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CBSE Class 11 Accountancy Study Material
CBSE Class 11 Accountancy Study Material
NEWDELHI
PREFACE
It is a pride and privilege given to Ahmedabad Region and particularly to the team of Chief Patron, Prepared Patrons &by members who got associated themselves with the preparation of study material for class XI KENDRIYAVIDYALAYASANGATHAN:AHMEDABADREGION Accountancy.
Itisexpectedthatthismaterialwillhelpthestudentstounderstand the subject easily and perform better in the examination. It will also be helpful to the teacher to guide the students in the classroom. While preparing this material lot of discussions were held among the members ofcommitteeandtheytriedtogivethebestinthisstudymaterialonthe basisoftheirexperience.ForexampleMistakesGenerallyCommittedby the Students. Teachers and students are requested to see these points carefully that will help them to solve the problems of Accountancy accurately. Efforts have been made that the language should be simple and easily understandable to the students. We expect that the students will be better equipped to face the examination with confidence by reading thisstudymaterial (P.DEVAKUMAR) DEPUTYCOMMISSIONER(K.V.S.) AHMEDABADREGION
Chief Patron
Shri P. Devakumar Deputy Commissioner, KVS, RO, Ahmedabad Region
PatronS
Sh. P. Madan Assistant Commissioner, KVS, RO, Ahmedabad Region & Sh. Y. P. Singh
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S.NO .
1 2 3 4 5 6
NAME OF MEMBER
SH.D.K.GUPTA SH.PRASHANT WADODKAR SH.RAJU GOSWAMI SH. N. C. KHAMBhATI SH.KAUSHIK R.DALVI SH.B.S.SRIVASTAV A
DESIGNATIO N
PRINCIPAL PGT (COMMERCE) PGT (COMMERCE) PGT (COMMERCE) PGT (COMMERCE) PGT (COMMERCE)
NAME OF K.V.
K.V.No.4 , ONGC, BARODA K.V.BSF, DANTIWAD A K.V.ONGC MEHSANA K.V.NO.2 EME BARODA K.V.NO.2 , ARMY BHUJ K.V.NO.1 HARNI ROAD, BARODA
INDEX
UNIT
PAGE NO. 4 8 15
I.
II. Theory Base of Accounting III. Recording of Transactions IV. Preparation of Ledger, Trial Balance and Bank Reconciliation Statement V. Depreciation, Provision & Reserves VI. Accounting for Bills of Exchange VII. Rectification of Errors VIII.Financial Statements of Sole Proprietorship IX. Financial Statement for Non Profit Organisations X. Accounts for Incomplete Records
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65 83
111 114
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137 XI. Computers in Accounting List of Project Works(Courtesy CBSE) Blue Print of Question Paper Sample Question Papers(Courtesy CBSE) 149 144 148
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Introduction Book keeping Meaning of accounting Difference between book keeping and accountancy Economic events Changing role of accountancy Process of accounting Users of financial statements Branches of accounting Objectives of accounting Basic accounting terms
There's no business like show business, but there are several businesses like accounting. Introduction: Accounting has greater discipline than book keeping. It includes conceptual knowledge of the subject and applications also. BOOK KEEPING:-It involves journal, ledger, cash book and other subsidiary books, it cannot disclose the results of Business. Meaning of Accounting:-It is process of identifying, measuring, recording and communicating the financial information. Difference between Bookkeeping and accountancy: Book keeping does not show the net result and accountancy shows net result of the business. Economic Events:All events which can be measured in monetary Terms are known as Economic events. (Salary paid to employees, Goods purchased from creditors, cash withdrew from bank) CHANGING ROLE OF ACCOUNTANCY 1. As a language to communicate information an enterprises. 2. To provide valuable information for judging management ability. 3. To provide quantitative information this is useful in economic decision.
Process of accounting 1. Identification of the economic events. (Selection of important event) 2. Classification of the business transaction (Assets, liability, expenses, income). 3. Measurement in terms (Monetary value transaction.), 4. Recording of business transactions (As per accounting principal) 5. Summarizing the business transaction (Journal, ledger, trial balance and Balance sheet.) 6. Analysis and interpreting the business transactions. (Various reports, ratio etc.)
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7. Communication (provide information to internal and external users.) Users of financial statements: 1. Internal users :- (Owners, shareholders, investors, creditors, employees, customers, management.) 2 External users: - (Regulatory agencies, labor union, stock exchange, public and others) BRANCHES OF ACCOUNTING 1. Financial accounting (Book Keeping + preparation of financial statement). 2. Cost accounting (Determines the unit cost at different level of production). 3. Management accounting (It blends financial and cost accounting to get maximum profit at maximum cost). 4. Tax accounting (Sales tax and income tax). 5. Social responsibility (Focus on social benefits) Objectives of Accounting 1. Provides information in systematic way. 2. Enables to get profit or loss of business during certain profit. 3. Shows the actual position of the business. BASIC ACCOUNTING TERMS 1. Entity:- It means existence of an individual which includes two things 1.Business entity 2. Non business entity. 2. Transactions: - Exchange of goods and services for consideration. 3.Assets:- These are properties or economic resources of an enterprises which can be expressed in monetary terms it can be divided in two parts 1.Fixed assets( more than 1 year period) 2. Current assets(less than 1 year period) 4. Liabilities:-These are certain obligations or dues which firm has to pay. 5. Capital: It is an essential investment for commencement of every business. 6. Sales: It can be credit or cash, in which goods are delivered to customers. 7. Revenues:-It is the amount which is earned by selling of products. 8. Expenses:-It is known as cost of assets consumed or services which used. 9. Expenditure:-It means spending money for some benefit. 10. Profit: - Excess of revenues over expenses is called profit. 11. Gain: - It generates from incidental transaction such as sales of fixed asset, winning of court case. 12. Loss: - Excess of expenses over income is termed as loss. 13. Discount:-It is defined as concession or deduction in price of goods sold. 14. Voucher:-It is known as evidence in support of a transaction. 15. Goods: - It refers all the tangible goods (Raw material, work in progress, finished goods.) 16. Drawings: - Amount of goods or cash which is withdrawn from business for personal use. 17. Purchases: - It means of procurement of goods on credit or cash.
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18. Stock: - It is a part of unsold goods. It can be divided into two categories. 1.Opening stock 2. Closing stock. 19 Debtors: - There are persons who owe to an enterprise an amount for buying goods and services on credit. 20. Creditors: - These are persons who have to be paid by an enterprise an amount for providing the enterprise goods and services on credit. Questions: 1. Write any two users of financial statements. ANS: - 1.Public 2.Regulatory agencies 2. Write any one advantage of accounting. ANS: - Provide information in systematic order 3. Write any one example of voucher. ANS: cash memo 4. Write any two examples of current assets. Ans. 1.Stock 2.Debtor ***********
Unit at a glance: Introduction Meaning of accounting principles Features of accounting principles Necessity of accounting principles Basic accounting concepts Basis of accounting Nature of accounting standards Utility of accounting standards International Financial Reporting Standards (IFRS) Meaning and benefits of IFRS A mode of conduct imposed on an accountant by custom, law and professional body. Kohler Introduction: To maintain uniformity in recording transactions and preparing financial statements, accountants should follow Generally Accepted Accounting Principles. Meaning of Accounting Principles: Accounting principles are the rules of action or conduct adopted by accountants universally while recording accounting transactions. GAAP refers to the rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity in the preparation and presentation of financial statements. Features of accounting principles: (1) Accounting principles are manmade. (2) Accounting principles are flexible in nature (3) Accounting principles are generally accepted. Necessity of accounting principles: Accounting information is meaningful and useful for users if the accounting records and financial statements are prepared following generally accepted accounting information in standard forms which are understood.
Basic accounting concepts (1) Business entity concepts This concept assumes that business has a distinct and separate entity from its owners. Therefore business transactions are recorded in the books of accounts from the business point
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of view and not owners. For example, If owner bring Rs. 1,00,000 as capital in business. It is treated as liability of business to owner. Similarly if owner withdrew Rs. 5,000 from business for personal use, it is treated as reduction of owners capital and consequently reduction in liability of business towards owner. (2)Money measurement concept This concept states that transactions and events that can be expressed in money terms are recorded in the books of accounts. Non monetary transactions cannot be recorded in the books like appointment of manager, capabilities of human resources etc. Another aspect is the records of transactions are to be kept not in physical unit but in monetary unit. For example, an organisation has 2 buildings, 15 computers, 20 office tables are not recorded because they are physical unit and not in monetary unit. Limitation of this concept is the value of rupee does not remain same over a period of time. As changes in the value of money is not reflected in books does not reflect fair view of business affairs. (3) Going concern concept This concept assumes that business shall continue to carry out its operations indefinitely for a long period of time and would not be liquidated in the foreseeable future. It provides the very basis for showing the value of assets in the balance sheet. An asset may be defined as a bundle of services. For example, a machine purchased for Rs. 2,00,000 and its estimated useful life say 10 years. The cost of machinery is spread on suitable basis over next 10 years for ascertaining the profit or loss for each year. The total cost of the machine is not treated as an expense in the year of purchase itself. (4) Accounting period concept Accounting period refers to span of time at the end of which financial statements are prepared to know the profits or loss and financial position of business. Information is required to by different users at regular intervals for decision making. For example, bankers require information periodically because they want to ensure safety and returns of their investments. Similarly management requires information at regular interval to assess the performance and funds requirement. Therefore they are prepared at regular interval, normally a period of one year. This interval of time is called accounting period.
(5) Cost concept According to this concept all assets are recorded in the books of accounts at the purchase price which includes the purchase price, cost of acquisition, transportation and installation.
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For example, if an asset purchased for Rs. 1,00,000 and spent Rs. 10,000 on its installation. Therefore asset will be recorded in the books of accounts at Rs. 1,10,000. This concept is historical in nature. For example, if machine purchased for Rs. 75,000, the purchase or acquisition price will remain same for all years to come, though its market value may change. The main limitation of this concept is that it does not show the true value of asset and may lead to hidden profits. (6) Dual aspect concept This concept provides the very basis for recording the transaction in the books of accounts. It states that every transaction entered in the books has two aspects. For example, Man as started business with cash Rs. 50,000. In this transaction asset (cash) increases and liability (capital of owner) also increases. This principle is also known as duality principle. This principle is commonly expressed in fundamental accounting equation given below. Assets = Liabilities + Capital This equation states that assets of business are always equal to the claims of owners and outsiders. (7) Revenue recognition concept ( Realisation concept) According to this principle revenue is considered to have been realised when a transaction has been entered and obligation to receive the amount has been established. In other words when we receive right to receive revenue than it is called revenue is realised. For example, sales made in March, 2010 and receives amount in April, 2010. Revenue of these sales should be recognised in February month, when the goods sold. For example commission for the March, 2010 even if received in April 2010 will be taken into profit and loss A/c of March, 2010. Similarly if rent for the April, 2010 is received in advance in March, 2010 it will be taken the profit and loss A/c of the financial year of March, 2011. (8) Matching concept The matching concept states that expense incurred in an accounting period should be matched with revenues during that period. It follows from this that revenue and expenses incurred to earn these revenues must belong to the same accounting period. For example, salary for the month of March, 2010 paid in April, 2010 is recorded in the profit and loss A/c of financial year ending March, 2010 and not in the year when it realized. Similarly we records cost of goods sold and not the goods purchased or produced. So the cost of unsold goods should be deducted from the cost of goods produced or purchased.
(9) Full disclosure concept Apart from legal requirement good accounting practice require all material and significant information must be disclosed. Financial statements are the basic means of communicating
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financial information to its users for taking useful financial decisions. This concept states that all material and relevant fact and financial performance must be fully disclosed in financial statement of the business. Companys act 1956 has provided a format for making profit and loss A/c and balance sheet, which needs to be compulsorily adhered to for preparation of financial statement. Disclosure of material information results in better understanding. For example, the reasons for low turnover should be disclosed. (10)Consistency concept This concept states that accounting practices followed by an enterprise should be uniform and consistent over a period of time. For example if an enterprise has adopted straight line method of charging depreciation then it has to be followed year after year. If we adopt written down value method from second year for charging depreciation than the financial information will not be comparable. Consistency eliminates the personal bias helps in achieving the results that are comparable. However consistency does not prohibits the change accounting policies. Necessary changes can be adopted and should be disclosed. (11) Conservatism concept (Prudence concept) This concept takes into consideration all prospective losses but not the prospective profit. It means profit should not be recorded until it realised but all losses, even those which have remote possibility are to be recorded in the books. For example, valuing closing stock at cost or market value whichever is lower, creating provision for doubtful debts etc. This concept ensures that the financial statements provide the real picture of the enterprise. (12) Materiality concept This concept states that accounting should focus on material fact. Whether the item is material or not shall depend upon nature and amount involved in it. For example, amount spent of repair of building Rs. 4,00,000 is material for enterprise having the sales turnover of Rs.1,50,000 but not material for enterprise having turnover of Rs. 25,00,000. Similarly closure of one plant material but stock eraser and pencils are not shown at the asset side but treated as expenses of that period, whether consumed or not because the amount involved in it are low. (13) Objectivity concept This concept states that accounting should be free from personal bias. This can be possible when every transaction is supported by verifiable documents. For example, purchase of machinery for Rs. 30,000 should be supported by the voucher and should be recorded in the books of accounts. Similarly other supporting documents are cash memo, invoices, receipts provides the basis for accounting and auditing. Basis of Accounting:
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(1) Cash basis Under this entries in the books of accounts are made when cash id received or paid and not when the receipt or payment becomes due. For example, if salary Rs. 7,000 of January 2010 paid in February 2010 it would be recorded in the books of accounts only in February, 2010. (2) Accrual basis Under this however, revenues and costs are recognized in the period in which they occur rather when they are paid. It means it record the effect of transaction is taken into book in the when they are earned rather than in the period in which cash is actually received or paid by the enterprise. It is more appropriate basis for calculation of profits as expenses are matched against revenue earned in the relation thereto. For example, raw materials consumed are matched against the cost of goods sold for the accounting period. Accounting Standards (AS): A mode of conduct imposed on an accountant by custom, law and a professional body. By Kohler Nature of accounting standards: (1) Accounting standards are guidelines which provide the framework credible financial statement can be produced. (2) According to change in business environment accounting standards are being changed or revised from time to time (3) To bring uniformity in accounting practices and to ensure consistency and comparability is the main objective of accounting standards. (4) Where the alternative accounting practice is available, an enterprise is free to adopt. So accounting standards are flexible. (5) Accounting standards are amendatory in nature. Utility of accounting standards: (1) They provide the norms on the basis of which financial statements should be prepared. (2) It creates the confidence among the users of accounting information because they are reliable. (3) It helps accountants to follow the uniform accounting practices and helps auditors in auditing. (4) It ensures the uniformity in preparation and presentation of financial statements by following the uniform practices.
International Financial Reporting Standards (IFRS): To maintain uniformity and use of same or single accounting standards, International Financial Reporting Standards (IFRS) are developed by International Accounting Standards board (IASB).
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Objectives of IASB: (1) To develop the single set of high quality global accounting standards so users of information can make good decisions and the information can be comparable globally. (2) To promote the use of these high quality standards. (3) To fulfill the special needs of small and medium size entity by following above objectives.
Meaning of IFRS: IFRS is a principle based accounting standards. IFRS are a single set of high quality accounting Standards developed by IASB, recommended to be used by the enterprises globally to produce financial statements. Benefits of IFRS: (1) Global comparison of financial statements of any companies is possible (2) Financial statements prepared by using IFRS shall be better understood with financial statements prepared by the country specific accounting standards. So the investors can make better decision about their investments. (3) Industry can raise or invest their funds by better understanding if financial statements are there with IFRS. (4) Accountants and auditors are in a position to render their services in countries adopting IFRS. (5) By implementation of IFRS accountants and auditors can save the time and money. (6) Firm using IFRS can have better planning and execution. It will help the management to execute their plans globally.
QUESTIONS Explain cost concept. (1) What is mean by accounting standard? What is the main objective of accounting standard?
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(2) Explain the following concepts. a. Business entity concept b. Going concern concept c. Revenue recognition concept (3) Explain the utility of Accounting Standards. (4) Which principle assumes that a business enterprise will not be liquidated in near future? Ans. Going concern concept. (5) Closing stock is valued lower than the market price which concept of accounting is applied here? Ans. Conservatism (prudence) concept. (6) An asset may defined as a bundle of services explain with an example. (7) Under which accounting principle, quality of manpower is not recommended in the books of accounts? Ans. Money measurement concept. ***********
Meaning of accounting equation Classification of transactions Rules of debit and credit Meaning of Source documents Meaning of voucher Meaning of journal Meaning and types of cash book Purchase journal Sales journal Purchase return journal Sales return journal Questions
Accounting Equation :
Total Assets = Total Liabilities Or Total Assets = Internal Liabilities + External Liabilities Or Total Assets = Capital + Liabilities Classification of Transactions Following are the nine basic transactions: 1. Increase in assets with corresponding increase in capital. 2. Increase in assets with corresponding increase in liabilities. 3. Decrease in assets with corresponding decrease in capital. 4. Decrease in assets with corresponding decrease in liabilities. 5. Increase and decrease in assets. 6. Increase and decrease in liabilities 7. Increase and decrease in capital 8. Increase in liabilities and decrease in capital 9. Increase in capital and decrease in liabilities. Illustration : Show the effect of the following business transactions on assets, liabilities and capital through accounting equations: 1. Commenced business with cash 20,000 2. Goods purchased on credit 7,000 3. Furniture purchased 3,000 4. paid to creditors 2,000 5. Amount withdrawn by the proprietor 4,000 6. Creditors accepted a bill for payment 1,500 7. interest on capital 1,000 8. Transfer from capital to loan 5,000 9. Allotted shares to creditors 1,000 Solution
Transactions 1. Commenced business with cash Rs.20000 Cash + 20000 + Stock+ 0+ Assets Furniture 0= = Liabilities = Creditors + B/P 0+ 0+ + Loan 0+ + Capital + Capital 20,000
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Goods purchased on credit Rs. 7,000/New Equation 3. Furniture Purchased New Equation 4. Paid to creditors New Equation 5. Amount withdrawn by proprietor New Equation 6. Creditors accepted a bill New Equation 7. Interest on capital New Equation 8. Transfer from capital to loan New Equation 9. Allotted shares to creditors New Equation
2.
+ 20,000+ (-) 3,000 17,000+ (-) 2,000+ 15,000+ - 4000+ 11,000+ 0+ 11000+ 0+ 11000+ 0+ 11000+ 0+ 11000+
7,000+ 7,000+ 0+ 7,000+ (-) 2000+ 5,000+ 0+ 5,000+ -1500+ 3500+ 0+ 3500+ 0+ 3500+ -1000+ 2500+
0 20,000 0 20,000 0 20,000 -4000 16,000 0 16000 -1000 16000 -5000 11000 1000 12000
Question for Practice: Prepare Accounting equation on the basis of following information: (1) Sohan started business with cash =80,000 Machinery =10,000 And stock =10,000 (2) Interest on the above capital was allowed @ 10% (3) Money withdrew from the business for his personal use 10,000/(4) Interest on drawings 500/(5) Depreciation charged on machinery 2,000/Q. How the assets liabilities and capital will be affected under following cases: (1) Purchase of building for cash (2) Purchase of furniture on credit (3) Receipt of commission (4) Payment to creditors.
Debit and credit should be done properly Depreciation must be treated properly.
SOURCE DOCUMENTS
Meaning of Source documents: Business transactions are recorded in the books of accounts on the basis of some written evidence called source document. Common Source documents are Cash Memo, Invoice or Bill, Receipts, Debit Note, Credit Note, Cheque, Pay in slip Meaning of Voucher: Voucher is a source by which we record the transactions. Meaning of Journal: Journal is a book of prime entry in which transactions are copied in order of date from a memorandum or waste book. Illustration: Journalise the following transactions in the books of Ravi: 1. Bought goods from Sonam Rs. 20,000 less trade discount 20% plus VAT @ 10%. 2. Sold goods costing Rs. 6,000 to Ram for Rs. 8,000 plus VAT @ 10%
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3. Sold the balance goods for Rs. 16,000 and charged VAT @ 10% to Mohan against payment by cheque which was banked on the same day. 4. Deposited the VAT into government account by cheque. Solution: Date Particulars 1 Purchases A/c Dr. VAT Paid A/c Dr. To Sonam (Goods purchased from Sonam ) Ram Dr. To Sales A/c To VAT Collected A/c (Goods sold & charged VAT @10%) Bank A/c Dr. To Sales A/c To VAT Collected A/c (Goods sold to Mohan against cheque & charged VAT @10%) VAT Collected A/c Dr. To VAT paid A/c (Adjustment of VAT paid with VAT collected) VAT Collected A/c Dr. To Bank A/c (Balance amount of VAT deposited in Govt.A/c L.F. Amount (Dr.) Rs. 16,000 1,600 8,800 8,000 800 17,600 16,000 1,600 1,600 1,600 800 800 Amount Cr. Rs. 17,600
Question for Practice: Journalise the following transactions: 1. Paid sales tax Rs. 5,000. 2. Sold goods for Rs. 80,000 to Diwan for cash and charged 8% sales tax. 3. Purchased goods from Neelam for Rs. 50,000 plus VAT @ 10% 4. Sold goods to Punam worth Rs. 80,000 plus VAT @ 10%. 5. VAT was deposited into Government Account on its due date. 6. Paid Income Tax Rs. 7,000.
CASH BOOK
Meaning: Cash book is a book in which all the transactions related to cash receipts and cash payments are recorded.
1. Single Column Cash Book: Illustration: Enter the following transactions in a single column cash book for the month of January 2008 from the following particulars: January 2008 Rs. 1 Cash in hand 2,000 2 Goods sold 18,000 4 Paid salaries to employees 10,000 6 Payment made to a creditor A by cheque 5,000 8 Cash sales of Rs. 30,000 out of which Rs. 5,000 immediately deposited into bank. 9 Cash sales of Rs. 28,000 out of which Rs. 10,000 was deposited into bank on 12th January 15 Purchased goods from Hari Ram 6,000 18 Paid to transporter 1,000 19 Sold goods to Manik Chand 3,000 28 Paid electricity bill 500 30 Paid to Mr. Sharma Rs.140 and discount received Rs.10 Solution : CASH BOOK (SINGLE COLUMN)
Date 2008 Jan. 1 2 8 9 Particulars V. No. LF Amount (Rs.) 2,000 18,000 25,000 28,000 73,000 To Balance b/d 51,360 Date 2008 Jan. 4 12 18 28 30 31 Particulars V. No. LF Amount (Rs.) 10,000 10,000 1,000 500 140 51360 73,000
2008 Feb. 1
Question for Practice: Enter the following transactions in the cash book Oct.2010 1 3 5 8 11 13 15 19 Cash in hand Goods sold for cash Bought goods for cash Paid Salary Cash deposited into bank Bought office furniture Cash sales Rs. 20000 of which Rs. 12000 are banked on Oct.16 Bought goods from Sohan Rs. 13,000 9,500 6,700 3,000 5,500 4,000 5,800
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21 23 25 27 31
Withdrew cash from bank for office use Paid Sohan in full settlement of his account Paid Amit by cheque Paid carriage Rs. 500, rent Rs. 800 and life insurance premium Rs. 600. Paid electricity charges Rs. 1,100 and insurance premium Rs. 800.
TWO COLUMN CASH BOOK Illustration: From the following information prepare a Two column cash book. 2006 Cash in hand March 1 March 1 Cash at bank Cheque received from Naresh March 3 Discount allowed Cheque received from Naresh was deposited into bank March 4 Nareshs cheque dishonoured March 6 Cheque paid to Ram March 7 Discount received Cash withdrawn from bank for office use March 9 March 10 Withdrawn from bank for paying income tax March 12 Cheque received from Harish and endorsed it to Shivam on 13th March March 14 Given a cheque to Amber for cash purchase of furniture for office use March 16 Cash purchase of Rs. 1,500 less 10% trade discount March 18 Cheque received for sales of Rs. 10,000 less 10% trade discount cheque was immediately deposited into bank March 25 Paid commission by cheque March 27 Paid rent March 28 Received bank interest March 29 Paid bank charges March 31 Paid into bank the entire balance after retaining Rs. 500 at office. Solution CASH BOOK (TWO COLUMN)
Date 2006 March 1 3 4 9 12 18 28 Particulars V. No. L.F. Cash Bank Date 2006 March 4 6 7 9 10 13 14 Particulars V. No. L.F. Cash
5000 6000 3000 100 4000 200 2000 2500 4000 3000
Bank
C C
31
To Cash
2150
16 25 27 29 31 31
Apr.1
To Balance b/d
14000 500
21150 4150
14000
21150
Question for Practice: Enter the following transactions in the cash book with cash and bank column of Rao & Sons. June 2010 1 3 6 8 10 12 13 15 17 19 23 25 26 29 Particulars Started Business with cash Rs. 1,00,000 Opened a bank current account with SBI Rs. 60,000 Bought goods from Ashok Rs. 15,000 Paid Ashok by cheque Rs. 14,700 and received discount Rs. 300 Sold goods to Mohan for cash Rs. 10,000 and on credit Rs. 22,000. Received cheque from Mohan 21,400 and allowed discount Rs. 600. Cheque of Mohan deposited into bank Paid electricity charges Rs. 1100 and rent Rs. 2,000. Received a cheque from Total for Rs. 6,800 in full settlement of his account Rs. 7,000 Endorsed the cheque of Gopal in favour of our creditor Amar Withdrew cash from bank for office use Rs. 5,000 and for personal use 3,500 Bought a machine from Raman. He was paid by cheque 9,000. Paid Carriage of machine Rs. 300 and installation charges Rs. 700 Bank allowed interest Rs. 800 and bank charges were Rs. 200.
PETTY CASH BOOK Meaning Petty Cash Book is the book which is used for the purpose of recording expenses involving petty amounts.
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Petty cash given to the Petty Cashier for small payments is recorded on the credit side of the Cash Book as By Petty Cash Account and is posted to the debit side of the Petty Cash Account in the Ledger. System of Petty Cash Petty Cash Book may be maintained by ordinary system or by imprest system. Imprest System Under this system an estimate is made of amount required for petty expenses for a certain period.
Types of Petty Cash Book 1. Simple Petty Cash Book and 2. Petty Cash Book. Illustration: From the following information, write up a Simple Petty Cash Book for the first week of April 2012 : Date 2012 April 1 April 2 April 4 April 5 April 6 April 7 Solution: Amount Received 4000 Cash Date Book Folio 2012 April 1 April 2 April 4 April 5 April 6 April 7 Particulars To Cash A/c By Postage A/c By Travelling Exp. A/c By Stationery A/c By Office Expenses A/c By Miscellaneous Exp. A/c By Balance c/d Voucher Amount No. Paid 200 120 1000 600 80 2000 4000 Particulars Received Rs. 4,000 from Chief Cashier for Petty Cash Bought Postage stamps Paid bus fare Purchased stationery for office use Paid for milk and sugar for office tea Paid to window cleaner Rs. 200 120 1000 600 80
4000
Illustration: Prepare an Analytical Petty Cash Book on the Imprest System from the following:
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Jan.2012 1 2 2 3 3 4 4 5 5 5 6 6 6 6 6 Solution:
Rs. Received Rs. 1,000 for Petty Cash Paid bus fare Paid cartage Paid for postage and telegrams Paid wages for casual labourers Paid for stationery Paid auto charges Paid for repairs to chairs Bus fare Cartage Postage and telegrams Conveyance charges Cartage Stationery Refreshment to customers 5 25 50 60 40 20 150 10 40 70 30 30 20 50
Total Payment
Voucher No.
Conveyance
Particulars
Stationery
Sundries
Jan 12 1000 1 2 3 4 5 6 6 6
Receipts
Cartage
Wages
Date
1 1 2 3 4 5 6 7 8 9 10 11 12
To Cash A/c To Conveyance A/c By Cartage A/c By Postage and Telegrams A/c By Wages A/c By Stationery A/c By Conveyance A/c By Repairs of Furniture A/c By Conveyance A/c By Cartage A/c By Postage and Telegrams A/c By Conveyance A/c By Cartage A/c
5 25 50 60 40 20 150 10 40 70 30 30
5 25 50 60 40 20 150 10 40 70 30 30
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13 14
By Stationery A/c By General Exp. A/c By Balance c/d To Balance b/d To Cash A/c
20 65 95 60 120 60 50 200
Purchases Book or Purchases Journal Name of the supplier (a/c to be Invoice No. credited) Bharat Electric Co: Dwarka, Delhi 100 Tube lights @ Rs. 40 each 50 Table Fans @ Rs. 415 each 30 Electric iron @ Rs. 200 each Less : Trade Discount 10% Ashoka Traders, Karol Bag, New Delhi 30 Table fans Polar @ 600 each 20 Mix grinders Usha @ Rs.500 each Less : Trade Discount 15% 1238
LF
Detail Rs. 4,000 20,750 6,000 30,750 3,075 18,000 10,000 28,000 4,200
Amount
27.675
Jan 9
581
23,800
Jan 16
Jan 31
Purchases A/c
Dr
5,950 57,425
Question for Practice From the following information prepare the Purchase Book of Moon Light House Gurgaon. 2007 April 1 Purchased goods from Rajan Electric Co. Pushp Vihar, Delhi (Invoice No.605) 16 Dozen bulbs @ Rs 90 per bulb 30 Water heaters @ 144 per heater Less 10% of Trade Discount. April 12 Purchased from M/s Sudharshan, Bombay Office Furniture worth Rs. 20,000. April 18 Purchased goods from Surya Electric House, Delhi (Invoice No. 2301) 10 Geyzers @ Rs. 5,000 each 04 Table fans @ Rs. 1,500 each 40 Electric Iron @ 220 each Trade Discount 20%. Sales Tax 8%. April 20 Purchased from Aman Lights, Surya Nagar GZB for cash (Invoice No. 640). 30 Dozen bulbs @ Rs. 70 each. 04 Ceiling fans @ 1,200 each. April 27 Purchased goods from Radhey Shyam Ltd. Delhi (Invoice No. 720) 30 Heaters @ Rs. 125 each. 70 Table fans @ Rs. 500 each
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Sales Book
Meaning of Sales Book: Sales Book or Sales Journal is a book in which all the credit sales of goods are recorded. Recording in Sales book is done on the basis of invoice issued to the customers. Illustration: Enter the following transactions in the Sales book of M/s Salim & Co. Hyderabad 2012 May 4 Sold to Gupta Bros. New Delhi (Invoice No. 175) 10 dozen Pencils @ Rs. 20 per dozen 14 gross Rubbers Rs. 5 per dozen May 14 Sold to M/s Fazal Mirza & Co. Mumbai (Invoice No.200) 5 Dozen Gum Bottle @ Rs. 5 per bottle 70 dozens Rulers @ Rs. 15 per dozen Less : 10% Trade Discount May 17 Sold old Newspapers for Rs. 200 (Invoice No. 215) May 21 Sold to M/s Rajendra & Co. Ghaziabad (Invoice No. 255) 10 reams of Papers @ Rs. 60 per ream Less : Trade Discount @ 10% May 25 Sold to M/s Dhyanchand & Co. Delhi for cash (Invoice No. 285) 10 dozen pens @ Rs. 120 per dozen for cash May 30 Sold to Cheap Stores, New Delhi (Invoice No. 299) 10 dozens Pencils @ Rs. 18 per dozen Less: Trade Discount @ 10%. May 31 Sold old furniture to M/s Kashyapel Co. on credit for Rs. 1700 (Invoice No.300) Solution: Sales Book (Sales Journal)
Date 2012 May 4 May 14 Invoice No. 175 200 Name of the customers (Account to be debited) Gupta Bros. New Delhi 10 Dozen Pencils @ Rs. 20 per dozen 14 gross Rubbers @ Rs. 5 per dozen Fazal Mirza & Company Mumbai 5 dozen Gum Bottles @ Rs.5 per bottle 70 dozens rulers @ Rs. 15 per dozen Less : Trade Discount @ 10% Rajendra & Company, Ghaziabad 10 reams papers @ Rs/ 60 per ream Less : Trade discount @ 10% Cheap Stores, new Delhi 10 dozens Pencils @ Rs/ 18 per dozen Less : Trade Discount @ 10% LF Amount Details (Rs.) 200 840 300 1050 1350 135 600 60 180 18 Total (Rs.)
1040
May 21 May 30
255 299
Sales A/c
Cr.
2,957
Question for Practice : Record the following transactions in the sales book of Sunny Furniture, Mumbai 2010 April 3 Sold goods to laxmi Furniture , Delhi 4 Sofa Sets @ Rs. 5000 each Less : 15% Trade Discount and VAT charged @ 10%. April 10 Sold to Star Furniture, Tilak Nagar, Delhi 50 Chairs @ Rs. 200 each 10 Tables @ Rs. 500 each Less : 5% VAT charged @ 10% April 17 Sold goods to Rajdhani Furniture, Raisena Hills, Gwalior for cash 40 Chairs @ Rs. 175 each, VAT charged @ 10%. April 25 Sold goods on credit to Vishal Mega Mart, Delhi 10 Almirahs @ Rs. 3,000 each. 2 Sofa Sets @ Rs. 4,500 each 20 Chairs @ Rs. 200 each Less : 15% Trade Discount : VAT charged ! 10% and freight charged Rs. 2,200.
Cr.
4940
Question for Practice: Enter the following transactions in the Purchase Return Book of Maya Sharma. 2006 April 8 Returned goods to Sudha Ltd for Rs. 15,000 as the goods were not according to specifications. (Debit Note No. 214) April 15 Allowance claimed from Ravi Taneja, on account of mistake in the invoice Rs. 800 (Debit Note No. 226). April 26 Returned goods to Ankit and Sons for Rs. 4000. Trade discount 20% (Debit Note No. 252).
Solution : Date Return Inward (Sales Return) Book Credit LF Amount Particulars (Name of the customer i.e. account to Note No. be credited) Detail Total Neelkamal & Co. 600 units @ Rs. 150 per unit Rohan & Co. 200 units @ Rs.100 per unit Sales Return Account 26 152 Dr. 90,000 20,000 1,10,000
Question for Practice: Prepare Sales Return Book of Mohan Lal & Sons. Dehradun from the following transactions :
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Goods returned by Rama & co. (Credit Note No. 121) 10 shirts @ 200 each Less : Trade Discount 10% Allowance allowed to Goel Agencies on account of mistake in invoice No. 1203 for Rs. 600 (Credit Note No. 122) Rohit & Co. returned goods being defective for Rs. 3,200 (Credit Note No. 123)
Questions for practice: 1. Prepare Accounting equation : 1. Started business with cash Rs. 3,30,000 2. Commission received Rs. 22,000 3. Interest received in advance Rs. 1,100. 4. Salary paid Rs. 22,000 5. Prepaid rent Rs. 4,400. 6. Accrued commission Rs. 3,300 7. Wages outstanding Rs. 11,000. Ans. Total after final equation = 3,14,600 A= C + L 3,14,600= 3,02,500+ 12,100 2. Show the effect of the following business transactions on assets, liabilities and capital with the help of accounting equation: 1. Commenced business with cash 31,200 2. Interest on Capital 1,560 3. Machinery Purchased 4,680 4. Cash withdrawn from the business for personal use of proprietor 6,240 5. Goods purchased on credit 3,120 6. Paid to creditors 2,340 7. Creditors accepted a bill for 1,560 8. Allotted shares to creditors 1,560 9. Transfer from capital to loan 7,800 Ans. Total after final equation 32,760 A = C+ L 32,760 = 18720 + 14040 3. Prepare Accounting Equation for the following : Started Business with 3,00,000 Cash 90,000 Building 60,000 Stock Interest on capital 45,000 Depreciation charged on building 9,000 45,000 Money withdrawn from business for personal use 22,500 Goods withdrawn for personal use 2,250 Interest on drawings Ans. Total after final equation 3,73,500
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A 3,73,500 4. 5. 6. 7.
= C+ = 3,73,500
L 0
8.
Write Rules of Debit and Credit. What is a Voucher ? Define Journal ? Enter the following transactions in the journal of Mohan: 2010 Rs. Jan 1 Started business with cash 80,000 And goods 40,000 Jan.3 Paid into bank for opening a bank current account. 50,000 Jan 6 Bought goods from Ram and paid by cheque 10,000 Jan 9 Sold goods to Amar and received cheque 12,000 Jan 11 Cheque received from Amar deposited in the bank. Jan 15 Withdrew cash by cheque for personal use 3,000 Jan 17 Took a bank loan 40,000 Jan 19 Paid Salary Rs. 2,000 rent Rs. 1,000 by cheque Jan 21 Interest allowed by bank. 300 Jan.25 Ram who owed us Rs. 1,000 met with an accident and nothing could be recovered. Pass journal entries in the books of Shyam : 2009 Dec. 1 Sold goods to Amar of the list price Rs. 50,000 less 15% trade discount. Dec.5 Amar returned goods of list price Rs. 6,000 being defective. Dec.8 Amar paid the amount due under a cash discount of 2%. Dec.12 Sold goods to Karan of list price Rs. 40,000 at 10% trade discount and 2% cash discount. Karan paid cash for only 40% value of goods.
9. Journalise the following transactions: 1 Mr.Ravi Started business with cash 2 Paid Salary to Hari an employee 3 Paid rent to Mr. Lokesh Landlord 4 Paid office expenses 5 Withdrawn from bank 6 Withdrawn from bank for office use 7 Withdrawn from bank for personal use 8 Paid rent to landlady by cheque 9 Bank charged for its services 10. Enter the following transactions in a One Column Cash Book. 2008 Jan.1 Cash-in-hand Jan.3 Purchased machinery on credit Purchased goods for cash Jan.6 Received from Mr.Singh Jan.7 Received commission Jan 9
70,000 7,000 10,000 15,000 8,000 6,000 5,000 12,000 800 Rs. 20,000 15,000 6,000 45,000 5,000
30
Paid to Srijan Rs. 140 in full settlement Goods sold for cash Paid brokerage to Charu Paid to Kartar Received cash from Jaydeep Rs. 520 in full settlement of his account of Interest accrued Wages outstanding Paid Salaries Paid rent
200 28,000 3,000 4,000 550 8,000 3,000 2,000 1,500 Ans. 81,880.
11. Enter the following transactions in a One Column cash book. May2008 Cash in hand 1 Purchased goods for cash 6 Furniture purchased on credit 7 Goods sold for cash 8 Paid to Kamal 12 Received from Sonu 18 Paid brokerage 20 Received commission 23 Received cash from Jagan Rs. 480 in full settlement 25 of his account of Paid to Somesh Rs. 190 in full settlement of the 27 account of Rs. Paid Salaries 30 Outstanding wages 31 Accrued Interest 31
Rs. 15,000 7,000 10,000 20,000 5,000 30,000 2,000 4,000 500 200 4,000 2,000 6,000 Ans. 51,290.
12. Record the following transactions in a Cash Book with Cash and Bank Columns: Jan 03 1 2 5 15 16 17 25 27
Cash in hand Cash at Bank Discounted a Bill Receivable (B/R) for Rs. 1,000 at 1% through bank Bought goods for RS. 2,000 and paid by cheque, discount allowed 1% Paid trade expenses Paid taxes Paid insurance charges Sold goods for Rs. 12,500, received cheque and allowed discount 1% Cheque received on 25th deposited into bank
31
28 30
Received cheque from John & Co. Purchased 100 NSC Plan Certificate for Rs. 100 each 6,000.00 @ 95 each and paid for them by cheque Ans. Cash = 12,995, Bank 700 Rs. 50,000 20,000 10,000 7,000 6,000 8,000 5,500 5,000 2,000 8,000 2,000 96,000 3,000 4,000 5,600 Ans Cash 22,100 Bank 31,000
13. From the following information prepare Two Column Cash Book July 2007 1 Bank Balance 1 Cash Balance 3 Purchased goods by cheque 6 Goods sold for cash 9 Machinery purchased by cheque 12 Cash sales immediately deposited into bank 14 Purchased goods from Vaidya for cash 16 Purchased stationery by cheque 20 Cheque given to Ratnesh 22 Cash withdrawn from bank 24 Salary paid by cheque 26 Cash deposited in bank 28 Cash withdrawn from bank for personal use 30 Paid rent 30 Received a cheque for Commission
14. Enter the following transactions in the purchases book. Mar.2012 1 Purchased from Rajendra Bros. Mahendrgarh (Invoice No. 324) 50 tins Ghee @ Rs. 500 per tin 100 bags sugar @ Rs. 900 per bag Less : 10% trade discount 2 Bought from Bhartat Stores, Madurai (Invoice No. 377) 20 bags Gram @ Rs. 300 per bag 10 bags Sugar @ Rs. 1000 per bag 15 bags wheat @ Rs. 400 per bag Less : 10%Trade Discount 30 Bought from Harish Kumar Chaudhary, Kotihar (Invoice No. 390) 10 bag sugar @ Rs. 1000 per bag 30 tins Ghee @ Rs. 400 per tin Ans. Total Purchases Book Rs. 1,45,300 15. Enter the following transactions in the Columnar Purchases Book of Sudarshan Chavda : 2011 May 1 Purchased from Suresh Gupta, Jaipur (Invoice No. 2680) 100 bags wheat @Rs. 400 per bag
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50 bags Gram @ Rs. 450 per bag 200 bags sugar @ Rs. 900 per bag May 5 Bought of Virendra Vig. Delhi (Invoice No.2015) 100 bags wheat @ Rs. 400 per bag 100 bags Gram @ Rs. 450 per bag May 8 Surendra Gupta, Agra sold to us : (Invoice No. 2950) 100 bags sugar @ Rs. 900 per bag May 9 Rajesh Kumar, Dehradun sold to us (Invoice No. 350) 200 bags wheat @ Rs. 460 per bag. Ans. Total of Purchases book Rs. 5,09,500 16. Mar. 3 From the following particulars of Baljinder Flour Mills prepare a Sales Book : 2005 Sold to Gupta Brothers 90 Bags of Sugar @ Rs. 85 per bag 20 Quintals Rice @ Rs. 300 per quintal Less : 10% Trade Discount Sold to Jugal Furniture House 80 Chairs of Rs. 10 each Sold to M/s Kunal & Sons for cash 30 qtl. wheat @ Rs. 250 per qtl. 40 Tins Oil @ Rs. 150 per tin Sold to M/s Chaman and Company 120 Bags of wheat @ Rs.90 per bag. 30 Tins oil @ Rs. 200 per tin 60 Bags of rice @ Rs. 150 per bag Less: Trade Discount = 15%. (Ans.Total of Sales Book = Rs. 21,930)
17.
From the following information of M/s Gajadhar and Sons prepare a Sales Book 2007 July 3 Sold to Mohan vide invoice No. 325, 40 kg. Assam Tea @ 66 per kg less trade discount of 5%. VAT @ 10%. Freight and Packing charges were separately charged in the invoice at Rs. 352. July 8 Sold to Ramanand vide (Invoice No. 426), 5 chests of tea for Rs. 3960 less trade discount @ 10% and VAT is charged @ 10%. July 20 Sold to Krishna & Sons vide Cash Memo No. 845, 80 ` kg butter @ Rs. 200 per kg; less trade discount @ 25% and VAT @ 8%. July 26 Sold to Shivhare vide invoice No. 189, 30 packets of Darjeeling Tea @ Rs. 110 per packet less trade discount Rs. 220, charged VAT @ 10%. Ans. Total of Sales Book Rs. 10,419.
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18.
19.
20.
Enter the following transactions in the Purchases Return Book of Sh. Mukund. 2007 Jan.20 Returned goods to Arav & Sons for Rs. 410,000 Trade Discount 10% (Debit Note No.369). Jan.24 Allowance Claimed from Rakesh on account of mistake in the invoice Rs. 900 (Debut Note No. 2660) Jan.29 Returned goods to Sweksha Ltd. For Rs. 26,000 as the goods were defective (Debit Note No.3100). (Ans.Total of Purchase Return Book = Rs. 35,900) Prepare purchase return book of Madhav Rao Furniture House 2011 Feb.1 Returned to Chanakya Co. (Debit Note No. 123) 5 Chairs @ Rs. 80 per chair 10 stools @ RS. 150 per stool Feb.10 Returned to Goyanka Furniture Stores (Debit Note No. 178) 5 Elmira @ Rs. 100 per Elmira 8 Tables @ Rs. 70 per table Feb.28 Returned to Ashok & Co. : (Debit Note No.199) 7 Stools @ Rs. 120 per stool 5 tables @ Rs. 100 per table (Ans. Total of Purchase Return Book = Rs. 4,300) Enter the following transactions of Tanuj & Co. in the proper books : 2012 July 5 Sold on credit to Sethi & Co. (Invoice No. 515) 10 Electronics Iron @ Rs. 25 5 Electric Stoves @ Rs. 15 July 8 Purchased on credit from Hari & Sons : (Invoice No. 601) 25 Heaters @ Rs. 40 10 Water Heaters @Rs. 20 July 10 Purchased for cash from Mohan and Co.(Invoice No. 625) 10 Electric Kettles @ Rs. 30 July 15 Sold to Gopal Bros. on credit : (Invoice No. 648) 10 Heaters @ Rs. 50 5 Water Heaters @ Rs. 25 July 18 Returned to Hari & Sons : (Debit Note No.650) 5 Heaters, being defective July 20 Purchased from Kohli & Co. (Invoice No. 712) 10 Toasters @ Rs. 20 10 Water Heaters @ Rs.30 July Gopal Bros. returned one water heater as defective. (Credit Note No.425) **********
UNIT 4
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Ledger is a book which contains all accounts of the business enterprise whether Personal, Real or Nominal. INTRODUCTION After recording the business transaction in the Journal or special purpose Subsidiary Books, the next step is to transfer the entries to the respective accounts in the Ledger. Ledger is a book where all the transactions related to a particular account are collected at one place. LEDGER Definition: The Ledger is the main or principal book of accounts in which all the business transactions would ultimately find their place under various accounts in a duly classified form. According to L.C. Cropper, The book which contains a classified and permanent record of all the transactions of a business is called the ledger. Points to be Remember: To know the collective effect of all the transactions pertaining to one particular account. By this classification / collective effect we are able to know the following How much amount is due from each customer and how much amount the firm has to pay to each supplier/ creditor. The amount of Purchases and Sales during a particular period. Amount paid or received on account of various items. Ultimate position of Assets and Capital. For the preparation of Trial Balance which helps in ascertaining the Arithmetic Accuracy of the Accounts.
35
Points to be Remember: Ledger is also called the Principal Book of Accounts PERFORMA OF LEDGER Name of the Account Dr. Date Particulars J.F Amount Date Particulars J.F Cr. Amount
Each ledger account is divided into two equal parts. Left Hand Side--Debit side (Dr) Right Hand Side-- Credit side (Cr) POSTING IN THE LEDGER This will be dealt separately from Journal Entries and each Subsidiary Book. Case I Posting from Journal Entries. If an account is debited in the journal entry, the posting in the ledger should be made on the debit side of that particular account. In the particular column the name of the other account (which has been credited in the Journal entry) should be written for reference. For the A/c credited in the Journal entry, the posting in the ledger should be made on the credit side of that particular A/c. In the particulars column, the name of the other account that has been debited (in the Journal entry) is written for reference. Points to be Remember: To is written before the A/c s which appear on the debit side of ledger. By is written before the A/c s appearing on the credit side. Use of these words To and By is optional.
1: Simple Journal Entry. On 1st August 2011, goods are sold for cash Rs. 2,000. SOLUTION Journal Entry:Cash A/c Dr. 2,000 -To Sales A/c -2,000 (for cash sales) Ledger A/c:Cash A/c (extract)
36
J.F
Rs. 2,000
Date
Particulars
J.F
Cr Rs.
Sales A/c (extract) Date 2011 Particulars J.F Rs. Date Aug.1 Particulars J.F By Cash A/c Rs. 2,000
Example 2: Compound Journal Entry. Received Rs.14,500 in full settlement of a debt of Rs. 15,000 from Ram on Aug 8, 2011. SULUTION - Journal Entry Rs. Rs. Cash A/c Dr. 14,500 Discount allowed A/c Dr 500 To Ram 15,000 (Cash received and discount allowed) Ledger A/c Cash A/c Dr Date Particulars 2011 Aug.8 To Ram L.F Rs. 14,500 Discount Allowed A/c Dr Date Particulars 2011 Aug.8 To Ram Cr Rs. Date Particulars L.F Cr Rs.
L.F
Rs. 500
Date
Particulars
L.F
Particulars
L.F
Rs.
Date
Particulars
L.F
Cr Rs.
37
2011 Aug. 8 By cash A/c 14,500 By Discount 500 Allowed A/c Case II. - Ledger Postings from Cash Book Important Points (1) Cash Book itself serves as a cash A/c also, therefore when cash book is maintained, cash A/c is not opened in the ledger. (2) When Bank column is maintained in the Cash Book, Bank A/c is also not opened in the ledger. The Bank column itself serves the purpose of Bank A/c. (3) Opening and closing balances of Cash Book will not be entered in the ledger anywhere. (4) As Cash Book serves the purpose of Cash/Bank A/c, it means that, only the second A/c (other than Cash A/c or Bank A/c) is to be opened in the ledger and posting is to be made for each entry in the Cash Book. Rules of Posting (a) Posting from the Debit Side of Cash Book Entries appearing on the debit side of Cash Book are to be posted to the Credit Side of respective accounts in the Ledger by writing the words By Cash A/c if it is from the Cash Column By Bank A/c if it is from the Bank column. (b) Posting from the Credit Side of Cash Book Entries appearing on the credit side of the Cash Book are to be posted to the Debit side of respective accounts in the ledger by writing the words. To Cash A/c if it is from the Cash Column By Bank A/c if it is from the Bank Column (c) All contra entries marked C are ignored while posting from the Cash Book to the Ledger because double aspect of such transactions is completed in the Cash Book itself.
Illusration: Given some Cash Book entries post there into ledger A/c
Date Particulars Vr. L.F. Cash ` 20,000 C Bank Date ` Jan,12 Particulars Vr. L.F. Cash ` 5,000 C Bank ` 2011 Jan 10 To Capital A/c Jan 15 To Cash A/c Jan 22 To Sales A/c Jan, 28 To Anil
By Purchases A/c
10,000 Jan,15 By Bank A/c 3,000 Jan,25 By Sumit 2,900 Jan,31 By Balance C/d 23,000 12,900
SOLUTION: 15 Jan. entry will not be posted (Contra Entry) Closing Balance will not be posted in the ledger
38
th
Capital A/c Dr Date Particulars L.F Amount Rs. Date Particulars By Cash A/c Cr L.F Amount Rs. 20,000 Cr Rs. 3,000 Cr Rs. 2,900
Dr Date Particulars
L.F
Rs.
Anils A/c Dr Date Particulars L.F Rs. Date 2011 Jan. 28 Particulars By Bank A/c L.F
Purchases A/c Dr
Date Particulars L.F Rs. 5,000 Date Particulars L.F 2011 Jan. 12 To Cash A/c
Cr
Rs.
Sumits A/c Dr
Date 2011 Jan. 25 To Bank A/c 4,500 Particulars L.F Rs. Date Particulars L.F
Cr
Rs.
Case III- Ledger posting from Purchases book Journal Entry for Credit Purchases is Purchases A/c Dr To Supplier A/c Therefore the rules of posting from Purchases Book are. (1) The total of the Purchases book will be posted to the Debit side of Purchase A/c and the words To Sundries as per Purchase Book will be written in the particulars column. (2) Each of the Suppliers A/c will be Credited and the words. By Purchases A/c will be
39
written in the particulars column. Illustration: Date 2011 June 4 June 14 June 26 June 30 Purchases Book Name of the Supplier Inv. No. L.F. Details (Rs) Sahil & Co. Geeta Industries Less Trade Discount 20% Vijay & Co. Less 20% Trade Discount Purchases A/c Dr Purchases A/c Dr
Date Particulars L.F Amount Rs. 35,600 Date Particulars L.F
Dr
Date Particulars L.F
Cr
Amount Rs. 10,000
Dr
Date Particulars L.F
Geeta Industries
Amount Rs. Date Particulars L.F 2011 June 14 By Purchases A/c
Cr
Amount Rs. 16,000
Dr
Date Particulars L.F
Cr
Amount
40
Rs.
Rs. 9,600
Hence the rules for posting are. 1. Suppliers A/c (to whom the goods are returned) is debited by writing the words To Purchase Return A/c) 2. The total of the Purchases return Book is credited to the Purchases Return A/c by writing the words By Sundries as per Purchases Return Book. Case VI - Ledger Postings of Sales Return Book Journal Entry for the Sales Return is Sales Return A/c Dr
To Customer A/c Hence the Rules for Posting are
(1) Individual Customers A/C s by whom the goods are returned are credited by writing the words By Sales Return A/c. (2) The total of the Sales Return Book is posted to the Debit of Sales Return A/c by writing the words. To Sundries as per Sales Return Book. a. Ledger Postings from Bills Receivable Book. Bills Receivable book shows the names of the persons from whom the Bills are received. Therefore the Journal Entry is B / R A/c Dr. To Personal A/c Hence. (1) Posting will be done on the Credit side of the Personal A/cs by writing the words. By Bills Receivable A/c.
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(2) The total of the Bills Receivable Book will be posted to the debit side of Bills Receivable A/c by writing the words To Sundries as per Bills Receivable Book. b. Ledger Postings of Bills Payable Book
Bills payable is a liability, therefore the Journal Entry is Personal A/c Dr
2. Total of the Bills Payable Book will be posted to the credit of Bills Payable A/c by writing By Sundries as per Bills Payable Book.
Closing and Balancing of Accounts
Normally after every month or whenever a businessman is interested in knowing the position of various A/C s, the accounts are balanced. Various steps for this purpose are .
(1) Debit and Credit sides of each A/c are totalled. (2) The difference between the two sides is written on the side which is shorter so as to make their totals equal. (3) The words Balance C/d i.e. the balance carried down and written against the amount of difference. (4) In the next period, the balance is brought down on the other side by writing the words Balance b/d. (5) If the Debit side exceeds the Credit Side the difference is a Debit Balance whereas.
(6) If the Credit side exceeds the Debit side the difference is a Credit Balance. GENERALLY STUDENTS COMMITS MISTAKES PLEASE AVOID :-
1. Debit Balance of a Personal A/c means the person is a Debtor of the firm whereas Credit Balance of a Personal A/c indicates that the person is a Creditor of the firm. 2. Real A/c s (which include Cash and all other Assets A/c s) will usually show Debit Balances.
3. Nominal A/C s (A/c s of Income and Expenses) are transferred to Trading and Profit and Loss A/c of the firm at the end of the Accounting Period.
4. Debit Balance of any A/c means an Asset or an Expense whereas Credit Balance means a liability, Capital or Income earned. TRIAL BALANCE I Meaning When posting of all the transactions into the Ledger is completed and accounts are balanced off, then the balance of each account is put on a list called Trial Balance. II Definition Trial Balance is the list of debit and credit balances taken out from ledger. It also includes the balances of Cash and bank taken from the Cash Book. III Preparation Steps (Only Balance Method)
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(1) Ledger A/Cs which shows a debit balance is put on the Debit side of the trial balance.
(2) The A/cs Showing credit balance are put on the Credit side of the Trial Balance.
(3) Accounts which show no balance i.e. whose Debit and Credit totals are equal are not entered in Trial Balance.
(4) Then the two sides of the Trial Balance are totaled. If they are equal it is assumed that there are no arithmetical error in the posting and balancing of Ledger A/cs.
Objectives or Functions of Trial Balance It helps in ascertaining the arithmetical accuracy of ledger accounts. Helps in locating errors. Provides the summary of Ledger A/cs. Helps in the preparation of Final A/cs. Recording in the journal and subsidiary Books, Posting into the Ledger and Preparation of Trial Balance can be clearly understood with the help of the example given on next pages. Illusration: Enter the following transactions in proper Subsidiary Books, post them into Ledger Accounts, balance the accounts and prepare a Trial Balance. 2011 June 1. Assets : Cash in hand Rs. 20,000; Debtors : Amit and Co. Rs. 15,000, Sumit Bros. Rs. 30,000, Stock Rs. 1,75,000, Machinery Rs. 1,20,000, Furniture Rs. 40,000. Liabilities : Bank overdraft Rs. 33,000, Creditors : Virat and Co. Rs. 24,000, Vishal Rs. 16,000. June 2 Purchased from Ramesh and Sons goods of the list price of Rs. 20,000 at 10% trade discount. June 5 Returned to Ramesh & Sons goods of the list price of Rs. 2,000. June 10 Issued a cheque to Ramesh and Sons in full settlement of their account. June 12 Sold to Amit and Co., goods worth Rs. 25,000. June 15 Received cash Rs. 10,000 and a cheque for Rs. 8,000 from Amit and Co. The cheque was immediately deposited into the bank. June 16 Withdrawn for personal use cash Rs. 5,000 and goods of Rs. 3,000. June 17 Accepted a bill for 45 days drawn by Virat and Co. for the amount due to him. June 18 Acceptance received from Sumit Bros. for the amount due from them payable after 30 days. June 19 Sold to Mohit Bros., goods for Rs. 16,000. June 20 Cash purchases Rs. 15,000. June 22 Withdrawn from bank for office use Rs. 10,000. June 23 Purchased from Vishal goods valued at Rs. 24,000. June 24 Amit and Co. returned goods worth Rs. 2,000. June 25 Received from Mohit Bros. Rs. 10,000. June 27 Accepted a bill for Rs. 25,000 for 1 month draw by Vishal. June 27. Paid by cheque, Rent Rs. 2,800 June 27 Received Commission in Cash Rs. 800
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SOLUTION:
Cash Book (with cash and Bank Columns)
Receipt
L.F.
Payments
L.F
*To Balance b/d To Amit & Co. C *To Bank a/c To Mohit Bro. To Commission A/c To Balance C/d
*By Balance b/d By Ramesh Son. By Drawings a/c By Purchases a/c *By Cash a/c By Rent a/c By Salary a/c By Balance c/d Total July *By Balance b/d 1 (Bank Overdraft)
Notes : 1. Extras marked with will* not be posted anywhere in the ledger. 2. Closing Balances of Cash and Bank will be shown in the Trial Balance. 3. All other A/cs shown in the Debit side will be credited & All other A/cs shown in the Credit side will be debited. Purchases Book
Date 2011 June 2 June 23 June 30 Name of the Supplier (Account to be Credited) Ramesh & Sons Less Trade Discount 10% Vishal Purchases A/c Dr Inv. No. L.F Details Rs. 20,000 2,000 Total Amount Rs.
Sales Book
Date Name of the Supplier (Account to be Debited) In. No. L.F Details Rs. Total Amount (Rs.
44
2011 June 12 Amit & Co. June 19 Mohit Bros. June 30 Sales A/c Cr
2011 June 5 Ramesh & Sons. Less Trade Discount 10% June30 Purchases Return A/c Cr
1,800 1,800
June 30
30,000
45 days 1 month
August 4 July 30
Posting of opening Entries : (1) First of all opening Journal Entry is done in the Journal proper. (2) All Assets A/cs are Debited and Liabilities A/cs are Credited. Difference between the totals of the two sides is the Capital.
Important: Besides opening Journal entries, any transaction which is not covered under any of the Subsidiary Book is done in Journal proper. Journal Proper Date 2011 June 1 Particulars L.F Amount Dr. Rs. 20,000 15,000 30,000 1,75,000 1,20,000 40,000 Amount Cr. Rs.
Cash A/c Dr Amit & Co. Dr Sumit Brothers Dr Stock A/c Dr Machinery A/c Dr Furniture A/c Dr To Bank (Overdraft) A/c To Virat & Co. To Vishal To Capital A/c (Balancing fig) (opening Balances, brought forward from the previous years books) Drawings A/c To Purchases A/c Dr
June 16
3,000 3,000
(Goods withdrawn for personal use) Ledger Accounts Amit & Co. Dr.
Date Particulars J.F Amount Date Particulars J.F
Cr.
mount
46
(Rs) 2011 June 1 June 12 To Balance b/d To Sales A/c 15,000 25,000 2011 June 15 June 15 June 24 June 30 40,000 July 1 To Balance b/d* 20,000 By Cash A/c By Bank A/c By Sale Reurn A/c By Balance c/d
Cr.
Amount (Rs) 30,000
By B/R. A/c
Cr.
J.F Amount (Rs)
Cr.
J.F Amount (Rs)
Cr.
Particular J.F Amount Date Particular J.F Amount
47
(Rs) 2011 June 1 To Balance b/d July 1 To Balance b/d 40,000 40,000 2011 June 30 By Balance c/d
(Rs) 40,000
Cr.
Particular By Balance b/d 24,000 J.F Amount (Rs)
Balance on June 30 is Nil in this A/c (Virat & Co.) Vishals A/c Dr.
Date Particular J.F
Cr.
Amount Date Particular J.F Amount (Rs) (Rs) 2011 June 1 By Balance b/d 16,000 25,000 15,000 June 23 By Purchases A/c 24,000 40,000 40,000 July 1 By Balance b/d* 15,000
Cr.
J.F Amount (Rs) 3,27,000 3,27,000
To Balance c/d
Cr.
J.F Amount (Rs)
48
2011 June 16 To Cash A/c June 16 To Purchases A/c July 1 To Balance b/d*
2011 June 30
By Balance c/d
8,000 8,000
Date
2011 June 2
Particular
J.F
By Puchase A/c
18,000
Cr.
J.F Amount (Rs) 3,000 54,000 57,000
2011 June 20 To Cash A/c June 30 To Sundries as per Purchases Book July 1 To Balance b/d*
Cr.
J.F Amount (Rs) 10,000 6,000 16,000
Cr.
J.F Amount (Rs)
49
Cr.
J.F Amount (Rs)
Cr.
J.F Amount (Rs)
Sales A/c Dr. Date Particular J.F Amount (Rs) Date Particular Cr. J.F Amount (Rs)
41,000
Cr.
Date
Particular
Date
Particular
Dr. Date
Particular
Particular
Dr.
Date June 30 July 1 Particular To Sundries as per B/R Book To Balance b/d*
2011 June 30 By Sundries as per Purchase Return Book Bills Receivable A/c
J.F Amount Date (Rs) 30,000 June 30 30,000 Particular By Balance c/d J.F
1,800 Cr.
Amount (Rs) 30,000
Dr.
Date June 30 Particular
Cr.
Cash A/c Bank (overdraft) A/c Amit & Co. Stock A/c Machinery A/c Furniture A/c Vishals A/c Capital A/c Drawings A/c Purchases A/c Mohit Brothers Rent A/c Commission A/c Salaries A/c Sales A/c Sales Return A/c Purchase Return A/c Bills Receivable A/c Bills Payable A/c
Debit Credit Balances Balances (Rs) (Rs) 25,800 54,000 20,000 1,75,000 1,20,000 40,000 15,000 3,27,000 8,000 54,000 6,000 2,800 800 5,000 41,000 2,000 1,800 30,000 49,000
51
Total
4,88,600
4,88,600
SUSPENSE ACCOUNT When Trial Balance does not agree, then first of all we try to locate the errors. Sometimes, in spite of the best efforts, all the errors are not located and the Trial Balance does not tally. Then in order to avoid delay in the preparation of final accounts, a new account is opened which is known Suspense Account Difference in Trial Balance is posted to this Account. 1. If there is Excess Debit in the Difference is posted to the Credit side Trial Balance of Suspense A/c 2. If there is Excess Credit in the Difference is posted to the Debit side Trial Balance of Suspense Account. Illusration: S. Trial no. Dr. Total (Rs) 1. 2,25,000 2. 2,16,500
Balance Difference Posted to the Suspense A/c ? (Cr Total) (Rs.) (Debit / Credit Side) (Rs) (Rs) 2,16,500 8,500 Credit Side of Suspense A/c. (Excess Debit) 2,25,000 8,500 Debit Side of Suspense A/c. (Excess Credit)
Closing of Suspense A/c : The errors which led to the difference still remains to have to be located. These errors will be rectified through Suspense A/c (One sided errors) which will be explained in the topic Rectification of Errors.
When all the errors are rectified, this Account closes down automatically. If the difference in Trial Balance persist, it is shown in the Balance Sheet.
Points to be Remember:(1) Debit Balance of Suspense Account is shown in the Asset Side of the B/Sheet. (2) Credit Balance of Suspense Account is shown in the Liability Side of the Balance Sheet. ***************
Causes of Differences in Bank Balance as per Cash Book and Pass Book. Importance of Bank Reconciliation Statement. Procedure of preparation of B.R.S. Preparation of Adjusted Cash Book.
INTRODUCTION
Usually all the firms open a current account with the bank as there are so many transactions and record these transactions in the Bank column of the Cash Book. Bank also maintains a separate ledger account of each firm (customer) and periodically supplies a copy of the account to the firm for information. This copy of the firms Account supplied by the bank is known as Bank Statement or Bank Pass Book.
Since all the transactions with the bank are entered in both the books Cash Book and Pass Book, the balances of the two books should tally with each other. But usually the two balances dont tally. Bank Reconciliation Statement is prepared to reconcile the difference between the Bank Balance shown by the Cash Book and Bank Pass Book. DEFINITION A schedule showing the items of difference between the bank statement and the bank column of Cash Book is known as Bank Reconciliation Statement. CAUSES OF DIFFERENCES IN CASH BOOK AND PASS BOOK The differences may be caused by either A. Time gap in recording transactions or B. Errors Committed in recording transactions. (A) Differences Caused by the time gap:Reasons for the time gap in recording the transactions in the two books (Cash Book and Pass Book) are as given below (1) Cheques issued but not yet presented for payment in the bank. (2) Cheques deposited or paid into the bank for collection but not yet credited by the bank. (3) Cheques deposited but dishonoured by the bank. (4) Interest allowed by the bank.
(5) (6) (7) (8) Interest on overdraft, bank charges, commission etc. charged by the bank.
Direct Deposit by the customers into the bank. Interest, Dividend etc. collected by the bank.
Direct payments made by the bank on behalf of customer as per standing instruction.
(B) Differences caused by Errors Committed Such errors may be of two types (1) Errors committed by the firm (i) Cheques issued to some creditors but omitted to be recorded in the Cash Book or recorded twice. (ii) Cheques deposited into the bank omitted to be entered in the Cash Book or
53
recorded twice. (iii) Error in totaling or balancing the bank column of the Cash Book. (2) Errors committed by the bank Sometimes bank records a wrong entry in the customers account which causes a difference in the two balances. NEED AND IMPORTANCE It helps in locating and rectifying the errors or omissions committed either by the firm or by the bank. Customer becomes sure of the correctness of the bank balance shown by the cash book. Facilitates the preparation of amended or revised Cash Book. Reduces the chances of fraud by the staff of the firm or bank. Helps in keeping a track of the cheques deposited for collection. Procedure of Preparing Bank Reconciliation Statement A Bank Reconciliation Statement is prepared when we get the duly completed Pass Book from the Bank. On receiving the Cash Book (1) First of all tally the Debit side entries of the cash book with the Credit side entries of the Pass Book and vice versa. (2) Tick the items appearing in both the books. (3) Un ticked items will be the points of differences. (4) A BRS is then prepared by taking either the balance as per Cash Book or Pass Book as a starting point. Important Points to Remember:(1) If the Starting point is Cash Book Balance then the ending point will be Pass Book Balance. (2) If the starting point is Pass Book Balance then the ending point will be the Balance as per Cash Book. (3) Debit Balance as per Cash Book or Credit Balance as per Pass Book, means that the firm has that much amount of deposited at the bank also called favorable balance write the amount under (+) item. (4) Credit Balance as per Cash Book or Debit Balance as per Pass Book, means that this much amount has been withdrawn in excess of deposit also called over-draft or unfavorable balance write the amount under (-) item. Method of Preparing BRS Starting with by the Balance / overdraft as per Bank Column of Cash Book. Starting Point Cash Book Less Balance More Balance End Point Pass Book More Balance Less Balance
+ item item
Note : To get more from less means something is to be added therefore + item & To get less from more, something is to be deducted therefore _ item.
54
1. First of all write Under Plus Item If the Cash Book Balance is debit or favorable or simple balance. Under Minus Item If the Credit Balance or overdraft as per Cash Book is given. 2. Now study the point of difference. (a) If the entry is done in the Cash Book and not in the Pass Book then . (i) if it is done on the debit side of Cash Book, Balance in the Cash Book will be more as compared to Pass Book and hence the item will be() item as shown in the box above. (ii) where as if the entry is done on the Credit side of Cash Book, the Balance in the Cash Book will be less as compared to Pass Book and hence the item will be (+) item. (b) If the entry is done in the Pass Book and not in the Cash Book then. (i) if done on the Credit side of Pass Book Pass Book Balance is more as compared to Cash Book () item. (ii) It it is done on the Debit side of Pass Book () item Pass Book Balance is less as compared to Cash Book 3. At the end + items and items are totaled. Difference is Cr Balance or (a) If total of Plus Items is more than the total of () items favorable balance as per Pass Book. (b) Whereas if the items total is more than the (+) items total Difference is Dr Balance or overdraft as per Pass Book. Ready Reference (+) Items (Items which increases the Pass Book Balances or decreases the Cash Book Balance) (1) Cheques issued but not yet presented. (2) Credits made by the bank for Interest. (3) Amount directly deposited by the customers in our bank A/c. (4) Interest and dividend collected by the bank. (5) Cheques paid into the bank but omitted to be recorded in the Cash Book. () Items (Items which, decreases the Pass Book Balance or increase the Cash Book Balance) 1. Cheques sent to the bank for collection but not yet credited by the bank. 2. Cheques paid into the bank but dishonoured. 3. Direct payments made by the bank. 4. Bank charges, commission etc. debited by the bank. 5. Cheqes issued but omitted to be recorded in the Cash Book. Illusration: Balance as per Cash Book is given st Prepare BRS as on 31 July 2011 st (1) Balance as per Cash Book is Rs. 25,000 as on 31 July 2011. (2) Cheques for Rs. 15,000 were deposited into the Bank in the month of July but only cheques for Rs. st 11,000 were credited by the bank till 31 July 2011. (3) Cheues issued for Rs. 13,000 in July, out of which a cheque for Rs. 3,800 was presented for
55
payment on 3 August. (4) Bank charged Rs. 50 as Bank charges and credited interest of Rs. 370. (5) A customer directly deposited Rs. 1,550 in firms bank A/c. (6) Bank paid the Insurance Premium of Rs. 1,200 as per standing instructions on 25.07.2011. SOLUTION:Bank Reconciliation Statement st as on 31 July 2011 Particulars (1) Balance as per Cash Book. (2) Cheques deposited but not yet collected by the bank (15,00011,000) (3) Cheques issued but not yet presented for payment (4) (a) Bank Charges (b) Interest credited by the bank (5) Directly deposited by the customers not recorded in the Cash Book (6) Insurance Premium paid by the bank not recorded in Cash Book. Total Balance as per Book (30,720 5,250) Explanation :
(1) Balance per Cash Book means favourable Balance, hence + item. If nothing b(i.e. Debit
rd
(3) Cheque issued but not presented for payment till 31st July is for Rs. 3800 entered more on the credit side of Cash Book as compared to Pass Book. Cash book Balance is less by Rs. 3800 as compared to Pass Book (+) item. (4) (a) Bank charges of Rs. 50 entered in the Pass Book decreases the Balance of Pass
56
Book. To reach Pass Book Balance from Cash Book Balance, this item has to be deducted i.e. () item. (b) Interest credited by the Bank Rs. 370 entered in Pass Book increases the, balance of Pass Book, hence to search the Balance from cash book and this item is to be added (+) item. (5) Direct deposit by a customer Rs. 1,550 increases the Pass Book Balance (+ )item (6) Payment made by the bank for insurance premium decreases the Pass Book Balance () item. (7) (+) items total Rs. 30,720 is more than( ) item total Rs. 5250 by Rs. 25,470. Hence the difference of Rs. 25,470 will be (+) item i.e. Favaurable Balance or Cr. Balance as per Pass Book. Illustration:when overdraft as per Cash Book is given th (1) Overdraft as per Cash Book is Rs. 10,500 on 30 June 2011. (2) Cheques deposited but not yet collected Rs. 2,000. (3) Chequs issued but not yet presented for payment of Rs. 2,800. (4) Bank charges of Rs. 50 and Interest on overdraft of Rs. 250 are charged by the bank. (5) A customer directly deposited Rs. 1,200 into the Bank. (6) Insurance Premium of Rs. 1,500 is paid by the bank as per standing instructions. Prepare Bank Reconciliation Statement for the month of June 2011. SOLUTION : Bank Reconciliation Statement th as on 30 June 2011 Particulars (1) Overdraft as per Cash Book* (2) Cheques deposited but not yet collected. (3) Cheques issued but not yet presented for payment (4) (a) Bank Charges (b) Interest on overdraft charged by the bank. (5) Directly deposited by a customer in the bank. (6) Insurance Premium paid by the bank not entered in Cash Book. Total Overdraft as per Pass Book (14,300 4,000) + item (Rs.) 2,800 1,200 4,000 item (Rs.) 10,500 2,000 50 250 1,500 14,300 10,300
57
Overdraft means unfavorable balance or Negative Balance Hence put it under item. Explanation for all other items is similar as example 1 except the following. (1) Item No. 4 (b) Interest on overdraft decreases the Pass Book Balance hence it is to be deducted from Cash Book Balance to reach at Pass Book Balance item. (2) This time the total of () items Rs. 14,300 is more to the total of + item is Rs. 4,000 by Rs. 10,300. Hence this is a () item or in other words overdraft as per Pass Book. Case II Starting with Pass Book Balance / overdraft. Starting Point Ending Point Pass Book Cash Book + item More Balance Less Balance More Balance item Less Balane 1. First of all write under + Item If Cr Balance, favaurable balance or Simply Balance as per Pass Book is given. () Item If Debit Balance or overdraft as per Pass Book is given. 2. Now study the point of difference between the Cash Book and Pass Book. (a) If the entry is done in the Cash Book and not in the Pass Book then. (i) If is done on the Debit side of Cash Book Balance in the Cash will be more as compared to Pass Book and hence the item is to be added in the Pass Book Balance to get the Cash Book Balance i.e. (+) item. (ii) Where as if the entry is done on the Credit side of Cash Book Cash Book Balance will be less as compared to Pass Book hence () item (b) If the entry is done in the Pass Book and not in the Cash Book then. (i) if it is done on the Debit side of Pass Book Pass Book Balance is less as compared to Cash Book item is to be added in Pass Book Balance to get the Cash Book Balance + item. (ii) if is done on the Credit side of Pass Book Pass Book Balance is more as compare to Cash Book item. () item 3. At the end + item and item are totalled (a) If total of (+) items is more than the total of () Differences is favourable Balance or Debit Balance as per Cash Book . (b) Where as if the total of () items is more than the total of + items Difference is Dr Balance or overdraft as per Pass Book. Difference is unfavourable or overdraft as per Cash Book. Ready Reference (+) Items [items which increases the Cash Book Balances or decreases the Pass Book Balance]
58
1) Cheques sent for collection to the bank but not yet credited / collected by the bank.
2) Cheques deposited into the bank but dishonoured. 3) Direct Payments made by the bank. 4) Bank charge, commission etc. debited by the bank. 5) Cheques issued but omitted to be recorded in the Cash Book. () Item [Items which decreases the Cash Book Balance or increases the Pass Book Balance] (1) Cheques issued but not yet presented. (2) Credits made by the bank for interest. (3) Amount directly deposited by the customers into the Bank. (4) Interest and dividend collected by the Bank. (5) Cheques paid into the bank but omitted to be recorded in the Cash Book. Illusration: Balance as per Pass Book is given Given (1) Balance as per Pass Book is Rs. 25,470 Point No. (2) to (6) are same as given in example (1) Prepare B.R. Statement for the month of July 2011. SOLUTION :
Bank Reconciliation Statement as on 31 July 2011
th
Particulars (1) Balance as per Pass Book (Cr) (2) Cheques deposited but not yet collected by the Bank (15,00011,000). (3) Cheques issued but not yet presented for payment (4) (a) Bank Charges (b) Interest Credited by the Bank. (5) Directly deposited by the customer not recorded in the Cash Book. (6) Insurance Premium paid by the bank not recorded in Cash Book. Total
50 1,200 30,720
Balance as per Cash Book (Dr) (30720-5720) 25,000 Important Points Starting and Ending Points are reversed as compared to Example No. 1, Hence + items and () items are interchanged.
Favourable balance whether of Cash Book or Pass Book is always a + item.
If + items total is more than the items total then the difference in the two totals is always a
59
favourable balance. where as if + items total is less than the items total then the difference in the two totals is overdraft. Example:- 4 Overdraft as per Pass Book is given. Given that (1) Overdraft as per Pass Book is Rs. 10,300 Rest of the contents (points 2 to 6) are same as given in example No. 2 Prepare B.R. Statement for the month of June 2011. SOLUTION
th
Bank Reconciliation Statement as on 30 June 2011 Particulars + item (Rs.) (1) Overdraft as per Pass Book (2) Cheques deposited but not yet 2,000 collected or Credited by the Bank (3) Cheques issued but not yet presented for payment (4) (a) Bank Charges not entered in in Cash Book 50 (b) Interest on overdraft chargeg by the bank 250 (5) Directly deposited by a customer in the Bank (6) Insurance Premium paid by 1,500 the Bank 3,800 Total Overdraft as per Cash Book (14,3003,800)
Important Points 1. Overdraft whether as per Cash Book or Pass Book is always a () items. 2. Starting and Ending points are interchanged as compared to Example No. 2, hence + items and () are also interchanged. 3. Here () items total is more as compared to (+) items total, therefore the difference in the two balance is a negative items i.e. overdraft as per Cash Book. Amended Cash Book Method:Introduction : So far we have studied the preparation Bank Reconcilliation State-ment simply by reconciling the causes of differences between the Cash Book and Pass Book. In actual practice adjustments are done in the Cash Book by comparing the Bank column of Cash Book with the Bank Statement and after that B.R. Statement is prepared. It is called Amended Cash Book Method. Procedure 1) Adjusted Cash Book is prepared starting with the Balance of the Cash Book given in the question. 2) All errors that have been committed in the Cash Book will have to be rectified by passing adjusting entries in the Cash Book.
60
Usual or General Errors are (a) Overcasting or Undercasting of Debit / Credit Column of Cash Book. (b) Cheques deposited or Issued but omitted to be entered in the Cash Book. (c) Incorrect amount (if any) entered in the Cash Book. (d) Entries on the incorrect side or in the wrong column of Cash Book. (e) (e) Any amount recorded twice in the Cash Book. (3) Certain amounts for which Bank has debited our A/c will be recorded on the Credit side of Cash Book. Such items are (a) Interest charged by the bank on overdraft etc. (b) Debits made by the bank for the bank charges, commission etc. (c) Direct payments made by the Bank on behalf of the A/c holder. (d) Cheques sent for collection but dishonoured by the bank. (4) Cash Book is then balanced and the new Balance of the Cash Book is taken as the Starting point for preparing the B.R. Statement. Important:It should be noted that the following items must not be recorded in the Amended Cash Book. 1. Cheques deposited into the Bank but not yet credited by the bank. 2. Cheques Issued but yet not presented for payment. 3. Any wrong entry in the Pass Book. Illusration: The Cash Book of Mr. Sharma showed a balance of Rs. 3,560 as on 31st Dec. 2010 at the Bank where as Pass Book showed a balance of Rs. 4,230 Comparison of the Cash Book and Pass Book revealed the following. (1) The Bank has debited Mr. Sharma with Rs. 460, the annual premium of his life policy according to his standing instructions and Rs. 20 as Bank charges. (2) Mr. Sharma paid into the Bank cheques totaling Rs. 3,100 on Dec. 26th 2010 of which those for Rs. 2,500 were collected in December. One cheque for Rs. 200 was returned deshonoured on 2nd Jan. 2011. (3) The Bank has credited Mr. Sharma by Rs. 1,600, the proceeds of a bill. (4) Cash collected on 31st Dec. 2010 totaling Rs. 850 was entered in the Cash Book in the Bank column on the same date but banked on 2.1.2011. (5) Mr. Sharma issued cheques totaling Rs. 2,300 in the month of Dec. out of which cheques for Rs. 1000 have not been presented for payment till 31st Dec.
SOLUTION:st Amended Cash Book (Bank Column only) as on 31 Dec. 2010 Receipt side Payment side Particulars (`) Particulars (`)
61
Bank Reconciliation Statement st As on 31 Dec. 2010 Particulars (1) Balance as per Adjusted Cash Book (Dr) (2) Cheques paid into the Bank but st not Credited by Dec. 31 , 2010 (31002500) (3) Cheques issued but not presented till date (4) Cash collected entered in the Cash st Book but not banked.
till 31 Dec.
(Cr)
GENERALLY STUDENTS COMMIT MISTAKES PLEASE AVOID: Amended or adjusted Cash Book is started with the given balance of bank as per Cash Book. Closing Balance of the adjusted Cash Book is the opening balance of Bank Reconciliation statement. Entry for the dishouner of the cheques of Rs. 200 is not done. st 1. In the Cash Book as it was dishonoured after 31 Dec. 2. In Bank Reconciliation Statement it is included in the adjustment (Rs. 3100 2500)
QUESTIONS Q.(1) Give journal entries of M/s Krutagna traders, Post them to the Ledger from the following transactions and prepare a Trial Balance :
62
April- 2012 Rs. 1. Commenced business with cash 1,10,000 2. Opened bank account with H.D.F.C. 50,000 3. Purchased furniture 20,000 7. Bought goods for cash from M/s Rupa Traders 30,000 8. Purchased good from M/s Hema Traders 42,000 10. Sold goods for cash 30,000 14. Sold goods on credit to M/s. Gupta Traders 12,000 16. Rent paid 4,000 18. Paid trade expenses 1,000 20. Received cash from Gupta Traders 12,000 22. Goods return to Hema Traders. 2,000 23. Cash paid to Hema Traders 40,000 25. Bought postage stamps 100 30. Paid salary to Rishabh 4,000 Q. (2) Journalise the following transactions in the Books of M/s Bhuj traders. Also post them in the ledger and prepare a Trial Balance. May- 2012 Rs. 1. Started business with cash 2,00,000 2. Bought office furniture 30,000 3. Paid into bank to open a current account 1,00,000 5. Purchased a computer and paid by cheque 2,50,000 6. Bought goods on credit from Ritika 60,000 8. Cash sales 30,000 9. Sold goods to Krishna on credit 25,000 12. Cash paid to Mansi on account 30,000 14. Goods returned to Ritika 2,000 15. Stationery purchased for cash 3,000 16. Paid wages 1,000 18. Goods returned by Krishna 2,000 20. Cheque given to Ritika 28,000 Bank Reconciliation Statement Q.(1) The cash book shows a bank balance of Rs. 7,800. On comparing the cash book with passbook the following discrepancies were noted : (a) Cheque deposited in bank but not credited Rs. 3,000 (b) Cheque issued but not yet present for payment Rs. 1,500 (c) Insurance premium paid by the bank Rs. 2,000 (d) Bank interest credit by the bank Rs. 400 (e) Bank charges Rs. 100 (d) Directly deposited by a customer Rs. 4,000 (Ans: Balance as per passbook Rs. 8,600). Q.(2) The passbook of Mr. Mohit current account showed a credit Balance of Rs. 20,000 on dated December 31, 2005. Prepare a Bank Reconciliation Statement with the following information.
63
(i) A cheque of Rs. 400 drawn on his saving account has been shown on current account. (ii) He issued two cheques of Rs. 300 and Rs. 500 on of December 25, but only the first cheque was presented for payment. (iii) One cheque issued by Mr. Mohit of Rs. 500 on December 25, but it was not presented for payment whereas it was recorded twice in the cash book. (Ans: Balance as per cash book Rs. 18,900). Q.(3) Prepare bank reconciliation statement. (i) Overdraft shown as per cash book on December 31, 2005 Rs. 10,000. (ii) Bank charges for the above period also debited in the passbook Rs. 100. (iii) Interest on overdraft for six months ending December 31, 2005 Rs. 380 debited in the passbook. (iv) Cheques issued but not in cashed prior to December 31, 2005 amounted to Rs. 2,150. (v) Interest on Investment collected by the bank and credited in the passbook Rs. 600. (vi) Cheques paid into bank but not cleared before December, 31 2005 were Rs.1,100. (Ans: overdraft as per passbook Rs. 8,830).
******************
UNIT-05
Unit at a glance: Meaning of Depreciation Features of depreciation Causes of depreciation Need or objectives of depreciation Factors or basis for providing depreciation Methods of calculating depreciation Difference between straight line method and written down value method Methods of recording depreciation Sale of an asset Disposal of an asset Provisions and reserves Types of reserves Depreciation is gradual and permanent decrease in the value of an asset from any cause. Carter Introduction: Every fixed asset loses its value due to use or other reasons. This decline in the value of asset is known as depreciation.
Meaning of Depreciation: Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed assets. Features of Depreciation: (1) It is decline in the book value of fixed assets. (2) It is a continuing process. (3) It includes loss of value due to efflux ion of time, usage or obsolescence. (4) It is an expired cost and must be deducted before calculating taxable profit. Causes of Depreciation: (1) Wear and tear due to use or passage of time. (2) Obsolescence. (3) Expiration of legal rights. (4) Abnormal factors. Need or Objectives of Depreciation: (1) To ascertain the true profit or loss. (2) For consideration of tax. (3) To ascertain the true and fair financial position. (4) Compliance with legal provisions. Factors or Basis for providing Depreciation: (1) Cost of asset. (2) Estimated net residual value. (3) Depreciable cost.
65
(4) Estimated useful life. Methods of calculating Depreciation: (1) Straight line method (Fixed installment method): This method is based on the assumption of equal usage of time over assets entire useful life. According to this method a fixed and equal amount is charged as depreciation in every accounting period during the life time of an asset. Depreciation amount can be calculated by the following formula:
Depreciation =
cost of asset estimated net residual value no. of years of expected life
(2) Written Down value method(Diminishing balance method): Basis Charging depreciation Amount of depreciation Recognition by income tax law Calculation Straight line method On original cost of an asset Fixed year after year Not recognised Easy to calculate Written down value method On book value of an asset Declines year after year Recognised Difficult to calculate
In this method depreciation is charged on the book value of tha asset. The amount of depreciation reduces year after year. Difference between Straight line method and written down value method: Methods of recording Depreciation: (1) When depreciation is charged to asset account: In this method depreciation is deducted from the asset value and charged (debited) to profit and loss account. Journal entries for recording under this method are as follows. (a) For purchase of an asset Asset A/c Dr. To Bank/ vendor A/c (With the cost of an asset including installation expenses, freight etc.) (b) Following entries are recorded at the end of each year (i) Depreciation A/c Dr. To Asset A/c (With an amount of depreciation) (ii) Profit and loss A/c Dr. To Depreciation A/c (With an amount of depreciation) (2) When provision for depreciation/Accumulated depreciation account is maintained: Following journal entries are recorded at the end of each year. (a) Depreciation A/c Dr To provision for depreciation A/c (With the amount of depreciation)
66
(b) Profit and loss A/c Dr To depreciation A/c (With the amount of depreciation) Illustration 1. Soham purchased a machinery for Rs. 1,00,000 on 1st July, 2009. Another machine was purchased for Rs. 50,000 on 1st January, 2011. Depreciation is charged at 10% p.a. by straight line method. Accounts are closed on 31st December each year. Pass the necessary Journal entries, show machinery A/c and Depreciation A/c for the year 2009, 2010, 2011. (a) When Provision for depreciation a/c is not maintained. (b) When Provision for depreciation a/c is maintained. Solution: (a) When Provision for depreciation a/c is not maintained. In the Books of Soham Journal Date 2009 July 1 Machinery A/c To Bank A/c (Being machinery purchased for Rs. 1,00,000) Dec 31 Depreciation A/c Dr. 5,000 5,000 Dr. 1,00,000 1,00,000 Particulars L.F. Dr. (Rs.) Cr.(Rs.)
To Machinery A/c (Being depreciation charged to machinery A/c) Dec 31 Profit and Loss A/c To Depreciation A/c (Being depreciation amount transferred to Profit and Loss A/c) 2010 Dec 31 Depreciation A/c To Machinery A/c (Being depreciation charged to machinery A/c) Dr. 10,000 Dr 5,000
5,000
10,000
67
Dr
10,000 10,000
(Being depreciation amount transferred to Profit and Loss A/c) 2011 Jan 1 Machinery A/c To Bank A/c (Being machinery purchased ) Dec 31 Depreciation A/c To Machinery A/c (Being depreciation charged to machinery A/c) Dec 31 Profit and Loss A/c To Depreciation A/c (Being depreciation amount transferred to Profit and Loss A/c) Dr. Date 2009 Jul 1 To Bank A/c (M-I) Particulars J.F. Rs. Machinery A/c Date 2009 1,00,000 Dec 31 Dec 31 1,00,000 2010 Jan 1 To Balance b/d 2010 95,000 Dec 31 Dec 31 95,000 By Depreciation A/c By Balance c/d 10,000 85,000 95,000 By Depreciation A/c By Balance c/d 5,000 95,000 1,00,000 Particulars J.F. Rs. Dr 15,000 15,000 Dr. 15,000 15,000 Dr. 50,000 50,000
Cr.
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2011 85,000 Dec 31 50,000 Dec 31 1,35,000 By Depreciation A/c (M-I 10,000 + M-II 5,000) By balance c/d
2012 Jan 1 To balance b/d Dr. Date 2009 Dec 31 To Machinery A/c 5,000 5,000 2010 Jan 1 To Machinery A/c 10,000 10,000 2011 Jan 1 To Machinery A/c 15,000 15,000 (b) When Provision for depreciation A/c is maintained. In the Books of Soham Journal Date Particulars 2009 July 1 Machinery A/c To Bank A/c Dr. 1,00,000 1,00,000 2011 Dec 31 By Profit and loss A/c 15,000 15,000 2010 Dec 31 By Profit and loss A/c 10,000 10,000 Particulars J.F. Rs. 1,20,000 Depreciation A/c Date 2009 Dec 31 By Profit and loss A/c 5,000 5,000 Particulars J.F . Rs. Cr.
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(Being machinery purchased for Rs. 1,00,000) Dec 31 Depreciation A/c Dr. 5,000 5,000
To Provision for Depreciation A/c (Being depreciation charged to machinery A/c) Dec 31 Profit and Loss A/c To Depreciation A/c (Being depreciation amount transferred to Profit and Loss A/c) Depreciation A/c To Machinery A/c (Being depreciation charged to machinery A/c) Dec 31 Profit and Loss A/c To Depreciation A/c (Being depreciation amount transferred to Profit and Loss A/c) 2011 Jan 1 Machinery A/c To Bank A/c (Being machinery purchased for Rs. 1,00,000) Dec 31 Depreciation A/c Dr. 15,000 Dr. 50,000 Dr 10,000 Dr. 10,000 Dr 5,000
5,000
2010 Dec 31
10,000
10,000
50,000
To Provision for Depreciation A/c (Being depreciation charged to machinery A/c) Dec 31 Profit and Loss A/c To Depreciation A/c (Being depreciation amount transferred to Profit and Loss A/c) Dr
15,000
15,000 15,000
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Dr. Date 2009 Jul 1 To Bank A/c (M-I) Particulars J.F. Rs.
Machinery A/c Date 2009 1,00,000 Dec 31 By Balance c/d Particulars J.F. Rs.
Cr.
1,00,000
1,00,000 2010 Jan 1 To Balance b/d 2010 1,00,000 Dec 31 1,00,000 2011 Jan 1 To Balance b/d Jan 1 To Bank A/c( M-II) 2011 1,00,000 Dec 31 50,000 By balance c/d By Balance c/d
1,00,000
1,00,000 1,00,000
1,50,000
1,50,000
Provision for Depreciation A/c J.F. Rs. Date 2009 5,000 Dec 31 5,000 By Depreciation A/c Particulars
5,000 5,000
2010 15,000 Jan 1 Dec 31 15,000 By Balance b/d By Depreciation A/c 5,000 10,000 15,000
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2011 30,000 Jan 1 Dec 31 By balance b/d By Depreciation A/c (M-I Rs. 10,000 + MII Rs. 5,000) 15,000
15,000 30,000
30,000
Dr. Date 2009 Dec 31 To Provision for Depreciation A/c Particulars J.F .
Depreciation A/c Rs. Date 2009 Dec 31 By Profit and loss A/c 5,000 Particulars J.F . Rs.
Cr.
5,000
5,000 2010 Dec 31 To Provision for Depreciation A/c 2010 Dec 31 By Profit and loss A/c 10,000 10,000 2011 Dec 31 To Provision for Depreciation A/c 2011 Dec 31 By Profit and loss A/c 15,000 15,000 Sale of an Asset (1) On the date of sale of an Asset Cash / Bank A/c To Asset A/c (Being an Asset sold) (2) If case of profit
5,000
10,000 10,000
15,000 15,000
Dr.
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Asset A/c Dr. To Profit and Loss A/c (Being profit on sale of an asset transferred to profit and Loss A/c) (3) In case of loss Profit and Loss A/c Dr. To Asset A/c (Being loss on sale of an asset transferred to profit and Loss A/c) st st Illustration 2. Rohan Ltd. purchased a Machinery on 1 May, 2009 for Rs. 60,000. On 1
July, 2010 it purchased another Machine for Rs. 20,000. On 31st March, 2011 it sold off the first machine purchased in 2009 for Rs. 39,000. Depreciation is provided at 20% on the original cost each year. Accounts are closed each year on 31st December. Show the Machinery account from 2009 to 2011.
Dr. Machinery A/c Particulars J.F. Rs. Date 2009 60,000 Dec 31 Dec 31 60,000 By Depreciation A/c By Balance c/d 8,000 52,000 60,000 2010 To Balance b/d To Bank A/c(M-II) 52,000 Dec 31 20,000 Dec 31 By Depreciation A/c (M-I Rs. 12,000 + M-II Rs. 2,000) By Balance c/d (M-I Rs. 40,000 + M-II Rs. 18,000) Particulars J.F. Rs. Cr.
Date 2009
14,000
58,000 72,000
72,000 2011 58,000 50,000 Mar 31 Mar 31 By Bank A/c (Sale) By Depreciation A/c(M-I) By Depreciation A/c (M-II Rs. 4,000 + M-III Rs. 7,500)
39,000 3,000
Mar 31 To Bank A/c (M-III) To Profit and Loss Mar 31 A/c (profit on sale)
2,000 Dec 31
11,500
By Balance c/d
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Dec 31
56,500
1,10,000 56,500
1,10,000
Working notes: Calculation of profit or loss on sale of machinery: Book value as on 1st January, 2011 Less: Depreciation (60,000*20/100*3/12) Book value as on 31st March, 2011 Less: sale of machinery Profit on sale of machine
Rs. 40,000 Rs. 3,000 Rs. 37,000 Rs. 39,000 Rs. 2,000
Illustration 3. Suyashi Ltd. purchased on 1st January, 2009 a machinery for Rs. 36,000 and spent Rs. 4,000 on its installation. On 1st July, 2009 another machine purchased for Rs. 20,000. On 1st July, 2011, machine bought on 1st January, 2009 was sold for Rs. 12,000 and a new machine purchased for Rs. 64,000 on the same date. Depreciation is provided on 31st December @ 10% p.a. on the written down value method. Prepare machinery A/c from 2009 to 2011. Solution: Dr. Date 2009 Jan 1 To Bank A/c (M-I) (36,000 + 4,000) July 1 To Bank A/c 40,000 20,000 Dec 31 Particulars J.F. Rs. Machinery A/c Date 2009 Dec 31 By Depreciation A/c (M-I Rs. 4,000 + MII Rs. 1,000) By Balance c/d (M-I Rs. 36,000 + M-II Rs. 19,000) Particulars J.F. Rs. Cr.
5,000
55,000
60,000
60,000
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2010 55,000 Dec 31 By Depreciation A/c (M-I Rs. 3,600 + MII Rs. 1,900) Dec 31 55,000 By Balance c/d (M-I Rs. 32,400 + M-II Rs. 17,100) 5,500
49,500 55,000
2011 July 1 By Bank A/c (Sale) By Depreciation A/c(M-I) by Profit and Loss A/c (profit on sale) By Depreciation A/c (M-II Rs. 1,710 + M-III Rs. 3,200) By Balance c/d (M-II Rs. 15,390 + M-III Rs. 60,800) 12,000 1,620
18,780
4,910
Dec 31
76,190
1,10,000 76,190
1,10,000
Working notes: Calculation of Profit or loss on machine sold: Book value of machine sold as on 31st December, 2010 Less: Depreciation (32400*10/100*6/12) Book value of machine sold as on 1st July, 2011 Less: sale of machine Loss on sale of machine
Rs. 32,400 Rs. 1,620 Rs. 30,780 Rs. 12,000 Rs. 18,780
Disposal of an Asset: Under this method a new account is opened named Asset Disposal A/c at the time of sale of an asset. Following journal entries required for preparation of Asset Disposal A/c
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(a) When provision for depreciation A/c is maintained. (1) Asset disposal A/c Dr. To Asset A/c (With the original cost of asset being sold) (2) Provision for depreciation A/c Dr. To Asset disposal A/c (Transfer of accumulated depreciation) (3) Bank A/c Dr. To Asset disposal A/c (With the net sales proceeds) (4) Asset disposal A/c Dr. To Profit and Loss A/c (For profit on sale of the asset) (5) Profit and Loss A/c Dr. To Asset disposal A/c (For loss on sale of an asset) (b) When provision for depreciation A/c is not maintained In this case replace entry no. 2 from above journal entries by passing following journal entry. Depreciation A/c Dr. To Asset disposal A/c Illustration 4. On 1st April, 2008, Jasmeet Ltd. purchased a machine for Rs. 12,00,000. On 1st October, 2010, a part of machine purchased on 1st April, 2008 for Rs. 80,000 was sold for Rs. 45,000 and a new machine was purchased for Rs. 1,58,000 on the same date. Company provides depreciation @10% p.a. on written down value method. Prepare necessary ledger accounts (a) When provision for depreciation A/c is not maintained. (b) When provision for depreciation A/c is maintained. Solution. (a) When provision for depreciation A/c is not maintained. Dr. Date 2008 Apr 1 To Bank A/c Particulars Machinery A/c J.F. Rs. Date 2009 12,00,000 Mar 31 Mar 31 12,00,000 2009 Apr 1 To Balance b/d 2010 10,80,000 Mar 31 Mar 31 By Depreciation A/c By Balance c/d 1,08,000 9,72,000
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Particulars
10,80,000 2010 Apr 1 Oct 1 To Balance b/d To Bank A/c 2010 9,72,000 Oct 1 1,58,000 Oct 1 Oct 1 2011 Mar 31 Mar 31 11,30,000 2011 Apr 1 To balance b/d 9,66,580 By Depreciation A/c By Balance c/d By Bank A/c (Sale) By Profit and Loss A/c (Loss on sale) By Depreciation A/c
10,80,000
(b) When provision for depreciation A/c is maintained. Dr. Date 2008 Apr 1 Particulars To Bank A/c Machinery A/c J.F. Rs. Date 2009 12,00,000 Mar 31 12,00,000 2009 Apr 1 To Balance b/d 2010 12,00,000 Mar 31 12,00,000 2010 Apr 1 Oct 1 To Balance b/d To Bank A/c 2010 12,00,000 Oct 1 1,58,000 2011 Mar 31 By Balance c/d 12,78,000
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By Balance c/d
12,00,000 12,00,000
80,000
13,58,000
Provision for Depreciation A/c J.F. Rs. Date 2009 1,20,000 Mar 31 By Depreciation A/c 1,20,000 Particulars
1,20,000 1,20,000
2009 2,28,000 Apr 1 2010 Mar 31 2,28,000 By Depreciation A/c 1,08,000 2,28,000 2011 To Machinery disposal A/c (8,000 + 7,200 + 3,240) Apr 1 18,440 Oct 1 2011 3,11,420 Mar 31 3,29,860 2011 Apr 1 By Balance b/d 3,11,420 By Depreciation A/c 98,620 3,29,860 By Balance b/d By Depreciation A/c 2,28,000 3,240 By Balance b/d 1,20,000
2010 Oct 1
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Machinery Disposal A/c J.F. Rs. Date 2010 80,000 Oct 1 Oct 1 Oct 1 80,000 By Provision for Dep. A/c By Bank a/c (sale) By Profit and loss A/c (Loss on sale) Particulars
Working notes: Calculation of profit or loss on machine sold Rs. 80, 000 Cost as on 1st April, 2008 Less: dep. For 2008-09 Rs. 8,000 st Book value as on 1 April, 2009 Rs. 72,000 Less: dep. For 2009-10 Rs. 7,200 Book value as on 1stApril, 2010 Rs. 64,800 Less: dep. For 2010 (64,800*10/100*6/12) Rs. 3,240 Book value as on 1st October, 2010 Rs.61,560 Less: sale of machine Rs.45,000 Loss on sale of machine Rs.16,560 Calculation of depreciation on remaining machine Old machine (9,72,000 64,800 = 9,07,200*10/100) New machine (1,58,000*10/100*6/12)
(April to October)
(October to March)
Provisions and Reserves Provisions Provision is an amount set aside by charging (debited) it in the profit and loss account, to provide for known liability the amount which can not be determined accurately because they are not yet incurred. For example, Provision for Depreciation, Provision for Bad and doubtful debts etc. Reserves
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Reserves are the amount set aside out of profits. It is an appropriation of profits to strengthen the financial position of the business. For example, General reserve, Capital reserve etc. Types of Reserves (a) General reserve It is the amount set aside out of profits for no specific purpose. It is available for strengthen the financial position or expansion of business. (b) Specific reserve This is created for specific purpose and can be utilized only for that purpose. (c) Secret reserve It is a reserve the existence or the amount of which is not disclosed in the balance sheet. It is also known as hidden reserve. Distinguish between Reserves and Provisions Basis Nature Purpose Reserves It is an appropriation of profit It is created to strengthen the financial position of business Provisions It is charge of profit It is created to meet known liability for which the amount is not determined. It has no effect on taxable profit
Effect on It reduces the taxable profit. taxable profit Distribution of It can not be used for dividend It can be used for dividend dividend distribution. distribution. Difference between revenue reserve and capital reserve Basis of Revenue reserve Capital reserve difference Source of creation These reserves created from revenue These reserves created from profits capital profits Usage These reserves can be used to give These reserves cannot be dividend to shareholders used for giving dividend to members. Purpose These reserves are created for meeting unforeseen losses It is used for writing off the capital losses.
Questions (1)Define Depreciation (2) State any two causes of Depreciation (3) Give two methods of providing Depreciation. (4) Give two examples of provisions. (5) What is meant by secret reserve? (6) Which method of depreciation assumes that an asset should be depreciated more in earlier years and less in the later years of use? (7) Depreciation cannot be provided in case of loss in a financial year. Comment. (8) Distinguish between provisions and reserves
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Numerical questions (1) Shyam Ltd. purchased a machinery on 1st May, 2009 for Rs. 60,000. On 1st July, 2010 it purchased another machine for Rs. 20,000. On 31st March, 2011, it sold the first machine purchased in 2009 for Rs. 38,500. Depreciation provided @ 20% p.a. on the original cost every year. Accounts are closed 31st December every year. Prepare machinery A/c for three years. [Profit on sale of machine Rs. 1,500: Balance of machine on 31st December, 2011 Rs. 14,000] (2) The following balances appear in the books of Raghav Ltd. As on 1st April, 2006: Machine A/c Rs. 5,00,000 Provision for Depreciation A/c Rs. 2,25,000 The machine is depreciated at 10% p.a. on the original cost. The accounting year being April to March. On 1st October, 2006, a machinery which was purchased on 1st July 2003 for Rs. 1,00,000 was sold for Rs. 42,000 and on the same date a new machine was purchased for Rs. 2,00,000. Prepare machine A/c and Provision for depreciation A/c for the year 2006-07. [Loss on sale of machine Rs. 25,500; Balance of Provision for dep. A/c Rs. 2,47,500; Balance of machine A/c Rs. 6,00,000] (3) Reema Ltd. Purchased on 1st on April, 2007 a machinery costing Rs. 30,000. It purchased another machinery on 1st October, 2007 costing Rs. 20,000 and on 1st July, 2008 costing Rs. 10,000. On 1st January, 2009 1/3rd of the machinery purchased on 1st April, 2007 became obsolete and was sold for Rs. 3,000. Show the machinery account assuming that the companys accounting year is a calendar year. It is being given that machinery was depreciated by fixed installment method at 10% p.a. What would be the value of Machinery A/c on 1st January, 2010? [Loss on sale of machine Rs. 5,250; Balance of machinery On 1st January, 2010 M-I (2/3) Rs. 14,500; M-II Rs. 15,500, M-III Rs. 8,500] (4) Ankit Ltd. Purchased a machine on1st April 2006 for Rs. 1,80,000 and spent Rs. 20,000 on its installation. On 1st January, 2007, it purchased another machine for Rs. 2,40,000. On 1st July 2008 the machine purchased on 1st April, 2006 was sold for Rs. 1,45,000. On 1st October, 2008 another machine was purchased for Rs. 3,60,000. Prepare Machinery A/c from 2006 to 2008 after charging depreciation @ 10% p.a. by diminishing balance method. Accounts are closed 31st December each year. [Loss on sale machine Rs. 13,175; balance of machinery A/c Rs. 5,45,500 M-II Rs. 1,94,400; M-II Rs. 3,51,000] (5) The following balance appears in the books of M/s. Palak Enterprise. 1st April, 2009 Machinery A/c Rs. 60,000 Provision for Depreciation A/c Rs. 36,000 On 1st April, 2009, they decided to dispose off a Machinery for Rs. 8,400 which was purchased on 1st April, 2005 for Rs. 16,000. You are required to prepare the Machinery A/c and Machinery Disposal A/c for 2009-10. Depreciation was charged at 10% on Original Cost Method. [Balance of machinery A/c on 31st March, 2010 Rs 44,000; Provision for Dep. A/c on 31st March, 2010 Rs. 34,000; Loss on sale of machinery Rs. 1,200]
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(6) A machinery was purchased for Rs.1,80,000 on 1st January, 2006. Depreciation was charged annually@ 10% on written down value method. 1/4th of this machinery was sold on 1st July, 2008 for Rs. 36,000. Prepare machinery A/c from 2006 to 2008, if the books are closed on 31st December each year. [Profit on sale of machinery Rs. 412; Balance of machinery A/c on 31st December, 2008 Rs. 1,01,150] Generally students commit the mistakes in these topics
Time factor in calculation of depreciation. Estimation of profit and loss at the time of sale of asset. At the time of maintain provision for depreciation A/c. Preparation of asset disposal A/c.
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UNIT-6
ACCOUNTING FOR BILLS OF EXCHANGE
Unit at a Glance: Introduction. Definition of a Bill of Exchange Features of a Bill of Exchange Parties to a Bill of Exchange Advantages of Bill of Exchange Promissory note Features of a promissory note Parties to a promissory note Distinction between bills of exchange and promissory note Important terms Accounting treatment of bill transactions Generally students commit mistakes please avoid it Questions Bills of Exchange are instrument of credit which facilitate the credit sale of goods. INTRODUCTION A Bill of Exchange and Promissory Note both are legal Instruments which facilitate the credit sale of goods by assuring the seller that the amount will be recovered after a certain period. Both of these are legal instruments under the Negotiable Instruments Act, 1881. BILL OF EXCHANGE A Bill of Exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. Section 5 of the Negotiable Instrument Act, 1881. FEATURES OF A BILL OF EXCHANGE ARE 1. A Bill of Exchange must be in writing. 2. It must contain an order (and not a request) to make payment. 3. The order of payment must be unconditional . 4. The amount of bill of exchange must be certain. 5. The date of payment should be certain. 6. It must be signed by the drawer of the bill. 7. It must be accepted by the drawee by signing on it. 8. The amount specified in the bill of exchange is payable either on demand or on the expiry of a fixed period. 9. The amount specified in the bill is payable either to a certain person or to his order or to the bearer of the bill. 10. It must be stamped as per legal requirements.
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PARTIES TO A BILL OF EXCHANGE 1. DRAWER: Drawer is the person who makes or writes the bill of exchange. Drawer is a person who has granted credit to the person on whom the bill of exchange is drawn. The drawer is entitled to receive money from the drawee (acceptor). 2. DRAWEE: Drawee is the person on whom the bill of exchange is drawn for acceptance. Drawee is the person to whom credit has been granted by the drawer. The drawee is liable to pay money to the creditor/drawer. 3. PAYEE: Payee is the person who receives the payment from the drawee. Usually the drawer and the payee are the same person. In the following cases. drawer and payee are two different persons : (i) When the bill is discounted by the drawer from his bank- payee is the bank. (ii) When the bill is endorsed by the drawer to his creditors: payee is the endorsee. ADVANTAGES OF BILL OF EXCHANGE 1. It helps in purchases and sales of goods on credit basis. 2. It is a legally valid document in the eyes of law. It assures a easier recovery to the drawer if drawee fails to make the payments. 3. A bill can be discounted from the bank before its date of maturity. By discounting with the bank, drawer can get the money before due date if required. 4. It can be easily transferred from one person to another by endorsement. 5. It helps in recovery of debt without sending reminders to the debtor. 6. It assures the seller about the timely recovery of debt. So a drawer and drawee can plan about its cash management. PROMISSORY NOTE A Promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument. FEATURES OF A PROMISSORY NOTE 1. There must be an unconditional promise to pay a certain sum of money on a certain date. 2. It must be signed by the maker. 3. The name of the payee must be mentioned on it. 4. It must be stamped according to its value. PARTIES TO A PROMISSORY NOTE 1. The maker : The maker is the person who makes the promise to pay the amount on a certain date. Maker of a bill must sign the promissory note before giving it to the payee. 2. The payee : The payee is the person who is entitled to get the payment from the maker of promissory note. Payee is the pesson who has granted the credit.
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DISTINCTION BETWEEN BILLS OF EXCHANGE AND PROMISSORY NOTE Basis of difference 1. Drawer 2. No. of Parties Bills of Exchange The Drawer is the creditor. It has three parties namely : 1. The drawer 2. The drawee 3. The payee It contains an order to make the payment. It is valid only when accepted by the drawee. It case of bill of exchange, drawer can be the payee. It case of dishonor of bill noting becomes important. The liability of the drawer arises only if the drawee fails to make payment. Promissory Note The Drawee is the debtor. It has two parties namely : 1. The maker 2. The payee It contains a promise to make the payment. It does not require any acceptance from the drawee. Drawer or maker cannot the payee of promissory note. Noting is not necessary in case of dishonor of promissory note. The liability of the drawer (maker) is primary.
IMPORTANT TERMS 1. Term of Bill : The period intervening between the date on which a bill is drawn and the date on which it becomes due for payment is called Term of Bill. 2. Due Date : Due date is the date on which the payment of the bill is due. Due date is ascertained in the following manner : (i) In case of Bill at sight Due date is the date on which a bill is presented for the payment. (ii) In case of Bill after Date Due Date = Date of Drawing + Term of Bill. (ii) In case of Bill after sight Due date = Date of Acceptance + Term of Bill. 3. Days of Grace : Drawee is allowed three extra days after the due date of bill for making payments. Such 3 days are known as Days of Grace. It is a custom to add the days of grace. 4. Date of Maturity : The date which comes after adding three days of grace to the due date of a bill is called Date of maturity.
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Illustration: 1 A bill of exchange for ` 25000 is drawn by A on B on 1st April, 2011 for 3 Months. B accepted the bill on 10th April, 2011. Find the DUE DATE and DATE OF MATURITY if Cash I - The bill is Bill After date Case II - The bill is Bill After Sight Solution: DUE DATE Date of Maturity Case I - When the Bill is Bill After date 1st July 2011 4th July, 2011 Case II When the Bill is Bill After Sight 10 th July 2011 13th July, 2011 In case a bill is Bill after Sight term of bill starts from the date of acceptance. 5. Bill at sight/Bill on Demand: When no time for payment is mentioned in the bill of exchange and the bill is payable whenever it is presented to the drawee for the payment, such bills are known as "Bill at sight" or "Bill on Demand". 3 days of grace are not allowed when bill is payable on demand. 6. Bill after Date: Bill after date is the bill in which due date and date of maturity is ascertained from the date on which the bill is drawn. 3 days of grace are allowed for ascertaining the date of maturity in case of bill after date. 7. Discounting of Bill: When the bill is encashed from the bank before its due date, it is known as discounting of bill. Bank deducts its charges from the amount of bill and disburses the balance amount. Illustration 2 Ram sold goods to shyam for Rs. 30,000 at credit on 1st April, 2011. Ram discounted the bill with his bank on 4th May 2011 @ 9% per annum find out : (i) The amount of discounting charges. (ii) The amount that Ram will receive from his bank at the time of discounting the bill. Solution : (i) Discounting Charges = Amount of Bill Discounted Rate Unexpired Period 100 =3000 9 2 = Rs. 450 100 12 (ii) Ram will receive from his bank Rs. 29,500 (i.e., Rs. 30,000 - 450) at the time of discounting the bill.
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8. Endorsement of Bill: Endorsement of a bill means the Process of transferring the title of bill from the drawer or holder to their creditors. The person transferring the title is called " Endorser" and the person to whom the bill is transferred called Endorsee. The endorsee can further endorse the bill in favor of his creditors. Endorsement is executed by putting the signature at the back of the bill. 9. Bill sent for Collection: It is a process when the bill is sent to the bank with instructions to keep the bill till maturity and collect its amount from the acceptor on the date of maturity. 10. Dishonour of Bill: When the drawee (or acceptor) of the bill fails to make payment of the bill on the date of maturity, it is called 'Dishonour of Bill. 11. Noting of Bill: To obtain the proof of dishonour of a bill, it is re-sent to the drawee through a legally authorized persons called Notary Public. Notary Public charges a small fee for Providing this service known as noting charges. Noting charges are paid to the Notary Public first by the holder of the bill but are ultimately recovered from the drawee, because he is the person responsible for the dishonour. 12. Retirement of a Bill: When the drawee makes the payment of the bill before its due date it is called 'Retirement of a bill'. In such a case, holder of the bill usually allow a certain amount as Rebate to the drawee. Amount of rebate is calculated at a fixed percentage for the unexpired period only. 13. Renewal of a Bill: Sometimes, the drawee of a bill finds himself unable to meet the bill on due date. To avoid dishonouring of bill, he may request the holder of the bill to cancel the original bill and draw a new bill in place of old one. It the holder agrees, the old bill is cancelled and a new bill with new terms is drawn on the drawee and also accepted by him. This process is called 'Renewal of a bill'. In this case, Noting of the bill is not required as cancellation of the bill is mutually agreed upon by both the parties of the bill. Normally, the drawer charge interest for the period of new bill. The interest may be paid in cash or may be added in the amount of new bill. If any part payment is made at the time of renewal of a bill, interest is calculated only on the outstanding amount. 14. Accommodation Bill: When bills of exchange or promissory note are not drawn to settle a trade between drawer and drawee but are written for the purpose of mutual help and to raise funds temporarily then it is known as Accommodation bill.
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15. Insolvency of Acceptor : When the drawee (i.e., acceptor) of a bill is unable to meet his liabilities on due date, the drawee become insolvent. In such a case, entries for the dishonour of the bill are passed in the books of drawer/holder and drawee of the bill. Any proportionate amount received from the drawee is recorded in the books of the holder and the amount unrecoverable is debited to Bad Debts A/c. ACCOUNTING TREATMENT OF BILL TRANSACTIONS A. On the Due Date bill is Honoured The accounting treatment under this heading is based on the assumption that bill is duly honoured at maturity of the bill. The drawer can treat the bill in the following ways: Case - I Bill is retained by the drawer till date of maturity: Transaction 1. When Goods are sold on credit 2. When Bill is Drawn In the books of DRAWER Drawee A/c Dr. To Sales A/c (Being goods Sold on credit) Bills Receivable A/c Dr. To Drawee A/c (Being acceptance received from drawee) In the books of DRAWEE Purchases A/c Dr. To Drawer A/c (Being goods purchased from Drawer) Drawer A/c Dr. To Bills Payable A/c (Being acceptance given to drawer) Bills Payable A/c Dr. To cash/Bank A/c (Being payment of bill made to drawer)
3. When Bill is Cash/Bank A/c Dr. Honored on Date To Bills Receivable A/c of Maturity (Being payment of bill received from Drawee)
Case II : When the bill is discounted from the Bank by the Drawer Transaction 1. When the bill is discounted from Bank 2. When the bill is honored on date of maturity In the books of Drawer Bank A/c Dr. Discounting Charges A/c Dr. To Bills Receivables A/c (Being bill discounted for the Bank) No Entry In the books of Drawee No Entry
Bills Payable A/c Dr. To Cash/Bank A/c (Being the payment of bill made)
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Points to be Remember : Discounting charges are always recorded (i.e., debited) in the books of Drawer. In the books of Drawee, there is no effect of discounting charges. Case III : When bill is endorsed in favour of a creditor Transaction 1. When bill is endorsed 2. When bill is honored on date of maturity In the books of Drawer/ Endorser Endorsee A/c Dr. To Bills Receivable A/c (Being bill receivable endorsed) No Entry In the books of Drawee No Entry Bills Payable A/c Dr. To Cash/Bank A/c (Being the payment of bill made)
In the Books of Endorse Bills Receivable A/c Dr. To Endoreser (Being bill received from debtor through endorsement) Cash/Bank A/c Dr. To Bills Receivable (Being Bill realised on date of maturity) Case - IV When Bill is sent to the Bank for collection
Transaction 1. When bill is sent collectin to Bank 2. When the amount is realised on date of maturity
In the books of Drawer Bills sent for for Collection A/c Dr. To Bills Receivable A/c (Being bill sent for collection) Bank A/c Dr. To Bill sent for collection A/c (Being the bill sent for collection realised on maturity)
In the books of Drawee No Entry Bill Payable A/c Dr. To Cash/Bank A/c (Being bill paid on date maturity)
Note : There will be no effect in the books of Drawee either the bill is discounted from the bank or endorsed to a creditor or sent to the bank for collection. The drawee makes the payment in normal manner. It is only in the books of drawer where an additional entry is passed to record the effect of the above transaction.
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Illustration: 5 X sold goods to Y on 1st April, 2011 for Rs. 20,000 on credit and drew upon him a bill for the same amount payable after 3 months. Y accepted the bill and returned it to X. On the date of maturity bill was presented to Y for the payment and he honoured it. Pass the Journal Entries in the books of both the parties when : Case I Bill is retained by the X till the date of maturity. Case II Bill is discounted by X from his bank on 4th April @ 6% per annum. Case III Bill is endorsed in favour of Z on 4th May, 2011. Case IV Bill is sent to Bank for collection on 1st July, 2011. Also record the Journal Entries in the books of C (Case - III) Solution: Date 2011 April, 1 Particulars In the book of X (Drawer) Journal L.F.
Cr. Rs.
April, 1
July, 4
April, 4
Y A/c Dr. To Sales A/c (Being goods sold to Y on credit) Bills Receivable A/c Dr. To YA/c (Being acceptance received from Y) Case I When bill is retained by X till the date of maturity Cash/Bank A/c Dr. To Bills Receivable A/c (Being amount received from B against bill) Case II When bill is discounted by X from his bank Bank A/c Dr. Discounting Charges A/c Dr. To Bills Receivable A/c (Being the bill discounted from the bank, discounting Charges are
20,000 20,000
May, 4
20,000
90
ate July, 1
Particulars
L.F. Rs.
Dr.
July, 4
Bills Sent for Collection A/c Dr. 20,000 To Bills Receivable A/c (Being bill sent for collection to bank.) Bank A/c Dr. 20,000 To Bill sent for Collection A/c (Being amount realised from bill sent for Collection) To Bills Receivable A/c (Being bill endorsed in favour of Z) Case IV When bill is sent to bank for collection
20,000
20,000
Points to be Remember :
(3) First two entries passed on April 1, 2011 will be same in the books of X (Drawer) in all the 4 cases. (4) If a bill is honoured on the date of maturity. NO ENTRY is passed on the date of maturity in the books of drawer, if : Bill is discounted from the bank ; or Bill is endorsed in favour of creditor. (In all 4 cases) In the Books of Y (Drawee) Journal Date Particulars L.F. Dr. Cr.
Rs. Rs.
2011 April, 1
April, 1
July, 4
Purchases A/c To X A/c (Being goods purchased from X on credit) X A/c To Bills Payable A/c (Being the acceptance given to X) Bills Payable A/c To Cash/Bank A/c (Being payment made on date of maturity)
Dr.
20,000 20,000
Dr.
20,000 20,000
Dr.
20,000 20,000
91
Cr. Rs.
July, 4
Bills Receivable A/c Dr. To X A/c (Being bill received from X through endorsement) Cash/Bank A/c Dr. To Bills Receivable A/c (Being payment received against bill)
20,000
20,000 20,000
B. When Bill is dishonoured on date of maturity. Case I - Bill is retained by the drawer till date of maturity. Transaction In the Books of In the Books of Drawer Drawee When bill is Drawee Dr. Bills Payable A/c Dr. dishonoured To Bills Noting charges A/c Dr. Receivable A/c To Drawer To cash A/c ( with (Being bill dishonured) noting charges) (Being bill dishonoured)
Points to be Remember:
Entry passed in the book of Drawee will be SAME in all cases. Cass II - Bill is discounted by the drawer from his bank, the following entry is passed, at the time of maturity, if the bill is dishonoured. In the books of DRAWER Date Particulars Drawee To Bank A/c (Including noting charges) (Being bill discounted from bank dishonoured ) Dr. L.F. Dr.
Rs.
Cr. Rs.
92
Case III - When bill is endorsed in favour of a creditor (At the time of Dishonour of a Bill)
In the books of DRAWER Date Particulars Drawee A/c Dr. To Endorsee A/c (Including noting charges) (Being bill dishonoured, earlier endorsed in favour of creditor) (At the time of Dishonour of a bill) In the books of ENDORSEE Particulars L.F. Endorser A/c Dr. To Bills Receiable A/c To Cash A/c (Noting charges) (Being bill dishonoured received through endorsement) Case IV- When Bill is sent for collection to Bank (At the time of Dishonour of a Bill) In the books of DRAWER Date Particulars Drawee A/c Dr. To Bills Sent for Collection A/c To Bank A/c (Noting charges) (Being bill sent to bank for collection, dishonoured)
93
L.F.
Dr.
Rs.
Cr. Rs.
Date
Dr. Rs.
Cr. Rs.
L.F.
Dr. Rs.
Cr. Rs.
Points to be Remember: 1. Same Entry is passed in the books of Drawee at the time of dishonour of a bill/
2. In the books of Drawer (At the time of Dishonour of Bill) Drawee A/c Dr. To Bills Receivable A/c To Cash A/c (Noting Charges) OR To Bank A/c (Including noting Charges) OR To Endorsee A/c (Including noting charges) OR To Bills Sent for Collection A/c To Bank A/c (Noting Charges)
(Case-II)
(Case-III)
(Case-IV)
Illustration: 6 A sold good to B on April 1, 2011 for Rs. 20,000 on credit and drew upon him a bill for the same amount payble after 3 months. B accepted the bill and returned into to A. On the due date bill was dishonoured. Pass Journal entries in the books of A and B if Case I : Bill is retained by A till the date of maturity., Case II : Bill is discounted by A from his bank on 4th April, 2011 @ 6% per annum. Case III : Bill is endorsed in favour of C on April, 4th, 2011. Case IV : Bill is sent to bank for collection on July 1, 2011.
Solution : In the books of A (Drawer) Journal Date 2011 April, 1 Particulars B Dr. L.F. Dr. Rs. 20,000 Cr. Rs. 20,000
94
on credit) April, 1 Bills Receivable A/c Dr. To B A/c (Being bill received from B) Case-I : When bill is retained by A B A/c Dr. To Bills Receivable A/c (Being bill received from B dishonoured) Case - II : When bill is discounted from the Bank Bank A/c Dr. Discounting charges A/c Dr. To Bills Receivable A/c (Being bill discounted from the bank ; discounting charges are = 2000 July, 4 20,000 20,000
July, 4
20,000 20,000
April, 4
100
12
April, 4
July, 4
B A/c Dr. To Bank A/c (Being bill discounted from, dishonoured on date of maturity) Case - III : When bill is endorsed in favour of C C A/c Dr. To Bills Receivable A/c (Being bill endorsed in favour of C) B A/c Dr. To C A/c (Being bill received from B and endorsed to C dishonoured on maturity date) Case - IV : When bill is sent for collection
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July, 1
July, 4
Bill sent for Collection A/c Dr. To Bills Receivable A/c (Being bill received from B sent for collection) B A/c Dr. To Bills Sent for Collection A/c (Being bill sent for collection to bank, dishonoured on date of maturity) In the Books of B (DRAWEE) (In All Cases) Particulars L.F.
20,000 20,000
20,000 20,000
Cr. Rs.
April,1
July, 4
Purchases a/c Dr. To A a/c (Being goods purchased on credit) A a/c Dr. To Bills Payble a/c (Being acceptance given to A) Bills Payable a/c Dr. To A a/c (Being bill Payable to A dishonoured on date of maturity)
Illustration 7 A sold goods to to B on May 1st, 2011 for ` 30,000 on credit and drew upon him a bill for the same amount payable after 2 months. B accepted the bill and returned it to A. On date of maturity, B fails to make payment of bill. Noting charges amounted to ` 100. Pan Journal Entries in the books of A and B if. Case 1 : A retains the bill till the date of maturity and also paid the noting charges. Case 2 : A discounts the bill from his bank on 4th June @ 12% per annum. Noting charges has been paid by bank. Case 3 : A endorses the bill n favour of C on June 1. C paid the noting charges. Case 4 : A sents the bill to his bank for collection on July 1. Bank paid the noting charges.
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Solution : In the Books of A (DRAWER) Date 2011 May, 1 Particulars L.F. Dr. Rs. 30,000 30,000 30,000 30,000 Cr. Rs.
May, 1
July, 4
June, 4
B A/c Dr. To Sales A/c (Being goods sold to B on Credit) Bills Receivables A/c Dr. To B A/c (Being acceptance received from B) Case 1 : When A retains the bill B A/c Dr. To Bills Receivable A/c To Cash A/c (Being bill dishonourted and noting charges paid by A) Cas 2 : When bill is discounted from the bank Bank A/c Dr. Discounting charges A/c Dr. To Bills Receivable A/c (Being bill discounted from the bank, discounting charges amounted to
` = 3000
12 1
= ` 300) 100 12
July, 4
B A/c Dr. To Bank A/c (Being bill discounted from bank dishonoured and noting charges paid by bank)
30,100 30,100
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Case 3 : When bill is endorsed in favour of C June, 1 C A/c Dr. To Bills Receivable A/c (Being bill sent to bank for collection) B A/c Dr. To C A/c (Being bill received from B and endorsed to C dishonoured on maturity ) Cash 4 : When bill is sent for Collection Bill Sent for Collection A/c Dr. To Bills Receivable A/c (Being bill sent to bank for collection) B A/c Dr. To Bills sent for Collection A/c To Bank A/c (Being bill received from B dishonoured on maturity) 30,000 30,000
July 4
30,100 30,100
July, 1
30,000 30,000
July, 4
Cr. Rs.
30,000
98
A a/c Dr. To Bills Payable A/c (Being acceptance given to A) July, 4 Bills Payable A/c Dr. Noting Charges A/c Dr. To A a/c (Being bill dishonoured and noting charges debited) C. Renewal of a Bill Transaction In the Books of Drawer Dr. Canelling the Drawee To Bills Receivable A/c Original Bill (Being the cancellation of bill receivable) Drawee Dr. Recording To Interst A/c Interest for extended Period (Being interest charged for extended period) Dr. Past Payment Cash or Bank A/c To Drawee Received/ made (Being the part payment received) New Bill Drawn / Bills Receivable A/c Dr. To Drawee Accepted (Being a new bill drown)
May, 1
In the Books of Drawee Bills Payable A/c Dr. To Drawer (Being th e bill payable cancelled) Interest A/c Dr. To Drawer (Being interest payable for extended period) Drawer Dr. To Cash Bank A/c (Being the part payment made). Drawer Dr. To Bills Payable A/c (Being a new bill accepted.)
Points to be Remember :1. No Entry for noting charges is passed at the time of cancellation of original bill because both the parties have mutually agreed to cancel the old bill. 2. Rate of interest must be carefully noticed that it is in % per annum (Time is important) or %. When rate of interest is given in % form, time extended for payment is not considered.
99
Illustration - 8 :
On 1st April, 2011 Anil accepts a bill drawn by Sunil for 2 months for Rs. 15000, in payment of a debt. On the date of maturity bill was dishonoured and Sunil had to pay Rs. 150 as noting charges. On 4th June 2011, Anil requested to Sunil to draw a new bill for the amount due. Sunil agreed to draw a new bill for 73 days but he charged interst @ 15% per annum in cash. This bill is duly met on its maturity.
Pass Journal entries in the books of both the parties. Solution : In the books of Sunil Journal Date 2011 April, 1 Particulars L.F. Dr. Rs. 15,000 15,000 15,150 15000 150 Cr.
Rs.
June, 4
Bills Receivable A/c Dr. To Anil A/c (Being acceptance received) Anil A/c Dr. To Bills Receivable A/c To Cash A/c (Being bill dishonoured and noting charges paid)
June, 4
Anil A/c To Interest A/c (Being interest charged = 15150 ) 100 365
Dr.
454.50 454.50
15 73
June, 4
June, 4
Aug., 19
Cash A/c Dr. To Anil A/c (Being interest received in cash) Bills Receivable A/c Dr. To Anil A/c (Being a new bill drown M Anil and acceptance received) Bank A/c Dr. To Bills Receivable A/c (Being amount received on maturity of bill)
15,1,50 15,1,50
100
Cr. Rs.
Dr.
June, 4
Bills Payable A/c Dr. Noting Charges A/c Dr. To Sunil A/c (Being bill dishonoured and noting charges due) Interest A/c Dr. To Sunil A/c (Being interest payable to Sunil) Sunil A/c Dr. To Cash A/c (Being interest paid in cash) Sunil A/c Dr. To Bills Payable A/c (Being acceptance of new bill given) Bills Payable A/c Dr. To Bank A/c (Being bill accepted, paid on maturity)
June, 4
454.50 454.50
June, 4
June, 4
Aug. 19
Illustration 9 P sold goods to Q for ` 10,000 on January 1, 2011 and on the same day draws a bill on Q for the same amount for 3 months. Q accept it and returns it to P, who discounts it on 10th January, 2011 with his bank for ` 9850. The acceptance is dishonoured on the due date and the noting charges were paid by bank being ` 50.
On 4th April, Q paid ` 2,050 (including noting charges) in cash and accepted a new bill at 3 months for the amount due to P together with interst @ 12% per annum.
Solution : Journal of P Date 2011 Jan., 1 Particulars L.F. Dr. Rs. 10,000 10,000 10,000 10,000 9,850 150 10,000 Cr. Rs.
Jan., 1
Jan., 10
Q A/c Dr To Sales A/c (Being goods sold to Q) Bills Receivable A/c Dr. To Q A/c (Being acceptance received) Bank A/c Dr. Discounting Charges A/c Dr. To Bills Receivable A/c (Being bill discounted from Bank) Q A/c Dr. To Bank A/c (Being bill discounted from bank dishonoured and noting charges paid by bank) Cash A/c Dr. To Q A/c (Being part payment received in cash) Q A/c Dr. To Interest A/c (Being interest charged = ( 8000
April, 4
10,050 10,050
April, 4
April, 5
12 3
April, 4
100 12 Bills Receivable A/c To Q A/c (Being a new bill drawn on Q together with interest)
102
Journal of Q (DRAWEE) Date 2011 Jan., 1 Particulars L.F. Dr. Rs. 10,000 10,000 10,000 10,000 10,000 50 10,050 Cr. Rs.
Purchases A/c Dr. To P A/c (Being goods purchased on credit) P A/c Dr. To Bills Payable A/c (Being acceptance given to P) Bills Payable A/c Dr. Noting Charges A/c Dr. To P A/c (Being bill dishonoured and noting charges due) P A/c Dr. To Cash A/c (Being part payment made in cash) Interest A/c Dr. To P A/c (Being interest payable on outstanding amount for 3 months) P A/c Dr. To Bills Payable A/c (Being acceptance given to P)
Jan., 1
April, 4
April, 4
2,050 2,050
April, 4
240 240
April, 4
8,240 8,240
D. Retiring a bill under Rebate: Transaction When Drawee retires the bill before date of Maturity In the Books of Drawer Cash/Bank A/c Rebate A/c Dr. Dr. In the Books of Drawee Bills Payable A/c Dr. To Cash/Bank A/c To Rebate A/c (Being the amount paid before date of maturity and
103
To Bill Receivable A/c (Being the amount received before date of maturity and
rebate received.)
1. In the books of Drawer, Rebate Account is DEBITED because it is a loss for Drawer. 2. In the books of Drawee, Rebate Account is CREDITED because it is a gain for Drawee. Illustration: 10 Mukesh sold goods to Jitender on July 1, 2011 for ` 30,000 and drew a bill for the some amount for 3months. Jitender accepted the bill and returned it to Mukesh. Jitender retired his acceptance on 4th August, 2011 under rebate of 8% per annum Give Journal entries in the books of Mukesh and Jitender. Solution : In the books of MUKESH Journal Date 2011 July, 1 Particulars L.F. Dr.
Rs.
Cr. Rs.
Dr.
July, 1
(Being goods sold on credit) Bill Receivable A/c Dr. To Jitender A/c (Being acceptance received) Cash A/c Dr. Rebate A/c Dr. To Bills Receivable A/c (Being amount received on bill before maturity and rebate allowed, Rebate = 3000
Aug., 4
2
12
100
8 = 400)
104
In the books of JITENDER Journal Date July, 1 Particulars Purchases A/c Dr. To Mukesh A/c (Being goods purchased on credit) Mukesh A/c Dr. To Bills Payable A/c (Being acceptance given to Mukesh) Bill Payable A/c Dr. To Cash A/c To Rebate A/c (Being acceptance retired with rebate) L.F. Dr.
Rs.
30,000
July, 1
30,000 30,000
Aug., 4
E. Insolvency of Acceptor : Transaction When Drawee is Insolvent When nothing could be Recovered In the books of Drawer Entry for dishonour of bill shall be passed (depending up on the case) Bad Debts A/c To Drawee (Being amount of Bill written off as bed debts) To Deficiency A/c or To P &L A/c (Being the amount of bill written off.) When Amount is Received Partially Cash/Bank A/c Bad Debts A/c To Drawee
(Being the amount received partially and the remaining amount written off due to Insolvency of drawer.)
In the books of Drawee Bills Payable A/c To Drawer (Being bill dishonoured) Dr. Drawer Dr. Dr.
Dr. Dr.
Dr.
or To P & L A/c. (Being the amount payable Settled by payment of......% only.
105
Illustration - II Rajiv sold goods to Pankaj for ` 40,000 on January 1st, 2011. On the same date Rajiv drew a bill of the same amount at 3 month on Pankaj. The bill was accepted by Pankaj. Rajiv discounted the bill with his bank on 4th February, 2011 @ 12% per annum. On date of maturity, the bill was dishonoured and noting charges ` 200 were paid by bank. Pankaj agreed to pay ` 10,200 and accpted another bill for the remaining amount for 3 months together wih interest @ 9% per annum. On July 4, 2011, Pankaj becomes insolvent and a first and final dividend of 60 paise in a rupee was received from his private estate on 15th July, 2011. Give Journal Entries in the books of Rajiv and Pankaj. Solution : In the Books of RAJIV (DRAWER) Journal Particulars L.F.
Cr. Rs.
Jan,.1
Feb., 4
Pankaj A/c To Sales A/c (Being goods sold on credit) Bill Receivable A/c To Pankaj A/c (Being acceptance received) Bank A/c Discounting Charges A/c To Bill Receivable A/c (Being bill discounted from bank and discounting charges are ` 800 : = 40000
Dr.
12 2
100 12 April, 4 Pankaj A/c Dr. To Bank A/c (Being bill dishonoured and noting charges paid by bank). 40,200 40,200
106
April, 4
April, 4
Cash A/c Dr. To Pankaj A/c (Being past payment received from Pankaj) Pankaj A/c Dr. To Interest A/c (Being Interest charged on remaining amount : (= 30000 x 9/100 x 3/12) Bills Receivable A/c Dr. To Pankaj (Being new acceptance received) Pankaj Dr. To Bills Receivable A/c (Being bill dishonoured due to insolvency of Pankaj) Bank A/c Dr. Bad Debts A/c Dr. To Pankaj
(Being final dividend @ 60 paise in a ` received from Pankaj and balance written off as Bad Debts )
10,200 10,200
675 675
April, 4
July, 4
July, 15
In the Books of PANKAJ (DRAWEE) Journal Date 2011 Jan, 1 Purchases A/c To Rajiv A/c (Being goods purchased on credit) Dr. 40,000 40,000 Particulars L.F. Dr. Rs. Cr. Rs.
107
Jan. 1
Dr.
40,000 40,000
April, 4
Bills Payable A/c Noting Charges A/c To Rajiv A/c (Being bill dishonoured and noting charges due)
Dr. Dr.
April, 4
Dr.
10,200 10,200
April, 4
Dr.
675 675
April 4
Rajiv A/c To Bills Payable A/c (Being the new acceptance given to Rajiv)
Dr.
30,675 30,675
July, 4
Bills Payable A/c To Rajiv A/c (Being bill dishonoured due to insolvency)
Dr.
30,675 30,675
July, 5
Rajiv A/c To Bank A/c To Deficiency A/c (Being amount paid @ 60 paise in a rupee`)
Dr.
108
GENERALLY STUDENTS COMMIT MISTAKES PLEASE AVOID IT:1. When calculating Date of Maturity the following points must be considered: 3. In case of Bill at sight or Bill on demand 3 days of grace are NOT allowed. 4. When the term of bill is mentioned in no of days, then Date of drawing the bill is not included. Date of payment is included in determining date of maturity . If date of maturity falls on a day which is public holiday, the maturity date of the bill shall be PRCEDING DAY.
If maturity date is on an emergent holiday declared under the Negotiable Installment Act. 1881, the next working day immediately after the holi day will be considered as the date of maturity.
When the period is stated in months the date of maturity shall be calculated in terms of calendar months ignoring the no. of days in a month.
(7) Noting Charges : 1. Noting charges are not an expense for the drawer. 2. It is always debited as Noting chargers in the books of drawee. 3. Noting charges are recovered by drawer from drawee. 4. Noting charges are paid only when noting of the bill is necessary any at the time DISHONOUR of bill.
Noting of the bill is NOT required when the bill is CANCELLED with the consent of both the parties, specially at the time of RENEWAL of Bill.
Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. State any four essential features of bill of exchange. What is meant by maturity of a bill of exchange? What is meant by acceptance of a bill of exchange? What is Noting of a bill of exchange. What is meant by renewal of a bill of exchange? What is retirement of a bill of exchange? What is meant by insolvency? Give the meaning of rebate. Distinguish between bill of exchange and promissory note. 10. Briefly explain the purpose and benefits of retiring a bill of exchange to the debtor and the creditor.
109
Numerical Questions 1. On Jan 15, 2006, Sankar Sold goods for Rs.30,000 to Parvati and drew upon him three bills of exchanges of Rs.10,000 each payable after one month, two month, and three months respectively. The first bill was retained by Sankar till its maturity. The second bill was endorsed by him in favour of his creditor Ratna and the third bill was discounted by him immediately @ 6% p.a. All the bills were met by Parvati. Journalise the above transactions in the books of Sankar and Parvati. Also prepare ledger accounts in books of Sankar and Parvati. 2. BSNL sold goods worth Rs.19,000 to MTNL on March 02, 2006. Rs.4,000 were paid by MTNL immediately and for the balance she accepted a bill of exchange drawn upon her by BSNL payable after three months. BSNL discounted the bill immediately with her bank. On the due date MTNL dishonoured the bill and the bank paid Rs.30 as noting charges. Record the necessary journal entries in the books of BSNL and MTNL. 3. Tina and Mina were in need of funds temporarily. On August 01 2005 Tina drew upon Mina a bill for Rs. 12,000 for 4 months. Mina Accepted the bill and returned to Tina. Tina discounted the Bill @ 8% p.a. Half amount of the discounted bill remitted to Mina. On due date, Tina sent the required sum to Mina, who met the bill. Journalise the transaction in the books of both the parties. 4. On Jan 01, 2006 Mr. Dalvi sold goods for Rs.20,000 to Mr. Vaghela and drew upon her a bill of exchange payable after two months. One month before the maturity of the bill Mr. Vaghela approached Mr. Dalvi to accept the payment against the bill at a rebate @ 12% p.a. Mr. Dalvi agreed to the request of Mr. Vaghela and Mr. Vaghela retired the bill under the agreed rate of rebate. Journalise the above transaction in the books of Mr. Dalvi and Mr. Vaghela.
**************
110