personal Asset
(l) GST Payable Personal Liability
(m) Discount Allowed Nominal Expense
(n) Bad Debts Nominal Expense
(o) Capital Personal Capital
(p) Drawings Personal Capital - Drawings
(q) Interest receivable Personal Asset
(r) Rent received in advance Personal Liability
(s) Prepaid salary Personal Asset
(t) Bad debts recovered Nominal Gain
(u) Depreciation Nominal Expense
(v) Personal Income Tax Personal (Drawings) Capital - Drawings

ILLUSTRATION 7
Transactions of Ramesh for April are given below. Journalise them.

2022 `

April 1 Ramesh started business with 10,00,000

“ 3 Bought goods for cash 50,000
“ 5 Drew cash from bank 10,000
“ 13 Sold to Krishna- goods on credit 1,50,000
“ 20 Bought from Shyam goods on credit 2,25,000
“ 24 Received from Krishna 1,45,000
“ Allowed him discount 5,000

© The Institute of Chartered Accountants of India

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“ 28 Paid Shyam cash 2,15,000

“ Discount allowed 10,000
“ 30 Cash sales for the month 8,00,000
Paid Rent 50,000
Paid Salary 1,00,000

SOLUTION
JOURNAL

Date Particulars L.F.* Amount Amount

2022 (Dr.) (Cr.)
April 1 Bank Account Dr. 1 10,00,000
To Capital Account 4 10,00,000
(Being the amount invested by Ramesh in
the business as capital)
“3 Purchases Account Dr. 7 50,000
To Bank Account 1 50,000
(Being goods purchased for cash)
“5 Cash Account Dr. 5 10,000
To Bank Account 1 10,000
(Being cash withdrawn from bank)
“ 13 Krishna Dr. 9 1,50,000
To Sales Account 11 1,50,000
(Being goods sold to Krishna on credit)
“ 20 Purchases Account Dr. 7 2,25,000
To Shyam 10 2,25,000
(Being goods bought from Shyam on credit)
“ 24 Bank Account Dr. 1 1,45,000
Discount Account Dr. 12 5,000
To Krishna 9 1,50,000
(Being cash received from Krishna and
discount allowed to him)

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 ACCOUNTING PROCESS 2.31

“ 28 Shyam Dr. 10 2,25,000

To Bank Account 1 2,15,000

To Discount Account 12 10,000

(Being cash paid to Shyam and discount

allowed by him)

“ 30 Bank Account Dr. 1 8,00,000

To Sales Account 11 8,00,000

(Being sales for the month of April 2022)

“ 30 Rent Account Dr. 15 50,000

Salaries Account Dr. 14 1,00,000

To Bank Account 1 1,50,000

(Being the amount paid for rent and salary)

Total 27,60,000 27,60,000

*Ledger Folio imaginary

1.10 ADVANTAGES OF JOURNAL

In journal, transactions recorded on the basis of double entry system, fetch the following
advantages:

1. As transactions are recorded in chronological order, one can get complete information
about the business transactions on timely basis.

2. Entries recorded in the journal are supported by a note termed as narration, which is
a precise explanation of the transaction for the proper understanding of the entry. One
can know about the transactions through these narrations.

3. Journal forms the basis for posting the entries in the ledger and reduces the chances
of error.

© The Institute of Chartered Accountants of India

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1.11 ACCOUNTING FOR GST

1.11.1 Introduction to GST

Goods and Services Tax (GST) is a comprehensive Indirect Tax* which has subsumed multiple
Indirect Taxes in India such as State Value added Tax (VAT) which was levied on sale of goods,
Excise Duty, which was levied on manufacture or production of goods, Service Tax which was
levied on provision of services etc. GST is a single tax on the supply of goods and services,
right from the manufacturer to consumer.
* An indirect tax is a tax whose incidence is borne by the consumers who ultimately consume
the product or service. The immediate liability to pay the tax may fall upon another person
such as a manufacturer or provider of service or seller of goods, but the same is collected
from the person purchasing the goods (recipient of goods or services).

Pre-GST scenario:
Prior to introduction of GST, the following duties were levied:
(a) On manufacture of goods: Excise Duty (levied by Central Government)

(b) On sale of goods within the State: State Value Added Tax (VAT)
(c) On sale of goods outside the State: Central Sales Tax (levied by Central Government)
(d) On provision of services provided: Service Tax (levied by Central Government)
Since the taxes were levied by different authorities (central and state authorities), it was not
possible to take the benefit of credit of taxes paid at different stages. For instance, when a
trader received goods (say costing ` 1,00,000) from the manufacturer, excise duty (say @ 18%
= ` 18,000) was levied on the goods sold by the manufacturer. When such trader would sell
the goods to the customer, he would charge VAT (assume 18%). However, the trader could
not avail the benefit of the credit of the excise duty of ` 18,000 paid in respect of the goods
purchased from the manufacturer. Accordingly, the ‘cost’ of the goods to the trader would be
` 1,00,000 + ` 18,000 = ` 1,18,000, on which the trader would add his profit margin and levy
VAT while selling to the consumer. This created a scenario wherein a tax (in our example, VAT)
was levied on the tax (in our example, excise duty) also, in addition to the tax levied on the
goods. This cascading effect (tax-on-tax) increased the price of the product, and resulted in
an unjust enrichment at the cost of the ultimate consumer.

Post-GST scenario:
On introduction of GST, the tax to be levied at all stages right from manufacture up to final
consumption was a single tax- GST, with credit of taxes paid at previous stages available as
setoff. Thus, in the example above, the GST (erstwhile excise duty) of ` 18,000 paid by the

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 ACCOUNTING PROCESS 2.33

trader could be availed as a credit (an asset), for set off against the tax charged by the trader
(a liability for the trader, which would be received from the consumer). Hence, the cost of the
goods to the trader would be ` 1,00,000 only, as ` 18,000 can be set off against the GST
charged by the trader to the consumer. The tax levied by the manufacturer to the trader
becomes ‘input tax’ for the trader, since the goods are purchased by him (it is his input). The
tax levied by the manufacturer to the trader, or the trader to the consumer is known as ‘output
tax’ (since it is output for both the manufacturer and trader) both for the manufacturer and
trader. The ‘input tax’ cannot be added to the cost of the goods or services procured, as it will
be adjusted against the ‘output tax’ liability. In a nutshell, since the input tax is availed as a
credit, only the value addition (i.e., the profit margin levied by the trader to the consumer in
our example) will be taxed, with the burden of tax being borne by the final consumer.

1.11.2 Salient features of GST

• GST is levied on supply i.e., manufacture or sale of goods and provision of services. In
other words, supply is taxable event which own its occurrence creates or attracts the
liability to pay tax.
• Under GST, tax in levied only the value added at each stage of the supply chain.

• GST is a destination-based consumption tax, i.e. the tax is levied at the place where the
goods or services are consumed, rather than the place where they are produced.
• There is no tax on tax or cascading of taxes under GST system.

• Under GST, there is a harmonization of laws, procedures and rates of tax across the
country.

1.11.3 Types of Taxes under GST

Before going through the types of taxes under GST, it is important to understand the concept
of intra-State supply and inter-State supply under GST which determines the type of tax to be
charged by the supplier.
The Concept of intra-state supply and inter-state supply depends upon on the location of the
supplier and place of supply (place of supply is the place where goods/services are consumed.
As a general rule, where the location of the supplier and the place of supply of goods or
services are in the same State/Union territory, it is treated as intra-State supply of goods or
services respectively.

Similarly, where the location of the supplier and the place of supply of goods or services are
in (i) two different States or (ii) two different Union Territories or (iii) a State and a Union
territory, it is treated as inter-State supply of goods or services respectively.

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GST has a dual aspect with the Centre and States simultaneously levying on a common tax
base. There are three main components of GST which are:

(i) Central Goods and Service Tax (CGST) is levied and collected by the Centre on the
“Intra -State” supply of goods and services.
(ii) State Goods and Services Tax (SGST) is levied and collected by the State
Governments (including Union Territories with legislature, for example Delhi,
Pondicherry, Jammu and Kashmir) on “Intra state” supply of goods and services
(iii) Union Territory Goods and Service Tax (UTGST) is levied and collected by Union
Territories without Legislatures [i.e. Andaman and Nicobar Islands,
Lakshadweep, Ladakh, Dadra and Nagar Haveli & Daman and Diu and Chandigarh] on
“intra-state” supply of goods and services.

(iv) Integrated Goods and services tax (IGST): It is the GST levied on the “inter state”
supply of goods and services and is collected by the Centre. IGST is equivalent to the
sum total of CGST and SGST.

GST is a “Consumption Based Tax“ i.e. the tax is received by the State in which the goods or
services are consumed and not by the state in which the goods and services are manufactured.

CGST
Intra State
SGST
GST

Inter State IGST

1.11.4 Input and Output GST

The tax paid by the recipient on procurement of goods /services is called Input tax. An entity
at each stage is permitted to avail credit of GST paid on the purchase of goods and /or
availment of services and can set off this credit against the GST payable on the goods and/or
services supplied by him. Thus, the final consumer bears the GST charged in the supply chain,
with set-off benefits at all the previous stages. Hence, the tax will be levied only on the value
added, which results in avoiding double taxation. For example, if tax payable by a
manufacturer on the output, i.e. final product is `750 and he has already paid tax on `500 on
input, i.e. purchases, then he can claim ‘Input Credit’ of `500 and he needs to deposit only
`250 in cash.

Output tax means the GST charged on supply of goods or services made by a supplier.
Input tax means the credit of Input tax already paid.

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Utilisation of Input Tax Credit under GST

Tax credit of CGST, SGST and IGST can be utilized in the following manner:
• Utilization of IGST Credit: IGST credit has to be first utilized against IGST liability and if
any balance is still available, the same can be utilized against CGST or/and SGST in any
order and in any proportion.
• Utilization of CGST Credit: CGST credit has to be first utilized against CGST liability and
if any balance is available, same can be utilized against IGST. However, CGST credit
cannot be utilized against SGST.
• Utilization of SGST Credit: SGST credit has to be first utilized against SGST liability and
if any balance is available, same can be utilized against IGST. However, SGST credit
cannot be utilized against CGST.

Input GST (credit can be Output GST (charged to the

availed, hence asset) consumer, payable by the
supplier, hence liability)

Nature At the time of purchases of goods At the time of sale of

(including fixed assets) or goods/assets or supply of
services, input GST A/c (CGST and services, Output GST A/c (CGST
SGST or IGST) is debited. and SGST or IGST) is credited.

Intra-state CGST paid is debited to “Input CGST charged is credited to

transaction CGST Account” and SGST paid is “Output CGST Account” and
debited to Input SGST”. SGST charged is credited to
“Output SGST Account “

Inter-state IGST paid is debited to “Input IGST charged is credited to

transaction IGST Account”. “Output IGST Account”

Reversal of Input GST paid at the time of Output GST charged is reversed
GST purchase are reversed in the when the goods are returned by
following situations: the purchaser.
(i) Purchases Return
(ii) Drawings
(iii) Goods distributed as free
samples
(iv) Goods distributed as gift (if
the same does not qualify as
“supply under GST”).

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(v) Goods lost in fire or theft.

(vi) Input tax credit of supplies
which are not allowed to be
availed by recipient.

Utilization Input GST A/c is credited when

of Input tax is paid by utilizing input tax.
tax credit

Double entry book-keeping with GST

The Double entry book-keeping records need to show the GST values separately so that the
purchases, expenses and sales are posted net i.e. without the addition of GST.

Journal entry in case of Sales of Goods or services

Account Receivable/Debtors A/c Dr. Gross Amount (including GST)

To Sales A/c Net Amount (excluding GST)

To Output GST Amount of GST

Journal entry in case of Purchase of Goods or services

Purchases A/c Dr. Net Amount (excluding GST)

Input GST A/c Dr. Amount of GST

To Account Payable/Creditors Gross Amount (including GST)

Journal entry in case of Utilization of Input Tax Credit towards payment of Output Tax

Output CGST A/c Dr. Amount of GST liability

Output SGST A/c Dr. Amount of GST liability

Output IGST A/c Dr. Amount of GST liability

To Input CGST A/c Amount of output GST liability paid

utilizing Input CGST

To Input SGST A/c Amount of output GST liability paid

utilizing Input SGST

To Input IGST A/c Amount of output GST liability paid

utilizing Input IGST

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 ACCOUNTING PROCESS 2.37

ILLUSTRATION 8
Journalise the following transactions in the books of Mr. Rohit:
(i) Purchased goods from Sahil for ` 50,000 plus CGST and SGST @ 9% each.
(ii) Purchased goods from Sam for ` 40,000 at a trade discount of 10% plus CGST and SGST
@ 9% each. ` 20,000 was paid immediately and balance payable after 3 months.
(iii) Goods costing ` 20,000 withdrawn for personal use. Such goods were purchased by
paying CGST and SGST @ 9% each.
(iv) Paid rent to Gagandeep for ` 30,000 plus CGST and SGST @ 6% each.
(v) Goods costing ` 5,000 (before trade discount of 10% ) returned to Sam. Such goods were
purchased by paying CGST and SGST @ 9% each.
(vi) Purchased furniture for ` 44,800 including IGST @ 12%.
(vii) Purchased machinery from M/s Symphony industries for ` 1,40,000 plus CGST and SGST
@ 9% each. Paid ` 1,00,000 immediately and balance to be paid after two months.
SOLUTION
In the books of Mr. Rohit

Date Particulars L.F. Dr. (`) Cr. (`)

(i) Purchases A/c Dr. 50,000
Input CGST A/c (50,000 x 9%) Dr. 4,500
Input SGST A/c (50,000 x 9%) Dr. 4,500
To Sahil’s A/c 59,000
(Being goods purchased from Sahil, CGST and
SGST paid @ 9% each)
(ii) Purchases A/c (40,000 x 90%) Dr. 36,000
Input CGST A/c (36,000 x 9%) Dr. 3,240
Input SGST A/c (36,000 x 9%) Dr. 3,240
To Sam’s A/c 22,480
To Bank A/c 20,000
(Being goods purchased from Sam, CGST and
SGST payable @ 9% each)
(iii) Drawings A/c* Dr. 23,600
To Purchase A/c 20,000

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To Input CGST A/c (20,000 x 9%) 1,800

To Input SGST A/c (20,000 x 9%) 1,800
(Being goods withdrawn for personal use and
input GST and input SGST debited at the time
of purchase reversed)
(iv) Rent A/c Dr. 30,000
Input CGST A/c (30,000 x 6%) Dr. 1,800
Input SGST A/c (30,000 x 6%) Dr. 1,800
To Gagandeep A/c 33,600
(Being rent paid to Gagandeep)
(v) Sam’s A/c Dr. 5,310
To Purchases Return A/c ** 4,500
( 5,000 – 10% trade Discount)
To Input CGST A/c (4,500 x 9%) 405
To Input SGST A/c (4,500 x 9%) 405
(Being goods returned to Sam and input IGST
debited at the time of purchases reversed)
(vi) Furniture A/c (WN 1) Dr. 40,000
Input IGST A/c Dr. 4,800
To Bank A/c 44,800
(Being furniture purchased paid IGST @ 12%)
(vii) Machinery A/c Dr. 1,40,000
Input CGST A/c (1,40,000 x 9%) Dr. 12,600
Input SGST A/c (1,40,000 x 9%) Dr. 12,600
To Bank A/c 1,00,000
To Symphony Industries 65,200
(Being machinery purchased and paid
` 1,00,000 immediately, CGST and SGST @ 9%
each)

* The input tax availed earlier is reversed, because these goods are ‘consumed’ by Mr. Rohit
himself. Since he cannot ‘sell’ goods to himself and charged output tax, the input tax thereon
is reversed, since in this case Mr. Rohit himself is the ultimate consumer of those goods.

© The Institute of Chartered Accountants of India

 ACCOUNTING PROCESS 2.39

** Since goods are returned to the supplier, the input tax credit availed earlier on those goods
is to be reversed, since these goods are no longer available to be sold.

Working Note.
1. Furniture purchased is including IGST @ 12%. So, value of furniture excluding IGST =
` 44,800 × 100/112 = ` 40,000. IGST = ` 40,000 × 12% = ` 4,800.
ILLUSTRATION 9
Journalise the following transactions in the books of Ms. Nidhi traders
July, 2022

3 Sold Goods for ` 50,000, charged CGST and SGST @ 6% each.

4 Sold goods to Surjeet for ` 28,000 including CGST and SGST @ 6% each.
5 Received ` 25,200 from Surjeet in full settlement of his account of ` 28,000.

6 Sold goods to Kapil for ` 30,000 charged IGST @ 12%. Received ` 12,000 immediately
and balance to be received after one month.
10 Kapil was allowed rebate of ` 5,000 as goods supplied to him were defective. These
goods were sold by charging IGST @ 12%.
12 Sold goods to Manpreet for ` 1,00,000 at trade discount of 20% and charged IGST
@ 12%
13 Goods of list price ` 20,000 returned by Manpreet.
17 Received commission of ` 15,000, charged CGST and SGST @ 6% each.
SOLUTION
In the Books of Ms. Nidhi
Journal
Date Particulars L.F. Dr. (`) Cr. (`)
July, 2022
3 Bank A/c Dr. 56,000
To Sales A/c 50,000
To Output CGST A/c 3,000
To Output SGST A/c 3,000
(Being goods sold for cash, charged CGST and
SGST @ 6% each)
4 Surjeet’s A/c Dr. 28,000
To Sales A/c 25,000

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To Output CGST A/c 1,500

To Output SGST A/c 1,500
(Being goods sold to Surjeet, charged CGST
and SGST @ 6% each )(refer W.N.)
5 Bank A/c Dr. 25,200
Discount Allowed A/c Dr. 2,800
To Surjeet A/c 28,000
(Being amount received from Surjeet in full
settlement of ` 28,000 after allowing him
discount of ` 2,800)
6 Bank A/c Dr. 12,000
Kapil’s A/c Dr. 21,600
To Sales A/c 30,000
To Output IGST A/c 3,600
(Being goods sold to Kapil, charged IGST @
12% and received ` 12,000 in cash and balance
receivable after one month)
10 Rebate A/c * Dr. 5,000
Output IGST A/c Dr. 600
To Kapil’s A/c 5,600
(Being rebate allowed on goods sold to Kapil,
Output IGST charged at the time of sales, now
reversed)
12 Manpreet’s A/c Dr. 89,600
To Sales A/c (1,00,000 x 80%) 80,000
To Output IGST A/c (80,000 x 12%) 9,600
(Being goods sold to Manpreet at trade
discount of 20% and charged IGST
@ 12%)
13 Sales Return A/c Dr. 16,000
Output IGST A/c Dr. 1,920
To Manpreet A/c 17,920
(Being goods returned by Manpreet and
Output IGST charged at the time of sales now
reversed)

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 ACCOUNTING PROCESS 2.41

17 Cash A/c Dr. 16,800

To Commission A/c 15,000
To Output CGST A/c (15,000 x 6%) 900
To Output SGST A/c (15,000 x 6%) 900
(Being commission received charged CGST and
SGST @ 6% each)

*Since rebate is on account of defective goods which cannot be sold/utilized further by Kapil,
the output GST charged thereon is also reversed. This treatment is like that of Sales Return. If
rebate was on account of other reasons (such as prompt payment), Output IGST would not be
reversed.
Working Note:
Goods sold to Surjeet is including CGST and SGST @ 6% each. So, sales excluding CGST and
SGST = ` 28,000 × 100/112 = ` 25,000. CGST and SGST = ` 25,000 × 6% = ` 1,500 each.
ILLUSTRATION 10
Record the following transactions in a Journal, assuming CGST and SGST@ 6% each.

(i) Sold goods to Mukesh at the list price of ` 50,000 less 20% trade discount.
(ii) Sold goods to Mukesh at the list price of ` 1,00,000 less 20% trade discount and 5% cash
discount.
(iii) Sold goods to Mukesh at the list price of ` 1,50,000 less 20% trade discount. Out of the
amount due 60% is received out of which three-fourth is received by cheque.
SOLUTION
Journal

Date Particulars L.F. Dr. (`) Cr. (`)

(i) Mukesh A/c Dr. 44,800

To Sales A/c 40,000

To Output CGST A/c 2,400

To Output SGST A/c 2,400

(Being goods sold to Mukesh at a trade discount

of 20% charged CGST and SGST @ 6% each)

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(ii) Discount Allowed A/c Dr. 4,000

Bank A/c 85,600
To Sales A/c 80,000
To Output SGST A/c 4,800
To Output SGST A/c 4,800
(Being goods sold to Mukesh at a trade discount
of 20% and 5% cash discount, charged CGST and
SGST @ 6% each)*
(iii) Bank A/c Dr. 60,480
Cash A/c Dr. 20,160
Mukesh’s A/c (refer W. N.) Dr. 53,760
To Sales A/c (1,50,000 x 80%) 1,20,000
To Output CGST A/c (1,20,000 x 6%) 7,200
To Output SGST A/c (1,20,000 x 6%) 7,200
(Being goods sold to Mukesh at a trade discount
of 20% and received 60%, charged CGST and SGST
@ 6% each)
*
Note : After allowing cash discount of ` 4,000 ( ` 80,000 × 5%), the balance of ` 85,600 is
received. Since discount is on account of prompt payment, output CGST and SGST is
computed on value determine after deducting trade discount.

Working Note: After allowing trade discount of ` 30,000 on ` 1,50,000 = ` 1,20,000, 60% of
the balance amount i.e. ` 1,34,400 (` 1,20,000 + 12% GST ` 14,400) is paid in cash and by
cheque.

Hence, the amount paid in cash and cheque = ` 1,34,400 × 60% = ` 80,640.
Amount paid by cheque = ` 80,640 × 3/4 = ` 60,480
Amount paid in cash = ` 80,640 x ¼ = ` 20,160

Mukesh’s A/c = (` 1,20,000 + ` 14,400 – ` 60,480 – ` 20,160) = ` 53,760

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 ACCOUNTING PROCESS 2.43

SUMMARY
♦ The accounting process starts with the recording of transactions in the form of journal
entries.
♦ The recording is based on double entry system. This book or register called journal is
the book of first or original entry.
♦ Next step is to post the entries in the ledger which is covered in the next unit.

TEST YOUR KNOWLEDGE

True and False
1. In accounting equation approach, equity + Long-term liabilities = fixed asset + current
assets – current liabilities.
2. In the traditional approach, for an entity a debtor will be receiver after sale of goods.
3. The rule of nominal account states that all expenses & losses are recorded on credit side.
4. Journal proper is also called a subsidiary book.
5. Capital account has a debit balance.
6. Purchase account is a nominal account.
7. All the personal & real account are recorded in P&L A/c.
8. Asset side of balance sheet contains all the personal & nominal accounts.
9. Capital account is a personal account.
10. Journal is also known as the book of original entry.

Multiple Choice Question

1. The rent paid to landlord is credited to
(a) Landlord’s account.
(b) Rent account.
(c) Cash account.
2. In case of a debt becoming bad, the amount should be credited to
(a) Trade receivables account.

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(b) Bad debts account.

(c) Cash account.
3. A Ltd. has a ` 35,000 account receivable from Mohan. On January, 22, Mohan makes a
partial payment of ` 21,000 to A Ltd. The journal entry made on January, 22 by A Ltd. to
record this transaction includes:

(a) A credit to the cash received account of ` 21,000.

(b) A credit to the Accounts receivable account of ` 21,000.
(c) A debit to the cash account of ` 14,000.

4. Which financial statement represents the accounting equation -

Assets = Liabilities + Owner’s equity:
(a) Income Statement
(b) Statement of Cash flows
(c) Balance Sheet.
5. Which account is the odd one out?
(a) Office furniture & Equipment.
(b) Freehold land and Buildings.
(c) Inventory of materials.

6. The debts written off as bad, if recovered subsequently are

(a) Credited to Bad Debts Recovered Account
(b) Credited to Trade Receivables Account.

(c) Debited to Profit and Loss Account.

7. In Double Entry System of Book-keeping every business transaction affects:
(a) Two accounts
(b) Two sides of the same account.
(c) The same account on two different dates.
8. A sale of goods to Ram for cash should be debited to:

(a) Ram
(b) Cash
(c) Sales

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 ACCOUNTING PROCESS 2.45

Theory Questions
1. Write short note on classification of accounts.
2. Distinguish between Real account and nominal account.

Practical Questions
1. Show the classification of the following Accounts under traditional and accounting
equation approach:

a Rent outstanding g Capital

b Closing Inventory h Sales Tax Payable

c Sales i Trade receivables

d Bank Fixed Deposit j Depreciation

e Cash k Drawings

f Bad Debts

2. Pass Journal Entries for the following transactions in the books of Gamma Bros.
(i) Employees had taken inventory worth ` 1,00,000 (Cost price ` 75,000) on the eve
of Deepawali and the same was deducted from their salaries in the subsequent
month.
(ii) Wages paid for erection of Machinery ` 18,000.
(iii) Income tax liability of proprietor ` 17000 was paid out of petty cash.

(iv) Purchase of goods from Naveen of the list price of ` 2,00,000. He allowed 10%
trade discount, ` 5,000 cash discount was also allowed for quick payment.
3. Calculate the missing amount for the following.

Assets Liabilities Capital

(a) 15,00,000 2,50,000 ?
(b) ? 1,50,000 75,000
(c) 14,50,000 ? 13,75,000
(d) 57,00,000 - 2,80,000 ?

4. Show the effect of increase = (+), decrease = (-) and no change=(0) on the assets of the
following transactions:

a. Purchased office furniture, payment to be made next month.

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b. Collected cash for repair services

c. Goods sold on credit.
d. Withdrawal of cash by the owner for personal use.
e. Hired an employee as sales manager of the north wing.
f. Returned goods worth ` 50,000.

g. One of our debtor agreed to pay his dues to Mr. C who is a creditor of the company
with the same amount being due to him.
h. Entered into an agreement with Mehta & Co. to purchase all raw materials from
their company from next year.
Also give reasons for your answers.
5. Following is the information provided by Mr. Gopi pertaining to year ended 31st March
2022. Find the unknowns, showing computation to support your answer:

Particulars ` Particulars `
Machinery 12,00,000 Trade Receivables B
Accounts Payable 1,00,000 Loans C
Inventory 60,000 Closing Capital D
Total Liabilities including 14,15,000 Opening Capital 10,00,000
capital
Cash A Loss incurred during the year 35,000
Bank 80,000 Capital Introduced during 1,00,000
the year

Additional Information: During the year sales of ` 15,55,000 was made of which
` 15,00,000 have been received.
5. Pass journal entries for the following transactions in the books of Mr. Manish:

(i) Purchased goods from Sonu for ` 3,00,000 at a trade discount of 10% plus CGST
and SGST@ 6% each.
(ii) Sold goods to Mohit for ` 1,00,000 and charged CGST and SGST @ 5% each. Out
of the amount due 40% is received by cheque immediately.
(iii) Goods costing ` 25,000 withdrawn for personal use. Such Goods were purchased
by paying CGST and SGST @ 6% each.

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 ACCOUNTING PROCESS 2.47

(iv) Machinery purchased from M/s Bright Industries for ` 2,00,000 plus CGST and
SGST @ 9% each. Paid ` 1,00,000 immediately by cheque and balance to be paid after
two months.

ANSWERS/HINTS
True and False
1. True: As per the modern accounting equation approach- it is the basic formula in the
accounting process
2. False: In the traditional approach, a debtor will be giver since he will be paying money
for the sale of goods by the entity.
3. False: The rule of nominal account states that all expenses & losses are recorded on
debit side.

4. True: It is one of the book where in the transactions not entered in the other books are
entered in this book.
5. False: Capital account has a credit balance.
6. True: As it is considered as an expense.
7. False: All the personal & real account are recorded in balance sheet.
8. False: Asset side of balance sheet contains all the personal & real accounts.
9. True: As it is in the name of the proprietor who is bringing in the capital to the business.
10. True: As the transactions are entered first in this book as a first hand record.

Multiple Choice Questions

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

7. (a) 8. (b)

Theoretical Questions
1. a. Accounts are broadly classified into assets, liabilities and capital. The basic
accounting equation specifies broad categories, which are as follows:
(i) Assets: These are resources controlled by the enterprise as a result of
past events and from which future economic benefits are expected to
flow to the enterprise, namely cash, stock of goods, land, buildings,
machinery etc.

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(ii) Liabilities: These are financial obligations of an enterprise other than

owner’s equity namely long term loans, creditors, outstanding
expenses etc.
(iii) Capital: It generally refer to the amounts invested in an enterprise by
its owner(s), the accretion to it or a reduction in it. Since capital is
affected by expenses and incomes of revenue nature, there are two
more categories of accounts, namely expenses and incomes. The
difference between incomes and expenses are taken into capital
account.
 Expenses: These represents those accounts which show the
amount spent or even lost in carrying on operations.
 Incomes: These represent those accounts which show the
revenue amounts earned by the enterprise.
However, traditionally accounts are classified as follows:

(i) Personal Accounts: These accounts relate to persons, institutions,

debtors or creditors.
(ii) Impersonal Accounts: These represent accounts which are not
personal. These can be further sub-divided as follows:
 Real Accounts: These accounts relate to assets of the firm but not
debt e.g. accounts relating to land, buildings, cash in hand etc.
 Nominal accounts: These accounts relate to expenses, losses,
gains, revenues etc.
2. A real account is an account relating to properties and assets, other than personal
accounts of the firm. Examples are land, buildings, machinery, cash, investments etc.
Nominal accounts relate to expenses or losses, incomes and gains. Examples are: wages,
salaries, rent, depreciation etc. The net result of all the nominal accounts is reflected as
profit or loss which is transferred to the capital account. Nominal accounts are therefore,
temporary. The real accounts are shown in the balance sheet along with personal accounts.

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 ACCOUNTING PROCESS 2.49

Practical Problems
1. Nature of Account

Sl. No. Title of Account Traditional Accounting

Approach Equation
Approach
a Rent Outstanding Personal Liability
b Closing Inventory Real Asset
c Sales Nominal Revenue
d Bank Fixed Deposit Personal Asset
e Cash Real Asset
f Bad Debts Nominal Expense
g Capital Personal Capital
h Sales Tax Payable Personal Liability
i Trade receivables Personal Asset
j Depreciation Nominal Expense
k Drawings Personal Capital -Drawings

2. Journal Entries in the books of Gamma Bros.

Dr. Cr.
Particulars Amount Amount
` `
(i) Salaries A/c Dr. 75,000
To Purchase A/c 75,000
(Being entry made for inventory taken by
employees)
(ii) Machinery A/c Dr. 18,000
To Bank A/c 18,000
(Being wages paid for erection of machinery)
(iii) Drawings A/c Dr. 17,000
To Petty Cash A/c 17,000
(Being the income tax of proprietor paid out of
business money)

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(iv) Purchase A/c Dr. 1,80,000

To Naveen A/c 1,80,000
(Being goods purchased from Naveen)
Naveen A/c Dr. 1,80,000
To Bank 1,75,000
To Discount Received A/c 5,000
(Being amount paid for the goods purchased from
Naveen for ` 2,00,000. 10% trade discount and cash
discount of ` 5,000 allowed by him)

Note:
i. Here wages paid on erection of machinery have been capitalised therefore
machinery account has been debited directly instead of wages being recorded
as an expenditure.
ii. The students may also note that trade discount is allowed on the list price of
goods. It is deducted to compute the invoice amount of the goods to be
recorded in the books. Cash discount is a discount allowed in case of early
payments to the seller. The entry is made in the books of accounts for cash
discount.
3. (a) 12,50,000

(b) 2,25,000
(c) 75,000
(d) 59,80,000

These have been solved using the Accounting Equation:

Assets = Capital + Liabilities
4.

S. Increase (+) / Reasons

No. Decrease (-) /
No Change (0)
in Assets
(a) Furniture has been purchased making it an increase in assets
+ and also it being purchased on credit it increases liability and
there is no outflow of assets like cash or bank.
(b) + Cash has flowed in for services provided making it an
increase in assets.

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 ACCOUNTING PROCESS 2.51

(c) + For goods sold, it is a decrease in inventory (assets) but

correspondingly there is an increase in debtors. However,
there will be a net increase in assets because goods sold on
profit.
Though if goods are sold at cost; it will result in no change
whereas if sold at below cost; it will result in decrease in
assets.
(d) - Here cash has been withdrawn from business resulting in
decrease in assets and capital.
(e) 0 Only hiring of employee has been done resulting in no
change in assets.
(f) - Outflow of goods has resulted in decrease in assets while
money owed to creditors reduce on the liability side.
(g) - Both assets and liabilities reduced by same amounts
meaning a decrease in assets.
(h) 0 Only a purchase agreement has been entered into with no
transaction taking place yet.

5. Trade Receivable Balance (B) = Sales- Amount received during the year

= ` (15,55,000 – 15,00,000) = ` 55,000.

Since, we know Assets = Capital + Liabilities
Therefore, balance of assets is also ` 14,15,000
So, total assets:

Particulars `
Total Assets 14,15,000
Less: Machinery (12,00,000)
Less: Inventory (60,000)
Less: Bank (80,000)
Less: Receivables (55,000)
Cash (A) 20,000

Computation of Closing Capital (D):

Particulars `
Opening Capital 10,00,000
Add: Introduced during the year 1,00,000
Less: Loss incurred during the year (35,000)
Closing Capital 10,65,000

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So, Loan amount (C) = Total Liabilities and capital - Closing Capital - Trade Payables
= ` (14,15,000 - 10,65,000 - 1,00,000)= ` 2,50,000
5. Journal entries in the books of Mr. Manish

S Particulars L.F. Amount Amount

No. Dr. (` ) Cr. (` )
(i) Purchases A/c Dr. 2,70,000
Input CGST A/c Dr. 16,200
Input SGST A/c Dr. 16,200
To Sonu’s A/c 3,02,400
(Being goods purchased from
Sonu, CGST and SGST payable @
6% each)
(ii) Bank A/c Dr. 44,000
Mohit’s A/c Dr. 66,000
To Sales A/c 1,00,000
To Output CGST A/c 5,000
To Output SGST A/c 5,000
(Being goods sold to Mohit,
charged CGST and SGST @ 5%
each and received 40% in cash)
(iii) Drawings A/c Dr. 28,000
To Purchase A/c 25,000
To Input CGST A/c 1,500
To Input SGST A/c 1,500
(Being goods withdrawn for
personal use and input CGST and
input SGST debited at the time of
purchase reversed)
(iv) Machinery A/c Dr. 2,00,000
Input CGST A/c Dr. 18,000
Input SGST A/c Dr. 18,000
To Bank A/c 1,00,000
To Bright Industries 1,36,000
(Being machinery purchased and
paid ` 1,00,000 immediately, CGST
and SGST @ 9% each)

© The Institute of Chartered Accountants of India

 ACCOUNTING PROCESS 2.53

UNIT 2 : LEDGERS

LEARNING OUTCOMES

After studying this unit, you will be able to:

♦ Understand the concept of Ledgers.
♦ Learn the technique of ledger posting and how to balance an
account.
♦ Learn the technique of opening accounts each year taking closing
balances of the previous year. Note also the use of term ‘balance c/d’
and ‘balance b/d’

UNIT OVERVIEW

Process of
transferring
journal entries
in the accuonts

Difference
between the Ledger known
totals of as principal Remaining are
debits and books of carried forward
credit sides is account to the next year
found out as
the balance

Some of the
balances are
transferred to
the profit and
loss acount

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2.1 INTRODUCTION
After recording the original transactions in the journal, recorded entries are classified and
grouped into by preparation of accounts. The book which contains all set of accounts (viz.
personal, real and nominal accounts), is known as Ledger. It is known as principal books of
account in which account-wise balance of each account is determined.

2.2 SPECIMEN OF LEDGER ACCOUNTS

A ledger account has two sides-debit (left side of the account) and credit (right side of the
account). Each of the debit and credit side has four columns. (i) Date (ii) Particulars (iii) Journal
folio i.e. page from where the entries are taken for posting and (iv) Amount.
Dr. Account Cr.

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

(` ) (` )

2.3 POSTING
The process of transferring the debit and credit items from journal to classified accounts in
the ledger is known as posting.

2.3.1 Rules regarding Posting of Entries in the Ledger

1. Separate account is opened in ledger book for each distinct account and entries from
Journal are posted to respective account accordingly.
2. It is a practice to use words ‘To’ and ‘By’ while posting transactions in the ledger. The
word ‘To’ is used in the particular column with the accounts written on the debit side
while ‘By’ is used with the accounts written in the particular column of the credit side.
These ‘To’ and ‘By’ do not have any meanings but are used to the account debited and
credited.

3. The concerned account debited in the journal should also be debited in the ledger but
reference should be of the respective credit account.

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2.4 BALANCING AN ACCOUNT

At the end of each month or year or any particular reporting period, it may be necessary to
ascertain the balance in an account. Suppose a person has bought goods worth `1,000 and
has paid only ` 850; he owes `150 and that is the balance in his account. To ascertain the
balance in any account, both the sides of the account is totalled and smaller amount is
deducted from the bigger amount to ascertain the difference. If the credit side is bigger than
the debit side, it is a credit balance and vice a versa. The credit balance is written on the debit
side as, “To Balance c/d”; c/d means “carried down”. By doing this, two sides will be equal. The
totals are written on the two sides opposite one another.
Then the credit balance is written on the credit side as “By balance b/d (i.e., brought down)”.
This is the opening balance for the new period. The debit balance similarly is written on the
credit side as “By Balance c/d”, the totals then are written on the two sides as shown above
and then the debit balance written on the debit side as, “To Balance b/d”, as the opening
balance of the new period.
It should be noted that nominal accounts are not balanced; the balance in the end are
transferred to the profit and loss account. Only personal and real accounts balances are
ultimately shown in the balance sheet at the end of the accounting period. The capital account
is adjusted for profit or loss (i.e net of nominal accounts) at the end of accounting period.
ILLUSTRATION 1
Prepare the Stationery Account of a firm for the month of Jan. 2022 duly balanced off, from the
following details:

2022 `
Jan. 1 Inventory of stationery 480
Jan. 5 Purchase of stationery by cheque 800
Jan. 15 Purchase of stationery on credit from Five Star Stationery Mart 1,280

SOLUTION

Dr. Stationery Account Cr.

Date Particulars ` Date Particulars `

1.1.2022 To Balance b/d 480 31.1.2022 By Balance c/d 2,560

5.1.2022 To Bank A/c 800
15.1.2022 To Five Star
Stationery

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Mart A/c 1,280

2,560 2,560
1.2.2022 To Balance b/d 2,560

ILLUSTRATION 2

Prepare the ledger accounts on the basis of following transactions in the books of a trader.
Debit Balances on January 1, 2022:
Cash in Hand ` 8,000, Cash at Bank ` 25,000, inventory of Goods ` 20,000, Building ` 10,000.
Trade receivables: Vijay ` 2,000 and Madhu ` 2,000.
Credit Balances on January 1, 2022:
Trade payables: Anand ` 5,000 and Kapil `7,000, Capital ` 55,000

Following were further transactions in the month of January, 2022:

Jan. 1 Purchased goods worth ` 5,000 (payable at later date) for cash less 20% trade
discount and 5% cash discount.
Jan. 4 Received ` 1,980 from Vijay and allowed him ` 20 as discount.
Jan. 8 Purchased plant from Mukesh for `5,000 and paid `100 as cartage for bringing the
plant to the factory and another `200 as installation charges.

Jan. 12 Sold goods to Rahim on credit `600.

Jan. 15 Rahim became insolvent and could pay only 50 paise in a rupee.
Jan. 18 Sold goods to Ram for cash `1,000.
SOLUTION
Dr. Cash Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2022 2022
Jan. 1 To Balance b/d 8,000 Jan. 1 By Purchases A/c 3,800
Jan. 4 To Vijay 1,980 Jan. 8 By Plant A/c 300
Jan. 15 To Rahim 300 Jan. 31 By Balance c/d 7,180
Jan. 18 To Sales A/c 1,000
11,280 11,280
Feb. 1 To Balance b/d 7,180

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 ACCOUNTING PROCESS 2.57

Dr. Bank Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 1 To Balance b/d 25,000 Jan. 31 By Balance c/d 25,000

25,000 25,000
Feb. 1 To Balance b/d 25,000

Dr. Inventory Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 1 To Balance b/d 20,000 Jan. 31 By Balance c/d 20,000
20,000 20,000
Feb. 1 To Balance b/d 20,000

Dr. Building Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 1 To Balance b/d 10,000 Jan. 31 By Balance c/d 10,000
10,000 10,000
Feb. 1 To Balance b/d 10,000

Dr. Vijay Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 1 To Balance b/d 2,000 Jan. 4 By Cash A/c 1,980
By Discount A/c 20
2,000 2,000

Dr. Madhu Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 1 To Balance b/d 2,000 Jan. 31 By Balance c/d 2,000
2,000 2,000
Feb. 1 To Balance b/d 2,000

Dr. Anand Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 31 To Balance c/d 5,000 Jan. 1 By Balance b/d 5,000
5,000 5,000
Feb. 1 By Balance b/d 5,000

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Dr. Kapil Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 31 To Balance c/d 7,000 Jan. 1 By Balance b/d 7,000
7,000 7,000
Feb. 1 By Balance b/d 7,000

Dr. Capital Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 31 To Balance c/d 55,000 Jan. 1 By Balance b/d 55,000
55,000 55,000
Feb. 1 By Balance b/d 55,000

Dr. Purchases Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 1 To Cash 3,800
Jan. 1 To Cash Discount 200 Jan. 31 By Balance c/d 4,000
4,000 4,000
Feb. 1 To Balance b/d 4,000

Dr. Discount Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 4 To Vijay 20 Jan. 1 By Purchases A/c 200
Jan.31 To Balance c/d 180
200 200
Feb. 1 By Balance b/d 180

Dr. Plant Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 8 To Mukesh 5,000 Jan. 31 By Balance c/d 5,300

Jan. 8 To Cash A/c 300

5,300 5,300

Feb. 1 To Balance b/d 5,300

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 ACCOUNTING PROCESS 2.59

Dr. Mukesh Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 31 To Balance c/d 5,000 Jan. 8 By Plant A/c 5,000

5,000 5,000

Feb. 1 By Balance b/d 5,000

Dr. Sales Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 31 To Balance c/d 1,600 Jan. 12 By Rahim 600

Jan. 18 By Cash A/c 1,000

1,600 1,600

Feb. 1 By Balance b/d 1,600

Dr. Rahim Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 12 To Sales A/c 600 Jan. 15 By Cash A/c 300

Jan. 15 By Bad Debts A/c 300

600 600

Dr. Bad Debts Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

Jan. 15 To Rahim 300 Jan. 31 By Balance c/d 300

300 300

Feb. 1 To Balance b/d 300

ILLUSTRATION 3
The following data is given by Mr. S, the owner, with a request to compile only the two personal
accounts of Mr. H and Mr. R, in his ledger, for the month of April, 2022.
1 Mr. S owes Mr. R ` 15,000; Mr. H owes Mr. S ` 20,000.
4 Mr. R sold goods worth ` 60,000 @ 10% trade discount to Mr. S.
5 Mr. S sold to Mr. H goods prices at ` 30,000.

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17 Record a purchase of ` 25,000 net from R, which were sold to H at a profit of `15,000.
18 Mr. S rejected 10% of Mr. R’s goods of 4th April.
19 Mr. S issued a cash memo for `10,000 to Mr. H who came personally for this consignment
of goods, urgently needed by him.
22 Mr. H cleared half his total dues to Mr. S, enjoying a ½% cash discount (of the payment
received, ` 20,000 was by cheque).
26 R’s total dues (less `10,000 held back) were cleared by cheque, enjoying a cash discount
of `1,000 on the payment made.
29 Close H’s Account to record the fact that all except ` 5,000 was cleared by him, by a
cheque, because he was declared bankrupt.
30 Balance R’s Account.
SOLUTION
In the books of Mr. S
Dr. Mr. H Account Cr.

Date Particulars ` Date Particulars `

1.4.2022 To Balance b/d 20,000 22.4.2022 By Bank A/c 20,000
5.4.2022 To Sales A/c 30,000 22.4.2022 By Cash A/c (Note 2) 24,775
17.4.2022 To Sales A/c 40,000 29.4.2022 By Discount Allowed A/c 225
29.4.2022 By Bank A/c 40,000
29.4.2022 By Bad Debts A/c 5,000
90,000 90,000

Dr. Mr. R Account Cr.

Date Particulars ` Date Particulars `

18.4.2022 To Purchase Returns 5,400 1.4.2022 By Balance b/d 15,000
A/c
4.4.2022 By Purchases A/c 54,000
26.4.2022 To Bank A/c 77,600 17.4.2022 By Purchases A/c 25,000
26.4.2022 To Discount
Received A/c 1,000
30.4.2022 To Balance c/d 10,000
94,000 94,000
1.5.2022 By Balance b/d 10,000

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 ACCOUNTING PROCESS 2.61

Working Notes:
(1) Sale of ` 10,000 on 19th April is a cash sales, therefore, it will not be recorded in the
Personal Account of Mr. H; and
(2) On 22nd April, Mr. H owes Mr. S ` 90,000, amount paid by Mr. H ½ of ` 90,000 less
½% discount i.e., ` 45,000– ` 225 = ` 44,775. Out of this amount, ` 20,000 paid by
cheque and the balance of ` 24,775 in cash.

Note: The balance of all nominal accounts is transferred to Profit and Loss account at the time
of preparation of financial statements as the nominal Accounts are in the nature of
revenue/incomes/gains or expenses/losses. Thus, the net result of all nominal accounts is
reflected in profit and loss Account for an accounting period which is transferred to Capital
Account. The balance of all the accounts relating to assets and liabilities (personal and real)
are reflected in the Balance Sheet at the end of accounting period.

SUMMARY
 Process of transferring journal entries in the accounts opened in Ledger is called
posting.
 Ledger is known as principal books of accounts and it provides full information
regarding all the financial transactions pertaining to any individual account.
 The difference between the totals of debits and credit sides is found out as the balance.
Some of these balances (i.e nominal accounts) are transferred to the profit and loss
account and some are carried forward to the next period/year i.e., shown in the balance
sheet, depending upon the nature of the account.

TEST YOUR KNOWLEDGE

True and False
1. A ledger is also known as the principal book of accounts.

2. Cash account has a debit balance.

3. Posting is the process of transferring the accounts from ledger to journal.
4. At the end of the accounting year, all the nominal accounts of the ledger book are
balanced.
5. Ledger records the transactions in a chronological order.

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6. If the total debit side is greater than the total of credit side, we get a credit balance as
opening balance.

7. Ledger accounts of assets will always be debited when they are increased.

Multiple Choice Questions

1. The process of transferring the debit and credit items from a Journal to their respective
accounts in the ledger is termed as
(a) Posting
(b) Purchase
(c) Balancing of an account
2. The technique of finding the net balance of an account after considering the totals of
both debits and credits appearing in the account is known as
(a) Posting
(b) Purchase

(c) Balancing of an account

3. Journal and ledger records transactions in
(a) A chronological order and analytical order respectively.

(b) An analytical order and chronological order respectively.

(c) A chronological order only
4. Ledger book is popularly known as
(a) Secondary book of accounts
(b) Principal book of accounts
(c) Subsidiary book of accounts

5. At the end of the accounting year all the nominal accounts of the ledger book are
(a) Balanced but not transferred to profit and loss account
(b) Not balanced and also the balance is not transferred to the profit and loss account

(c) Not balanced and their balance is transferred to the profit and loss account.

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Theory Questions
1 What do you mean by principal books of accounts?
2 What are the rules of posting of journal entries into the Ledger?

Practical Questions
1. Journalize the following transactions, post them in the Ledger and balance the accounts
on 31st December.
1. X started business with a capital of ` 20,000
2. He purchased goods from Y on credit ` 4,000
3. He paid cash to Y ` 2,000

4. He sold goods to Z ` 4,000

5. He received cash from Z ` 6,000
6. He further purchased goods from Y ` 4,000

7. He paid cash to Y ` 2,000

8. He further sold goods to Z ` 4,000
9 He received cash form Z ` 2,000

ANSWERS/HINTS
True and False
1. True: Since it classifies all the amounts related to a particular account and then it is used
as the base for preparing the Trial balance, a ledger is also known as principal books of
accounts.
2. True: Being an asset under the modern equation approach, cash account has a debit
balance.
3. False: Posting is the process of transferring the balances from journal to ledger.
4. False: At the end of the accounting year, all the nominal accounts of the ledger book are
totaled and transferred to P&L A/c.
5. False: Ledger records the transactions in analytical order. But journal records the
transactions in a chronological order.

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6. False: If the total of debit side is greater than the total of credit side, we get a debit
balance as the opening balance.

7. True: The increase to an asset shall be debited since the original balance is also debit.

Multiple Choice Questions

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

Theoretical Questions
1. Ledger is known as principal books of accounts and it provides full information regarding
all the transactions pertaining to any individual account. Ledger contains all set of
accounts (viz. personal, real and nominal accounts).
2. Rules regarding posting of entries in the ledger:
a. Separate account is opened in ledger book for each account and entries from the
Journal are posted to respective accounts accordingly.

b. It is a practice to use words ‘To’ and ‘By’ while posting transactions in the ledger.
The word ‘To’ is used in the particular column with the accounts written on the
debit side while ‘By’ is used with the accounts written in the particular column of
the credit side. These ‘To’ and ‘By’ do not have any meanings but are used to the
account debited and credited.
c. The concerned account debited in the journal should also be debited in the ledger
but reference should be of the respective credit account.

Practical Questions
1. Journal

Particulars L.F. Debit ` Credit `

Cash A/c Dr. 20,000
To Capital A/c 20,000
(Being commencement of business)
Purchase A/c Dr. 4,000
To Y 4,000
(Being purchase of goods on credit)
Y Dr. 2,000
To Cash 2,000
(Being amount paid to Y)

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Z Dr. 4,000
To Sales A/c 4,000
(Being goods sold to Z)
Bank A/c Dr. 6,000
To Z 6,000
(Being amount received from Z)
Purchase A/c Dr. 4,000
To Y 4,000
(Being purchase of goods on credit from Y)
Y Dr. 2,000
To Cash A/c 2,000
(Being amount paid to Y)
Z Dr. 4,000
To Sales A/c 4,000
(Being goods sold to Z)
Cash A/c Dr. 2,000
To Z 2,000
(Being cash received from Z)
TOTAL 48,000 48,000

Dr. Cash Account Cr.

Date Particulars ` Date Particulars `

To Capital A/c 20,000 By Y 2,000

To Z 6,000 By Y 2,000
To Z 2000 By Balance c/d 24,000
28,000 28,000
Feb. 1 To Balance b/d 24,000

Dr. Capital Account Cr.

Date Particulars ` Date Particulars `

Jan. 31 To Balance c/d 20,000 By Cash A/c 20,000

20,000 20,000
Feb. 1 By Balance b/d 20,000

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Dr. Purchase Account Cr.

Date Particulars ` Date Particulars `

To Y 4,000 Jan 31. By Balance c/d 8,000

To Y 4,000
8,000 8,000
Feb.1 To Balance b/d 8,000

Dr. Y’s Account Cr.

Date Particulars ` Date Particulars `

To Cash 2,000 By Purchases 4,000

To Cash 2,000 By Purchases 4,000
Jan. 31 To Balance c/d 4,000
8,000 8,000
By Balance b/d 4,000

Dr. Z’s Account Cr.

Date Particulars ` Date Particulars `

To Sales 4,000 By Cash A/c 6,000

To Sales 4,000 By Cash A/c 2,000
8,000 8,000

Dr. Sales Account Cr.

Date Particulars ` Date Particulars `

Jan. 31 To Balance c/d 8,000 By Z 4,000

By Z 4,000
8,000 8,000
Feb. 1 By Balance b/d 8,000

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UNIT 3 : TRIAL BALANCE

LEARNING OUTCOMES

After studying this unit, you will be able to:

♦ Learn the technique of taking balances from ledger accounts to
prepare trial balance.
♦ Understand what is trial balance and what purposes it can serve..

UNIT OVERVIEW

Phase of
the
accounting
process

Baisis for
Ledger
Preparing final
Trial balances on a
accounts i.e.
P&L A/c and Balance particular
date
Balance sheet

Checks
arthmetical
accuracy of
the books

Trial balance contains various ledger balances on a particular date. It forms the basis for
preparing the financial statement i.e. profit and loss account and balance sheet. If it tallies, it
means that the accounts are arithmetically accurate but certain errors may still remain
undetected. Therefore, it is very important to carefully journalise and post the entries,
following the rules of accounting.

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3.1 INTRODUCTION
Preparation of trial balance is the third phase in the accounting process. After posting the
accounts in the ledger, a statement is prepared to show separately the debit and credit
balances. Such a statement is known as the trial balance. It may also be prepared by listing
each and every account and entering in separate columns the totals of the debit and credit
sides. Whichever way it is prepared, the totals of the two columns should agree. An agreement
indicates arithmetic accuracy of the accounting work; if the two sides do not agree, then there
is simply an arithmetic error(s).
This follows from the fact that under the Double Entry System, the amount written on the
debit sides of various accounts is always equal to the amounts entered on the credit sides of
other accounts and vice versa. Hence the totals of the debit sides must be equal to the totals
of the credit sides. Also total of the debit balances will be equal to the total of the credit
balances. Once this agreement is established, there is reasonable confidence that the
accounting work is free from clerical errors, though it is not a proof of cent per cent accuracy,
because some errors of principle and compensating errors may still remain. Generally, to check
the arithmetic accuracy of accounts, trial balance is prepared at monthly intervals. But because
double entry system is followed, one can prepare a trial balance any time. Though a trial
balance can be prepared any time but it is preferable to prepare it at the end of the reporting
period which may be month end/quarter end/year end to ensure the arithmetic accuracy of
all the accounts before the preparation of the financial statements. It may be noted that trial
balance is a statement and not an account.

3.2. OBJECTIVES OF PREPARING THE TRIAL BALANCE

The preparation of trial balance has the following objectives:
(i) Trial balance enables one to establish whether the posting and other accounting
processes have been carried out without committing arithmetical errors. In other
words, the trial balance helps to establish arithmetical accuracy of the books of
accounts.
(ii) Financial statements are normally prepared on the basis of agreed trial balance;
otherwise the financial statements will not give true and fair picture of the financial
transactions.
(iii) The trial balance serves as a summary of what is contained in the ledger; the ledger
may have to be seen only when details are required in respect of an account.

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

Trial Balance
as at.......................

S.No Ledger Accounts Dr. Amount Cr. Amount

(Total or Balance) (Total or Balance)
` `

The under mentioned points may be noted:

(i) A trial balance is prepared as on a particular date which should be mentioned at the
top.
(ii) In the second column the name of the account is written.
(iii) In the third column the total of the debit side of the account concerned or the debit
balance, if any is entered.
(iv) In the fourth column, the total of the credit side or the credit balance is written.
(v) The third and fourth columns are totalled at the end.

3.3 LIMITATIONS OF TRIAL BALANCE

One should note that the agreement of Trial Balance is not a conclusive proof of accuracy. In
other words, in spite of the agreement of the trial balance some errors may remain. These
may be of the following types:
(i) Transaction has not been entered at all in the journal.

(ii) A wrong amount has been written in both columns of the journal.
(iii) A wrong account has been mentioned in the journal.
(iv) An entry has not at all been posted in the ledger.

(v) Entry is posted twice in the ledger.

Still, the preparation of the trial balance is very useful; without it, the preparation of financial
statements, would be difficult.

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3.4 METHODS OF PREPARATION OF TRIAL BALANCE

1. TOTAL METHOD
Under this method, every ledger account is totalled and that total amount (both of debit side
and credit side) is transferred to trial balance. In this method, trial balance can be prepared as
soon as ledger account is totalled. Time taken to balance the ledger accounts is saved under
this method as balance can be found out in the trial balance itself. The difference of totals of
each ledger account is the balance of that particular account. This method is not commonly
used as for the preparation of the financial statements, only net balance of the ledger account
is required. Therefore, the trial balance compiled under this method cannot be used directly
for preparation of the financial statements.
ILLUSTRATION 1
Given below is a ledger extract relating to the business of X and Co. as on March, 31, 2022. You
are required to prepare the Trial Balance by the Total Amount Method.
Dr. Cash Account Cr.

Particulars ` Particulars `
To Capital A/c 10,000 By Furniture A/c 3,000
To Ram’s A/c 25,000 By Salaries A/c 2,500
To Cash Sales 500 By Shyam’s A/c 21,000
By Cash Purchases 1,000
By Capital A/c 500
By Balance c/d 7,500
35,500 35,500

Dr. Furniture Account Cr.

Particulars ` Particulars `
To Cash A/c 3,000 By Balance c/d 3,000
3,000 3,000

Dr. Salaries Account Cr.

Particulars ` Particulars `
To Cash A/c 2,500 By Balance c/d 2,500
2,500 2,500

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Dr. Shyam’s Account Cr.

Particulars ` Particulars `
To Cash A/c 21,000 By Purchases A/c 25,000
To Purchase Returns A/c 500 (Credit Purchase)
To Balance c/d 3,500 –
25,000 25,000

Dr. Purchases Account Cr.

Particulars ` Particulars `
To Cash A/c (Cash Purchases) 1,000 By Balance c/d 26,000
To Sundries as per Purchases Book
(Credit Purchases) 25,000 –
26,000 26,000

Dr. Purchases Returns Account Cr.

Particulars ` Particulars `
To Balance c/d 500 By Sundries as per 500
Purchases Return Book
500 500

Dr. Ram’s Account Cr.

Particulars ` Particulars `
To Sales A/c (Credit Sales) 30,000 By Sales Returns A/c 100
By Cash A/c 25,000
By Balance c/d 4,900
30,000 30,000

Dr. Sales Account Cr.

Particulars ` Particulars `
To Balance c/d 30,500 By Cash A/c (Cash Sales) 500
By Sundries as per Sales Book
(Credit Sales) 30,000
30,500 30,500

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Dr. Sales Returns Account Cr.

Particulars ` Particulars `
To Sundries as per Sales
Returns Book 100 By Balance c/d 100
100 100

Dr. Capital Account Cr.

Particulars ` Particulars `
To Cash A/c 500 By Cash A/c 10,000
To Balance c/d 9,500
10,000 10,000

SOLUTION
Trial Balance of X and Co. as at 31.03.2022

Sl. Name of Account Total Debit Total Credit

No. ` `
1. Cash A/c 35,500 28,000
2. Furniture A/c 3,000
3. Salaries A/c 2,500
4. Shyam’s A/c 21,500 25,000
5. Purchases A/c 26,000
6. Purchases Returns A/c 500
7. Ram’s A/c 30,000 25,100
8. Sales A/c 30,500
9. Sales Returns A/c 100
10. Capital A/c 500 10,000
1,19,100 1,19,100

2. BALANCE METHOD
Under this method, every ledger account is balanced and those balances only are carried
forward to the trial balance. This method is used commonly by the accountants and helps in
the preparation of the financial statements. Financial statements are prepared on the basis of
the balances of the ledger accounts.

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ILLUSTRATION 2
Taking the same information as given in Illustration 1, prepare the Trial Balance by Balance
Method.
SOLUTION
Trial Balance of X and Co. as at 31.03.2022

Sl. Name of Account Debit Balance Credit Balance

No. ` `
1. Cash A/c 7,500
2. Furniture A/c 3,000
3. Salaries A/c 2,500
4. Shyam’s A/c 3,500
5. Purchases A/c 26,000
6. Purchases Returns A/c 500
7. Ram’s A/c 4,900
8. Sales A/c 30,500
9. Sales Returns A/c 100
10. Capital A/c 9,500
44,000 44,000

3. TOTAL AND BALANCE METHOD

Under this method, the above two explained methods are combined. This has been explained
with the help of the following example:
Trial Balance of X as at 31.03.2022

Sl. Heads of Account Debit Credit Debit Credit

No. Balance Balance Total Total
(` ) (` ) (` ) (` )
1. Cash Account 7,500 35,500 28,000
2. Furniture Account 3,000 3,000
3. Salaries Account 2,500 2,500
4. Shyam’s Account 3,500 21,500 25,000

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5. Purchases Account 26,000 26,000

6. Purchase Returns Account 500 500
7. Ram’s Account 4,900 30,000 25,100
8. Sales Account 30,500 30,500
9. Sale Returns Account 100 100
10. Capital Account 9,500 500 10,000

Total 44,000 44,000 1,19,100 1,19,100

3.5 ADJUSTED TRIAL BALANCE (THROUGH SUSPENSE

ACCOUNT)
If the trial balance does not agree after transferring the balance of all ledger accounts
including cash and bank balance and also errors are not located timely, then the trial balance
is tallied by transferring the difference of debit and credit side to an account known as
suspense account. This is a temporary account opened to proceed further and to prepare the
financial statements timely.

3.6 RULES OF PREPARING THE TRIAL BALANCE

While preparing the trial balance from the given list of ledger balances, following rules should
be taken into account:
1. The balances of all (i) assets accounts (ii) expenses accounts (iii) losses (iv) drawings
are placed in the debit column of the trial balance.

2. The balances of all (i) liabilities accounts (ii) income accounts (iii) gains (iv) capital are
placed in the credit column of the trial balance.
ILLUSTRATION 3

From the following ledger balances, prepare a trial balance of Anuradha Traders as on 31st
March, 2022:

Account Head `

Capital 1,00,000
Sales 1,66,000
Purchases 1,50,000

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 ACCOUNTING PROCESS 2.75

Sales return 1,000

Discount allowed 2,000
Expenses 10,000
Trade receivables 75,000
Trade payables 25,000
Investments 15,000
Cash at bank and in hand 37,000
Interest received on investments 1,500
Insurance paid 2,500

SOLUTION
Trial Balance of Anuradha Traders as on 31.03.2022

Particulars Dr. Particulars Cr.

balance balance
` `
Purchases 1,50,000 Capital 1,00,000
Sales return 1,000 Sales 1,66,000
Discount allowed 2,000 Trade payables 25,000
Expenses 10,000 Interest received on investments 1,500
Trade receivables 75,000
Investments 15,000
Cash at bank and in hand 37,000
Insurance paid 2,500

Total 2,92,500 2,92,500

ILLUSTRATION 4
One of your clients, Mr. Singhania has asked you to finalise his accounts for the year ended 31st
March, 2022. Till date, he himself has recorded the transactions in books of accounts. As a basis
for audit, Mr. Singhania furnished you with the following statement.

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Dr. Balance Cr. Balance (`)

(` )
Singhania’s Capital 1,556
Singhania’s Drawings 564
Leasehold premises 750
Sales 2,750
Dues from customers 530
Purchases 1,259
Purchases return 264
Loan from bank 256
Trade payables 528
Trade expenses 700
Cash at bank 226
Bills payable 100
Salaries and wages 600
Inventories (1.4.2021) 264
Rent and rates 463
Sales return 98
5,454 5,454

The closing inventory on 31st March, 2022 was valued at ` 574. Mr. Singhania claims that he
has recorded every transaction correctly as the trial balance is tallied. Check the accuracy of the
above trial balance.
SOLUTION
Corrected Trial Balance of Mr. Singhania as on 31st March, 2022

Particulars Dr. Amount ` Cr. Amount `

Singhania’s Capital 1,556
Singhania’s Drawings 564
Leasehold premises 750
Sales 2,750

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 ACCOUNTING PROCESS 2.77

Dues from customers (refer note 1 below) 530

Purchases 1,259
Purchases returns (refer note 2 below) 264
Loan from Bank 256
Trade payables (refer note 3 below) 528
Trade expenses 700
Cash at Bank 226
Bills payable (refer note 4 below) 100
Salaries and Wages 600
Inventory (1.4.2021) (refer note 5 below) 264
Rent and rates 463
Sales return (refer note 6 below) 98
5,454 5,454

Notes:
1. Dues from customers is an asset, so its balance will be a debit balance.

2. Purchases return account always shows a credit balance because assets go out.
3. Balance in Trade payables is a liability, so its balance will be a credit balance.
4. Bills payable is a liability, so its balance will be a credit balance.
5. Inventory (opening) represents assets, so it will have a debit balance.
6. Sales return account always shows a debit balance because assets come.

ILLUSTRATION 5
The following trail balance as on 31st March, 2022 was drawn from the books of fintech traders:

L.F. Dr. Cr.

Balance (`) Balance (`)
Building 60,000 -
Machinery 17,000 -
Return Outward 2,600 -
Bad Debts 2,800 -
Cash 400 -

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Discount Received 3,000 -

Bank Overdraft 10,000 -
Creditors 50,000 -
Purchases 1,00,000 -
Capital - 73,600
Fixtures - 5,600
Sales - 1,04,000
Debtors -- 60,000
Interest Received - 2,600
Input CGST A/c - 3,000
Input SGST A/c - 3,000
Input IGST A/c - 4,800
Output CGST A/c 5,400 -
Output SGST A/c 5,400 -
Total 2,56,600 2,56,600

Even though the debit and credit sides agree, the trial Balance contains certain errors. Check
the accuracy of trial balance.
SOLUTION
Corrected Trial Balance of Fintech traders as on 31st March, 2022

L.F. Dr. Balance (`) Cr. Balance (`)

Building 60,000 -
Machinery 17,000 -
Return Outward - 2,600
Bad Debts 2,800 -
Cash 400 -
Discount Received - 3,000
Bank Overdraft - 10,000
Creditors - 50,000
Purchases 1,00,000 -
Capital - 73,600

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 ACCOUNTING PROCESS 2.79

Fixtures 5,600 -
Sales - 1,04,000
Debtors 60,000 -
Interest Received - 2,600
Input CGST A/c 3,000 -
Input SGST A/c 3,000 -
Input IGST A/c 4,800 -
Output CGST A/c - 5,400
Output SGST A/c - 5,400
2,56,600 2,56,600

SUMMARY
♦ Trial balance contains various ledger balances on a particular date.
♦ It forms the basis for preparing financial statement i.e. profit and loss account and
balance sheet.
♦ If it tallies, it means that the accounts are arithmetically accurate but certain errors may
still remain undetected.
♦ It is very important to carefully journalize and post the entries, following the rules of
accounting.

TEST YOUR KNOWLEDGE

True and False
1. Preparing trial balance is the third phase of accounting process.
2. Trial balance forms a base for the preparation of Financial statement.

3. Agreement of trial balance is a conclusive proof of accuracy.

4. A trial balance will tally in case of compensating errors.
5. A trial balance can find the missing entry from the journal.
6. Suspense account opened in a trial balance is a permanent account.
7. The balance of purchase returns account has a credit balance.

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Multiple Choice Questions

1. A trial balance will not balance if _____________________________
(a) Correct journal entry is posted twice.
(b) The purchase on credit basis is debited to purchases and credited to cash.

(c) ` 500 cash payment to creditor is debited to Trade payables for ` 50 and credited
to cash as ` 500.
2. ` 1, 500 received from sub-tenant for rent and entered correctly in the cash book is
posted to the debit of the rent account. In the trial balance _____________________________
(a) The debit total will be greater by ` 3,000 than the credit total.
(b) The debit total will be greater by ` 1,500 than the credit total.

(c) Subject to other entries being correct the total will agree.
3. After the preparation of ledgers, the next step is the preparation of
_____________________________

(a) Trading accounts

(b) Trial balance
(c) Profit and loss account

4. After preparing the trial balance the accountant finds that the total of debit side is short
by ` 1,500. This difference will be _____________________________
(a) Credited to suspense account

(b) Debited to suspense account

(c) Adjusted to any of the debit balance account

5. S.No. Account heads Debit (`) Credit (`)

1. Sales 15,000
2. Purchases 10,000
3. Miscellaneous expenses 2,500
4. Salaries 2,500

Total 12,500 17,500

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The difference in trial balance is due to _____________________________

(a) Wrong placing of sales account
(b) Wrong placing of salaries account
(c) Wrong placing of miscellaneous expenses account

Theory Questions
1. What is the trial balance? And how it is prepared?
2. Explain objectives of preparation of trial balance.
3. Even if the trial balance agrees, some errors may remain. Do you agree? Explain.

Practical Question
1. An inexperienced bookkeeper has drawn up a Trial Balance for the year ended 30th June, 2022.

Debit (`) Credit (`)

Provision for Doubtful Debts 200 –
Bank Overdraft 1,654 –
Capital – 4,591
Trade payables – 1,637
Trade receivables 2,983 –
Discount Received 252 –
Discount Allowed – 733
Drawings 1,200 –
Office Furniture 2,155 –
General Expenses – 829
Purchases 10,923 –
Returns Inward – 330
Rent & Rates 314 –
Salaries 2,520 –
Sales – 16,882
Inventory 2,418 –
Provision for Depreciation on Furniture 364 –
Total 24,983 25,002

Required:
Draw up a ‘Corrected’ Trial Balance, debiting or crediting any residual errors to a Suspense
Account.

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ANSWERS/HINTS
True and False
1. True: Preparing trial balance is the third phase of accounting process which forms the
base for the preparation of the final accounts.
2. True: Based on trial balance only, we can prepare financial statement.
3. False: Agreement of trial balance gives only arithmetical accuracy, there can still be
errors in preparing the trail balance.
4. True: Since compensating errors cancel out due to their compensating nature of the
amounts, hence the Trial balance tallies.
5. False: A trial balance cannot find the missing entry from the journal.
6. False: Suspense account opened in a trial balance is a temporary account

7. True: As purchases is debited, any returns shall be credited (treated in opposite way).

Multiple Choice Questions

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

Theoretical Questions
1. Preparation of trial balance is the third phase in the accounting process. After posting
the accounts in the ledger, a statement is prepared to show separately the debit and
credit balances. Such a statement is known as the trial balance.
Trial balance contains various ledger balances on a particular date. It forms the basis
for preparing the financial statements i.e. profit and loss account and balance sheet. If
is tallies, it means that the accounts are arithmetically accurate but certain errors may
still remain undetected. Therefore, it is very important to carefully journalise and post
the entries, following are rules of accounting.
2. The preparation of trial balance has the following objectives:
(i) Trial balance enables one to establish whether the posting and other
accounting processes have been carried out without committing arithmetical
errors. In other words, the trial balance helps to establish arithmetical accuracy
of the books of accounts.
(ii) Financial statements are normally prepared on the basis of agreed trial balance.
(iii) The trial balance serves as a summary of what is contained in the ledgers.

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3. In spite of the agreement of the trial balance some errors may remain. These may be
of the following types:

(i) Transaction has not been entered at all in the journal.

(ii) A wrong amount has been written in both columns of the journal.
(iii) A wrong account has been mentioned in the journal.

(iv) An entry has not at all been posted in the ledger.

(v) Entry is posted twice in the ledger.

Practical Question
1. Trial Balance as on 30th June, 2022

Heads of Accounts Debit ` Credit `

Provision for Doubtful Debts – 200
Bank overdraft – 1,654
Capital – 4,591
Trade payables – 1,637
Trade receivables 2,983 –
Discount Received – 252
Discount allowed 733 –
Drawings 1,200 –
Office furniture 2,155 –
General Expenses 829 –
Purchases 10,923 –
Returns Inward 330 –
Rent & Rates 314 –
Salaries 2,520 –
Sales – 16,882
Inventory 2,418 –
Provision for Depreciation on Furniture – 364
Suspense Account (Balancing figure) 1,175 –
Total 25,580 25,580

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UNIT – 4 SUBSIDIARY BOOKS

LEARNING OUTCOMES

After studying this unit, you will be able to:

♦ Understand the techniques of recording transactions in Purchase
Book, Sales Book; Returns Inward Book and Returns Outward Book;
Bills Receivable and Bills Payable Book.
♦ Learn the technique of posting from Subsidiary Books to Ledger.
♦ Understand that even if subsidiary books are maintained,
journalisation is required for many other transactions and events.
♦ Learn the difference between the subsidiary books and principal
books.

UNIT OVERVIEW

• Ledger
• Cash books
Principal books

• Purchases and Sales book, Purchase

and Sales return books
Subsidiary books • Bill payable and Bills receivable books
• Journal Proper

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4.1 INTRODUCTION
In a business, most of the transactions generally relate to receipts and payments of cash, sale
of goods and their purchase. It is convenient to keep a separate register for each such class
of transactions one for receipts and payments of cash, one for purchase of goods and one for
sale of goods. A register of this type is called a book of original entry or of prime entry. The
transactions recorded in such books will not require journal entries. The system by which
transactions of a class are first recorded in the specified book, specially meant for it and on
the basis of which ledger accounts are then prepared is known as the Practical System of Book
keeping or even the English System. It should be noted that in this system, there is no
departure from the rules of the double entry system.

These books of original or prime entry are also called subsidiary books since ledger accounts
are prepared on their basis without further processing of ledger posting. Normally, the
following subsidiary books are used in a business:

(i) Cash Book to record receipts and payments of cash, including receipts into and
payments out of the bank.

(ii) Purchases Book to record credit purchases of goods dealt in or of the materials and
stores required in the factory.

(iii) Purchase Returns Book to record the returns of goods and materials previously
purchased.

(iv) Sales Book to record the sales of the goods dealt in by the firm.

(v) Sale Returns Book to record the returns of goods made by the customers sold to them
earlier.

(vi) Bills Receivable Book to record the receipts of promissory notes or hundies from
various parties.

(vii) Bills Payable Book to record the issue of the promissory notes or hundies to other
parties.

(viii) Journal (proper) to record the transactions which cannot be recorded in any of the
seven books mentioned above.

It may be noted that in all the above cases the word “Journal” may be used for the word
“book”.

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Advantages of Subsidiary Books

The use of subsidiary books affords the undermentioned advantages:

(i) Division of work: Since in the place of one journal there will be so many subsidiary
books, the accounting work may be divided amongst a number of clerks.

(ii) Specialization and efficiency: When the same work is allotted to a particular person
over a period of time, he acquires full knowledge of it and becomes efficient in
handling it. Thus the accounting work will be done efficiently.

(iii) Saving of the time: Various accounting processes can be undertaken simultaneously
because of the use of a number of books. This will lead to the work being completed
quickly.

(iv) Availability of information: Since a separate register or book is kept for each class of
transactions, the information relating to each class of transaction be available at one
place.

(v) Facility in checking: When the trial balance does not agree, the location of the error
or errors is facilitated by the existence of separate books. Even the commission of
errors and frauds will be checked by the use of various subsidiary books.

4.2 DISTINCTION BETWEEN SUBSIDIARY BOOKS AND

PRINCIPAL BOOKS
The books in which transactions are first recorded to enable further processing are called
subsidiary books. The ledger and the cash book are the principle books since they furnish
information for preparation of the trial balance and financial statements. The following chart
will help you in understanding the difference between Subsidiary Books and Principal Books.

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Ledger

Simple Cash Book

Principal Books Cash book with

discount column
Cash Books
Cash book with
Bank & discount
column

Petty Cash Book

Financial Books
of Accounts
Purchase Book

Sales Book

Purchase Return
Subsidiary Books
Book

Sales Return
Book

Bill Received
Book

Bill Payable Book

Journal Proper

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4.3 PURCHASES BOOK

To record the credit purchases of goods dealt in or materials used in the business, a separate
register called the Purchases Book or the Purchases Journal, is usually maintained by firms.
The format is given below:
Date Particulars Details Amount
` `

It should be remembered that:

(i) Cash purchases are not entered in this book since these will be entered in the cash
book; and
(ii) Credit purchases of items other than goods or materials, such as office furniture or
typewriters are journalised - they are not entered in the Purchases Book.

The particulars column is meant to record the name of the supplier and name of the articles
purchased and the respective quantities. The amount in respect of each article is entered in
the details column. After totalling the various amounts included in a single purchase, the
amount for packing, or other charges is added and the amount for trade discount is deducted.
The net amount is entered in the amount column. The total in the amount column shows the
total purchase made in a period.
ILLUSTRATION 1
The Rough Book of M/s. Narain & Co. contains the following :
2022
Feb. 1. Purchased from Brown & Co. on credit :
5 gross pencils @ `100 per gross,
1 gross register @ ` 240 per doz.
Less : Trade Discount @ 10%
2. Purchased for cash from the Stationery Mart;
10 gross exercise books @ ` 300 per doz.
3. Purchased computer for office use from M/s. office
Goods Co. on credit for ` 30,000.
4. Purchased on credit from The Paper Co.
5 reams of white paper @ `100 per ream.

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 ACCOUNTING PROCESS 2.89

10 reams of ruled paper @ `150 per ream.

Less : Trade Discount @ 10%
5. Purchased one dozen gel pens @ `15 each from
M/s. Verma Bros. on credit.
Make out the Purchase Book of M/s. Narain & Co.

SOLUTION

Purchases Book

Date Particulars Details Amount

2022 ` `
Feb. 1 M/s. Brown & Co.
5 gross pencils @ ` 100 per gross 500.00
1 gross register @ ` 240 per doz. 2880.00
3380.00
Less : 10% trade discount (338) 3,042
“4 The Paper Co.
5 reams white paper @ ` 100 per ream 500.00
10 reams ruled paper @ ` 150 per ream 1500.00
2,000.00
Less : 10% trade discount (200.00) 1,800
5 M/s. Verma Bros.
1 doz. gel pens @ ` 15 each 180 180
Total 5022

Note : Purchases of cash and purchase of computer are not recorded in the Purchase Book.

ILLUSTRATION 2
Enter the following transactions in Purchase Book and post them into ledger.
2022

April 4 Purchased from Ajay Enterprises, Delhi

100 Doz. Rexona Hawai Chappal @ ` 120 per doz.
200 Doz. Palki Leather Chappal @ ` 300 per Doz.

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Less : Trade discount @ 10%

Freight charged ` 150.

April 15 Purchased from Balaji Traders, Delhi

50 doz. Max Shoes @ ` 400 per doz.
100 pair Sports Shoes @ ` 140 per pair.

Less : Trade discount @ 10%.

Freight charged ` 200.
April 28 Purchased from Tripti Industries, Bahadurgarh
40 pair leather shoes @ ` 400 per pair
100 doz. Rosy Hawai Chappal @ ` 180 per doz.
Less : Trade discount @ 10%.

Freight charged ` 100.

SOLUTION
Purchase Book

Date Particulars Details Gross Trade Net Freight Total

2022 Amount Discount Price Amount
April 4 Ajay Enterprises
100 doz Rexona Hawai
chappal @ ` 120 per doz
- ` 12,000
12,000
200 doz Palki Leather
Chappal @ ` 300 per doz 60,000
- ` 60,000
Less: trade discount @ 72,000 7,200 64,800 150 64,950
10%
April 15 Balaji Traders, Delhi
50 doz max Shoes @
` 400 per doz - ` 20,000 20,000
100 pair Sports shoes @
` 140 per pair - ` 14,000 14,000
Less: Trade discount @ 34,000 3,400 30,600 200 30,800
10%

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April 28 Tripti Industries,

Bahadurgarh
40 pair Leather shoes @
` 400 per pair - ` 16,000 16,000
100 doz Rosy Hawai
Chappal: 18,000
@ ` 180 per doz -
` 18,000

Less: Trade discount @

10% 34,000 3,400 30,600 100 30,700
1,40,000 14,000 1,26,000 450 1,26,450

Ledgers
Dr. Purchases A/c Cr.

2022 ` 2022 `

April 30 To amount as per purchase book 1,26,000

Dr. Freight A/c Cr.

2022 ` 2022 `

April 30 To amount as per 450

purchase book

Dr. Ajay Enterprises Cr.

2022 ` 2022 `

April 4 By Purchase A/c 64,800

(From Purchase Book)
By Freight A/c 150
(From Purchase Book)

Dr. Balaji Traders Cr.

2022 ` 2022 `

April 15 By Purchase A/c 30,600

(From Purchase Book)
By Freight A/c 200
(From Purchase Book)

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Dr. Tripati Industries Cr.

2022 ` 2022 `

April 28 By Purchase A/c 30,600

(From Purchase Book)
By Freight A/c 100
(From Purchase Book)

POSTING THE PURCHASES BOOK

The Purchases Book shows the names of the parties from whom goods have been purchased
on credit. These parties are now trade payables. Their accounts have to be credited for the
respective amounts shown in the purchase book. The total of the amounts column shows the
credit purchases made in a period. The amount is debited to the Purchase Account to indicate
receipt of goods. In Illustration 1, the Purchases Account is debited by ` 5,022, M/s. Brown &
Co. is credited by ` 3,042, The Paper Company by `1,800 and M/s. Verma Bros. by `180. The
total of the amounts put on the credit side equals the debit. Thus the double entry is
completed.

4.4 SALES BOOK

The Sales Book is a register specially kept to record credit sales of goods dealt in by the firm,
cash sales are entered in the Cash Book and not in the Sales Book. Credit sales of items other
than the goods dealt in by the firm are not entered in the Sales Book rather they are
journalised. The rules are the same as for the Purchases Book.
Entries in the Sales Book are also made in the same manner as in the Purchase Book. The
particulars column will record the name of the customers concerned together with particulars
and quantities of the goods sold. For each item, the amount is entered in the details column;
after totalling the amounts for one sale, charges for packing etc; are added and the trade
discount, if any is deducted: the net amount is put in the outer column. The total of this
column will show the total credit sales for a period.
ILLUSTRATION 3

The following are some of the transaction of M/s Kishore & Sons of the year 2022 as per their
Waste Book. Make out their Sales Book.
Sold to M/s. Gupta & Verma on credit:
30 shirts @ ` 800 per shirt.
20 trousers @ `1,000 per trouser.

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Less : Trade Discount @ 10%

Sold furniture to M/s. Sehgal & Co. on credit `8,000.
Sold 50 shirts to M/s. Jain & Sons @ `800 per shirt.
Sold 13 shirts to Cheap Stores @ `750 each for cash.
Sold on credit to M/s. Mathur & Jain.
100 shirts @ `750 per shirt
10 overcoats @ `5,000 per overcoat.
Less: Trade Discount @ 10%

SOLUTION
Sales Book

Date Particulars Details Amount

` `
2022 M/s. Gupta & Verma
30 shirts @ `800 24,000
20 Trousers @ `1,000 20,000
44,000
Less : 10% (4,400)
Sales as per invoice no. dated ..... 39,600
M/s. Jain & Sons 50 shirts @ `800
Sale as per invoice no. dated ...... 40,000
M/s Mathur & Jain
100 shirts @ `750 75,000
10 overcoats @ `5,000 50,000
1,25,000
Less : 10% (12,500)
Sales as per invoice no. dated...... 1,12,500
Total 1,92,100

Note : Cash sale and sale of furniture are not entered in Sales Book.

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POSTING THE SALES BOOK

The names appearing in the Sales Book are of those parties which have received the goods.
The accounts of the parties have to be debited with the respective amounts. The total of the
Sales Book shows the credit sales made during the period concerned; the amount is credited
to the Sales Account. In the Illustration 3, ` 1,92,100 is credited to the Sales Account; `39,600
is debited to M/s. Gupta and Verma `40,000 to M/s Jain and Sons and `1,12,500 to M/s Mathur
& Jain. The amount put on the credit side is equal to the total of the amount put on the debit
side. Thus, the double entry principle is followed correctly.

4.5 SALES RETURNS BOOK OR RETURNS INWARD

BOOK
If customers frequently return the goods sold to them, it would be convenient to record the
returns in a separate book, which is named as the Sales Returns Book or the Returns Inward
Book. The rules of the book is similar to the Sales Book and entries are also made in the same
manner. The following, assumed figures, will illustrate this:
Returns Inward Book

Date Particulars Details L.F. Amount

2022 `
June 7 Sunil Bank & Co.
6 Copies-Double Entry
Bookkeeping by T.S. Grewal @ ` 7 42.00
Less : Trade Discount 10% (4.20) 37.80
Kailash & Co.
1 Copy-Business Methods by R.K. Gupta 3.50
Total 41.30

4.6 PURCHASE RETURNS OR RETURNS OUTWARD

BOOK
Such a book conveniently records return of goods or material purchased to the suppliers.
However, if the returns are not frequent, it may be sufficient to record the transaction in the
journal. The rules of the Purchase Returns or Returns Outward Book is similar to that of the
Purchase Book; entries are also similarly made, as the illustration given below shows:

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Returns Outward Book

Date Particulars ` Amount

2022 `
June 2 Premier Electric Co. 175.00
One 36” Usha Ceiling Fan
“ 28 Mohan Electric Co.
Ten Iron Heaters 150.00
Less : Discount (15.00) 135.00
Total 310.00

POSTING OF THE RETURN BOOKS

The Sales Return Book will show the total of the returns made by customers. The total of the
sales returns is in reduction of the sales. Therefore, the amount may be debited to the Sales
Account but, usually, a separate account called Returns Inward Account is opened and the
total of the sales returns is debited to this accounts. The customers who have returned the
goods are credited with the respective amounts.
It should be noted that on goods being received and accepted back from the customers, a
credit note is issued to the customers concerned. This shows the amount to be credited to the
customer’s account.
Similarly, when goods are returned to suppliers they will issue the necessary credit note; also
the firm returning the goods will issue a debit note to the supplier, indicating the amount for
which the supplier account is being debited.
The total of Returns Outwards Book shows the total purchase returns made. The amount can
be credited to the Purchase Account, but in practice, it is credited to a separate account called
Purchase Returns or Returns Outward Account. The suppliers whose names appear in the Book
have received the goods, so their accounts are debited. This is shown in the illustration given
below:
ILLUSTRATION 4
Post the following into the ledger
Returns Outward Book

Date Particulars Details Amount

2022 ` `
Nov. 20 Rajindra Prakash & Sons

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One 36” Usha Ceiling Fan 200.00

Less : Trade Discount @ 10% (20.00) 180.00
“ 30 Modern Electric Company 100.00
Total 280.00

SOLUTION

Ledger
Dr. Rajindra Parkash & Sons Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
2022
Nov. 20 To Returns 180.00
Outward A/c
(From Returns
Outward Book)

Dr. Modern Electric Co. Cr.

Date Particulars Folio Amount Date Particulars Folio Amou
2022 nt

Nov. To Returns Outward A/c 100.00

30 (From Returns Outward
Book)

Dr. Returns Outward Account Cr.

Date Particulars Folio Amount Date Particulars Folio Amount

2022
Nov. 30 By Sundries as per 280.00
Returns
Outward Book

BILLS RECEIVABLE BOOKS AND BILLS PAYABLE BOOKS

If the firm usually receives a number of promissory notes or hundies, it would be convenient
to record the transaction in a separate book called the Bills Receivable Book. Similarly, if
promissory notes or hundies are frequently issued, the Bills Payable Book will be convenient.
This will be discussed later.

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4.7 IMPORTANCE OF JOURNAL

Students are now familiar with the journal. They also know that :
(i) Cash transactions are recorded in the cash book;
(ii) Credit purchases of goods or materials are recorded in the purchases book;
(iii) Credit sales of goods are recorded in the sales book;
(iv) Returns from customers are recorded in the sale returns book; and
(v) Returns to suppliers are entered in the purchase returns book.
Bill received or accepted transactions are entered in the bills receivable books or the bills
payable books, if these are maintained. Apart from the transactions mentioned above, there
are other entries also which have to be recorded. For them the proper place is the journal. In
fact, if there is no special book meant to record a transaction, it is recorded in the journal
(proper). The role of the journal is thus restricted to the following types of entries:
(i) Opening entries : When books are started for the new year, the opening balance of
assets and liabilities are journalised.
(ii) Closing entries : At the end of the year, the profit and loss account is prepared. For
this purpose, the nominal accounts are transferred to profit and loss account. This is
done through journal entries called closing entries.
(iii) Rectification entries : If an error has been committed, it is rectified through a journal
entry.
(iv) Transfer entries : If some amount is to be transferred from one account to another,
the transfer will be made through a journal entry.
(v) Adjusting entries : At the end of the year the amount of expenses or income may
have to be adjusted for amounts received in advance or for amounts not yet settled in
cash. Such an adjustment is also made through journal entries. Usually, the entries
pertain to the following:
(a) Outstanding expenses, i.e., expenses incurred but not yet paid;
(b) Prepared expenses, i.e., expenses paid in advance for future period;
(c) Interest on capital, i.e., the interest on proprietor’s investment in the business;
and
(d) Depreciation, i.e., fall in the value of the assets used on account of wear and
tear.
For above type of transactions/events, journal entries are necessary.

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(vi) Entries on dishonour of Bills : If someone who accepted a promissory note (or bill) is
not able to pay in on the due date, a journal entry will be necessary to record the non-
payment or dishonour of bills.
(vii) Miscellaneous entries : The following entries will also require journalising:
(a) Credit purchase of items other than goods dealt in or materials required for
production of goods e.g. credit purchase of furniture or machinery will be
journalised.
(b) An allowance to be given to the customers or a charge to be made to them
after the issue of the invoice.
(c) Receipt or issue of promissory notes, if separate bill books have not been
maintained.
(d) If an amount becomes irrecoverable, say, because, of the customer becoming
insolvent.
(e) Effects of accidents such as loss of property by fire.
(f) Transfer of net profit to capital account.
ILLUSTRATION 5
From the following transactions, prepare the Purchases Returns Book of Alpha & Co., a saree
dealer :

Date Debit Note Particulars

No.
04.01.2022 101 Returned to Goyal Mills, Surat - 5 polyester sarees @ ` 1,000.
09.01.2022 Garg Mills, Kota - accepted the return of goods (which were
purchased for cash) from us - 5 Kota sarees @ ` 400.
16.01.2022 102 Returned to Mittal Mills, Bangalore - 5 silk sarees @ ` 2,600.
30.01.2022 Returned one computer (being defective) @ ` 35,000 to B &
Co.

SOLUTION

Purchase Returns Book

Date Debit Note No. Name of supplier L.F. Amount

2022
Jan. 4 101 Goyal Mills, Surat 5,000
Jan. 16 102 Mittal Mills, Bangalore 13,000
Jan. 31 Purchases Returns Account (Cr.) 18,000

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SUMMARY
♦ Instead of recording all journal entries in one register, it is better to categorize the
entries on the basis of type of transactions.
♦ Various subsidiary books are maintained so as to record transactions of one type in
each register. These are also called books of original entry or prime entry.
♦ Example of subsidiary books are purchases book, sales book, purchase returns books,
sales returns book, bills receivable book, bills payable book etc. On the basis of these
subsidiary books, the ledger accounts are prepared.

TEST YOUR KNOWLEDGE

True and False
1. Transactions recorded in the purchase book include only purchases of goods on credit
transactions.
2. Transactions regarding the purchase of fixed asset are recorded in the purchase book.
3. Cash sales are recorded in the sales book.
4. Subsidiary books are also known as the books of original entry.
5. Bills receivable book is a subsidiary book.
6. Return inward book is also known as purchase return book.
7. Purchase of a second hand machinery will be recorded in purchase book.

8. Total of sales return book may be posted to the debit side of sales account.
9. If the sales are on a frequent basis, the transactions are recorded in the sales book.

Multiple Choice Questions

1. In Purchases Book, the record is in respect of ___________________________
(a) Cash purchase of goods.
(b) Credit purchase of goods dealt in.
(c) All purchases of goods.
2. The Sales Returns Book records ___________________________
(a) The return of goods purchased.

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(b) Return of anything purchased.

(c) Return of goods sold.
3. The Sales Book ___________________________
(a) Is a part of journal.
(b) Is a part of the ledger.
(c) Is a part of the balance sheet.
4. The weekly or monthly total of the Purchase Book is ___________________________
(a) Posted to the debit of the Purchases Account.
(b) Posted to the debit of the Sales Account.
(c) Posted to the credit of the Purchases Account.
5. The total of the Sales Book is posted to ___________________________
(a) Credit of the Sales Account.
(b) Credit of the Purchases Account.
(c) Credit of the Capital Account.
6. In which book of original entry, will you record an allowance of `50 which was offered
for an early payment of cash of `1,050 ___________________________.
(a) Sales Book

(b) Cash Book

(c) Journal Proper (General Journal)
7. A second hand motor car was purchased on credit from B Brothers for `10,000 will be
recorded in ___________________________.
(a) Journal Proper (General Journal)
(b) Sales Book

(c) Cash Book

(d) Purchase Book
8. In which book of original entry, will you record a bills receivable of `1,000, which was
received from a debtor in full settlement for a claim of `1,100, is dishonoured
____________________.
(a) Purchases Return Book

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(b) Bills Receivable Book

(c) Journal Proper (General Journal)

Theory Questions
1 Which subsidiary books are normally used in a business?

2. What are the advantages of subsidiary books?

Practical Questions
1. Enter the following transactions in Sales Book of M/s. Pranat Engineers Ltd., Delhi.
2022
Jan. 2. Sold to M/s. Ajanta Electricals, Delhi 5 pieces of Ovens @ `6,000/- each less Trade
discount @ 10%.
8 Sold to M/s. Electronics Plaza, 10 pieces of Tablets @ ` 8,000/- each less trade
discount 5%.
15 Sold to M/s. Haryana Traders, 5 pieces of Juicers @ `3,500/- each less trade
discount @ 10%.
2. Post into the ledger, the entries of Sales Book prepared in Question1.

ANSWERS/HINTS
True and False
1. True: Since cash purchases are taken to the cash book , it is only credit transactions
that are recorded in the purchases book.
2. False: Transactions regarding the purchase of fixed asset are not recorded in the
purchase book, only the credit purchases of goods are recorded in it.

3. False: Credit sales are recorded in the sales book.

4. True: Subsidiary books are maintained as an alternate to the journal.
5. True: Bills receivable is one of the subsidiary book.

6. False: Return inward book is also known as sales return book.

7. False: Purchase of a second hand machinery will not be recorded in purchase book.
8. True: Since sales return is reduction from the total sales value, it is debited in the sales
account.

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9. True: When there are numerous transactions then there are subsidiary books like the
sales book where there are recorded instead of regular journal entries.

Multiple Choice Questions

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

Theoretical Questions
1. Refer para 4.1 of this unit for subsidiary books normally mainlined in a business.

2. For advantages of Subsidiary Books, refer para 4.1 of this unit.

Practical Problems
1. Sales Book

Date Particulars Gross Trade Net Price

Amount Discount
(`) (`) (`)
2022
Jan. 2 M/s. Ajanta Electricals
5 pieces of Ovens @ ` 6,000 each
Less: 10% discount 30,000 3,000 27,000
8 M/s. Electronics Plaza
10 pieces of Tablets @ ` 8,000 each,
less 5% trade discount 80,000 4,000 76,000
15 M/s. Haryana Traders
5 pieces of Juicers @ ` 3,500 each,
less 10% trade discount 17,500 1,750 15,750
1,27,500 8,750 1,18,750

2. Ledger
M/s. Ajanta Electricals

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

2022 (`) 2022 (` )
Jan. 2 To Sales A/c 27,000
(From Sales Book)

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M/s. Electronics Plaza

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

2022 (` ) 2022 (` )
Jan. 8 To Sales A/c 76,000
(From Sales Book)

M/s. Haryana Traders

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

2022 (`) 2022 (`)
Jan. 15 To Sales A/c 15,750
(From Sales Book)

Sales Account

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

2022 (` ) 2022 (` )
Jan. 31 By Sundries (As 1,18,750
per Sales Book)

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UNIT 5 : CASH BOOK

LEARNING OUTCOMES

After studying this unit, you will be able to:

♦ Understand that a Cash Book is a type of subsidiary book but treated
as a principal book.
♦ Be familiar with various kinds of Cash Books, viz., Simple Cash Book,
Two-column Cash Book and Three-column Cash Book.
♦ Learn the technique of preparation of Simple Cash Book and how to
balance it.
♦ See how Double-Column Cash Book is prepared adding discount
column alongwith cash column.
♦ Understand the techniques of preparing Three-column Cash Book.
♦ Understand what is a Petty Cash Book and the Imprest System of
Petty Cash.
♦ Note the advantages of the Petty Cash Book.
♦ Learn how to maintain a Petty Cash Book and how to post the entries
of the Petty Cash Book in the ledger.
♦ Understand the accounting of credit/debit sales transactions.

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UNIT OVERVIEW

Subsidiary
book as well
as Principal
book

Simple Cash Three

column
cash book
Book cash book

Two
column
cash book

5.1 CASH BOOK - A SUBSIDIARY BOOK AND A

PRINCIPAL BOOK
Cash transactions are straightaway recorded in the Cash Book and on the basis of such a
record, ledger accounts are prepared. Therefore, the Cash Book is a subsidiary book. But the
Cash Book itself serves as the cash account and the bank account; the balances are entered in
the trial balance directly. The Cash Book, therefore, is part of the ledger also. Hence, it has
also to be treated as the principal book. The Cash Book is thus both a subsidiary book and a
principal book.

5.2 KINDS OF CASH BOOK

The main Cash Book may be of the three types:
(i) Simple Cash Book;
(ii) Two-column Cash Book;
(iii) Three-column Cash Book.

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In addition to the main Cash Book, firms also generally maintain a petty cash book but that is
purely a subsidiary book.

SIMPLE CASH BOOK

Such a cash book appears like an ordinary account, with one amount column on each side.
The left-hand side records receipts of cash and the right-hand side the payments.

Balancing: The cash book is balanced like other accounts. The total of receipts column is
always greater than total of payments column. The difference is written on the credit side
as ‘By balance c/d’. The totals are then entered in the two columns opposite one another
and then on the debit side the balance is written as “To Balance b/d”, to show cash balance
in hand in the beginning of next period.

ILLUSTRATION 1
Enter the following transactions in a Simple Cash Book:

2022 `

Jan.1 Cash in hand 1,200

“5 Received from Ram 300
“7 Paid Rent 30
“8 Sold goods for cash 300
“10 Paid to Shyam 700
“27 Purchased Furniture 200
“31 Paid Salaries 100
“31 Rent due, not yet paid, for January 30

SOLUTION
Dr. Cash Book Cr.

Date Receipts L.F. Amount Date Payments L.F. Amount

2022 ` 2022 `

Jan. 1 To Balance b/d 1,200 Jan. 07 By Rent A/c 30

“5 To Ram A/c 300 “ 10 By Shyam A/c 700
“8 To Sales A/c 300 “ 27 By Furniture A/c 200

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“ 31 By Salaries A/c 100

“ 31 By Balance c/d 770
1,800 1,800
2022
Feb. 1 To Balance b/d 770
Note :
(i) In the simple cash book only the cash receipts and cash payments are recorded.
(ii) The total of debit side is always greater than the total of credit side since the payment
cannot exceed the available cash.
(iii) The simple cash book is like an ordinary account.
(iv) Rent due not yet paid for January has not been recorded in the cash book because no
cash has been paid, hence it will be recorded through normal Journal entry.

DOUBLE-COLUMN CASH BOOK

If along with column for “Amount” to record cash receipts and cash payments another column
is added on each side to record the cash discount allowed or the discount received, or a
column on the debit side showing bank receipts and another column on the credit side
showing payments through bank. It is a double-column cash book.
Cash discount is an allowance which often accompanies cash payments. For example, if a
customer owes ` 500 but is promised that 2% will be deducted if payment is made within a
certain period, the customer can clear his account by paying promptly ` 490. Cash received
will be ` 490 and ` 10 will be the discount for the firm receiving the payment and discount is
a loss; for the person making the payment it is a gain. Since cash discount is allowed only if
cash is paid, it is convenient to add a column for discount allowed on the receipt side of the
cash book and a column for discount received on the payment side of the cash book.

Balancing: It should be noted that the discount columns are not balanced. They are merely
totalled. The total of the discount column on the receipts side shows total discount allowed to
customers and is debited to the Discount Account. The total of the column on the payments
side shows total discount received and is credited to the Discount Account. The Cash columns
are balanced, as already shown. The bank columns are also balanced and the balancing figure
is called bank balance. Thus a double column cash book should have two columns on each
side comprising of either cash and discount transaction or cash and bank transactions.

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In the cash column on the debit side, actual cash received is entered; the amount of the
discount allowed, if any, to the customer concerned is entered in the discount column.
Similarly, actual cash paid is entered in the cash column on the payments side and discount
received in the discount column. Also the bank column on the debit side records all receipts
through bank and the same column on the credit side shows payment through bank.
ILLUSTRATION 2
Ganesh commenced business on 1st April, 2022 with ` 2,000 as capital. He had the following
cash transactions in the month of April 2022:
` `
April 1 Purchased furniture April 7 Paid for petty expenses 15
and paid cash 250 “8 Cash purchases 150
“2 Purchased goods 500
“4 Sold goods for cash 950
13 Paid for labour 1,000
“5 Paid cash to Ram Mohan 560
“6 He allowed discount 10 “” Paid Ali & Sons 400
“6 Received cash from They allowed discount 8
Krishna & Co. 600 “”
Allowed discount 20

Make out the two-column Cash Book (Cash and discount column) for the month of April, 2022.
SOLUTION

Cash Book
Dr. Receipts L.F. Discount Amount Date Payments L.F. Discount Cr.
Date ` ` 2022 ` Amount
2022 `

April 1 To Capital A/c 2,000 April By Furniture A/c 250

1
“4 To Sales A/c 950 “ 2 By Purchases A/c 500

“6 To Krishna A/c 20 600

“5 By Ram Mohan 10 560
“7 By Petty

Expenses A/c 15

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“8 By Purchases A/c 150

“ 13 By wages A/c 1,000

“ 13 By Ali & Sons 8 400

“ 30 By Balance c/d 675

20 3,550 18 3,550

May 1 To Balance b/d 675

To summarise:
(i) the discount columns in the cash book are totalled;
(ii) they are not balanced; and

(iii) their totals are entered in the discount received/paid account in the ledger.

Note: The person who pays, is credited by both the cash paid by him and the discount allowed
to him. Similarly, the person to whom payment is made, is debited with both the amount paid
and the discount allowed by him.

THREE-COLUMN CASH BOOK

A firm normally keeps the bulk of its funds at a bank; money can be deposited and withdrawn
at will if it is current account. Probably payments into and out of the bank are more numerous
than strict cash transactions. There is only a little difference between cash in hand and money
at bank. Therefore, it is very convenient if, on each side in the cash book, another column is
added to record cash deposited at bank (on the receipt side of the cash book) and payments
out of the bank (on the payment side of the cash book).
For writing up the three-column cash book the under mentioned points should be noted:

1. While commencing a new business, the amount is written in the cash column if cash is
introduced and in the bank column if it is directly put into the bank with the description
“To Capital Account”. If a new cash book is being started for an existing business, the
opening balances are written as : “To Balance b/d”.
2. All receipts are written on the receipts side, cash in the cash column and cheques in
the bank column. If any discount is allowed to the party paying the amount, the
discount is entered in the discount column. In the particulars column the name of the
account in respect of which payment has been received is written.
3. All payments are written on the payments side, cash payment in the cash column and
payments by cheques in the bank column. If some discount has been received from
the party receiving the payment, it is entered in the discount column.

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4. Contra Entries: Often cash is withdrawn from bank for use in the office. In such a case
the amount is entered in the bank column on the payments side and also in the cash
column on the receipts side. In the reverse case of cash being sent to the bank, the
amount is recorded in the bank column on the receipts side and in cash column on
payment side. Against such entries, the letter “C” should be written in the L.F column,
to indicate that these are contra transaction and no further posting is required for
them.
Note: If initially cheques received are entered in the cash column and then sent to the
bank, the entry is as if cash has been sent to the bank.
While recording contra entries, the basic but important rules should be followed -
(a) The Receiver Dr.

The Giver Cr.

(b) All what comes in Dr.
All what goes out Cr.
e.g. where a Cash Book with separate columns for Bank Account is maintained.
(a) If cash is deposited in Bank Account, the Bank will be the Receiver, hence it will
be Debited and as the cash is going out, cash will be credited.
(b) If cash is withdrawn from the Bank Account, the Bank will be the Giver, hence it
will be Credited and, as the cash is coming in, cash will be Debited.
5. If some cheque sent to the bank is dishonoured, i.e., the bank is not able to collect the
amount, it is entered in the bank column on the credit side with the name of the
concerned party in the particulars column.
6. If some cheque issued by the firm is not paid on presentation, it is entered in the Bank
column on the debit side with the name of the party to whom the cheque was given.
7. In a rare case, a cheque received may be given to some other party, i.e., endorsed. On
receipt, it must have been entered in the bank column on the debit side; on
endorsement the amount will be written in the bank column on the credit side.
The advantages of such type of Cash Book are that -
(a) the Cash Account and the Bank Account are prepared simultaneously, therefore
the double entry is completed in the Cash Book itself. Thus the contra entries
can be easily cross-checked in Cash column in one side and the Bank column
in the other side of the Cash Book. Also the chances of error are reduced.

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(b) the information regarding Cash in Hand and the Bank Balance can be obtained
very easily and quickly as there is no need to prepare Ledger of the Bank
Account.
In case of maintaining more than one Bank Account, separate column can be add for
each Bank Account. Transactions between these two or more Bank Accounts can be
recorded and tallied with a much less effort.
Suppose, there are two Bank Accounts namely PNB Current Account and SBI-Cash
Credit Account. Now, if a cheque is issued from PNB cheque Book to SBI Account, the
receiver - i.e., SBI Account will be debited and the giver i.e. the PNB Account shall be
credited.

Balancing: The discount columns are totalled but not balanced. The cash columns
are balanced exactly in the same manner as indicated for the simple cash book. The
process is similar for balancing the bank columns also. It is possible, however, that
the bank may allow the firm to withdraw more than the amount deposited i.e., to
have an overdraft, In such a case, the total of the bank column on the credit side is
bigger than the one on the debit side. The difference is written on the debit side as
“To Balance c/d.” Then the totals are written on the two sides opposite one another,
the balance is then entered on the credit side as “By Balance b/d.”

However, in usual cases debits into the bank will exceed the withdrawals or payments
out of the bank. Then the bank columns are balanced just like the cash columns.
ILLUSTRATION 3
Enter the following transactions in Cash Book with Discount and Bank Columns. Cheques are
first treated as cash receipt.

2022 `

Jan.1 Chandrika commences business with Cash 20,000

“ 3 He paid into Current A/c 19,000
“ 4 He received cheque from Kirti & Co. on account 600
“ 7 He pays in bank Kirti & Co.’s cheque 600
“ 10 He pays Rattan & Co. by cheque and is allowed discount ` 20 330
“ 12 Tripathi & Co. pays into his Bank A/c 475
“ 15 He receives cheque from Warshi and allows him discount ` 35 450

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“ 20 He receives cash ` 75 and cheque ` 100 for cash sale

“ 25 He pays into Bank, including cheques received on 15th and 20th 1,000
“ 27 He pays for cash purchase 275
“ 30 He pays sundry expenses in cash 50

SOLUTION

Dr. Cash Book Cr.

Date Receipts L.F. Discount Cash Bank Date Payments L.F. Discount Cash Bank
` ` ` ` ` `
2022 2022
Jan. 1 To Capital A/c 20,000 Jan. 3 By Bank A/c C 19,000
3 To Cash C 19,000 7 By Bank A/c C 600
4 To Kirti & Co. 600 10 By Ratan & Co. 20 330
7 To Cash C 600 25 By Bank A/c C 1,000
12 To Tripathi & 475 27 By Purchases 275
Co. A/c
15 To Warshi 35 450 30 By S. Exp. A/c 50
20 To Sales A/c 175
25 To Cash C 1,000
31 By Balance c/d 300 20,745

35 21,225 21,075 20 21,225 21,075

Feb. 1 To Balance b/d 300 20,745

5.3 POSTING THE CASH BOOK ENTRIES

Students would have seen that the cash columns in the cash book is actually the cash account
and the bank column is actually bank account. Also, the discount columns are memorandum
columns, meant only to provide information about the total discount allowed and total
discount received.
The debit side columns for cash and bank indicate receipts. Therefore, the amounts debited
in the cash book should be put to the credit of the account in respect of which cash or cheque
has been received. For instance, in the cash book given above we see that `175 have been
received for sale of goods. For posting, the amount is credited to the Sales Account as “By
Cash `175.” We also see M/s. Warsi have paid `450 and also they have been allowed ` 35 as
discount; thus they have discharged a debt of `485. In the account of M/s. Warsi, the posting
is on the credit side as

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By Cash ` 450
By Discount ` 35
or as:
By Sundries ` 485
All payments are recorded on the credit side. The particulars columns show on what account
payments have been made. In the ledger accounts concerned the amount is put on the debit
side. For example, the cash book shows that a cheque for ` 330 has been issued to M/s. Ratan
& Co. and also that they have allowed a discount of ` 20; thus an obligation of ` 350 has
been met. In the account of M/s. Ratan & Co. the posting is:
To Bank ` 330

To Discount ` 20

Or
To Sundries ` 350

The rule thus develops: From the debit side of the cash book, credit the various accounts with
their respective amounts (including any discount that may have been allowed); from the credit
side of cash book, the posting will be to the debit of the accounts mentioned in the particular
column with their respective amounts (including the discount which may have been received).

As has been shown already, the total of the discount columns on the debit side is debited to
the discount account; the total of the column discount on the credit side is credited to the
discount account. From the cash book given on the previous page ` 35 is debited and ` 20 be
credited to the discount account.

5.4 PETTY CASH BOOK

In the firm a number of small payments, such as for telegrams, taxi fare, cartage, etc., have to
be made. If all these payments are recorded in the cash book, it will become unnecessarily
heavy. Also, the main cashier will be overburdened with work. Therefore, it is usual for firms
to appoint a person as ‘Petty Cashier’ and to entrust the task of making small payments say
below ` 200, to him. Of course he will be reimbursed for the payments made. Later, on an
analysis, the respective account may be debited.
IMPREST SYSTEM OF PETTY CASH
It is convenient to entrust a definite sum of money to the petty cashier in the beginning of a
period and to reimburse him for payments made at the end of the period. Thus, he will have

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again the fixed amount in the beginning of the new period. Such a system is known as the
imprest system of petty cash.

The system is very useful specially if an analytical Petty Cash Book is used. The book has one
column to record receipt of cash (which is only from the main cashier) and other columns to
record payments of various types. The total of the various columns show why payments have
been made and then the relevant accounts can be debited.
(i) The amount fixed for petty cash should be sufficient for the likely small payments for
a relatively short period, say for a week or a fortnight.
(ii) The reimbursement should be made only when petty cashier prepares a statement
showing total payments supported by vouchers, i.e., documentary evidence and should
be limited to the amount of actual disbursements.

(iii) The vouchers should be filed in order.

(iv) No payment should be made without proper authorisation. Also, payments above a
certain specified limit should be made only by the main cashier.
(v) The petty cashier should not be allowed to receive any cash except for reimbursement.
In the petty cash book the extreme left-hand column records receipts of cash. The money
column towards the right hand side shows total payments for various purposes; a column is
usually provided for sundries to record infrequent payments. The sundries column is analysed.
At the end of the week or the fortnight the petty cash book is balanced. The method of
balancing is the same as for the simple cash book.
ILLUSTRATION 4
Prepare a Petty Cash Book on the imprest System from the following:

2022 `

Jan. 1 Received `100 for petty cash

“ 2 Paid bus fare .50
“ 2 Paid cartage 2.50
“ 3 Paid for Postage 5.00
“ 3 Paid wages for casual labourers 6.00
“ 4 Paid for stationery 4.00
“ 4 Paid Bus charges 2.00
“ 5 Paid for the repairs to chairs 15.00
“ 5 Bus fare 1.00

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“ 5 Cartage 4.00
“ 6 Postage 7.00
“ 6 Bus charges 3.00
“ 6 Cartage 3.00
“ 6 Stationery 2.00
“ 6 Refreshments to customers 5.00

SOLUTION
Petty Cash Book

Receipts Date V. Particulars Total Con- Cartage Statio- Postage Wages Sundries
` 2022 No.* ` veyance ` nery ` ` `
` `
100 Jan.1 To Cash
2 1 By Conveyance .50 .50
2 By Cartage 2.50 2.50
3 3 By Postage 5.00 5.00
4 By Wages 6.00 6.00
4 5 By Stationery 4.00 4.00
6 By Conveyance 2.00 2.00
5 7 By Repairs to 15.00 15.00
Furniture
8 By Conveyance 1.00 1.00
9 By Cartage 4.00 4.00
6 10 By Postage 7.00 7.00
“ 11 By Conveyance 3.00 3.00
“ 12 By Cartage 3.00 3.00
“ 13 By Stationery 2.00 2.00
“ 14 By General 5.00 5.00
Expenses

60.00 6.50 9.50 6.00 12.00 6.00 20.00

By Balance c/d 40.00

100 100.00

40.00 To Balance b/d

60.00 8 To Cash

* Voucher Numbers

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ADVANTAGES OF PETTY CASH BOOK

There are mainly three advantages:
(i) Saving of time of the chief cashier;
(ii) Saving in labour in writing up the cash book and posting into the ledger; and
(iii) Control over small payments.
POSTING THE PETTY CASH BOOK
In the ledger, a petty cash account is maintained, when an amount is given to the petty cashier,
the petty cash account is debited. Each week or forthnight, the total of the payments made is
credited to this account. The petty cash account will then show the balance in the hand of the
cashier; on demand he should be able to produce it for counting. At the end of the
period/year, the balance is shown in the balance sheet as part of cash balance.
Of course, the payments must be debited to their respective accounts as shown by the petty
cash book. For this two methods may be used:
(i) From the petty cash book the total of the various columns may be directly debited to
the concerned accounts; or
(ii) A journal entry may first be prepared on the basis of the petty cash book, debiting the
accounts shown by the various analysis columns, and crediting the total of the payment
of the petty cash accounts.
For Illustration 4 the journal entry and relevant accounts are as follows:

2022 Dr. Cr.

` `
Jan. 6 Conveyance Account 6.50
Cartage Account 9.50
Stationery Account 6.00
Postage Account 12.00
Wages Account 6.00
Repairs Account 15.00
General Expenses Account 5.00
To Petty Cash Account 60.00
(Being the analysis of the Petty Cash Book for the week
ending Jan. 6)

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Entry for cash handed over to the Petty Cashier

Petty Cash Account 60
To Cash Account 60
(Being Cash received)

Petty Cash Account

Date Particulars Folio Amount Date Particulars Folio Amount

2022 ` 2022 `
Jan.1 To Cash 100.00 Jan. 6 By Sundries:
“6 To Cash 60.00 Conveyance 6.50
Cartage 9.50
Stationery 6.00
Postage 12.00
Wages 6.00
Repairs 15.00
General 5.00
Expenses

ILLUSTRATION 5
Enter the following transaction in Cash Book with Discount and Bank columns. Cheques are first
treated as cash receipts –

2022 `

March 1 Cash in Hand 15,000

Overdraft in Bank 500
2 Cash Sales 3,000
3 Paid to Sushil Bros. by cheque 3,400
Discount received 100
5 Sales through credit card 2,800
6 Received cheque from Srijan 6,200
7 Endorsed Srijan’s cheque in favour of Adit
9 Deposit into Bank 6,800
10 Received cheque from Aviral and deposited the same into Bank by 3,600
allowing discount of ` 50

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12 Adit informed that Srijan’s cheque is dishonoured. Now cash is

received from Srijan and amount is paid to Adit through own cheque
15 Sales through Debit Card 3,200
24 Withdrawn from Bank 1,800
28 Paid to Sanchit by cheque 3,000
30 Bank charged 1% commission on sales through Debit/Credit Cards

SOLUTION
Dr. Cash Book Cr.
Date Particulars L.F. Discount Cash Bank Date Particulars L.F. Discount Cash Bank
` ` ` ` ` `

2022 2022
March To Balance 15,000 March By Balance 500
1 b/d 1 b/d
2 To Sales 3,000 3 By Sushil Bros. 100 3,400
5 To Sales 2,800 7 By Adit 6,200
6 To Srijan 6,200 9 By Bank C 6,800
9 To Cash A/c C 6,800 12 By Adit 6,200
10 To Aviral 50 3,600 24 By Cash A/c C 1,800
12 To Srijan 6,200 28 By Sanchit 3,000
15 To Sales A/c 3,200 30 By 60
Commission
24 To Bank A/c C 1,800 31 By Balance 19,200 1,440
c/d
50 32,200 16.400 100 32,200 16,400

Note: If the received cheque is endorsed to the other party on the same day, then no entry
is required. However, in the above case posting has been done through cash column as the
endorsement is done on next day.

5.5 ENTRIES FOR SALE THROUGH CREDIT/DEBIT

CARDS
Now-a-days sales through Credit/Debit Cards are issued by almost every Bank in India either
directly or with collaboration of some other agencies. HSBC Card, SBI Card, BOB Card, ICICI
Bank Card, HDFC Card and Andhra Bank Card are some of the popular Cards.
The procedure for issuing Credit/Debit Cards are as follows -

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1. A small Plastic Card, called Credit Card is issued by the bank to a prospective customer,
after verifying his credibility, which is generally measured by his income sources. Debit
Card is issued by bank to a customer who has an account with the bank. Now a days
ATM Card issued by the bank can also be used as Debit Card. This card would contain
an embossed 16 digit number and also the name of the cardholder.
2. Generally Bank charges annual subscription fees from the credit card holder. No fee is
charged in case of Debit Card, though some banks charge a nominal fee on Debit Card
also.

3. When the Card holder intends to buy some goods or services through Credit or Debit
Card, the seller insert the customer’s debit/credit card in the card machine and inputs
the amount of sales and gives back to customers for feeding the password (i.e Personal
Identification Number – PIN) for authorising the transactions. One copy of the receipt
is given to the customer and other once is kept by the sellier for its record.
4. The seller sums up the different amounts sold like this and submits, generally everyday,
to his bank all the forms. The amount is credited by the bank to the seller’s account
and debited to the account of the Bank or the company issuing the Credit/Debit Card.
5. The bank issuing the Card, charges commission for each such transaction, which varies
between 1% to 4% and is immediately debited to seller’s bank account.
6. The bank sends a monthly statement to the card holder. In case of Debit Card the
account is immediately debited to the card holder’s account, whereas in case of Credit
Card, card holder has to pay the amount in full or part. However, if not paid in full, the
interest is charged.
ACCOUNTING FOR CREDIT/DEBIT CARD SALE

From the seller’s point of view, this type of sale is equivalent to a cash sale. Commission
charged by the bank will be treated as selling expenses. The following journal entries will be
made in the seller’s books of accounts.

1. Bank A/c Dr.

To Sales Account
(Sales made through Credit/Debit Card)

2. Commission Account Dr.

To Bank Account
(Commission charged by bank)

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SUMMARY
♦ Cash book contains cash transactions and also bank transactions, if it has a separate
book column. It is both a subsidiary book and a principal book.
♦ Cash book can be prepared with discount column also.
♦ For small payments, petty cash book is maintained separately for recording the
particulars of payment and its amount. The fixed amount is given to the petty cashier
for making small payments in the beginning of the period. The amount spent is
replenished so that he will have again the fixed sum in the beginning of the next period.
This system is known as imprest system of petty cash book.

TEST YOUR KNOWLEDGE

True and False
1. Cash book is a subsidiary book as well as a principal book.
2. Two column cash book consists of two columns cash column & bank column.
3. Discount column of cash book is never balanced.
4. Contra entry is passed in a two column cash book.
5. If the bank column is showing the opening balance on credit side, it is an overdraft.
6. A cash book records cash transactions as well as credit transactions.
7. Discount column of cash book records the trade discount.

Multiple Choice Questions

1. The total of discounts column on the debit side of the cash book, recording cash discount
deducted by customers when paying their accounts, is posted to the
__________________________
(a) Credit of the discount allowed account.
(b) Debit of the discount allowed account
(c) Credit of the discount received account.
2. Cash book is a type of __________ but treated as a ____________ of accounts.
(a) Subsidiary book, principal book
(b) Principal book, subsidiary book
(c) Subsidiary book, subsidiary book

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3. Which of the following is not a column of a three-column cash book?

(a) Cash column
(b) Bank column
(c) Petty cash column
4. Contra entries are passed only when __________________________
(a) Double-column cash book is prepared
(b) Three-column cash book is prepared
(c) Simple cash book is prepared
5. The Cash Book records __________________________
(a) All cash receipts
(b) All cash payments
(c) All cash receipts and payments
6. The balance in the petty cash book is __________________________
(a) An expense
(b) A profit
(c) An asset
7. If Ram has sold goods for cash, the entry will be recorded __________________________
(a) In the Cash Book
(b) In the Sales Book
(c) In the Journal

Theory Questions
1. Is cash book a subsidiary book or a principal book? Explain.
2. What are the various kinds of cash book?
3. What are the advantages of a three column cash book?

Practical Questions
1. Shri Ramaswamy maintains a Columnar Petty Cash Book on the Imprest System. The
imprest amount is ` 500. From the following information, show how his Petty Cash Book
would appear for the week ended 12th September, 2022:

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`
7-9-2022 Balance in hand 134.90
Received Cash reimbursement to make up the imprest 365.10
Stationery 49.80
8-9-2022 Miscellaneous Expenses 20.90
9-9-2022 Repairs 156.70
10-9-2022 Travelling 68.50
11-9-2022 Stationery 71.40
12-9-2022 Miscellaneous Expenses 6.30
13-9-2022 Repairs 48.30

ANSWERS/HINTS
True and False
1. True: Since the balance is directly taken to the Trial balance from cash book. Hence, it
is a subsidiary book as well as principal book.
2. False: Two column cash book consists of two columns either cash column & discount
column or cash column & bank column.
3. True: Discount column is totalled and transferred to the discount allowed or received
account.
4. True: Contra entry can be passed in a two column cash book which includes bank and
cash columns.

5. True: The debit side of opening balance shows a favourable balance, whereas the credit
balance is an unfavourable balance and treated as overdraft.
6. False: A cash book records only cash transactions.
7. False: Discount column of cash book records the cash discount. Trade discount is not
shown in the books of accounts.

Multiple Choice Questions

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

7. (a)

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Theoretical Questions
1. Cash transactions are straightaway recorded in the Cash Book and on the basis of such
a record, ledger accounts are prepared. Therefore, the Cash Book is a subsidiary book.
But the Cash Book itself serves as the cash account and the bank account, if bank
column is also included; the balances are entered in the trial balance directly. The Cash
Book, therefore, is part of the ledger also. Hence, it is also treated as the principal book.
The Cash Book is thus both a subsidiary book and a principal book.
2. The main Cash Book may be of the three types:
(i) Simple Cash Book;
(ii) Two-column Cash Book;
(iii) Three-column Cash Book.
In addition to the main Cash Book, firms also generally maintain a petty cash book but
that is purely a subsidiary book.

3. The advantages of three column Cash Book are that -

(a) the Cash Account and the Bank Account are prepared simultaneously, therefore
the double entry is completed in the Cash Book itself. Thus the contra entries
can be easily cross-checked in Cash column in one side and the Bank column
in the other side of the Cash Book. The chances of error are also reduced.
(b) the information regarding Cash in Hand and the Bank Balance can be obtained
very easily and quickly as there is no need to prepare Ledger of the Cash and
Bank Account.

Practical Problems
1. Petty Cash Book
Date Receipts Amount Date Payments Total Stationery Travelling Misc Exps. Repairs
2022 ` 2022 Amount ` ` ` `
`
Sept. 7 To Balance b/d 134.90 7 By Stationery 49.80 49.80
To Reimbursement 365.10 8 By Misc. Expenses 20.90 20.90
9 By Repairs 156.70 156.70
10 By Travelling 68.50 68.50
11 By Stationery 71.40 71.40
12 By Misc. Expenses 6.30 6.30
13 By Repairs 48.30 48.30
421.90 121.20 68.50 27.20 205.00
By Balance c/d 78.10
500.00 500.00
To Balance b/d 78.10

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UNIT 6 : RECTIFICATION OF ERRORS

LEARNING OUTCOMES

After studying this unit, you will be able to:

♦ Understand different types of errors which may occur in the course
of recording transactions and events.
♦ Be familiar with the steps involved in locating errors.
♦ Learn the nature of one-sided errors and two-sided errors.
♦ Understand why suspense account is opened for rectification of
errors.
♦ Understand the technique of correcting errors of one period in the
next accounting period.

UNIT OVERVIEW

Errors of
Principle

Errors of Types of Erros of

Omission Errors Commission

Compensating
Errors

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6.1 INTRODUCTION
Unintentional omission or commission of amounts and accounts in the process of recording
the transactions are commonly known as errors. These various unintentional errors can be
committed at the stage of collecting financial information/data on the basis of which financial
statements are drawn or at the stage of recording this information. Also errors may occur as
a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation
of facts, or oversight. To check the arithmetic accuracy of the journal and ledger accounts,
trial balance is prepared. If the trial balance does not tally, then it can be said that there are
errors in the accounts which require rectification thereof. Some of these errors may affect the
Trial Balance and some of these do not have any impact on the Trial Balance although such
errors may affect the determination of profit or loss, assets and liabilities of the business.
Illustrative Case of Errors and their Nature
We have seen that after preparing ledger accounts a trial balance is taken out where debit
and credit balances are separately listed and totalled. If the totals of debit and credit do not
agree, it is definite that there are some errors We shall now study the types of errors which
may be committed and how they may be rectified. For this purpose, the working of the
following illustrative cases should be carefully seen.
Illustrative Cases of Errors
(a) Wrong Entry: Let us start from the first phase of the accounting process. Where wrong
amount of transactions and events are recorded in the subsidiary books, Journal Proper
and Cash Book.

Example 1: Credit purchases `17,270 are entered in the Purchases Day Book as
`17,720. Credit sales of `15,000 gross less 1% trade discount are wrongly entered in
Sales Day Book at `15,000. Cheque issued `19,920 are wrongly entered in the credit of
bank column in the Cash Book as `19,290.

(b) Wrong casting of subsidiary books: Subsidiary books are totalled periodically and
posted to the appropriate ledger accounts. There may be totalling errors. Totalling
errors may arise due to wrong entry or simply these may be independent errors.

Example 2: For the month of January, 2022 total of credit sales are `1,75,700, this is
wrongly totalled as `1,76,700 and posted to sales account as `1,76,700.

(c) In case of cash book, wrong castings will result in wrong calculation of the balance
c/d.

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Example 3: The following cash transactions of M/s. Tularam & Co. occurred:
2023

Jan. 1 Balance - cash `1,200 bank `16,000;

Jan. 2 Cheque issued to M/s. Bholaram & Co., a supplier, for `22,500;
Jan. 6 Cheque collected from M/s. Scindia & Bros. `42,240 and deposited for
clearance;
Jan. 7 Cash sales `27,200 and paid wages `12,400;
Jan. 8 Cash sales ` 37,730 and cash deposited to bank ` 35,000.

The following Cash Book entries are passed:

Dr. Cash Book Cr.
Date Particulars Cash Bank Date Particulars Cash Bank

2023 ` ` 2023 ` `

Jan. 1 To Balance b/d 1,200 16,000 Jan. 2 By M/s Bholaram & 22,500
Co. A/c
Jan. 6 To M/s. Scindia & 42,420 By Wages A/c 12,200
Bros. A/c

Jan. 7 To Sales A/c 27,200 By Bank A/c 34,500

Jan. 8 To Sales A/c 37,370 By Balance c/d 19,070 71,420

Jan. 8 To Cash A/c 34,500

65,770 93,920 65,770 93,920

Wrong entries and wrong casting are shown in bold prints. However, errors of cash
entries generally are not carried. Usually cash balances are tallied daily. So errors are
identified at an early stage. But bank balance cannot be checked daily and thus errors
may be carried until bank reconciliation is done. In the above example, there are four
wrong entries and one wrong casting. Bank and cash balances are affected by these
errors.
(d) Wrong posting from subsidiary books: In this case, the wrong amount may be
posted to the ledger account or the amount may posted to the wrong side or to the
wrong account. For example, purchases from A may be posted to B’s account.
(e) Wrong casting of ledger balances: Likewise Cash Book, any ledger account balance
may be casted wrongly. Obviously wrong postings make the balance wrong; but that
is not wrong casting of balances. Whenever there arises independent casting error as

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in the case of bank column in the Cash Book of example (4), that is called wrong casting
to ledger balances.

Example 4: The following are the credit purchases of M/s. Ballav Bros.:
2023
Jan. 1 Purchases from M/s. Saurabh & Co.- gross `1,00,000 less 1% trade discount.

Jan. 3 Purchases from M/s. Netai & Co.- gross ` 70,000 less 1% trade discount.
Jan. 6 Purchases from M/s. Saurabh & Co.- gross ` 60,000 less 1% trade discount
Let us cast M/s. Saurabh & Co.’s Account:

Dr. M/s Saurabh & Co. Account Cr.

Date Particulars Amount ` Date Particulars Amount `

2023 2023

Jan. 1 To Balance c/d 1,55,400 Jan. 1 By Purchases A/c 99,000

Jan. 6 By Purchases A/c 59,400

1,55,400 *1,55,400

*While casting the credit side, an error has been committed and so the account is
wrongly balanced.
Example 5: Goods are purchased on credit from M/s. Saurabh & Co. for ` 27,030 and
from M/s. Karnataka Suppliers for ` 28,050. The following Purchase Day Book is
prepared:
Purchases Day Book

Amount
Date Particulars
`
M/s. Saurabh & Co. 27,050
M/s. Karnataka Suppliers 28,030

55,080

In the above Purchase Day Book, both the transactions are entered wrongly but the
first error has been compensated by the second. Even if these errors are not rectified
Trial Balance would tally.

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Trial Balance

Dr. Cr.
Particulars
` `
M/s. Saurabh & Co. 27,050
M/s. Karnataka Suppliers 28,030
Purchases Account 55,080

55,080 55,080

6.2 STAGES OF ERRORS

Errors may occur at any of the following stages of the accounting process:

AT THE STAGE OF RECORDING THE TRANSACTIONS IN JOURNAL

Following types of errors may happen at this stage:

(i) Errors of principle,

(ii) Errors of omission,

(iii) Errors of commission.

AT THE STAGE OF POSTING THE ENTRIES IN LEDGER

(i) Errors of omission:

(a) Partial omission,

(b) Complete omission.

(ii) Errors of commission:

(a) Posting to wrong account,

(b) Posting on the wrong side,

(c) Posting of wrong amount.

AT THE STAGE OF BALANCING THE LEDGER ACCOUNTS

(i) Wrong Totalling of accounts,

(ii) Wrong Balancing of accounts.

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AT THE STAGE OF PREPARING THE TRIAL BALANCE

(i) Errors of omission,

(ii) Errors of commission:
(a) Taking wrong account,
(b) Taking wrong amount,
(c) Taking to the wrong side.

On the above basis, we can classify the errors in four broad categories:

Errors of Compensating
Errors of Principle Errors of Omission
Commission Errors

6.3 TYPES OF ERRORS

Basically errors are of two types:

(a) Errors of principle: When a transaction is recorded in contravention of accounting

principles, like treating the purchase of an asset as an expense, it is an error of principle.
In this case, there is no effect on the trial balance since the amounts are placed on the
correct side, though in a wrong account. Suppose on the purchase of a computer, the
office expenses account is debited; the trial balance will still agree.

(b) Clerical errors: These errors arise because of mistake committed in the ordinary course
of the accounting process. These are of three types:

(i) Errors of Omission: If a transaction is completely or partially omitted from the

books of account, it will be a case of omission. Examples would be: not
recording a credit purchase of furniture or not posting an entry into the ledger.

(ii) Errors of Commission: If an amount is posted in the wrong account or it is

written on the wrong side or the totals are wrong or a wrong balance is struck,
it will be a case of “errors of commission.”

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(iii) Compensating Errors: If the effect of errors committed cancel out, the errors will
be called compensating errors. The trial balance will agree. Suppose an amount
of `10 received from A is not credited to his account and the total of the sales
book is `10 in excess. The omission of credit to A’s account will be made up by
the increased credit to the Sales Account.

From another point of view, error may be divided into two categories:

(a) Those that affect the trial balance - because of these errors, trial balance does
not agree; these are the following:

(i) Wrong casting of the subsidiary books.

(ii) Wrong balancing of an account.

(iii) Posting an amount on the wrong side.

(iv) Posting 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) Totalling the trial balance wrongly.

(b) The errors that do not affect the trial balance are the following:

(i) Omitting an entry altogether from the subsidiary book.

(ii) Making an entry with the wrong amount in the 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.

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Errors

Error of principle (Treating a Clerical Errors

revenue expenses as capital
expenditure or vice versa or
the sale of a fixed asset as Errors of
Errors of Compensating Errors
ordinary sale) Commission
Omission
Trial Balance will agree
Trial Balance will agree

Omitting an Entry Omitting to post the

completely from the ledger account from
subsidiary books the subsidiary books.

Trial Balance will agree Trial Balance will not agree

Writing the wrong Wrong casting Posting the

Posting an Wrong balance
amount in the of Subsidiary Wrong amount amount on the of an account
subsidiary books books in the ledger wrong side

Trial Balance will agree

Trial Balance will not agree

6.4 STEPS TO LOCATE ERRORS

Even if there is only a very small difference in the trial balance, the errors leading to it must
be located and rectified. A small difference may be the result of a number of errors. The
following steps will be useful in locating errors :
(i) The two columns of the trial balance should be totalled again. If in place of a number
of accounts, only one amount has been written in the trial balance the list of such
accounts should be checked and totalled again. List of Trade receivables is the example
from which Trade receivable balance is derived.

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(ii) It should be seen that the cash and bank balances have been written in the trial
balance.

(iii) The exact difference in the trial balance should be established. The ledger should be
gone through again; it is possible that a balance equal to the difference has been
omitted from the trial balance. The difference should also be halved; it is possible that
balance equal to half the difference has been written in the wrong column.
(iv) The ledger accounts should be balanced again.
(v) The casting of subsidiary books should be checked again, especially if the difference is
` 1, ` 100 etc.

(vi) If the difference is very big, the balance in various accounts should be compared with
the corresponding accounts in the previous period. If the figures differ materially, those
cases should be further scrutinised; it is possible that an error has been committed.
Suppose the sales account for the current year shows a balance of ` 32,53,000 whereas
it was ` 36,45,000 last year; it is possible that there is an error in the Sales Account.
(vii) Postings of the amounts equal to the difference or half the difference should be
checked. It is possible that an amount has been omitted to be posted or has been
posted on the wrong side.
(viii) If there is still a difference in the trial balance, a complete checking will be necessary.
The posting of all the entries including the opening entry should be checked. It may
be better to begin with the nominal accounts.

6.5 RECTIFICATION OF ERRORS

Errors should never be corrected by overwriting. The correction should be made by making
another suitable entry, called as 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 accounts are drawn.
(c) After final accounts, i.e., in the next accounting period.

6.5.1 Before preparation of Trial Balance

There are some errors which affect one side of an account or which affect more than one
account in such a way that it is not possible to pass a complete rectification entry. In other
words, there are some errors which can be corrected, if detected at this stage, by making
rectification statement in the appropriate side(s) of concerned account(s). It is important to

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note here that such errors may involve only one account or more than one account. Read the
following illustrations:

(i) The sales book for November is undercast by ` 200. The effect of this error is that the
Sales Account has been credited short by ` 200. Since the account is posted by the
total of the sales book, there is no error in the accounts of the customers since they
are posted with amounts of individual sales. Hence only the Sales Accounts is to be
corrected. This will be done by making an entry for ` 200 on the credit side: “By
undercasting of Sales Book for November ` 200”.

(ii) While posting the discount column on the debit side of the cash book the discount of
` 10 allowed to Ramesh has not been posted. There is no error in the cash book, the
total of discount column presumably has been posted to the discount account on the
debit side. The error is in not crediting Ramesh by ` 10. This should now be done by
the entry “By omission of posting of discount on ----- `10”.
(iii) ` 200 received from Ram has been entered by mistake on the debit side of his account.
Since the cash book seems to have been correctly written, the error is only in the
account of Ram - he should have been credited and not debited by ` 200. Not only the
wrong debit is to be removed but also a credit of ` 200 is to be given. This can be done
now by entering ` 400 on the credit side of his account. The entry will be “By Posting
on the wrong side - ` 400”.
(iv) ` 50 was received from Mahesh and entered on the debit side of the cash book but
was not posted to his account. By the error, which affects only the account of Mahesh,
` 50 has been omitted from the credit side of his account. The rectification will be by
the entry. “By Omission of posting on the ` 50.”

(v) ` 51 paid to Mohan has been posted as `15 to the debit of his account. Mohan has
been debited short by ` 36. The rectifying entry is “To mistake in posting on ` 36”.
(vi) Goods sold to Ram for `1,000 was wrongly posted from sales day book to the debit of
purchase account. Ram has however been correctly debited. Here the error affects two
accounts, viz., purchases account and sales account but we cannot pass a journal entry
for its rectification because both the accounts need to be credited. The rectification
will be done by the entry “By wrong posting on ` 1,000” in the credit of purchases
account and also “By omission of posting on - ` 1,000” in the credit sales account.
(vii) Bills receivable from Mr. A of ` 500 was posted to the credit of Bills payable Account
and also credited to A account. Here also although two accounts are involved we
cannot pass a complete journal entry for rectification. The rectification will be done by
the entry “To wrong posting on ` 500” in debit of Bills payable Account and also “To
omission of posting on ` 500” in the debit of Bills Receivable Account.

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(viii) Goods purchased from Vinod for ` 1,000 was wrongly credited to Vimal account by `
100. Again we cannot pass a complete journal entry for rectification even though two
accounts are involved. The rectification will be done by the entry “To wrong posting
on `100” in the debit of Vimal account and “By omission of posting on ` 1,000” in the
credit of Vinod account.
Thus, from the above illustrations, it is clear that the general rule of errors affecting two
accounts can be corrected by a journal entry does not hold true always.
ILLUSTRATION 1
How would you rectify the following errors in the book of Rama & Co.?
1. The total to the Purchases Book has been undercast by ` 100.
2. The Returns Inward Book has been undercast by ` 50.
3. A sum of ` 250 written off as depreciation on Machinery has not been debited to
Depreciation Account.
4. A payment of ` 75 for salaries (to Mohan) has been posted twice to Salaries Account.
5. The total of Bills Receivable Book ` 1,500 has been posted to the credit of Bills Receivable
Account.
6. An amount of `151 for a credit sale to Hari, although correctly entered in the Sales Book,
has been posted as ` 115.
7. Discount allowed to Satish ` 25 has not been entered in the Discount Column of the Cash
Book. the amount has been posted correctly to the credit of his personal account.
SOLUTION
1. The Purchases Account should receive another debit of `100 since it was debited short
previously:

“To Undercasting of Purchases Book for the month of --- `100.”

2. Due to this error the Returns Inward Account has been posted short by ` 50 : the
correct entry will be:
“To Undercasting of Returns Inward Book for the month of --- `50.”
3. The omission of the debit to the Depreciation Account will be rectified by the entry:
“To Omission of posting on ` 250”.
4. The excess debit will be removed by a credit in the Salaries Account by the entry:
“By double posting on ` 75”.

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5. `1,500 should have been debited to the Bills Receivable Account and not credited. To
correct the mistake, the Bills Receivable Account should be debited by ` 3,000 by the
entry:
“To Wrong posting of B/R received on ` 3,000”
6. Hari’s personal A/c is debited ` 36 short. The rectification entry will be:

“To Wrong posting ` 36”.

7. Due to this error, the discount account has been debited short by ` 25. The required
entry is :
“To Omission of discount allowed to Satish on ` 25.”
So far we have discussed the correction of errors which affected only one Account or more
than one account but for which rectifying entries were not complete journal entries. We shall
now take up the correction of errors which affect more than one account in such a way that
complete journal entries are possible for their rectification. Read the following illustrations:
(i) The purchase of machinery for ` 2,000 has been entered in the purchases book. The
effect of the entry is that the account of the supplier Ram & Co. has been credited by
` 2,000 which is quite correct. But the debit to the Purchases Account is wrong : the
debit should be to Machinery Account. To rectify the error, the debit in the purchases
Account has to be transferred to the Machinery Account. The correcting entry will be
to Credit Purchases Account and debit the Machinery Account. Please see the three
entries made below: the last entry rectifies the error:

Particulars Debits Credits

` `
Wrong Entry:
Purchases Account 2,000
To Ram & Co. 2,000
Correct Entry:
Machinery Account 2,000
To Ram & Co. 2,000
Rectifying Entry:
Machinery Account 2,000
To Purchases Account 2,000

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(ii) `100 received from Kamal Kishore has been credited in the account of Krishan Kishore.
The error is that there is a wrong credit in the account of Krishan Kishore and omission
of credit in the account of Kamal Kishore; Krishan Kishore should be debited and Kamal
Kishore be credited. The following three entries make this clear:

Particulars Debits Credits

` `
Wrong Entry:
Cash Account 100
To Krishan Kishore 100
Correct Entry:
Cash Account 100
To Kamal Kishore 100
Rectifying Entry:
Krishan Kishore 100
To Kamal Kishore 100

(iii) The sale of old machinery, `1,000 has been entered in the sales book. By this entry the
account of the buyer has been correctly debited by `1,000. But instead of crediting the
Machinery Account. Sales Account has been credited. To rectify the error this account
should be debited and the Machinery Account credited. See the three entries given
below:

Particulars Debits Credits

` `
Wrong Entry:
Buyer’s Account 1,000
To Sales Account 1,000
Correct Entry:
Buyer’s Account 1,000
To Machinery Account 1,000
Rectifying Entry:
Sales Account 1,000
To Machinery Account 1,000

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ILLUSTRATION 2
The following errors were found in the book of Ram Prasad & Sons. Give the necessary entries
to correct them.
(1) ` 500 paid for furniture purchased has been charged to ordinary Purchases Account.
(2) Repairs made were debited to Building Account for ` 50.

(3) An amount of `100 withdrawn by the proprietor for his personal use has been debited to
Trade Expenses Account.
(4) `100 paid for rent debited to Landlord’s Account.
(5) Salary ` 125 paid to a clerk due to him has been debited to his personal account.
(6) ` 100 received from Shah & Co. has been wrongly entered as from Shaw & Co.
(7) ` 700 paid in cash for a typewriter was charged to Office Expenses Account.
SOLUTION
Journal

Sr. Particulars Dr. Cr.

No. ` `
(1) Furniture A/c 500
To Purchases A/c 500
(Correction of wrong debit to Purchases A/c for
furniture purchased)
(2) Repairs A/c 50
To Building A/c 50
(Correction of wrong debit to building A/c for repairs
made)
(3) Drawings A/c. 100
To Trade Expenses A/c 100
(Correction of wrong debit to Trade Expenses A/c for
cash withdrawn by the proprietor for his personal use)
(4) Rent A/c 100
To Landlord’s Personal A/c 100
(Correction of wrong debit to landlord’s A/c for rent
paid)

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(5) Salaries A/c 125

To Clerk’s (Personal) A/c 125
(Correction of wrong debit to Clerk’s personal A/c for
salaries paid)
(6) Shaw & Co. 100
To Shah & Co. 100
(Correction of wrong credit to Shaw & Co. Instead of
Shah & Co.)
(7) Typewriter A/c 700
To Office Expenses A/c 700
(Correction of wrong debit to Office Expenses A/c for
purchase of typewriter)

ILLUSTRATION 3
Give journal entries to rectify the following:
(1) A purchase of goods from Ram amounting to `150 has been wrongly entered through
the Sales Book.
(2) A Credit sale of goods amounting `120 to Ramesh has been wrongly passed through the
Purchase Book.
(3) On 31st December, 2022 goods of the value of ` 300 were returned by Hari Saran and
were taken into inventory on the same date but no entry was passed in the books.
(4) An amount of ` 200 due from Mahesh Chand, which had been written off as a Bad Debt
in a previous year, was unexpectedly recovered, and had been posted to the personal
account of Mahesh Chand.
(5) A Cheque for ` 100 received from Man Mohan was dishonoured and had been posted to
the debit of Sales Returns Account.
SOLUTION
Journal

Sr.No. Particulars Dr.(`) Cr.(`)

(1) Purchases A/c 150
Sales A/c 150
To Ram 300
(Correction of wrong entry in the sales Book for a
purchases of goods from Ram)

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(2) Ramesh 240

To Purchases A/c 120
To Sales A/c 120
(Correction of wrong entry in the Purchases Book of a
credit sale of goods to Ram)
(3) Returns Inwards A/c 300
To Hari Saran 300
(Entry of goods returned by him and taken in inventory
omitted from records)
(4) Mahesh Chand 200
To Bad Debts Recovered A/c 200
(Correction of wrong credit to Personal A/c in respect
of recovery of previously written off bad debts)
(5) Man Mohan 100
To Sales Return A/c 100
(Correction of wrong debit to Sales Returns A/c for
dishonour of cheque received from Man Mohan)

Thus, it can be said that errors detected before the preparation of trial balance can be rectified
either through rectification statements (not entries) or through rectification entries.

6.5.2 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 despite of errors by opening a
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 and vice as versa.
One must note that such agreement of the trial balance is not 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

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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, 2022 is casted short by `100 ; as a consequence the
trial balance will not agree. The credit column of the trial balance will be `100 short and a
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. Now one error remains, the Suspense
Account must be closed by debiting the Suspense Account. The entry will be:

Suspense Account `100

To Sales Account `100
(Correction of error of undercasting the sales Book for November 2022)

ILLUSTRATION 4
Correct the following errors (i) without opening a Suspense Account and (ii) opening a Suspense
Account:
(a) The Sales Book has been totalled `100 short.
(b) Goods worth `150 returned by Green & Co. have not been recorded anywhere.
(c) Goods purchased `250 have been posted to the debit of the supplier Gupta & Co.
(d) Furniture purchased from Gulab & Bros, `1,000 has been entered in Purchases Day Book.

(e) Discount received from Red & Black `15 has not been entered in the Discount Column
of the Cash Book.
(f) 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 casted `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 totalling of the Sales Book `100”.

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(b) To rectify the omission, the Returns Inwards Account has to be debited and the account
of Green & Co. credited. The entry:

Returns Inward Account Dr. `150

To Green & Co. `150
(Goods returned by the firm, previously omitted from the
Returns Inward Book)

(c) Gupta & Co. have been debited `250 instead of being credited. This account should
now be credited by 500 to remove the wrong debit and to give the correct credit. The
entry will be on the credit side... “By errors in posting `500”.
(d) By this error Purchases Account has to be debited by `1,000 whereas the debit should
have been to the Furniture Account. The correcting entry will be:

Furniture Account Dr. `1,000

To Purchases Account `1,000
(Correction of the mistake by which of the Furniture
Account)

(e) The discount of `15 received from Red & Black should have been entered on the credit
side of the cash book. Had this been done, the Discount Account would have been
credited (through the total of the discount column) and Red & Black would have been
debited. This entry should not be made:

Red & Black Dr. `15

To Discount Account `15
(Rectification of the error by which the discount allowed by the
firm was not entered in Cash Book)

(f) 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.”
If a Suspense Account is opened :

Particulars Dr.(`) Cr.(`)

(a) Suspense Account 100
To Sales Account 100
(Being the correction arising from under- casting of
Sales Day Book)

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(b) Return Inward Account 150

To Green & Co 150
(Being the recording of unrecorded returns)
(c) Suspense Account 500
To Gupta & Co. 500
(Being the correction of the error by which Gupta &
Co. was debited instead of being credited by ` 250).
(d) Furniture Account 1,000
To Purchases Account 1,000
(Being the correction of recording purchase of
furniture as ordinary purchases)
(e) Red & black 15
To Discount Account 15
(Being the recording of discount omitted to be
recorded)
(f) Discount Account 18
To Suspense Account 18
(Being the correction of omission of the discount
allowed from Cash Book customer’s account already
posted correctly).

Suspense Account
Dr. Particulars Amount Date Particulars Cr.
Date ` Amount`
To Sales A/c 100 By Difference in
To Gupta & Co. 500 Trial Balance 582
By Discount A/c 18
600 600

Notes:
(i) One should note that the opening balance in the Suspense Account will be
equal to the difference in the trial balance.
(ii) If the question is silent as to whether a Suspense Account has been opened,
the student should make his assumption, state it clearly and then proceed.

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ILLUSTRATION 5
Correct the following errors found in the books of Mr. Dutt. The Trial Balance was out by ` 493
excess credit. The difference thus has been posted to a Suspense Account.
(a) An amount of `100 was received from D. Das on 31st December, 2022 but has been
omitted to enter in the Cash Book.

(b) The total of Returns Inward Book for December has been casted short by`100.
(c) The purchase of an office table costing ` 300 has been passed through the Purchases
Day Book.

(d) ` 375 paid for Wages to workmen for making show-cases had been charged to “Wages
Account”.
(e) A purchase of ` 67 had been posted to the trade payables’ account as ` 60.
(f) A cheque for ` 200 received from P. C. Joshi had been dishonoured and was passed to
the debit of “Allowances Account”.
(g) ` 1,000 paid for the purchase of a motor cycle for Mr. Dutt for his personal use had been
charged to “Miscellaneous Expenses Account”.
(h) Goods amounting to `100 had been returned by customer and were taken into inventory,
but no entry in respect thereof, was made into the books.
(i) A sale of ` 200 to Singh & Co. was wrongly credited to their account. Entry was correctly
made in sales book.
SOLUTION
(a) Journal Entries

Particulars L.F. ` `
(a) Cash Account Dr. 100
To D. Das 100
(Being the amount received)

(b) Returns Inward Account Dr. 100

To Suspense Account 100
(Being the mistake in totalling the Returns Inward
Book corrected)

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(c) Furniture Account Dr. 300

To Purchases Account 300
(Being the rectification of mistake by which
purchase of furniture was entered in Purchases book
and hence now corrected by crediting the Purchases
Account)
(d) Furniture Account Dr. 375
To Wages Account 375
(Being the wages paid to workmen for making
show-cases which should have been capitalised and
not to be charged to Wages Account)
(e) Suspense Account Dr. 7
To Creditors (personal) Account 7
(Being the mistake in crediting the Trade payables
Account less by ` 7, now corrected)
(f) P.C. Joshi Dr. 200
To Allowances Account 200
(Being the cheque of P.C. Joshi dishonoured,
previously debited to Allowances Account)
(g) Drawings Account Dr. 1,000
To Miscellaneous Expenses 1,000
(Being the motor cycle purchased for Mr. Dutt
debited to his Drawings Account instead of
Miscellaneous Expenses Account as previously done
by mistake)
(h) Returns Inward Account Dr. 100
To Debtors (Personal) Account 100
(Correction of the omission to record return of
goods by customers)
(i) Singh & Co. Dr. 400
To Suspense Account 400
(Being the correction of mistake by which the
account of Singh & Co. was credited by ` 200
instead of being debited)

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Suspense Account

Dr. Cr.
Date Particulars Amount Date Particulars Amoun
t
2022 ` 2022 `
Dec.31 To Difference in Dec. 31 By Returns
Trial Balance 493 Inwards A/c 100
““ To Trade Payables A/c 7 ““ By Singh & Co. 400
500 500

ILLUSTRATION 6
The following errors, affecting the account for the year 2022 were detected in the books of Jain
Brothers, Delhi:
(1) Sale of old Furniture ` 150 treated as sale of goods.
(2) Receipt of ` 500 from Ram Mohan credited to Shyam Sunder.

(3) Goods worth ` 100 brought from Mohan Narain have remained unrecorded so far.
(4) A return of ` 120 from Mukesh posted to his debit.
(5) A return of ` 90 to Shyam Sunder posted as ` 9 in his account.

(6) Rent of proprietor’s residence, ` 600 debited to rent A/c.

(7) A payment of ` 215 to Mohammad Sadiq posted to his credit as `125.
(8) Sales Book casted short by ` 900 .

(9) The total of Bills Receivable Book ` 1,500 left unposted.

You are required to pass the necessary rectifying entries and show how the trial balance would
be affected by the errors.
SOLUTION
Journal
Particulars L.F. Dr. Cr.
Amount Amount
` `
(1) Sales Account Dr. 150
To Furniture Account 150
(Rectification of sales of furniture treated as
sales of goods)

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(2) Shyam Sunder Dr. 500

To Rama Mohan 500
(Rectification of a receipt from Ram Mohan
credited to Shyam Sunder)
(3) Purchases Account Dr. 100
To Mohan Narain 100
(Purchases of goods from Mohan Narain
unrecorded, now corrected)
(6) Drawing Account Dr. 600
To Rent Account 600
(Rectification of Payment of rent of
proprietor’s residence treated as payment of
office rent)

N.B. : For 4, 5, 7, 8, 9 no journal entry can be passed as they affect a single account. The
correction will be as under:
(4) Credit Mukesh’s Account with ` 240.
(5) Debit the account of Shyam Sunder by ` 81.
(7) Debit the account of Mohammad Sadiq by ` 340.
(8) Credit Sales Account by ` 900.
(9) Debit Bills Receivable Account with ` 1,500.
Effect of the Errors on Trial Balance
1. No effect
2. No effect
3. No effect
4. Trial Balance credit total short by ` 240.
5. Trial Balance debit total short by ` 81.
6. No effect
7. Trial Balance debit total short by ` 340.
8. Trial Balance credit total short by ` 900.
9. Trial Balance debit total short by ` 1,500.

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ILLUSTRATION 7
Write out the Journal Entries to rectify the following errors, using a Suspense Account.
(1) Goods of the value of ` 100 returned by Mr. Sharma were entered in the Sales Day Book
and posted therefrom to the credit of his account;
(2) An amount of `150 entered in the Sales Returns Book, has been posted to the debit of
Mr. Philip, who returned the goods;
(3) A sale of ` 200 made to Mr. Ghanshyam was correctly entered in the Sales Day Book but
wrongly posted to the debit of Mr. Radheshyam as ` 20; and
(4) The total of “Discount Allowed” column in the Cash Book for the month of September,
2022 amounting to ` 250 was not posted.
SOLUTION
Journal
Particulars L.F. Dr. Cr.
` `
(1) Sales Account Dr. 100
Sales Returns Account Dr. 100
To Suspense Account 200
(The value of goods returned by Mr. Sharma
wrongly posted to Sales and omission of debit to
Sales Returns Account, now rectified)
(2) Suspense Account Dr. 300
To Mr. Philip 300
(Wrong debit to Mr. Philip for goods returned by
him, now rectified)
(3) Mr. Ghanshyam Dr. 200
To Mr. Radheshyam 20
To Suspense Account 180
(Omission of debit to Mr. Ghanshyam and wrong
credit to Mr. Radhesham for sale of
` 200, now rectified)
(4) Discount Account Dr. 250
To Suspense Account 250
(The total of Discount allowed during September,
2022 not posted from the Cash Book; error now
rectified)

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6.5.3 Correction in the next Accounting Period

Rectification of errors discussed so far assumes that it was carried out before the books were
closed for the concerned year. However, sometimes, the rectification is carried out in the next
year, carrying forward the balance in the Suspense Account or even transferring it to the
Capital Account. Suppose, the Purchase Book was cast short by `1,000 in December, 2022 and
a Suspense Account was opened with the difference in the trial balance. If the error is rectified
next year and the entry passed is to debit Purchase Account (and credit Suspense Account), it
will mean that the Purchases Account for year 2023 will be `1,000 more than the amount
relating to year 2023 and thus the profit for year 2023 will be less than the actual for that year.
Thus, correction of errors in this manner will ‘falsify’ the Profit and Loss Account.

To avoid this, correction of all amounts concerning nominal accounts, i.e., expenses and
incomes should be through a special account styled as “Prior Period Items” or “Profit and Loss
Adjustment Account”. The balance in the account should be transferred to the Profit and Loss
Account. However, these Prior Period Items should be charged after deriving the profit of the
current year. ‘Prior Period items’ are material income or expenses which arise in the current
period as a result of errors or omissions in the preparation of the financial statements of one
or more prior periods. Prior Period Items should be separately disclosed in the current
statement of profit and loss together with their nature and amount in a manner that their
impact on current period profit or loss can be perceived.
ILLUSTRATION 8
Mr. Roy was unable to agree the Trial Balance last year and wrote off the difference to the Profit
and Loss Account of that year. Next Year, he appointed a Chartered Accountant who examined
the old books and found the following mistakes:
(1) Purchase of a scooter was debited to conveyance account `3,000.
(2) Purchase account was over-cast by `10,000.

(3) A credit purchase of goods from Mr. P for ` 2,000 was entered as a sale.
(4) Receipt of cash from Mr. A was posted to the account of Mr. B ` 1,000.
(5) Receipt of cash from Mr. C was posted to the debit of his account, ` 500.

(6) ` 500 due by Mr. Q was omitted to be taken to the trial balance.
(7) Sale of goods to Mr. R for ` 2,000 was omitted to be recorded.
(8) Amount of ` 2,395 of purchase was wrongly posted as ` 2,593.

Mr. Roy used 10% depreciation on vehicles. Suggest the necessary rectification entries.

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SOLUTION
Journal Entries in the books of Mr. Roy

Sr. No. Particulars Dr.(`) Cr.(`)

(1) Motor Vehicles Account 2,700
To Profit and Loss Adjustment A/c 2,700
(Purchase of scooter wrongly debited to conveyance
account now rectified-capitalisation of ` 2,700, i.e.,` 3,000
less 10% depreciation)
(2) Suspense Account 10,000
To Profit & Loss Adjustment A/c 10,000
(Purchase Account overcast in the previous year; error now
rectified).
(3) Profit & Loss Adjustment A/c 4,000
To P’s Account 4,000
(Credit purchase from P ` 2,000, entered as sales last year;
now rectified)
(4) B’s Account 1,000
To A’s Account 1,000
(Amount received from A wrongly posted to the account of
B; now rectified)
(5) Suspense Account 1,000
To C’s Account 1,000
(` 500 received from C wrongly debited to his account; now
rectified)
(6) Trade receivables 500
To Suspense Account 500
(` 500 due by Q not taken into trial balance; now rectified)

(7) R’s Account 2,000

To Profit & Loss Adjustment A/c 2,000
(Sales to R omitted last year; now recorded)

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(8) Suspense Account 198

To Profit & Loss Adjustment A/c 198
(Excess posting to purchase account last year,
` 2,593, instead of ` 2,395, now adjusted)

(9) Profit & Loss Adjustment A/c 10,898

To Roy’s Capital Account 10,898
(Balance of Profit & Loss Adjustment A/c transferred to
Capital Account)
(10) Roy’s Capital Account 10,698
To Suspense Account 10,698
(Balance of Suspense Account transferred to the Capital
Account)

Note : Entries No. (2) and (8) may even be omitted; but this is not advocated.
Profit and Loss Adjustment Account
(Prior Period Items)
` `
To P 4,000 By Motor Vehicles A/c 2,700
To Roy’s Capital (transfer) 10,898 By Suspense A/c 10,000
By R 2,000
By Suspense Account 198
14,898 14,898

Suspense Account

` `
To Profit & Loss Adjustment A/c 10,000 By Trade Receivables (Q) 500
To C 1,000 By Roy’s Capital A/c (Transfer) 10,698
To Profit & Loss Adjustment A/c 198
11,198 11,198

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SUMMARY
♦ Unintentional omission or commission of amounts and accounts in the process of
recording the transactions are commonly known as errors.
♦ Accounting errors are generally of four types-
(a) Errors of Principle;
(b) Errors of Omission;

(c) Errors of Commission;

(d) Compensating Errors.
♦ Some errors may affect the Trial Balance and some of these do not.
♦ The method of rectification of errors depends on the stage at which the errors are
detected. If the error is detected before the preparation of trial balance, rectification
is carried out by making the statement in the appropriate side of the concerned
account.
♦ In case of the errors detected after the preparation of the trial balance, we open a
suspense account with the amount of difference in the trial balance. Then complete
journal entries can be passed for rectifying the errors.
♦ For rectifying the errors detected in the next accounting period, a special account
‘Profit and Loss Adjustment Account’ is opened for correction of amounts relating to
expenses and incomes.

TEST YOUR KNOWLEDGE

True and False
1. The method of rectification of errors depends on the stage at which the errors are
detected.
2. In case of error of complete omission, the trial balance does not tally.
3. When errors are detected after preparation of trial balance, suspense account is opened.
4. When purchase of an asset is treated as an expense, it is known as error of principle.
5. Trial balance agrees in case of compensating errors.
6. When amount is written on wrong side, it is known as an error of principle.
7. On purchase of old furniture, the amount spent on repairs should be debited to repairs
account.

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8. ‘Profit & Loss adjustment account’ is opened to rectify the errors detected in the current
accounting period.

9. Rent paid to landlord of the proprietors house, must be debited to ‘Rent account’.
10. If the errors are detected after preparing trial balance, then all the errors are rectified
through suspense account.

Multiple Choice Questions

1. Goods purchased from A for `10,000 passed through the sales book. The error will result
in
(a) Increase in gross profit.
(b) Decrease in gross profit.

(c) No effect on gross profit.

2. If a purchase return of `1,000 has been wrongly posted to the debit of the sales returns
account, but has been correctly entered in the suppliers’ account, the total of the
(a) Trial balance would show the debit side to be `1,000 more than the credit.
(b) Trial balance would show the credit side to be ` 1,000 more than the debit.
(c) The debit side of the trial balance will be ` 2,000 more than the credit side.

3. If the amount is posted in the wrong account or it is written on the wrong side of the
account, it is called
(a) Error of omission.
(b) Error of commission.
(c) Error of principle.
4. ` 200 paid as wages for erecting a machine should be debited to
(a) Repair account.
(b) Machine account.
(c) Capital account.

5. On purchase of old furniture, the amount of `1,000 spent on its repair should be debited to
(a) Repair account.
(b) Furniture account.

(c) Cash account.

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 ACCOUNTING PROCESS 2.153

6. Goods worth `50 given as charity should be credited to

(a) Charity account.
(b) Sales account.
(c) Purchase account.
7. Goods worth `100 taken by proprietor for domestic use should be credited to
(a) Sales account.
(b) Proprietor’s personal expenses.
(c) Purchases account.
8. Sales of office furniture should be credited to
(a) Sales Account.
(b) Furniture Account.
(c) Purchase Account.
9. The preparation of a trial balance is for:
(a) Locating errors of commission.
(b) Locating errors of principle.
(c) Locating clerical errors.
10. ` 200 received from Smith whose account, was written off as a bad debt should be
credited to:
(a) Bad Debts Recovered account.
(b) Smith’s account.
(c) Cash account.
11. Purchase of office furniture `1,200 has been debited to General Expense Account. It is:
(a) A clerical error.
(b) An error of principle.
(c) An error of omission.

Theory Questions
1. How does errors of omission differ from errors of commission?
2. What is error of principle and how does it affect Trial Balance?
3. When and how is Suspense account used to rectify errors?

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Practical Questions
1. The trial balance of Mr. W & H failed to agree and the difference `20,570 was put into
suspense account pending the investigation which disclosed that:
(i) Purchase returns day book had been correctly entered and totalled at `6,160, but
had not been posted to the ledger.
(ii) Discounts received `1,320 had been debited to discounts allowed.
(iii) The Sales account had been under added by `10,000.
(iv) A credit sale of `1,470 had been debited to a customer account at `1,740.
(v) A vehicle bought originally for `7,000 four years ago and depreciated to `1,200
had been sold for `1,500 in the beginning of the year but no entries, other than
in the bank account had been passed through the books.
(vi) An accrual of `560 for telephone charges had been completely omitted.
(vii) A bad debt of `1,560 had not been written off and provision for doubtful debts
should have been maintained at 10% of Trade receivables which are shown in
the trial balance at `23,390 with a credit provision for bad debts at `2,320.
(viii) Tools bought for `1,200 had been inadvertently debited to purchases.
(ix) The proprietor had withdrawn, for personal use, goods worth `1,960. No entries
had been made in the books.
You are required to give rectification entries without narration to correct the above errors
before preparing annual accounts and also prepare suspense account.
2. 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 casted in excess by ` 50.
(2) The “Sales Account” has been totalled in short by `100.
(3) Supplier account has been overcast by 225.
(4) The sale return of `100 from a party has not been posted to that account though
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.

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You are required to

(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.
3. Mr. A closed his books of account on September 30, 2021 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 2022 following errors were located:
(i) A sale of `2,300 to Mr. Lala was posted to the credit of Mrs. Mala.
(ii) The total of the Returns Inward Book for July, 2021 `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.
10% Depreciation is charge on this machines.
(iv) While carrying forward the total in the Purchases 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 on 30th sept. 2021 was not
entered in the books at all. The book value of the machine was `6,750.
Pass journal entries to rectify the errors. Have you any comments to make?
4. A merchant’s trial balance as on June 30, 2022 did not agree. The difference was put to
a Suspense Account. During the next trading period, the following errors were discovered:
(i) The total of the Purchases Book of one page, `4,539 was carried forward to the
next page as `4,593.
(ii) A sale of `573 was entered in the Sales Book as `753 and posted to the credit of
the customer.
(iii) A return to a creditor, `510 was entered in the Returns Inward Book; however, the
creditor’s account was correctly posted.
(iv) Cash received from C. Dass, `620 was posted to the debit of G. Dass.
(v) Goods worth `840 were despatched to a customer before the close of the year but
no invoice was made out.
(vi) Goods worth `1,000 were sent on sale or return basis to a customer and entered
in the Sales Book. At the close of the year, the customer still had the option to
return the goods. The sale price was 25% above cost.
You are required to give journal entries to rectify the errors in a way so as to show the
current year’s profit or loss correctly.

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5. The following errors were committed by the Accountant of Geete Dye-Chem.

(i) Credit sale of ` 400 to Trivedi & Co. was posted to the credit of their account.
(ii) Purchase of ` 420 from Mantri & Co. passed through Sales Day Book as ` 240
How would you rectify the errors assuming that :
(a) they were detected before preparation of Trial Balance.

(b) they were detected after preparation of Trial Balance but before preparing Final
Accounts, the difference was taken to Suspense A/c.
(c) they were detected after preparing Final Accounts

ANSWERS/HINTS
True and False
1. True: There are 3 different stages when the mistakes are identified and then the
rectification depends on the stage of identification of errors.
2. False: In case of error of complete omission, the trial balance tallies.
3. True: In order to balance the difference of balances in the trial balance suspense
account is opened.
4. True: Where the accounts being debited is principally incorrect it is termed as error of
principle.

5. True: Compensating errors cancel out each other when Trial balance is prepared as the
mistake pertains to the same amount being credited and later debited on account of
two different mistakes.
6. False: When amount is written on wrong side, it is known as an error of commission.
7. False: On purchase of furniture, the amount spent on repairs should be debited to
furniture account as it is a capital expense.
8. False: ‘Profit & Loss adjustment account’ is opened to rectify the errors detected in the
next accounting period.
9. False: Rent paid to land lord of the proprietors house, must be debited to ‘Drawings
account’.
10. False: If the errors are detected after preparing trial balance, then all the errors are not
rectified through suspense account. There may be principal errors, which can be
rectified without opening a suspense account.

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 ACCOUNTING PROCESS 2.157

Multiple Choice Questions

1. (a) 2. (c) 3. (b) 4. (b) 5. (b) 6. (c)
7. (c) 8. (b) 9. (c) 10. (a) 11. (b)

Theoretical Questions
1. (i) Errors of Omission: If a transaction is completely or partially omitted from the
books of account, it will be a case of omission. Examples would be: not
recording a credit purchase of furniture or not posting an entry into the ledger.
(ii) Errors of Commission: If an amount is posted in the wrong account or it is
written on the wrong side or the totals are wrong or a wrong balance is struck,
it will be a case of “errors of commission.”
2. Errors of principle: When a transaction is recorded in contravention of accounting
principles, like treating the purchase of an asset as an expense, it is an error of principle.
In this case there is no effect on the trial balance since the amounts are placed on the
correct side, though in a wrong account. Suppose on the purchase of a typewriter, the
office expenses account is debited; the trial balance will still agree.
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 a 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. Each and every error detected after preparation of trial balance 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.

Practical Questions
1.

Particulars Dr. Cr.

(i) Suspense Account 6,160
To Return Outward A/c 6,160
(ii) Suspense Account 2,640

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To Discount Allowed Account 1,320

To Discount Received Account 1,320
(iii) Suspense Account 10,000
To Sales Account 10,000
(iv) Suspense Account 270
To Trade Receivable Account 270
(v) Suspense Account 1,500
To Vehicle Account 1,200
To Profit on Sale of Vehicle Account 300
(vi) Telephone Charges Account 560
To Outstanding Expenses Account 560
(vii) Bad Debts Account (refer W.N 1) 1,560
To Trade Receivables Account 1,560
Provision for Doubtful Debts Account (refer W.N. 2) 1,396
To Profit and Loss Account 1,396
(viii) Loose Tools Account 1,200
To Purchases Account 1,200
(ix) Drawings Account 1,960
To Purchases Account 1,960

Suspense Account
` `
To Return outward Account 6,160 By balance b/d 20,570
To Discount allowed Account 1,320
To Discount Received Account 1,320
To Sales Account 10,000
To Customers Account 270
To Vehicles Account 1,200
To Profit on Sale of Vehicle 300
20,570 20,570
Working Notes :

(i) Balance of Trail Balance for Computation of

Provision for Doubtful Debts
Trade receivables as per books 23,390

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Deduction vide item (iv) 270

Bad Debts 1,560 1,830
21,560
(ii) Amount Charge to Profit & Loss on Account of Provision
for Doubtful Debts
Opening of Provision for Doubtful Debts 2,320
Less: Bad debts 1,560
760
Closing Balance of Provision for Doubtful Debts 2,156
Charge to Profit and Loss A/c 1,396

2. Journal Entries

Particulars L.F. Dr. Cr.

` `
Suspense Account Dr. 50
To Expenses Account 50
(Being the mistake in totalling of Expenses
Account, rectified)
Suspense Account Dr. 100
To Sales Account 100
(Being the mistake in totalling of Sales Accounts
rectified)
Supplier Dr. 225
To Suspense Account 225
(Being the mistake in posting from Day Book to
Ledger rectified)
Sales Returns Account Dr. 100
To Suspense Account 100
(Being the sales return from a party not posted to
“Sales Returns” now rectified)
Trade payables Account Dr. 500
To Purchases Account 500

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(Being the payments made to supplier wrongly

posted to purchases now rectified)
Trade receivables Account Dr. 100
To Suspense Account 100
(Being the sales wrongly credited to Customer’s
Account now rectified)

Suspense Account

Dr. ` Cr. `

To Expenses Account 50 By Difference in Trial Balance 150

To Sales Account 100 By Trade payables 225
To Balance c/d 425 By Sales Returns Account 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:

Increased by ` Decreased by`

Mistake in totalling in “Expenses” 50
Mistake in totalling in “Sales” 100
Mistake in posting from day book to Ledger
under
“Purchases” 500
Omission in posting under “Sales Returns” 100
650 100
Net Increase 550

As a result of these adjustments, the Profits will be increased by `550.

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3. Journal of Mr. A

Date Particulars Dr. Cr.

` `
2022 (i) Mrs. Mala 2,300
Mr. Lala 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 1,240
To Suspense A/c 1,240
(Rectification of omission to post the total of
Returns Inward Book for July, 2021)
(iii) (a) Machinery A/c 5,600
Suspense A/c 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 capitalising it)
(b) Profit & Loss Adjustment A/c 560
To Plant and Machinery A/c 560
(Depreciation @ 10% charged on freight paid on a
machine capitalised)
(iv) Suspense A/c 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 9,000
To Plant & Machinery A/c 6,750
To Profit & Loss Adjustment A/c 2,250
(Correction of omission of a sale of machine on
credit to Mr. Mehta for ` 9,000 )

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Comments
The Suspense Account will now appear as shown below:
Suspense Account
Date Particulars Dr. Date Particulars Cr.
Amount Amount
` `
2022 To Profit and Loss 2022 By Balance b/d 830
Adjustment A/c 900 Oct. 1 By Sundries
To Profit and Loss Mrs. Mala 2,300
Adjustment A/c 8,640 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 A/c

(For Prior Period Items)

Date Particulars Dr. Date Particulars Cr.
2022 Amount 2022 Amount
` `
To Suspense A/c 1,240 By Machinery A/c 5,600
To Plant and 560 By Suspense A/c 900
Machinery A/c
To Balance c/d 15,590 By Suspense A/c 8,640
By Mr. Mehta 2,250
17,390 17,390

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4. Journal Entries

Particulars Dr. Cr.

` `

(i) Suspense Account Dr. 54

To Profit and Loss Adjustment A/c 54

(Correction of error by which Purchase Account was

over debited last year- `4,593 carried forward
instead of `4,539)

(ii) Profit & Loss Adjustment A/c Dr. 180

Customer’s Account Dr. 1,326

To Suspense Account 1,506

(Correction of the entry by which (a) Sales A/c was

over credited by `180 (b) customer was credited by
`753 instead of being debited by `573)

(iii) Suspense Account Dr. 1,020

To Profit & Loss Adjustment A/c 1,020

(Correction of error by which Returns Inward

Account was debited by `510 instead of Returns
Outwards Account being credited by ` 510)

(iv) Suspense Account Dr. 1,240

To C. Dass 620

To G. Dass 620

(Removal or wrong debit to G. Dass and giving

credit to C. Dass from whom cash was received).

(v) Customer’s Account Dr. 840

To Profit & Loss Adjustment A/c 840

(Rectification of the error arising from non-

preparation of invoice for goods delivered)

(vi) Profit & Loss Adjustment A/c Dr. 200

Inventory Account Dr. 800

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To Customer’s Account 1,000

(The Customer’s A/c credited with ` 1,000 for goods

not yet purchased by him; cost of the goods
debited to inventory and “Profit” debited to Profit
& Loss Adjustment Account)

(vii) Profit & Loss Adjustment A/c Dr. 1,534

To Capital Account 1,534

(Transfer of Profit & Loss Adjustment A/c balance

to the Capital Account)
5. (b) (i) This is one sided error. Trivedi & Co. account is credited instead of debit.
Amount posted to the wrong side and therefore while rectifying the
account, double the amount (` 800) will be taken.
Before Trial Balance After Trial Balance After Final Accounts
No Entry Trivedi & Co. A/c Dr. 800 Trivedi & Co. A/c Dr. 800
Debit Trivedi A/c with ` 800 To Suspense A/c 800 To Suspense A/c 800
(ii) Purchase of ` 420 is wrongly recorded through sales day book as ` 240.

Correct Entry Entry Made Wrongly

Purchase A/c Dr. 420 Mantri & Co. Dr. 240
To Mantri & Co. 420 To Sales 240

Rectification Entry

Before Trial Balance After Trial Balance After Final Accounts

Sales A/c Dr. 240 Sales A/c Dr. 240 Profit & Loss Adj. A/c Dr.660
Purchase A/c Dr. 420 Purchase A/c Dr. 420 To Mantri & Co. 660
To Mantri & Co. 660 To Mantri & Co. 660

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