Professional Documents
Culture Documents
Principles and Practices of Accounting - CAF - RL - 07
Principles and Practices of Accounting - CAF - RL - 07
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Unit -3 Admission of Partner.......................................................................................................................236
Unit-4 Retirement of Partner .....................................................................................................................246
Illustrations ....................................................................................................................................................253
Chapter 9 – Financial Statements of Not-For-Profit Organizations..........................................................269
Illustrations ....................................................................................................................................................277
Chapter – 10 Company Accounts ....................................................................................................................283
Unit-1 INTRODUCTION ..................................................................................................................................284
Unit-2 Issue, Forfeiture and Re-issue of Shares.......................................................................................298
Illustrations ....................................................................................................................................................326
Unit-3 Issue of Debentures ..........................................................................................................................330
Illustrations ....................................................................................................................................................348
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Chapter 1 – Theoretical Framework
OBJECTIVES
The lists of topics which will be covered in this chapter are as follows:
- Contingent Liabilities
- Contingent Liabilities Vs Liabilities
- Contingent Liabilities Vs Provisions
- Contingent Assets
- 4 Valuation Principles
- Accounting Estimates
Meaning of Accounting:
In simple terms Accounting can be stated as the process of recording and maintaining the
Financial Information.
Procedures of Accounting:
1. Recording:
This is the first step of accounting. All the transactions are recorded in the respective
account book which is called as a “Journal”.
For Eg: All the transactions done by the company during a particular month will be
recorded in the Journal on a daily basis.
2. Classifying:
Classifying involves systematically analyzing and segregating the transactions
recorded in the Journal.
This is done by transferring the journal entries in the Ledger which clubs all the similar
transactions to a particular account.
For Eg: All the journal entries related to sales will be recorded in the Sales Ledger.
3. Summarizing:
Under this step all the ledger balances are summarized and prepared in manner that
is useful to the users of the Financial Statements.
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Therefore, to avoid this problem a summary of all the transactions and ledger balances
is presented. The preparation of this summary leads to the creation of the Financial
Statements which includes the following:
i) Trial Balance
ii) Profit and Loss Statement
iii) Balance Sheet
iv) Cash Flow Statement
4. Analyzing:
The financial statements need to be presented in a meaningful and usable way for the
users whereby they can analyze and draw the relationship among the various items of
the Financial Statements.
For Eg: All items relating to a particular type of Asset can be found in the Balance
Sheet Asset side such as Fixed Asset, Current Asset, Investments, etc. This
classification makes it easier for the users to analyze the information presented in the
Financial Statements in a systematical manner and analyze various important ratios
and other meaningful information as per their requirement.
5. Interpreting:
This step is stated as the Final Step of Accounting whereby the financial statements
are interpreted in a manner that enables the end users of the Financial Statements to
derive useful information about the company’s Financial Condition and profitability
of the Business.
It is important from the point of view of interpretation that the companies provide an
in depth explanation the conditions under which the important transactions have
happened, the impact of its occurrence, what is the likelihood of its occurrence.
6. Communicating:
This step is not concerned with the generation of the Financial Statements, but it
deals with communicating the Financial Statements prepared using the above steps.
With the advancement of the global trade and rising interest of various parties in an
organizations business there has been an increase in the number of stakeholder’s who
are interested in the using the company’s Financial Statements to fulfill their various
interests.
Broadly speaking the users of financial statement can be classified into 2 categories:
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User’s of Financial Statements
As seen in the previous diagram the users of the Accounting Information are classified into 2
categories Internal Users and External Users.
Let us try to understand the usability of the Financial Statement to the various users:
Internal Users:
1. Management:
The Management of the entity needs to take various decisions with respect to
budgeting, forecasting based on the past trends and market analysis for the sake of
which they need to evaluate their financial statements to get an understanding of
their business has been performing and the details of their financial position which
assist them in taking better decisions.
Also, they need the various financial information to identify the shortcomings and
weaknesses in their business so that they can design and act on corrective measures
to improve the deficiencies.
External Users:
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1. Investors:
The investors of the company want to understand how the company has been
performing and how is their investment growing.
Based on that information they can take various investment related decisions such
as whether to invest further or disinvest from their existing investment.
2. Employees:
Employees of any company are interested in understanding how the growth of the
company is?
This is because their career growth depends on the growth of the organization at
least till the time they are associated with the company.
3. Lenders:
Lenders are interested in knowing how profitably the company is performing.
This is to ensure that their loans and interest are safe with the company and will
be repaid as per the contracts.
They are keen to know whether the credit balances owed to them by the company
will be paid on timely basis.
Also, they try to estimate that how long they can expect to be in business with the
company in future.
5. Customers:
Many of customers of any business are probably their repeat customers and if the
business goes into trouble and cannot continue then it also causes hassle to the
customer who needs to find a replacement of the product.
This is especially true if the customer used the company’s product as an input for
its own business.
For Eg: If ABC Company was a steel manufacturer and its customer Mr. D had a
steel factory. Mr. D used to procure majority of his raw material from ABC
Company.
If for some reason ABC Company shuts down, then it would be a lot of hassle for
Mr. D to find a new supplier for the same input especially if it was a customizable
product.
6. Statutory Authorities:
Statutory Authorities make sure that the business is operating within the laws and
regulations and defined framework and for accomplishing this objective they need
to rely on the Financial Statements submitted by the companies as per the rules
and acts.
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Objectives of Accounting:
The objectives of Accounting and the method through which they are achieved can be
understood with the help of the following diagram:
Objectives of Accounting
Book-Keeping:
By properly recording all the transactions in an orderly manner, organizations can prepare
the Financial Statements which are true and correct and useful to their users.
The main objective of Book-Keeping is to provide proper summary of all the financial and
non-financial transactions entered by the company which would help the company in
systematic preparation of the Financial Statements.
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The main objective of Book-Keeping is to maintain a Complete Record of all the Transactions
in a systematic manner which is useful in determining the Financial Results on the business.
The following table will enable you to understand the important points of Distinction
between Book-Keeping and Accounting:
Sub-Fields of Accounting:
Accounting is not just restricted to the preparation and presentation of the Financial
Statements to the users. It has various domains which are designed to serve the various
purposes:
1. Financial Accounting:
This field of Accounting deals in preparation and presentation of the financial
statements to the users. The Financial Accounting main objective is determining
profitability and financial position of the business at a particular point of time.
2. Management Accounting:
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This field of Accounting is specifically designed to provide customized and specialized
information to the managers of the organization which would assist them in planning
and taking appropriate steps in achieving the goals of the organization.
3. Cost Accounting:
This field of Accounting is specifically designed to determine the cost and its
allocation which is crucial in determining profitability of the business.
The companies who are spending towards CSR are highly interested in knowing
whether the amount spent by them is able to fulfill the cause and generate the impact
it had expected through the spending.
The measurement of the social benefits created and the lives impacted is the main
objective of the Social Responsibility Accounting.
For Eg: If Company ABC had spent Rs.1.00 Cr during F.Y.2017-2018 for promoting
education among the low income kids. It would like to know the number of kids who
got enrolled in the schools via their programs for which they had spent amount of
Rs.1.00 Cr.
Except for the Human Resource, which is the only expenditure incurred by the
company to develop and maintain the human resource which will be able to provide
the company benefits across the years. However, it is written off as expense in the
year it is incurred.
Human Resource Accounting attempts to identify measure and report the investment
made in the Human Resource of the entity.
Limitations of Accounting:
Accounting has some limitations which are important to be aware of. Since the Financial
statements are the basis of communicating the performance and financial position it is
important to be aware of the limitations in the presence of which the Financial Statements
have been prepared:
However, to overcome this limitation the auditors disclose the events occurring
after the balance sheet date.
4. Use of Estimates:
Some Accounting Estimates such as provision for doubtful debts, useful life of the
Fixed Asset, etc. depends on the estimates and judgments made by the management
and accounting personnel.
Since human judgment is involved it can lead to error in estimation of the same
which can have an impact on the Financial Statements.
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Questions:
1. Identify whether the following are transactions which would be recorded in the
Financial Statement or not?
i) Mr. A asked for Quotation of goods and received a quotation of Rs.5.00/- Lac
from Mr. B. Will this be recorded as purchase in the Books of Mr. A?
Will not be recorded
ii) Mr. B received an order for Rs.10.00/- Lac and raised an invoice to Mr. C for
the same. Will this be recorded as sales in the books of Mr. B?
Will be recorded
2. Which of the following is not an internal user of the Company’s Financial Statement?
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Unit-2 Accounting for Concepts, Conventions and principles
Accounting is stated as the Language through which the results of the operations of
the company are communicated to the various stakeholders.
How would the Financial Statements of various companies look like when they are prepared
by various accountants based on their understanding of the norms and notions of accounting
due to absence of any standardized policy? It would literally cause chaos because the result
of operations prepared by two different accountants for the same set data would be showing
different results rendering it useless.
To avoid this issue and establish uniformity and comparability among the financial
statements of various entities and across the period of time for same entity framework of
GAAP “Generally Accepted Accounting Principles” have been established.
GAAP provides all the concepts, conventions and principles on the basis of which the
Financial Statements of the entity needs to be prepared.
Accounting Concepts:
Accounting Concepts defines the assumptions which form the basis of preparation of
Financial Statements.
Accounting Principles:
Accounting principles provide explanation of current practices and a guide for selection of
practices where alternative treatments exist.
Accounting Conventions:
Accounting Conventions are the conventions which arise in the company Accounting Process
due to the application of the principles and practices over a period of time.
1. Entity Concept:
Entity Concepts states that the business enterprise and the owner of the enterprise
are two separate entities and have their own identities. The transactions occurring
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between the two should be clearly recorded as transaction between two different
persons.
For Eg: If an amount of Rs.10,000/- is withdrawn by Mr. A from his business, it should
be treated as a Drawings from business and not as a Expense of the Business.
Any transaction which cannot be measured in monetary terms should not be recorded
even though it may be materially significant in value.
For Eg: The Human Resource of any organization is its biggest strength but it will not
be recorded anywhere in the Financial Statement because it cannot be measured in
Monetary Terms.
3. Periodicity Concept:
As per this Concept companies need to prepare their accounts at a regular interval
comprising of fixed period of time and not at the end of the life of the business.
Using this concept only the Financial Statements of the company are prepared for
every 12 months also known as “Financial Year”.
It can be stated that the periodicity concept helps in achieving the following
objectives:
- Comparing financial statements of different periods of time.
- Uniform and consistent accounting treatment for ascertaining the profit/loss and
assets/liabilities of the business.
- Matching current period revenues with current period expenses for getting
correct results of the business operations during a given period of time.
4. Accrual Concept:
As per the Accrual Concept of Accounting all transactions and events of business are
recognized o a Mercantile Basis.
It means that all expenses and losses are recognized in the period during which they
have occurred irrespective of the fact whether they have been paid or not and all
income and gains are recognized in the period during which they have been earned
irrespective of the fact whether they have been received or not.
5. Matching Concept:
As per the Matching Concept all the expenses incurred should be matched to the
corresponding revenue earned from those expenses. In Simple words it can be stated
that for all the revenue recognized during a period the corresponding expenses should
be recorded during that period.
For Eg: ABC Company had purchased 1000 quantity of goods for reselling and had sold
600 of those in the current financial year.
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Then at the end of the Financial Year the Cost of Goods Sold will be booked only for
600 units and the balance 400 will be transferred to Ending Inventory which will be
transferred to COGS when they are sold.
If it has any intention to scale down its operations materially or it is intending to close
down its operation then it is liable to disclose the same to the users of the Financial
Statements.
7. Cost Concept:
As per the Cost Concept the assets are supposed to be measured at their historical
cost i.e. their original cost of purchase.
This concept is mainly applied to long term assets such as Fixed Assets. Because
current assets are valued at cost or market value whichever is realizable.
For Eg: If ABC company had acquired a Machinery worth Rs.10.00 Lacs 10 years back
and had spend Rs.2.00 Lac towards its installation. Then the cost of the machine will
be carried over across the years at Rs.12.00 Lac Less Accumulated Depreciation.
8. Realization Concept:
As per the Realization Concept any change in the value of the assets is to be
recognized only when the asset has been sold and the amount has been realized.
This means that companies do not need to revalue their assets every year as per the
realizable value. However, they need to adjust the cost of the asset when they are
sold.
For Eg: ABC Company had machinery with book value of Rs.5.00 Lac as on August 2018
whose market value was Rs.6.00 Lac which was sold for Rs.5.50 Lac. In Sep 2018.
Here ABC Co. would not revalue the asset at Rs.6.00 Lac in August 2018 and then
record the sale in Sep recognizing a loss of Rs.50 thousand.
ABC Co. would be directly booking the asset value at Rs.5.00 Lac and a gain of Rs.50
thousand when asset is sold in September.
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iii) In one Asset, in other Asset.
iv) In one Asset, in Liability.
For Eg: When the business pays of dues to its creditors, it results in reduction of Asset
(Cash & Bank) and reduction of liability (Creditors Balance).
As the name itself suggest this concept is based on Conservatism principle which
means that all the possible expenses and losses are reported which have not even
occurred yet but the income and gains are reported only once they are realized.
Resulting in preparation of most conservative Financial Statements.
The exceptional circumstances under which the companies can change the accounting
policies are as stated below:
i) To prepare the accounts in line with the newly issued Accounting Standards.
ii) To comply with the provisions of Law.
iii) If the circumstances have changed and it is felt that only by the adoption of
the New Accounting Standards the company’s financial results will be shown in
a true and fair manner.
According to the Materiality concept all the items which have significant effect on the
financial statements should be disclosed and all the items which are insignificant in
value and will only increase the work of the accountant but are not relevant to the
users should be ignored.
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For Eg; When the business purchases some stationery items such as calculator which
are going to be used for a more than a year, they are not classified as Fixed Asset and
depreciated accordingly. They are expensed off as a Expense under Printing and
Stationery for the year.
This is because the cost of calculator is no material enough to impact the decision of
the users of the Financial Statement.
Characteristics of Financial Statements.
The 4 qualitative characteristics of Financial Statement that make them useful to their
users are as follow:
1. Understandability:
The Financial Statements should be easily understandable by the users.
It is assumed that the users of these Financial Statements have a basic understanding of the
Business and Accounting to study the information presented in them.
The Financial Statements contain information about complex matters that are to be supposed
to be reported. However, they should not be omitted just because they are complex in nature
to understand.
2. Relevance:
The information presented in the Financial Statement should be relevant to the users.
It means that the users should be able to use the information presented in making their
economic decisions.
3. Reliable:
The information presented in the Financial Statements should be reliable.
Quality of reliability is established when the Financial Statements are free from material
errors and bias and represents all the information in a faithful manner.
4. Comparable:
The information presented should be comparable. It should be comparable with the entities
past performance as well as with the different entities across the same and other industries.
Comparability can be established when the financial statements are presented using the
consistent principles and policies across the years.
The other characteristics which enhance the value of the Financial Statements are as
follow:
5. Materiality:
The information is said to be material if its misstatement either by way of omission of wrong
presentation can influence the economic decision of the user which is based on the financial
statements.
Therefore, it is important the Financial Statements present all the material information.
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6. Substance over Form:
The information presented should be indicating the true nature or intention of the
transactions rather than focusing on the legality of the transaction.
For Eg: if the ABC Co. had purchased a asset of Rs.10.00 Lac by paying an advance amount
of Rs.1.00 Lac. However, the official transfer is not made in the name of the ABC Co.
In this situation ABC Co. will record the asset in its balance sheet and create a creditor for
the balance amount. Even though the official transfer is not made by considering the
substance over the form the asset is recorded in the books of ABC Co.
7. Neutrality:
If the financial statement are prepared and presented with a view to influence the decision
of the user they are said to be biased and not neural.
A neutral financial statement is the one which presents the information as it is without any
intention to influence the decision of the users.
8. Prudence:
Quality of Prudence states that the Financial Statements have been prepared using
professional judgment needed in determining the estimates needed in the preparation of the
financial statements.
However, by using prudence one should not resort to unethical practices such as creation of
hidden reserves, overstatement or understatement of assets and liabilities, incomes and
expenses, etc.
9. Faithful Representation:
Financial Statements should faithfully represent all the transactions and events related to
the period for which the financial statements are being presented.
Fair disclose states that all the transactions should be accounted for in manner that presents
the financial statement in a true and fair manner.
Adequate disclosure states that all the information which could influence the decision of the
user should be presented in adequate detail.
11. Completeness:
To establish reliability it is important that the information presented is complete in all
material aspects. Information can be false or misleading and thus irrelevant and reliable if
it is not complete in all material aspects.
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Questions:
i) Comparability
ii) Completeness – Not an qualitative characteristics
iii) Relevance
iv) Reliability
4. What are the situations under which company can change its Accounting Policy?
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Unit-3 Capital and revenue expenditure and receipts
Capital Expenditure:
Capital Expenditure is that expense whose benefits last for more than one accounting period.
For Eg: Purchase of Fixed Assets is a capital expenditure since its benefit is going to be lasting
for more than 1 accounting period.
Revenue Expenditure:
Revenue Expenditure is that expense whose benefit is going to expire within a single
accounting period or is incurred in relation to the sales made during the accounting period.
1. Nature of Business:
The Nature of business is an important factor in determining whether a expense is
capital or revenue in nature.
For Eg: For a company dealing in sale of computers, purchase of computer will be a
part of revenue expenditure. However, for company dealing in groceries purchase of
computer will be capital expenditure.
The Expenses which are incurred once in a while such as purchase of Fixed Asset is a
capital expenditure.
3. Purpose of Expense:
If the expense helps in generating income over more than one accounting period it is a
capital expenditure.
If the expense is useful in generating income in the current accounting period, then it
is revenue expenditure.
4. Materiality:
The most important factor is the materiality of the amount involved. If the amount of
expenditure is not material enough to be classified as a capital expenditure it will be
written off as a Revenue Expenditure in the current period itself.
Revenue Receipts:
Revenue Receipts are the receipts which are received in the normal course of the business
operations. It is important to note that the revenue receipt is not equal to cash receipts.
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Capital Receipts:
Capital Receipts are the receipts which are not revenue in nature. Capital receipts realized
from sale of asset are first utilized to reduce the outstanding value of the asset in the
company’s balance sheet and any surplus or deficit is transferred to Profit & Loss Account.
For Eg: An asset whose value is Rs.1.00 Lac in the books of Accounts is sold for Rs1.10 Lac.
Here the Rs.1.00 lac out of the proceeds will be credited to the asset value to make it 0.
And the balance Rs.10 thousand will be transferred to credit side of Profit & Loss Account.
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Questions:
iv) Sale of old Fixed Asset by the company at a loss of Rs. 50 thousand.
Capital Receipt
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Unit-4 Contingent liabilities and contingent assets
Contingent Liabilities:
A contingent liability is an obligation which may arise in future depending on occurrence of
one or more uncertain events in the future. This obligation would be arising due to some
past events.
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Contingent Assets:
A contingent Asset is possible asset that may arise in future due past events. The occurrence
of Asset is dependent on one or more future uncertain events in Future.
As per the Accounting Standards, A Contingent Asset is not supposed to be recognized in the
Financial Statements. This is because recognition of any anticipated gains is not allowed in
the Financial Statements.
A Contingent Assets should be disclosed in the Board of Directors Report, if the realization
of the assets is probable.
When the future event on the basis of which the Contingent Asset was dependent has
occurred and it is certain that the contingent asset is realizable by the entity, then it is no
longer a contingent asset and it is supposed to be recognized in the Financial Statement.
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Questions:
iv) Company expects additional bad debts of 5% during the current year as
compared to the average of the past 3 years.
Not a Contingent Liability. (It’s a provision)
Illustration
State with reasons whether the following statements are ‘True’ or ‘False’.
1. Overhaul expenses of 2nd hand machinery purchased are Revenue Expenditure
2. Money spent to reduce working expenses is Revenue Expenditure
3. Legal fees to acquire property is Capital Expenditure
4. Amount spent as lawyer’s fee to defend a suit claiming that the firm’s factory site
belonged to the plaintiff ’s land is Capital Expenditure
5. Amount spent for replacement of worn out part of machine is Capital Expenditure
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Unit-5 Accounting policies
Accounting Policies:
Accounting Policies are the specific accounting principles and the methods of applying those
principles adopted by the organization sin preparation of their Financial Statements.
There isn’t any single set of accounting policy applicable to all the organizations. Selection
of Accounting Policies needs extreme judgment on part of the Key Management personnel of
the organization.
There are 3 main considerations in selection of Accounting Policies which are as presented
below:
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Changes in Accounting Policies:
Although the Accounting policies which are adopted once are supposed to be followed every
year as per the principle of consistency to present the financial statements in a comparable
manner.
There are exceptional circumstances under which the companies can change the accounting
policies which are as stated below:
i) To prepare the accounts in line with the newly issued Accounting Standards.
ii) To comply with the provisions of Law.
iii) If the circumstances have changed and it is felt that only by the adoption of the
New Accounting Standards the company’s financial results will be shown in a true
and fair manner.
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Unit-6 Valuation principles and contingent assets
Valuation Principles:
There are 4 valuation principles on the basis of which the amounts which are to be presented
in the Financial Statements are measured. These 4 principles are:
1. Historical Cost:
Under this principle the Assets Acquired are recorded at the original acquisition price or the
original cost at which they were acquired.
For Eg: If ABC Co. had acquired a plant & machinery worth Rs.20.00 Lac in 2000 and had
spent Rs.5.00 Lac towards its installation and other charges to bring to its usable condition.
2. Current Cost:
Under this principle the cost of an asset is measured at the current amount of cash or cash
equivalents to be paid to acquire the same.
For Eg: If ABC Co. had acquired a plant & machinery worth Rs.20.00 Lac in 2000 and had
spent Rs.5.00 Lac towards its installation and other charges to bring to its usable condition.
The Current Cost to acquire the machinery as of August 2018 was Rs. 45.00 Lacs.
Then as per the current cost principle it value would be Rs. 45.00 Lacs.
3. Realizable Value:
Under this principle the cost of an asset is measured at the amount of cash or cash
equivalents which could be obtained by selling the asset in its present condition.
For Eg: If ABC Co. had acquired a plant & machinery worth Rs.20.00 Lac in 2000 and had
spent Rs.5.00 Lac towards its installation and other charges to bring to its usable condition.
It can sell the machinery in the market as on today for Rs.30.00 and it can buy new machine
for Rs.45.00 Lacs.
Then as per the Realizable Value principle it value would be Rs. 30.00 Lacs.
4. Present Value:
Under this principle the asset is value at the present value of all the future net cash flows
expected to be received from the asset over its course of life.
For Eg: If ABC Co. had acquired a plant & machinery worth Rs.20.00 Lac in 2000 and had
spent Rs.5.00 Lac towards its installation and other charges to bring to its usable condition.
It had expected that over its useful life of 20 years it will generate an output of Rs.2.00 Lac
each year. Its expected rate of return is 10%.
Then as per the Present value Principle, it will be valued at Rs. 17,02,800/-
As per the PV Annuity table PV of Rs.1 received for 20 years at 10% rate of interest is 8.514.
Therefore Rs.2.00 lac received for 20 years at 10% is Rs.17,02,800/-.
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Accounting Estimate:
Till now we have seen how to value the transaction which have already taken place in past.
But in the Financial Statements there are certain items which are based on future events
which are uncertain.
The value of these future assets and liabilities is based on estimates. Therefore, it is
important to select the estimates with a reasonable prudence and intelligence.
Organizations need to constantly evaluate the circumstances on the basis of which the
estimates were made and revise their estimates as needed.
For Eg: When the company buys machinery it has to estimate its useful life. But in the
evolving technological world it is highly possible that the circumstances on the basis of which
the management had estimated life of 20 years have changed and now the machine has a
useful life of only 15 years.
Then the management needs to revise its estimate of life of the machine and depreciation
accordingly to bring it to the revised life.
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Questions:
1. ABC Co. bought a machine in 2013 for Rs. 50.00 Lacs and spent another Rs. 10Lacs to
install the machine and put it to its intended usage.
After 5 years it found that the machine has Book value of Rs.45 Lacs and can be sold
for Rs.48 Lacs in its present condition. The same machine cost Rs. 75 Lacs today.
When it had bought the machine it had estimated that the machine had useful life of
20 years and its expected rate of return was 10%. The machine was expected to
provide an annual output of Rs.10 Lacs.
i) Historical Cost
Rs.60/- Lacs
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Chapter 2 – Accounting Process
OBJECTIVES
The lists of topics which will be covered in this chapter are as follows:
2.2 Ledgers
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Unit-1 Journal Entries
The Double Entry System of Accounting is the most commonly used system of Accounting.
According to Double Entry System, Every transaction has two aspects a Debit and a Credit.
For every transaction entered into there will be one or more Debit and one or more Credit
and the total of debit will be equal to the total of credit.
Following are the advantages of Double Entry System due to which it is extensively used in
all the countries.
i) The accuracy of the accounting can be established by the preparation of the trial
balance.
ii) The result of the operations carried on during a period of time i.e. either profit or loss
can be ascertained with details.
iii) The financial position of the organization can be ascertained at the end of each period
through the balance sheet.
iv) The accounts can be kept in as much details as required and provides information for
the purposes of control etc.
v) Result of one year may be compared with those of previous years and reasons for the
change may be easily determined.
Debits and Credits are the 2 sides of same coin. For every debit there will always be an equal
and corresponding credit.
There are 2 methods of recording every transaction by under the Double Entry System.
Accounts
Real Accounts
Nominal Accounts
1. Personal Accounts:
These are the accounts which relate to someone who can be identified. All those
accounts that have their own identity either as an individual or as a legal
establishment such as Mr.A, ABC &Co, etc. are classified as Personal Accounts.
2. Real Accounts:
These are the accounts which represent the assets of the firm either tangible or
intangible such as Cash, Bank, Inventory, Trademark, Goodwill, etc.
3. Nominal Accounts:
These are the accounts which are presented in the Profit & Loss account. This includes
all the revenues, expenses, gains & Losses. The important feature of the Nominal
Accounts is that they are temporary accounts and are written off by the end of the
accounting period by transfer to Profit & Loss Account.
The Golden Rules of Accounting states the rules of debit and credit for every type of
accounts. The summary of Golden Rule of Accounting is as follow:
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Example on Journal Entry:
The relationship among the Assets, Liabilities and Owner’s equity can be expressed in
terms of an Equation which is known as the “Accounting Equation.”
Contributed Capital
Add: Beginning Retained Earnings
Add: Profit earned during the period (Revenues – Expenses)
Less: Dividends distributed
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The Modern classification of accounts can be summarized in the following table:
Account Type Account shown a Debit when the Credit when the
Normal Balance in account is to be account is to be
ASSET Debit Increase Decrease
LIBAILITES Credit Decrease Increase
CAPITAL Credit Decrease Increase
REVENUE Debit Decrease Increase
EXPENSES Credit Increase Decrease
DRAWINGS Debit Increase Decrease
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Questions:
4. Show the effect of the following transactions using the Traditional approach as well
as the Modern Approach.
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Unit-2 Ledgers
What is a Ledger?
Once all the transactions are recorded through Journal Entries, they need to be classified
and grouped by preparing the accounts. The book in which all the accounts are prepared is
known as “LEDGER”.
Format of LEDGER:
The process of transferring the Journal Entries in the Ledger is known as “POSTING”.
1. All the Accounts which have been entered in the Journal should have Ledger
Account.
2. Whenever any account is mentioned in the Debit side of the Ledger it is supposed to
use the word “TO” before the name of the account
3. Whenever any account is mentioned in the Credit side of the Ledger it is supposed to
use the word “BY” before the name of the account
4. At a fixed interval of time the accounts needs to be balanced. Wherein the accounts
are totaled and the balance on either side is carried forward to the next period.
(Refer example to understand the concept of Balancing a Ledger).
Example on Ledger:
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Note:
1. Whenever the Purchase account was debited in the Journal the corresponding credit
account is mentioned on the debit side of the journal with the word “TO” before it.
2. Whenever the Purchase account was credited in the Journal the corresponding credit
account is mentioned on the debit side of the journal with the word “BY” before it.
3. At the end of the month the total of both the sides is done. The deficit amount on the
lower side is mentioned as Balance c/d which is known as Balancing of the Account.
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Questions:
1. Prepare the Ledgers for the various transactions entered into by the company as
follow:
i) Mr. A Introduced capital of Rs.25.00 lac to start his business.
ii) Purchased Machinery worth Rs.10.00 Lac by paying the Rs.5.00 Lac in cash and
balance in credit from XYZ &Co.
iii) Purchased goods on credit from Mr. C worth Rs. 50 Thousand and in cash for Rs.1.50
Lacs
iv) Sold goods for Rs. 2.00 Lac to Mr.D and received amount of Rs.1.00 lac from him
after 20 days.
v) Mr. A asked deposited amount of Rs.2.00/- Lac from his savings in Bank.
(Hint – Use the Journal entries created while solving the exercise for chapter 2.1)
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Unit-3 Trial Balance
After the entire ledger accounts for the various transactions which were recorded via Journal
Entries is completed. The Next step is the creation of the Trial balance.
Trial Balance contains the debit and credit balance of the various ledgers. It is important
to note that the total of debit column and credit column needs to be equal for the trial
balance to be complete.
The agreement of Trial Balance is not a final evidence of the accuracy of the trial balance.
The Arithmetical accuracy shows the fact that all the debit balance equals the credit
balances. However, there are certain possibilities whereby even though the trial balance is
agreed upon it is still inaccurate.
It is possible that the following types of errors still exist and the trial balance is agreed
upon.
i) Transaction has not been entered at all in the journal. Hence, is not entered in
Ledger and not accounted for in Trial balance.
ii) A journal recorded with wrong Amount.
iii) A journal recorded with wrong Accounts.
iv) Omitting to record a Journal entry in the Ledger.
v) Posting the same journal entry twice in the ledger.
It is to be noted that the preparation of trial balance still cannot be omitted due to the
above mentioned limitations.
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Format of TRIAL BALANCE:
1. TOTAL METHOD:
Under this method, every ledger account is totaled and that total amount of debit side and
credit side is transferred to trial balance. In this method, trial balance can be prepared as
soon as ledger accounts are totaled. There is no need to balance the ledger Accounts.
2. BALANCE METHOD:
Under this method, only the ledger balances of the various ledger accounts are transferred
to trial balance. This is the most commonly used method of creating trial balance. Also, it is
to be noted that the Financial Statements are prepared on the basis of the Ledger Account
Balances.
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Example on Trial Balance:
The Balances of the various ledgers and the total of the ledger columns are as presented
below: Prepare the Trial Balance for the following Ledger Accounts as per the 3 different
methods.
Note:
1. The Total Amount represents the total of the Ledger Accounts.
2. The Balance Amount represents the amounts remaining after the balancing of the
respective ledgers which are carried forward.
Note: Here we have considered only the amount from the total column.
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TRIAL BALANCE AS PER BALANCE METHOD:
Note: Here we have considered only the amount from the BALANCE column.
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Questions:
1. Prepare the Trial Balance as per the 3 different methods from the following details:
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Unit-4 Subsidiary Books
What is Subsidiary Book?
All the transactions incurred by business on a daily basis can be classified into few major
activities which are Receipt and Payment of Cash, Sale of Goods and Purchase of Goods.
To facilitate ease of work a separate register is maintained which records all the transactions
for each such class of transactions. For the entries mentioned in such registers there
wouldn’t be any Journal Entries. The balances from these registers in respect of the
particular items will be directly posted in the Ledger.
This separate registers where the entries are first made are known as “SUBSIDIARY BOOKS”.
The following Subsidiary Books are commonly prepared and maintained by the businesses:
1. Cash Book:
Records all transactions related to receipts and payments.
2. Purchase Book
Records credit purchase of goods which are required by the entity in its daily
operations.
4. Sales Book
Records Credit sales of goods made by the entity.
7. Journal Book
This is the book where if any transaction cannot be recorded in the above 7 books
they are recorded in this book.
1. Division of Work:
Every Subsidiary book deals in a specific area of business. Therefore, it is possible to
allocate resources on a specific of work based on the volume
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2. Specialization of Work:
Since the work is divided into different areas of business, it can be specialized by
allocating and training resources on a particular domain.
3. Time Saving:
Since the need to maintain the Journal is eliminated for the transactions entered into
the subsidiary books and there are various accountants involved for different work
areas, it leads to Time Savings.
4. Information Availability:
Since all the common areas of work are identified and maintained in separate books
it is easy to access information about a specific area of work without going through
all the different records.
The book in which transactions are recorded first for further processing is called Subsidiary
Books. The details entered into subsidiary books are transferred to the Ledgers and from the
Ledgers to the trial balance and ultimately to the Financial Statements.
The Ledger and the Cash Book are called the Principal Books. This is because they facilitate
the information needed to prepare the trial balance and financial statements.
Prepare the Purchase Book from the following transactions and post their balances in Ledger.
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The ledger posting for the above transactions recorded in the Purchase Book is as Follow:
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Questions:
1. Prepare the Sales Subsidiary Books for the following transactions and prepare the
Ledger posting for the same.
Hint:
1. The sale of Computer is a sale of Fixed Asset and not normal sale made in the course
of business.
2. The Cash Sales will be recorded in Cash Book. Only credit sales are recorded in Sales
Book.
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Unit-5 Cash Books
What is CASH Book?
As discussed in the Subsidiary Books, Under Cash Book all the transactions wherein cash has
been received or paid are recorded.
Cash Book plays a dual role as a Principal as well as a Subsidiary Book also.
This is because all the transactions related to payment and deposit of cash is recorded in the
cash book directly. Therefore, it is treated as Subsidiary Book. But cash book also serves as
a basis for preparing the trial balance thereby serving as a Ledger also. Hence, it is a principal
book.
Some organizations also maintain another form of cash book known as Petty Cash Book.
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2. Double Column Cash Book:
When an additional column is added to the simple cash book which shows either
discount allowed or discount received. Alternatively, the new column can also show
payments made through the Bank and deposits received in the bank. It is known as a
Double Column Cash Book.
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3. Three Column Cash Book:
Most of the organizations keep most of their balances in the Bank and the money can
be deposited and withdrawn at any point of time as per their requirements.
The only difference between cash in hand and money in bank is the location of the
cash amount. But it is important to track the moment in both of them. That purpose
is served by the three column cash book.
Another column is added to the Cash and discount column which is the Bank Column.
All the deposits and payment made in Bank are entered in the Bank Column.
The most important factor to be noted in the three column cash book is the method
of recording contra entries.
For instance when cash is deposited in the bank the Receipt Column on the bank side
is debited and the cash column on the credit side is credited. This shows the increase
in the bank balance and decrease in the cash balance due to depositing cash in Bank.
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IMPEREST SYSTEM OF PETTY CASH BOOK:
Sometimes business have to make a lot of petty payments in cash as a part of their
operational and miscellaneous expenses.
It would be highly inconvenient for the main cashier to deal in such transactions on a daily
basis. For the sake of convenience companies install the Petty Cash System.
Under the system of petty cash, a small imprest amount of cash is always maintained in the
petty cash balance. The petty cashier pays all the petty expenses during the given period
and at the beginning of the next period may be a week or month the petty cashier is provided
the deficit to bring the petty cash balance to the originally decided amount.
For instance, if the company decides to maintain a petty cash balance of 10,000 on a weekly
basis. And the petty cashier incurs an expense of Rs. 5,000 during the given week. Then at
the beginning of the next week he will be reimbursed Rs.5,000 of the expenses incurred by
him to bring the petty cash balance to the decided amount of Rs.10,000.
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Accounting www.indigolearn.com 54
Unit-6 Rectification of Errors
What are ERRORS?
Since Accounting involves a huge amount of recurring and record-keeping task it is highly
possible that sometimes unintentional omission or commission of amounts and accounts may
happen during the preparation of the accounts while recording them. This is known as ERROR
in ACCOUNTING.
It is also possible that there may be due to mathematical mistake due to which the trial
balance may not agree.
Whatever kind of error has occurred it is important to rectify the error that have occurred
and been detected so that the Financial Statements show a True and Fair view of the various
transactions and events.
STAGES OF ERRORS:
Till now we have been able to see that accounting involves multiple processes from recording
a transaction to posting ledger to preparation of the Financial Statements.
An error can occur at any stage; broadly speaking the error can occur during any of the
following stages based on the flow of the process:
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TYPES OF ERRORS:
Classification of errors can be understood from the following table:
TYPES OF ERROR
Error of Principle:
This error occurs when the transactions are recorded in a fundamentally wrong manner
ignoring the principles of Accounting.
For Eg: When the purchase of Computer (Fixed Asset) is recorded as office expense.
Clerical errors:
1. Error of Omission:
This error occurs when the recording of transactions is omitted from the books of accounts.
For Eg: Omitting to record a purchase entry from the journal or omitting to record the journal
entry in the ledger.
2. Error of Commission:
This error occurs when the amounts are posted in the wrong account, or a debit amount is
written on the credit side, or the amounts are written wrong.
3. Compensating Errors:
These are the errors whose combine effect cancels out each other. For Eg: if salaries account
is overbooked by Rs. 1000/- and the office expense is under booked by the same amount i.e.
Rs.1000/- then the final profit remains unaffected. These types of errors are known as
“COMPENSATING ERRORS”.
Apart from the above mentioned classification based on principle of error or clerical error
there is also another category of error which can occur which is based on whether they affect
the trial balance or not.
The errors which affect the trial balance are as stated below:
(i) Wrong casting of the subsidiary books.
(ii) Wrong balancing of an account.
(iii) Posting an amount on the wrong side.
(iv) Posting the wrong amount.
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(v) Omitting to post an amount from a subsidiary book.
(vi) Omitting to post the totals of subsidiary book.
(vii) Omitting to write the cash book balances in the trial balance.
(viii) Omitting to write the balance of an account in the trial balance.
(ix) Writing a balance in wrong column of the trial balance.
(x) Totaling the trial balance wrongly.
The errors which do not affect the trial balance are as stated below:
(i) Omitting an entry altogether from the subsidiary book.
(ii) Making an entry with the wrong amount in the subsidiary book.
(iii) Posting an amount in a wrong account but on the correct side, e.g., an amount to
be debited to A debited to B, the trial balance will still agree.
1. The two columns of the Trial Balance should be verified and is there are multiple
amounts which are represented by a single amount in the trial Balance then even
those amounts should be verified again.
For eg: if the trial balance shows only a single amount for Trade Payables for the
various accounts then the list of the trade payables should also be verified.
2. Verify the Cash and Bank Balances written in the trial balance.
3. The exact difference in the trail balance should be determined. All the ledgers should
be scrutinized thoroughly to verify whether any amount of the exact difference has
been omitted from recording in the trial balance.
6. Posting of the amount equal to the difference in the trial balance or the half amount
of the difference should be checked. If the amounts are posted on the wrong side the
difference doubles up.
For Eg: If the amount of Rs.1000 to be posted in the debit side is posted on the
credit side then the trial balance would be showing a difference of Rs. 2000/-. The
omission of Debit of Rs.1000/- and additional credit of Rs.1000/-
7. If the difference still exists a complete checking of the entire books of accounts would
be necessary.
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Rectification of an Error:
Errors always need to be corrected in a systematic way such that the effect of the error is
nullified and the correct entry is also shown in the accounts.
The rectification of error depends on which stage the error is detected. The stage at which
the rectification needs to happen depends on the following stages:
Example:
Purchase of Fixed Asset for Rs. 1,00,000/- from ABC & Co. has been booked under Purchases.
Rectify the same.
The following states the wrong entries made and the correct entry to be passed for the
rectification.
Wrong Entry Reversal of Wrong entry Correct Entry
Purchase A/c Dr. 100000 ABC & Co. A/c Dr. 100000 Fixed Assets A/c Dr.
100000
To ABC & Co. A/c 100000 To Purchases 100000
To ABC & Co. A/c
100000
Rectification of error after preparation of trial balance but before preparation of Final
Accounts:
Sometimes when the trial balance does not agree it is made to agree artificially by opening
a Suspense Account. If the debit total of the trial balance is higher than the suspense account
is credited, and it is debited if the total of the credit side of the trial balance is higher.
All those errors which needs to be rectified by a Journal entry but were not able to be
rectified due to the absence of complete journal entry will be rectified with the use of
Journal Entry by using suspense account as the other part of the Journal.
Example:
Pass the rectification entry for the following errors using a Suspense Account:
For instance the purchase for the year 2017 were over stated by Rs.10000/- but the Financials
of the year 2017 were finalized along with the errors itself and it was only in 2018 the
company realized the presence of error in 2017 financial statements and intended to rectify
it.
If the company rectifies the error by reducing the purchases in 2018 by Rs. 10000/- then it
would be reducing the purchases for the year 2018 instead of 2017. It is to avoid these
situations a special account named “PROFIT & LOSS ADJUSTMENT ACCOUNT” is used to
rectify the errors of previous years.
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It is to be noted that at the end of the current accounting period the balance of Profit & Loss
Adjustment Account will be transferred to the Profit & Loss Account itself.
Example:
Mr. A was unable to agree the trial balance for 2017 and directly posted the differences in
the Profit and Loss account. In 2018, the Auditors of the company revealed the following
errors committed in 2017.
Rectify the mistakes noted above and use the Profit & Loss Adjustment Account wherever
necessary:
i) Purchase of a Fixed Asset was debited to Printing & Stationery Account for
Rs.5,000. Depreciation on Fixed Assets is levied at 10%.
ii) Sales account was overstated by Rs.20,000.
iii) A credit sale of goods to Mr. A for Rs.5,000 entered as a purchase.
iv) Rs. 1000 due by Mr. C was omitted from recording into the trial balance.
v) Purchase of goods from Mr. R for 5,000 was omitted to be recorded.
vi) Amount of Rs.2525 of purchase was wrongly posted as Rs.5252.
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Accounting www.indigolearn.com 61
Questions:
1. The following errors have occurred in the Books of Accounts of Mr. A and have been
identified before the preparation of the trial Balance. Pass the wrong entries and the
correct entries for the same.
i) Purchase of Fixed Asset for Rs. 10,000/- from ABC & Co. has been booked under
Purchases.
ii) Sales of Rs. 5000/- to Mr. B were recorded as Sales to Mr. D.
iii) Omitted to record cash sales of Rs. 1000/-.
2. The Following errors have been identified after the preparation of the trial balance
but before the preparation of Final Accounts. Correct the errors using suspense
account wherever necessary:
i) Goods of the value of Rs.1000 returned by Mr. A were not recorded as sales
return.
ii) Discount received for Rs.500/- for making early payment was not recorded in
the discount received ledger. But the same was recorded in the cash book.
iii) Goods Purchased from Mr. B for Rs.4500/- were recorded in Purchases but the
same was recorded in Mr. B A/c
3. The Following errors have been identified in the next year and the entity wants to
rectify the same using Profit & Loss Adjustment Account.
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Illustrations
UNIT 1: Basic Accounting Procedures - Journal Entries
Question: 1
Following are the transactions entered by ‘R’ after he started his business. Show how
various accounts will be affected by these transactions:
April 2017 Particulars Amount (Rs.)
1st R started business with 5,000,000
2nd He purchased furniture for 1,200,000
3rd Paid salary to his clerk 1,100,000
4th Paid rent 1,150,000
5th Received interest 2,000,000
Question: 2
Develop the accounting equation from following information available at the beginning of
accounting period:
Particulars Amount (Rs.)
Capital 51,000,000
Loan 11,500,000
Trade payables 5,700,000
Fixed Assets 12,800,000
Inventory 22,600,000
Trade receivables 17,500,000
Cash and Bank 15,300,000
At the end of the accounting period the balances appear as follows:
Particulars Amount (Rs.)
Capital ?
Loan 11,500,000
Trade payables 5,800,000
Fixed Assets 12,720,000
Inventory 22,900,000
Trade receivables 17,500,000
Cash and Bank 15,600,000
a. Reset the equation and find out profit.
b. Prepare Balance Sheet at the end of the accounting period
Question: 3
Mr. Dravid has provided following details related to his financials. Find out the missing
figures:
Particulars Amount (Rs.)
Profits carved during the year 5,000,000
Assets at the beginning of year A
Liabilities at the beginning of year 12,000,000
Assets at the end of the year B
Liabilities at the end of the year C
Closing capital 35,000,000
Total liabilities including capital at the end of the year 50,000,000
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Question: 4
From the following information, state the nature of account and state which account will
be Debited and which will be Credited:
1. Started business with a capital of Rs. 50,00,00
2. Wages and salaries paid Rs. 50,000
3. Rent received Rs. 2,00,000
4. Purchased goods on credit Rs. 9,00,000
5. Sold goods for Rs. 8,16,000 and received payment in cheque.
Question: 5
Journalise the following transactions. Also state the nature of each account involved in the
Journal entry:
Following figures are given in (‘000)
1. December 1,2016, Ajith started business with capital Rs. 4,00,000
2. December 3,2016, He withdrew cash for business from the Bank Rs. 2,000
3. December 5,2016, He purchased goods making payment through bank Rs. 15,000
4. December 8,2016, He sold goods Rs. 16,000 and received payment through bank
5. December 10,2016, He purchased furniture and paid by cheque Rs. 2,500
6. December 12,2016, He sold goods to Arvind Rs. 2,400
7. December 14,2016, He purchased goods from Amrit Rs. 10,000
8. December 15,2016, He returned goods to Amrit Rs. 500
9. December 16,2016, He received from Arvind Rs. 2,300 in full settlement
10. December 18,2016, He withdrew goods for personal use Rs. 1,000
11. December 20,2016, He withdrew cash from business for personal use Rs. 2,000
12. December 26,2016, Amount paid to Amrit in full settlement Rs. 9,450
13. December 31,2016, Paid for Stationery Rs. 200, Rent Rs. 5,000 and Salaries to staff
Rs. 2,000
14. December 31,2016, Goods distributed by way of free samples Rs. 2,000
Question: 6
Transactions of Ramesh for April are given below. Journalise them
Apr 1,2107 Ramesh started business with Rs. 10,00,000
Apr 1,2107 Bought goods for cash Rs. 50,000
Apr 1,2107 Drew cash from bank Rs. 10,000
Apr 1,2107 Sold to Krishna- goods on credit Rs. 1,50,000
Apr 1,2107 Bought from Shyam goods on credit Rs. 2,25,000
Apr 1,2107 Received from Krishna Rs. 1,45,000
Allowed him discount Rs. 5,000
Apr 1,2107 Paid Shyam cash Rs. 2,15,000
Discount allowed Rs. 10,000
Apr 1,2107 Cash sales for the month Rs. 8,00,000
Paid Rent Rs. 50,000
Paid Salary Rs. 1,00,000
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UNIT 2: Ledgers
Question: 1
Prepare the Stationery Account of a firm for the year ended 31.12.2015 duly balanced off,
from the following details:
Date Particulars Amount (Rs.)
01.01.2015 Inventory of stationery 480
15.04.2015 Purchase of stationery by cheque 800
15.11.2015 Purchase of stationery on credit from Five Star 1,280
Stationery Mart
31.12.2015 Inventory of stationery 240
Question: 2
Prepare the ledger accounts on the basis of following transactions in the books of a trader
• Debit Balances on January 1, 2015
• Cash in Hand Rs. 8,000,
• Cash at Bank Rs. 25,000,
• Inventory of Goods Rs. 20,000,
• Building Rs. 10,000
• Trade receivables: Vijay Rs. 2,000 and Madhu Rs. 2,000
Following were further transactions in the month of January 2015:
Jan 1 Purchased goods worth Rs. 5,000 for cash less 20% trade discount and 5%
cash discount
Jan 4 Received Rs. 1,980 from Vijay and allowed him Rs. 20 as discount
Jan 8 Purchased plant from Mukesh for Rs. 5,000; Paid Rs. 100 as cartage for
bringing the plant to the factory and Paid Rs. 200 as installation charges
Jan 12 Sold goods to Rahim on credit Rs. 600
Jan 15 Rahim became insolvent and could pay only 50 paise in a rupee
Jan 18 Sold goods to Ram for cash Rs. 1,000
Question: 3
The following data is given by Mr. S, the owner, with a request to compile only the two
personal accounts of Mr. H and Mr. R, in his ledger, for the month of April,2015:
1 Mr. S owes Mr. R Rs. 15,000; Mr. H owes Mr. S Rs.20,000
4 Mr. R sold goods worth Rs. 60,000 @ 10% trade discount to Mr. S
5 Mr. S sold to Mr. H goods prices at Rs.30,000
17 Record a purchase of Rs.25,000 net from R, which were sold to H at a profit of
Rs.15,000
18 Mr. S rejected 10% of Mr. R’s goods of 4th April
19 Mr. S issued a cash memo for Rs.10,000 to Mr. H who came personally for this
consignment of goods, urgently needed by him
22 Mr. H cleared half his total dues to Mr. S, enjoying a ½% cash discount (of the
payment received, Rs.20,000 was by cheque)
26 R’s total dues (less Rs.10,000 held back) were cleared by cheque, enjoying a cash
discount of Rs.1,000 on the payment made
29 Close H’s Account to record the fact that all but Rs.5,000 was cleared by him, by a
cheque, because he was declared bankrupt
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UNIT 3: Trial Balance
Question: 1
Given below is a ledger extract relating to the business of X and Co. as on March,31,2016.
You are required to prepare the Trial Balance by:
1. Total Method.
2. Balance Method
3. Total and Balance Method
Dr. Cash Account Cr.
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Capital A/c 10,000 By Furniture A/c 3,000
To Ram’s A/c 25,000 By Salaries A/c 2,500
To Cash Sales 500 By Shyam’s A/c 21,000
By Cash Purchases 1,000
By Capital A/c 500
By Balance c/d 7,500
Total 35,500 Total 35,500
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Dr. Purchases Returns A/c Cr.
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Balance c/d 500 By Sundries as per 500
Purchases Return
Book
Total 500 Total 500
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Question: 2
From the following ledger balances, prepare a trial balance of Anuradha Traders as on 31st
March 2016
Account Head Amount (Rs.)
Capital 1,00,000
Sales 1,66,000
Purchases 1,50,000
Sales Returns 1,000
Discount allowed 2,000
Expenses 10,000
Trade receivables 75,000
Trade Payables 25,000
Investments 15,000
Cash at bank and in hand 37,000
Interest received on investments 1,500
Insurance paid 2,500
Question: 3
One of your clients, Mr. Singhania has asked you to finalise his accounts for the year ended
31st March 2016.
Till date, he himself has recorded the transactions in books of accounts. As a basis for
audit, Mr. Singhania furnished you with the following statement.
Particulars Debit Balance (Rs.) Credit Balance (Rs.)
Singhania’s Capital 1,556
Singhania’s Drawings 564
Leasehold premises 750
Sales 2,750
Due from customers 530
Purchases 1,259
Purchases return 264
Loan from bank 256
Trade payables 528
Trade expenses 700
Cash at bank 226
Bills payable 100
Salaries and wages 600
Inventories (1.4.2015) 264
Rent and rates 463
Sales return 98
Total 5,454 5,454
The closing inventory on 31st March’16 was valued at Rs. 574. Mr. Singhania claims that he
has recorded every transaction correctly as the trial balance is tallied. Check the accuracy
of the above trial balance.
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UNIT 4: Subsidiary books
Question: 1
The Rough Book of M/s. Narain & Co. contains the following in Feb’16:
1. Purchased from Brown & Co. on credit:
• 5 gross pencils @ Rs. 100 per gross
• 12 gross registers @ Rs. 240 per doz
• Less: Trade Discount @ 10%
2. Purchased for cash from the Stationery Mart: 10 gross exercise books @ Rs. 300 per
doz.
3. Purchased computer for office use from M/s. office Goods Co. on credit for Rs.
30,000
4. Purchased on credit from The Paper Co.
• 5 reams of White paper @ Rs. 100 per ream.
• 10 reams of Ruled paper @ Rs. 150 per ream.
• Less Trade Discount @ 10%
5. Purchased one Dozen Gel Pens @ Rs. 15 each from M/s. Verma Bros. on credit
Make out the Purchase Book of M/s Narain & Co.
Question: 2
Enter the following transactions in Purchase Book and post them into ledger.
April 4th, 2017
• Purchased from Ajay Enterprises, Delhi
• 100 Doz. Rexona Hawai Chappal @ Rs. 120 per doz.
• 200 Doz. Palki Leather Chappal @ Rs. 300 per Doz.
• Less: Trade discount @ 10%
• Freight charged Rs. 150
April 15 th
Question: 3
The following are some of the transaction of M/s Kishore & Sons of the year 2017 as per
their Waste Book. Make out their Sales Book
Sold to M/s. Gupta & Verma on credit:
• 30 shirts @ Rs. 800 per shirt.
• 20 trousers @ Rs. 1,000 per trouser.
• Less Trade Discount @ 10%
Sold furniture to M/s. Sehgal & Co. on credit Rs. 8,000
Sold 50 shirts of M/s. Jain & Sons @ Rs. 800 per shirt
Sold 13 shirts to Cheap Stores @ Rs. 750 each for cash
Sold on credit to M/s. Mathur & Jain.
Accounting www.indigolearn.com 69
• 100 Shirts @ Rs. 750 per shirt
• 10 overcoats @ Rs. 5,000 per overcoat
• Less Trade Discount @ 10%
Question: 4
Post the following into the ledger
Sold Goods to M/s. Ram & Co of Rs. 100
• Less Trade Discount 10%
• Goods Returned by M/s Ram & Co on 5th June 2020
Purchased Goods from M/s. Ram & Co of Rs. 100
• Less Trade Discount 10%
• Goods Returned to M/s Ram & Co on 5th June 2020
Question: 5
Date 2017 Particulars Details (Rs.) Amount (Rs.)
20th Nov Rajindra Prakash & Sons
One 36” Usha Ceiling Fan 200
Less Trade Discount @ 10% (20) 180
30th Nov Modern Electric Company 100
Total 280
Question: 6
From the following transactions, prepare the Purchases Returns Book of Alpha & Co., a
saree dealer and post them to ledger
Date Debit Note Particulars
No.
04.01.2016 101 Returned to Goyal Mills, Surat - 5 polyester sarees @ Rs.
1,000
09.01.2016 Garg Mills, Kota - accepted the return of goods (which were
purchased for cash) from us – 5 Kota sarees @ Rs. 400
16.01.2016 102 Returned to Mittal Mills, Bangalore - 5 silk sarees @ Rs.
2,600
30.01.2016 Returned one computer (being defective) @ Rs. 35,000 to B
& Co
Accounting www.indigolearn.com 70
UNIT 5: Cash books
Question: 1
Enter the following transactions in a Simple Cash Book:
2016 Particulars Amount (Rs.)
Jan 1 Cash in hand 1,200
Jan 5 Received from Ram 300
Jan 7 Paid Rent 30
Jan 8 Sold goods for cash 300
Jan 10 Paid to Shyam 700
Jan 27 Purchased Furniture 200
Jan 31 Paid Salaries 100
Jan 31 Rent due, not yet paid, for January 100
Question: 2
Ganesh commenced business on 1st April 2017 with Rs 2,000 as capital. He had the
following cash transaction in the month of April 2017
Date Particulars Amount Date Particulars Amount
in Rs in Rs
April 1 Purchased furniture 250 April 7 Paid for petty 15
and paid cash Expenses
April 2 Purchased goods 500 April 8 Cash purchases 150
April 4 Sold goods for cash 950 April 13 Paid for labour 1000
April 5 Paid cash to Ram 560 April 13 Paid Ali & Sons 400
Mohan
April 6 He allowed discount 10 April 13 They allowed 8
discount
April 6 Received cash from 600
Krishna & Co
April 6 Allowed Discount 20
Make out the two-column Cash Book (Cash and discount column) for the month
of April,2017.
Question: 3
Enter the following transactions in Cash Book with Discount and Bank Columns. Cheques are
first treated as cash receipt:
2016 Particulars Amount in
Rs
Jan 1 Chandrika commences business with Cash 20000
Jan 3 He paid into Current A/c 19000
Jan 4 He received cheque from Kirti & Co. on account 600
Jan 7 He pays in bank Kirti & Co.’s cheque 600
Jan 10 He pays Rattan & Co. by cheque and is allowed discount Rs 20 330
Jan 12 Tripathi & Co. pays into his Bank A/c 475
Jan 15 He receives cheque from Varshi and allows him discount Rs 35 450
Jan 20 He receives cash Rs 75 and cheque Rs 100 for cash sale
Jan 25 He pays into Bank, including cheques received on 15th and 20th 1000
Jan 27 He pays by cheque for cash purchase 275
Jan 30 He pays sundry expenses in cash 50
Accounting www.indigolearn.com 71
Question: 4
Prepare a Petty Cash Book on the Imprest system from the following:
2016 Particulars Rs.
Jan
1 Received Rs.100 for petty cash
2 Paid bus fare .50
2 Paid cartage 2.50
3 Paid for Postage & Telegrams 5.00
3 Paid wages for casual labor 6.00
4 Paid for stationery 4.00
4 Paid Tonga charges 2.00
5 Paid for the repairs to chairs 15.00
5 Bus fare 1.00
5 Cartage 4.00
6 Postage and Telegrams 7.00
6 Tonga charges 3.00
6 Cartage 3.00
6 Stationery 2.00
6 Refreshments to customers 5.00
Question: 5
Enter the following transaction in Cash Bank with Discount and Bank columns. Cheques are
first treated as cash receipts
2016 Particulars Rs.
March
1 Cash in Hand 15,000
Overdraft in Bank 500
2 Cash Sales 3,000
3 Paid to Sushil Bros. by cheque 3,400
Discount received 100
5 Sales through credit card 2,800
6 Received cheque from Srijan 6,200
7 Endorsed Srijan’s cheque in favour of Adit
9 Deposit into Bank 6,800
10 Received cheque from Aviral and deposited the 3,600
same into Bank by allowing discount of Rs. 50
12 Adit informed that Srijan’s cheque is dishonored.
Now cash is received from Srijan and amount is paid
to Adit through own cheque
15 Sales through Debit Card 3,200
24 Withdrawn from Bank 1,800
28 Paid to Sanchit by cheque 3,000
30 Bank charged 1% commission on sales through
Debit/Credit Cards
Accounting www.indigolearn.com 72
UNIT 6: Subsidiary books
Question: 1
The following errors, affecting the account for the year 2015 were detected in the books of
Jain Brothers, Delhi:
(1) Sale of old Furniture Rs 150 treated as sale of goods
(2) Receipt of Rs 500 from Ram Mohan credited to Shyam Sunder
(3) Goods worth Rs 100 brought from Mohan Narain have remained unrecorded so far
(4) A return of Rs 120 from Mukesh posted to his debit
(5) A return of Rs 90 to Shyam Sunder posted as Rs 9 in his account
(6) Rent of proprietor’s residence, Rs 600 debited to rent A/c
(7) A payment of Rs 215 to Mohammad Sadiq posted to his credit as Rs125
(8) Sales Book added Rs 900 short
(9) The total of Bills Receivable Book Rs 1,500 left unposted
You are required to pass the necessary rectifying entries and show how the trails balance
would be affected by the error.
Question: 2
Write out the Journal Entries to rectify the following errors, using a Suspense Account.
i.Goods of the value of Rs.100 returned by Mr. Sharma were entered in the Sales Day
Book and posted therefrom to the credit of his account
ii.An amount of Rs.150 entered in the Sales Returns Book, has been posted to the debit of
Mr. Philip, who returned the goods
iii.A sale of Rs. 200 made to Mr. Ghanshyam was correctly entered in the Sales Day Book
but wrongly posted to the debit of Mr. Radheshyam as Rs. 20
iv.Bad Debts aggregating Rs.450 were written off during the year in the Sales ledger but
were not adjusted in the General Ledger
v.The total of “Discount Allowed” column in the Cash Book for the month
of September,2015 amounting to Rs.250 was not posted
Question: 3
Mr. Roy was unable to agree the Trial Balance last year and wrote off the difference to the
Profit and Loss Account of that year. Next Year, he appointed a Chartered Accountant who
examined the old books and found the following mistakes:
1. Purchase of a scooter was debited to conveyance account Rs.3,000.
2. Purchase account was over-cast by Rs.10,000.
3. A credit purchase of goods from Mr. P for Rs. 2,000 entered as a sale.
4. Receipt of cash from Mr. A was posted to the account of Mr. B Rs. 1,000
5. Receipt of cash from Mr. C was posted to the debit if his account Rs.500.
6. Rs.500 due by Mr. Q was omitted to be taken to the trial balance.
7. Sale of goods to Mr. R for Rs.2,000 was omitted to be recorded.
8. Amount of Rs. 2,395 of purchase was wrongly posted as Rs.2,593.
Mr. Roy used 10% depreciation on vehicles. Suggest the necessary rectification entries
Accounting www.indigolearn.com 73
Chapter 3 – Bank Reconciliation System
OBJECTIVES
The lists of topics which will be covered in this chapter are as follows:
3.2 Understand the differences between cash book and bank pass book
3.3 Reconcile the difference between the cash book and bank pass book.
3.4 Intention of preparing the bank reconciliation system and its utility.
Accounting www.indigolearn.com 74
SERVICES PROVIDED BY BANK:
In the present time nearly all of the transactions of the organizations are performed through
the banks whether it is a receipt or a payment at local, regional, national or international
level. In Fact, it is legally necessary to carry out the transactions through bank after a certain
limit.
Apart from receiving collections and making payments, the following services are also
performed by the bank:
i. Discounting of promissory notes or hundies which enables the entities to receive the
cash before the due date in exchange for a small charges.
ii. Allowing overdraft facilities to their credible customer which enables them to make
payments even when they do not have sufficient balance in their account. These
overdraft balances need to be cleared within a certain period of time.
iii. Providing loans to their customers which provide great financial assistance for their
businesses.
iv. Collecting on behalf of the customer the amount of dividends, interest on securities
etc.
v. Making Utility payments such as insurance premium, rent etc. on the due dates as
instructed by their customers.
vii. Providing security or guarantee for its customers whose credit is good, in return for a
consideration,
viii. Issuing letter of credit or traveller’s cheque which facilitates commerce as well as
travel.
The Bank Reconciliation Statement reconciles the difference between the Bank Pass Book
and Bank Balance as per the organization record eliminating any differences arising between
them.
Accounting www.indigolearn.com 75
Whenever any deposit or withdraws is made from banks, it is always recorded at two places:
-
1. Bank column of the cash book and
2. Bank statement or Bank pass book
The cash book is maintained by the customer having who has the bank account and the bank
statement is prepared by the bank.
The balance in both the accounts should be equal and opposite in nature ideally. For e.g. If
Mr. Z deposited 1,000 in his bank account, it should be recorded as Debit entry on the cash
book of Mr. Z. And the same should be recorded as Credit Entry on the Customer Account
maintained by the Bank.
In an Ideal world both the accounts should always match but it does not happen in most of
the cases due to several reasons.
There are many reasons for these differences in balances which are explained later. These
differences are reconciled by considering the various facts and figures on the two
statements.
The process of reconciling the difference and bringing the two accounts in line with each
other is known as “Reconciliation”, and the statement in which the reconciliation is done is
known as “BANK RECONCILIATION STATEMENT”.
Bank reconciliation statement acts as a tool for internal control of cash flows by detecting if
any errors, frauds and irregularities have occurred at the time of passing entries in the cash
book or in the passbook, whether intentionally or unintentionally. The important features of
bank reconciliation statement can be summarized as follow:
i) The reconciliation identifies any errors that may have been committed either in the
cash book or in the pass book.
ii) Any unreasonable delay in the clearance of cheques will be shown up by the
reconciliation
iii) A regular reconciliation discourages the accountant of the bank from embezzlement.
There have been many cases when the cashiers merely made entries in the cash book
but never deposited the cash in the bank they were able to get away with it only
because of lack of reconciliation.
iv) It helps in finding out the actual position of the bank balance.
CAUSES OF DIFFERENCES:
The differences between the balance as per the Bank Pass Book and the Bank Balance as per
the company’s cash book arise mainly due to the following reasons:
Accounting www.indigolearn.com 76
For e.g., If M has issued a cheque on 30th March, it will be recorded in the bank column
of cash book on 30th March itself, but it will be recorded by the Bank only when it is
presented for clearance giving rise to the difference.
2. Transactions:
Some transactions are carried out by the bank directly and the customer becomes
aware of it only when they perform the reconciliation.
For e.g. crediting the interest in the customer’s account directly.
3. Errors:
Any kind of Mistake or error made either by the customers or the bank results in
differences.
Accounting www.indigolearn.com 77
3 Collection of When referring the When it is collected by the
bills/cheque directly by bank pass book bank.
the bank
4 Direct payment to the When referring the When the amount is made
account holder bank pass book. in the account
6 Bank charges levied by When referring the When charges are levied
the Bank bank pass book by the bank
Accounting www.indigolearn.com 78
As can be noted above the balance as per the bank pass book is Rs.140250/- However, as per
the Bank Column of the cash book it is Rs. 140000/-. The difference between the same is
reconciled as follow:
We will reconcile the balance by arriving at the cash book balance from the pass book
balance.
PROCEDURE FOR RECONCILING THE CASH BOOK BALANCES WITH THE PASS BANK
BALANCE:
Understanding the following debit and credit balances presented in the cash book and bank
pass book is important in reconciling the differences:
Debit Balance as per Cash Book – Excess of Deposit over Withdrawals in Bank
Credit Balance as per Cash Book – Excess of Withdrawals over Deposit in Bank
Debit Balance as per Bank Pass Book – Excess of Withdrawals over Deposit in Bank
Credit Balance as per Bank Pass Book – Excess of Deposit over Withdrawals in Bank
The reconciliation can be done by using any of the four balances given in the question.
There can be 2 different kinds of reconciliation based on the details provided which can be
categorized as follow:
i) When the causes of differences are known
ii) When the causes of differences are not known
When causes of differences are known the reconciliation can be done by taking any of the
balance stated above and analyzing the causes and accordingly reconciling the transactions
to eliminate the effects of the various differences.
Accounting www.indigolearn.com 79
If the balance of the other book is more on account of the said causes then add the amount.
If the balance of the other book is less on account of the said causes then subtract the
amount.
For example, if the reconciliation is initiated with Dr. Balance as per the cash book and there
is a cheque deposited in the bank but not cleared, then on account of non-clearance of the
cheque, the Cr. balance of the pass book would be less. In this case, the amount of cheque
should be subtracted from the cash book balance to arrive at the balance as per the pass
book.
When causes of differences are not known then a comparison needs to be done of the debit
entries of cash book with the credit entries of the pass-book and vice-versa.
The entries which do not tally are the causes of difference in the balances of both the books.
Once the causes are located their effects on both the books are analyzed and then
reconciliation statement is prepared to arrive at the actual bank balance. However, one
should take care that whether opening balance of both the books tallies or not. If opening
balances are not same then the reconciliation items are divided into two categories i.e., one
relating to reconciliation of opening balance and other relating to reconciliation of closing
balance.
METHODS OF RECONCILIATION:
There are 2 methods of reconciliation:
Favorable
balance (Dr.) Unfavorable Favorable Unfavorable
as per cash balance (Cr.) as balance (Cr.) as balance (Dr.) as
Causes of differences book per cash book per pass book per pass book
Cheque directly
deposited in bank by a
customer Add Subtract Subtract Add
Accounting www.indigolearn.com 80
Income (e.g., interest
from UTI) directly
received by bank Add Subtract Subtract Add
Expenses (e.g.,
telephone bills,
Insurance charges)
directly paid by bank
on standing instructions Subtract Add Add Subtract
Bill receivable
collected directly by
bank Add Subtract Subtract Add
Accounting www.indigolearn.com 81
Interest on bank
overdraft charged Subtract Add Add Subtract
Note: The reconciliation statement can be presented as per the two methods:
i) Balance Presentation
ii) Plus-Minus Presentation
2. Only these transactions are considered for adjusting cash book, apart from this delay
in recording in the pass-book due to difference in timing (like cheque issued but not
presented for payment, cheque deposited but not collected) is taken to bank
reconciliation statement. This adjusted cash-book balance is taken to bank
reconciliation statement.
Accounting www.indigolearn.com 82
EXAMPLE 1:
On 30th September, 2018, the bank account of Mr. A, according to the bank column of the
Cash- Book, was overdrawn to the extent of Rs 10,000. On the same date the bank statement
showed a debit balance of 15,000 in favor of A.
An examination of the Cash Book and Bank Statement reveals the following:
1. A cheque for Rs.50,000 deposited on 28th September, 2018 was credited by the bank only
on 2nd October, 2018
2. A payment by cheque for Rs.20,000 has been entered twice in the Cash Book.
3. On 29th September, 2018, the bank credited an amount of Rs.75,000 received from a
customer of A, but the advice was not received by A until 2nd October, 2018.
4. Bank charges amounting to Rs. 1500 had not been entered in the Cash Book.
6. A bill of exchange for Rs.90,000 was discounted by X with his bank. This bill was dishonored
on 28th September, 2018 but no entry had been made in the books of A.
7. Cheques issued up to 30th September, 2018 but not presented for payment up to that date
totaled Rs.100,000.
1. Present appropriate rectifications in the Cash Book of Mr. A to arrive at the correct
balance as on 30th September 2018 and
2. Bank Reconciliation Statement
Accounting www.indigolearn.com 83
EXAMPLE 2:
From the following information (as on 31.3.2018), prepare a bank reconciliation statement
after making necessary amendments in the cash book
Bank charges debited by bank but not recorded in the cash-book 2,500
Cash sales wrongly recorded in the Bank column of the cash-book 2,00,000
Also show the bank balance that will appear in the trial balance as on 31.3.2018.
Accounting www.indigolearn.com 84
The balance of Rs. 499,500/- will appear on the trial balance of 31st March 2018.
Accounting www.indigolearn.com 85
Questions:
From the following information (as on 31.3.2018), prepare a bank reconciliation statement
after making necessary amendments in the cash book
Bank charges debited by bank but not recorded in the cash-book 1,000
Cash sales wrongly recorded in the Bank column of the cash-book 1,50,000
Also show the bank balance that will appear in the trial balance as on 31.3.2018.
Accounting www.indigolearn.com 86
Illustrations
Question: 1
From the following particulars, prepare a Bank Reconciliation Statement for Jindal offset
Ltd.
(1) Balance as per cash book is Rs. 2,40,000
(2) Cheques issued but not presented in the bank amounts to Rs. 1,36,000.
(3) Cheques deposited in bank but not yet cleared amounts to Rs. 90,000.
(4) Bank charges amounts to Rs. 300.
(5) Interest credited by bank amounts to Rs. 1,250.
(6) The balance as per passbook is Rs.2,86,950
Question: 2
On 31st March 2017, the Bank Pass Book of Namrata showed a balance of Rs.1,50,000 to her
credit while balance as per cash book was Rs.1,12,050. On scrutiny of the two books, she
ascertained the following causes of difference:
i.She has issued cheques amounting to Rs. 80,000 out of which only Rs. 32,000 were
presented for payment.
ii.She received a cheque of Rs.5,000 which she recorded in her cash book but forgot to
deposit in the bank.
iii.A cheque of Rs.22,000 deposited by her has not been cleared yet.
iv.Mr. Gupta deposited an amount of Rs.15,700 in her bank which has not been recorded
by her in Cash Book yet.
v.Bank has credited an interest of Rs. 1,500 while charging Rs. 250 as bank charges.
Prepare a bank reconciliation statement.
Question: 3
From the following particulars ascertain the balance that would appear in the Bank Pass
Book of A on 31st December 2017.
1. The bank overdraft as per Cash Book on 31st December 2017 Rs. 6,340.
2. Interest on overdraft for 6 months ending 31st December 2017 Rs. 160 is entered
in Pass Book.
3. Bank charges of Rs. 400 are debited in the Pass Book only.
4. Cheques issued but not cashed prior to 31st December,2017, amounted to
Rs.11,68,000.
5. Cheques paid into bank but not cleared before 31st, December 2017 were for Rs.
22,17,000.
6. Interest on investments collected by the bank and credited in the Pass
Book Rs.12,00,000.
Question: 4
On 30th September 2017, the bank account of X, according to the bank column of the Cash-
Book, was over drawn to the extent of Rs. 4,062. On the same date the bank statement
showed a debit balance of Rs.20,758 in favour of X. An examination of the Cash Book and
Bank Statement reveals the following:
1. A cheque for Rs.13,14,000 deposited on 29th September 2017 was credited by the
bank only on 3rd October 2017
2. A payment by cheque for Rs.16,000 has been entered twice in the Cash Book.
Accounting www.indigolearn.com 87
3. On 29th September 2017, the bank credited an amount of Rs.1,17,400 received from
a customer of X, but the advice was not received by X until 1st October 2017.
4. Bank charges amounting to Rs.580 had not been entered in the Cash Book.
5. On 6th September 2017, the bank credited Rs.20,000 to X in error.
6. A bill of exchange for Rs.1,40,000 was discounted by X with his bank. This bill was
dishonoured on 28th September 2017, but no entry had been made in the books of X.
7. Cheques issued up to 30th September 2017 but not presented for payment up to that
date totalled Rs.13,26,000.
You are required:
a. to show the appropriate rectifications required in the cash Book of X, to arrive at
the correct balance on 30th September 2017. And
b. to prepare a bank reconciliation statement as on that date.
Question: 5
On 30th December 2017 the bank column of A. Philip’s cash book showed a debit balance
of Rs. 4,610. On examination of the cash book and bank statement you find that:
1. Cheques amounting to Rs. 6,30,000 which were issued to trade payables and entered
in the cash book before 30th December 2017 were not presented for payment until that
date.
2. Cheques amounting to Rs. 2,50,000 had been recorded in the cash book as having
been paid into the bank on 30th December 2017 but were entered in the bank
statement on1st January 2018.
3. A cheque for Rs. 73,000 had been dishonoured prior to 30th December 2017, but no
record of this fact appeared in the cash book.
4. A dividend of Rs. 3,80,000, paid direct to the bank had not been recorded in the
cash book.
5. Bank interest and charges amounting to Rs.4,200 had been charged in the bank
statement but not entered in the cash book.
6. No entry had been made in the cash book for a trade subscription of Rs. 10,000 paid
vide banker’s order in November 2017.
7. A cheque for Rs.27,000 drawn by B. Philip had been charged to A. Philip’s bank
account by mistake in December 2017.
You are required:
a. to make appropriate adjustments in the cash book bringing down the correct
balance, and
b. to prepare a statement reconciling the adjusted balance in the cash book with the
balance shown in the bank statement.
Question: 6
From the following information, prepare a Bank reconciliation statement as at 31st
December 2017 for Messrs New Steel Limited:
(1) Bank overdraft as per Cash Book on 31st December, 2017 22,45,900
th
(2) Interest debited by Bank on 26 December 2017, but no advice 2,78,700
received
(3) Cheque issued before 31st December 2017 but not yet presented to 6,60,000
Bank
(4) Transport subsidy received from the State Government directly by
the Bank but not advised to the company 14,25,000
(5) Draft deposited in the Bank, but not credited till 13,50,000
31st December, 2017
Accounting www.indigolearn.com 88
(6) Bills for collection credited by the Bank till 31st December 2017 but
no advice received by the company 8,36,000
(7) Amount wrongly debited to company account by the Bank, for which
no details are available 7,40,000
Question: 7
The Cash Book of Mr. Gadbadwala shows Rs.8,36,400 as the balance at Bank as on 31st
December 2017, but you find that it does not agree with the balance as per the Bank Pass
Book. On scrutiny, you find the following discrepancies:
1. On 15th December 2017 the payment side of the Cash Book was undercast by
Rs.10,000.
2. A cheque for Rs.1,31,000 issued on 25th December 2017 was not taken in the bank
column.
3. One deposit of Rs.1,50,000 was recorded in the Cash Book as if there is no bank
column therein.
4. On 18th December 2017 the debit balance of Rs.15,260 as on the previous day, was
brought forward as credit balance.
5. Of the total cheques amounting to Rs.11,514 drawn in the last week of December
2017, cheques aggregating Rs.7,815 were encashed in December.
6. Dividends of Rs.25,000 collected by the Bank and subscription of Rs.1,000 paid by it
were not recorded in the Cash Book.
7. One out-going Cheque of Rs.3,50,000 was recorded twice in the Cash Book.
Prepare a Reconciliation Statement
Question: 8
When Nikki & Co. received a Bank Statement showing a favourable balance of Rs.10,39,200
for the period ended on 30th June 2017, this did not agree with the balance in the cash
book.
An examination of the Cash Book and Bank Statement disclosed the following:
1. A deposit of Rs.3,09,200 paid on 29th June 2017 had not been credited by the Bank
until 1st July 2017.
2. On 30th March 2017 the company had entered into hire purchase agreement to pay
by bank order a sum of Rs.3,00,000 on the 10th of each month, commencing from April
2017. No entries had been made in Cash Book.
3. A customer of the firm, who received a cash discount of 4% on his account of
Rs.4,00,000 paid the firm a cheque on 12th June. The cashier erroneously entered the
gross amount in the bank column of the Cash Book.
4. Bank charges amounting to Rs.3,000 had not been entered in Cash Book.
5. On 28th June, a customer of the company directly deposited the amount in the bank
Rs. 4,00,000, but no entry had been made in the Cash Book.
6. Rs.11,200 paid into the bank had been entered twice in the Cash Book.
7. A debit of Rs. 11,00,000 appeared in the Bank Statement for an unpaid cheque,
which had been returned marked ‘out of date’. The cheque had been re-dated by the
customer and paid into Bank again on 5th July 2017.
Prepare Bank Reconciliation Statement on 30 June 2017.
Accounting www.indigolearn.com 89
Chapter 4 – Inventories
OBJECTIVES
The lists of topics which will be covered in this chapter are as follows:
- FIFO
- LIFO
- Average Price
- Weighted Average Price
- Specific Identification
- Adjusted Selling price
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Accounting www.indigolearn.com 90
MEANING OF INVENTORY:
Inventory can be defined as an asset which is held for sale in the ordinary course of business,
or in the process of production, or for consumption in the production of goods or services for
sale, including maintenance supplies and consumables other than machinery spares,
servicing equipment and standby equipment.
Different types of businesses have different kinds of inventories. The goods which are
inventory for one business can be a fixed asset for other business.
For Example: For a business dealing in computers, the computers will form a part of inventory
but for a business providing professional consulting services computers would form a part of
the Fixed Assets.
For Example: For a business dealing in computers, the computers will form a part of inventory
but the computer which is used by the entity to maintain their accounting and other records
will form a part of the Fixed Assets and not inventory.
Every business entity needs to ascertain the closing balance of Inventory which comprise of
Inventory of raw material, work-in-progress, finished goods and other consumable items
which is reported in the financial statements by crediting the value of closing Inventory to
the Trading Account and the other effect is to report it on the asset side of the Balance
Sheet.
INVENTORY VALUATION:
Inventories are reported in the balance sheet until the revenue related to them is
recognized.
Most of the times inventory forms a significant component of the entities current assets
especially in case of trading and manufacturing enterprises. Proper valuation of inventory is
important to present the true and fair financial statements. The significance of inventory
valuation arises due to various reasons as explained in the following points:
1. Determination of Income:
The gross profit of the entity can be determined with the correct value of the Cost
of Goods Sold which is computed as follow:
If closing inventory is overstated, net income for the current accounting period will be
overstated and the net income for the next accounting period will be understated.
Accounting www.indigolearn.com 91
If closing inventory is understated, net income for the current accounting period will be
understated and the net income for the next accounting period will be overstated.
3. Liquidity Analysis:
Since inventories form a part of the current assets they are used in the computation of
the liquidity position of the entity.
4. Statutory Compliances:
Schedule III to the Companies Act, 2013 requires valuation of each class of goods i.e.
raw material, work-in-progress and finished goods under broad head to be disclosed in
the financial statements.
As per the conservatism principle of accounting, Inventories are always valued at the
“LOWER OF COST OR NET REALIZABLE VALUE”.
The following expenses are not included in computing the costs of inventories:
1. Abnormal Losses or Expenses.
2. Storage costs, unless it is necessary in the production process.
3. Administrative overheads that do not contribute to bringing the inventories to their
present location and condition.
4. Selling and distribution costs
This is the price expected to be realized by selling the inventories in the ordinary course of
business less the estimated costs of completion necessary to make the sale.
Accounting www.indigolearn.com 92
PERIODIC INVENTORY SYSTEM:
Under the Periodic inventory system, the inventory is determined by performing an actual
physical count of the inventory items on hand at a particular date on which inventory is
valued.
The system is also called physical inventory system because of the method of physically
counting the units.
Periodic inventory system is simple and less expensive than the perpetual system. Under this
method, inventory account is adjusted at the end of the accounting period to determine cost
of goods sold.
There are some limitations in using this system which are as stated below:
i) Inventory values are needed more often and not just at the year end. Thereby
making this system more expensive.
ii) Physical count of goods can be conducted properly on by closure of normal
operations of business.
iii) It is not possible to identify loss of goods due to pilferage, damage or even fraud.
iv) Inventory control is not possible.
v) Books of accounts does not reflect inventory in hand on real time basis due to
which it is difficult to plan operations e.g. how much or when to
order/manufacture.
This system is suitable for small enterprises where is easy to control physical inventory. It is
not considered suitable for medium or large enterprises.
Under the Perpetual inventory system, the inventory balances are recorded after each
transaction involving inventory.
Details about the cost of goods sold and Details about cost of goods sold and
ending inventory is available on a ending inventory is available on real
particular date. time and continuous basis.
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Cost of Goods Sold is computed as Ending Inventory is computed as
balancing figure after determining the balancing figure after determining the
Inventory balance Cost of Goods Sold
HISTORICAL METHODS:
Oct 1 1000 10
Oct 5 500 12
Oct 15 200 15
Oct 25 500 13
2200 Units
The ending inventory consists of 650 units. Compute the cost of the ending inventory for
October using FIFO Method:
Accounting www.indigolearn.com 94
The Closing Inventory of 650 units would consist of 500 units purchased on Oct 25 and 150
units purchased on Oct 15, the value of the same is as computed below:
Particulars Amount
TOTAL 8750
Thus, the value of inventory using the FIFO Method has been computed.
Oct 1 1000 10
Oct 5 500 12
Oct 15 200 15
Oct 25 500 13
2200 Units
ISSUES
Date Quantity (In Units)
Oct 10 900
Oct 23 700
Oct 28 200
1800 Units
The ending inventory consists of 400 units. Compute the cost of the ending inventory for
October using LIFO Method:
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Under the LIFO Method the following will be the stock ledger of the entity:
Thus, as can be observed from the above computations that the value of ending inventory
using the LIFO Method for 400 units is Rs 4900/-.
The simple average price per unit of the output is computed by the following
formula:
Different Prices of all Purchases
Total Number of purchases
Oct 1 1000 10
Oct 5 500 12
Oct 15 200 15
Oct 25 500 13
2200 Units
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The trader has 500 units in its ending inventory. Compute the Cost of the inventory using the
Simple Average Method:
The simple average price per unit of the product is computed as below:
The ending inventory of 500 units will be computed at Rs.12.5/- per unit. Therefore, the
value of the ending inventory is Rs.6250/-
The weighted average price per unit of the output is computed by the following
formula:
Total Cost of Goods Available for Sale during the period
Total Number of units available for sale during the period
Ending Inventory = No. of units in inventory X Weighted Average price per unit
Cost of Goods Sold = No. of units in sold X Weighted Average price per unit
Oct 1 1000 10
Oct 5 500 12
Oct 15 200 15
Oct 25 500 13
2200 Units
ISSUES
Date Quantity (In Units)
Oct 10 900
Oct 23 700
Oct 28 200
1800 Units
Accounting www.indigolearn.com 97
The ending inventory consists of 400 units. Compute the cost of the ending inventory for
October using LIFO Method:
NON-HISTORICAL METHODS:
The cost of the inventory is determined by reducing the percentage of gross margins from
the sales value of the inventory.
Cost of Purchases:
Goods purchased Rs.2,00,000/-
Packaging and transportation charges Rs.10,000/-
Rs.2,10,000/-
Based on the past experiences a standard cost is determined and the inventory is valued
on that price per unit.
INVENTORIES TAKING:
Ideally inventories need to be counted physically on the last day of the accounting period to
determine the correct balance of the closing inventory. However, it is not possible in most
of the cases and the same is done near the balance sheet date but not exactly on it.
For the year-end inventory valuation, physical inventory taking is done during the last week
of the financial year or during the first week of next financial year. In such a case, the actual
value of the inventory needs to be adjusted to relate it to the end of the year concerned.
For doing so, the entity needs to consider the goods that have come in either by way of
purchases or sales returns and those that have gone out either by way of sales or purchase
returns during the time between the close of the year and the date of actual inventory
taking. It is important to note that all the adjustment must be on the basis of cost. If
inventory taking is finished on 5th April, whereas accounting year ends on 31st March
purchases and sales between 31st March and 5th April are then separately adjusted.
Suppose a company that closes its books on 31st March, carried out the inventory taking on
the 5th of April and actual inventory was of Rs. 5,00,000 on 5th April, during the period March
31 to April 5 purchases were Rs. 1,00,000 and sales were Rs. 2,00,000, the mark up being
20% on cost. The inventory on 31st of March is computed below:
Accounting www.indigolearn.com 99
Questions:
Question 1:
A trader has the following details of purchases and issue of goods in which he deals
PURCHASES
Date Quantity (In Units) Price Per Unit
Oct 1 2000 25
Oct 5 1000 22
Oct 15 700 20
Oct 25 500 30
4200 Units
ISSUES
Date Quantity (In Units)
Oct 10 1500
Oct 23 1300
Oct 28 400
3200 Units
The ending inventory consists of 1000 units. Compute the cost of the ending inventory for
October using the following methods:
1. FIFO
2. LIFO
3. Simple Average
4. Weighted Average
Question 2:
A trader has the following records available for the month of October 2018.
Determine the adjusted selling price of the inventory using the adjusted selling price
method.
Question: 2
M/s X, Y and Z are in retail business, following information are obtained from their records
for the year ended 31st March 2016-
Particulars Amount (Rs.)
Goods received from suppliers 15,75,500
(subject to trade discount and taxes)
Trade discount 3% and sales tax 11%
Packaging and transportation charges 87,500
Sales during the year 22,45,500
Sales price of closing inventories 2,35,000
Find out the historical cost of inventories using adjusted selling price method
Question: 3
From the following information, calculate the historical cost of inventories using adjusted
selling price method:
Particulars Amount (Rs.)
Sales during the year 2,00,000
Cost of Purchases 2,00,000
Opening Inventory Nil
Closing Inventory at Selling Price 50,000
Question: 4
From the following ascertain the value of Inventories as on 31st March 2017
Particulars Amount (Rs.)
Inventory as on 01.04.2016 1,42,500
Purchases 7,62,500
Manufacturing Expenses 1,50,000
Selling Expenses 60,500
Administrative Expenses 30,000
Financial Charges 21,500
Sales 12,45,000
At the time of valuing inventory as on 31st March 2016, a sum of Rs. 17,500 was written
off on an item, which was originally purchased for Rs. 50,000 and was sold during the year
for Rs. 45,000. Barring the transaction relating to this item, the gross profit earned during
the year was 20 % on sales.
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Question: 5
A trader prepared his accounts on 31st March, each year. Due to some unavoidable reasons,
no inventory taking could be possible till 15th April 2017. On which date the total cost of
goods in his go down came to Rs. 5,00,000. The following facts were established between
31st March and 15th April 2017.
(i) Sales Rs. 4,10,000 (including cash sales Rs. 1,00,000)
(ii) Purchases Rs. 50,340 (including cash purchases Rs. 19,900)
(iii) Sales Return Rs. 10,000
Goods are sold by the trader at a profit of 20% on sales
You are required to ascertain the value of inventory as on 31st March 2017.
Question: 6
1. Inventory taking for the year ended 31st March 2016 was completed by 10th April
2016
2. The Valuation of which showed an Inventory figure of Rs. 16,75,000 at cost as on the
completion date
3. After the end of the accounting year and till the date of completion of inventory
taking
4. Sales for the next year were made for Rs. 68,750, Profit Margin being 33.33 % on
Cost
5. Purchases for the next year included in the inventory amounted to Rs. 90,000 at cost
less trade discount 10%
6. During this period, goods were added to inventory at the mark up price of Rs. 3,000
in respect of sales returns
7. After inventory taking it was found that there were certain very old slow-moving
items costing Rs. 11,250, which should be taken at Rs. 5,250 to ensure disposal to an
interested customer
8. Due to heavy flood, certain goods costing Rs. 15,500 were received from the supplier
beyond the delivery date of customer
9. As a result, the customer refused to take delivery and net realizable value of the
goods was estimated to be Rs. 12,500 on 31st March
Compute the value of inventory for inclusion in the final accounts for the year ended 30th
March 2016.
OBJECTIVES
The lists of topics which will be covered in this chapter are as follows:
Concept of Depreciation
Fixed Assets includes Property, plant and equipment that are tangible and which are
used in the production or supply of goods or services or for administrative purposes
and are expected to be used during more than a period of one accounting year i.e.
more than twelve months.
Value of such assets decreases with passage of time due to following reasons.
To arrive at the correct income for the current accounting period it is important to
account for value of portion of property, plant and equipment utilized for generating
revenue during that period. The portion of Property, Plant & Equipment allocated to
an accounting year is called depreciation.
As per Schedule II under the Companies Act, 2013, Depreciation is the systematic
allocation of the depreciable amount of an asset over its useful life. The depreciable
amount of an asset is the cost of an asset or other amount substituted for cost, less
its residual value. The useful life of an asset is the period over which an asset is
expected to be available for use by an entity, or the number of production or similar
units expected to be obtained from the asset by the entity.
iii. Residual value of the asset at the end of the of its estimated useful life
Following factors are taken into consideration while computing the depreciation.
iii. Estimated scrap value at the end of useful life of the asset.
Cost of the Fixed Asset (i.e. Property, Plant and Equipment) comprises of the
following:
i. The purchase price including import duties and taxes and deducting the trade
discounts and rebates.
ii. Any cost incurred to bring the asset to its present condition to put it to its
intended usage
iii. The costs of preparing the site on which an asset is to be located.
Thus, all the expenses which are necessary for asset to bring it in condition and
location of desired used will become part of cost of the asset.
There are several methods of computing depreciation, in this chapter we are going
to focus on 3 methods which are as follow:
i. Straight-Line Method
ii. Diminishing Balance Method
iii. Sum of Years of Digits Method
iv. Annuity Method
v. Sinking Fund Method
vi. Machine Hour Method
vii. Units of Production Method
viii. Depletion Method
1. Straight-Line Method:
This method is also known as Fixed Installment Method. According to this method, an
equal amount of depreciation is written off every year so as to reduce the cost of the
asset to nil or its salvage value at the end of its useful life.
The advantage of this method is that it is the easiest methods to apply and gives
accurate results in case of leases and also in case of plant and machinery are assumed
to have a constant usage across years.
The formula to compute the depreciation and the rate of depreciation under straight
line method is as follow:
This method is also known as Reducing Balance Method. According to this method, a
Fixed Percentage of depreciation is computed on the Asset Value every year so as to
reduce the asset value to Nil or it’s Salvage Value at the end of its useful life.
Under this method, the depreciation amount decreases from year to year due to
which the earlier years suffer incur a higher depreciation expense as compared to
the later years.
Under this method, the value of asset can never be completely extinguished, which
happens in the earlier explained Straight Line Method. This method assumes that the
cost of repairs will increase with the passage of time. Therefore, depreciation is
higher in earlier years and lower in the later years when the cost of the asset is
expected to be lower in the later years.
There are two approaches to account for depreciation. The entity can either opt to
have a provision for depreciation account and credit the annual depreciation in that
provision account, thereby the asset account remains at the same historical cost or
else it can directly credit the depreciation amount to the asset account and reduce
the asset balance on an annual basis.
ABC Co. acquired a equipment on 1st July, 2016 at a cost of Rs.9,00,000 and spent
Rs.1,00,000 on its installation. The books are closed on 31st December every year.
Prepare the Machinery Account and Depreciation Account for 2016 & 2017 using:
i. Straight Line Method @ 10% Depreciation per annum
ii. Diminishing Balance Method @ 15% Depreciation per annum
Example:
ABC Co. acquired a equipment on 1st January, 2010 at a cost of Rs.20,00,000 which
had a life of 10 years and scrap value of Rs2,40,000/- . The books are closed on 31st
December every year.
Prepare the Machinery Account and Depreciation Account for 2015 using Sum of
Digits method of depreciation:
4. Annuity Method:
Under this method of depreciation, the interest which is lost on capital invested on
the asset and is written off. It is based on the assumption that the amount invested
in acquiring the asset, if would have been invested elsewhere, would have earned
interest which must be recorded as part of the cost of asset.
This method is suitable for writing off the amounts paid for long leases which involve
a considerable capital outlay. It is not practicable to adopt this method for writing
off depreciation of plant and machinery on account of frequent changes in the value
of such assets which would necessitate the recalculation of the amount of
depreciation to be written off annually.
When a large sum of money is required for replacement of the fixed asset at the end
of its effective life, organizations invest the amount equal to depreciation and the
amount earned on that investment is re-invested. The account in which the amount
is kept aside is referred to as Sinking Fund Account.
When the asset is due for replacement, the securities are sold and the new asset is
purchased with the proceeds of their sale. The book value of the old asset, at the
time, is transferred to the Sinking Fund Account. Any amount realized on sale of the
old asset, as well as the profit or loss on sale of securities is transferred to the Sinking
Fund Account and it is closed off by transfer of the balance of the Profit and Loss
Account or General Reserve.
On 1st April, 2013, ABC & Co. purchased the Equipment for Rs.20,00,000. The life of
the asset was only 3 years and would expire on 31st March, 2016.
ABC & Co. decided to set up a sinking fund.
2014 31st March: A contribution from profits of Rs. 6,40,000 was made and this sum
was invested.
2014 5th Oct.: Investments which originally costed Rs. 2,20,000 were sold for Rs.
2,40,000 and the proceeds of sale were re-invested.
2015 31st March: A contribution from profits of Rs. 6,40,000 was made; interest on
investments of Rs. 32,000 was received and these amounts were reinvested.
2015 15th September: Investments which originally costed Rs. 4,20,000 were sold at
a profit of Rs. 40,000 and proceeds of sale were re-invested.
2016 31st March: Interest on investments Rs. 96,000 was received which was not
invested. All existing investments were sold for Rs. 13,20,000. A contribution from
profit of an amount required to make up the sinking fund to Rs. 20,00,000 was made
and this amount was not invested.
Prepare Sinking Fund and Sinking Fund Investment Account for the years 2013-14,
2014-15, 2015-16.
Under this method, Depreciation is calculated on the basis of hours that the
concerned machine worked. The machine hour rate of the depreciation is calculated
after estimating the total number of hours that machine would work during its whole
life.
Example:
A machine was purchased for Rs. 20,00,000 having an estimated total working of
30,000 hours. The scrap value is expected to be Rs. 4,00,000 and anticipated machine
hours usage is as follows :
Year
1 – 2 3,000 hours per year
3 – 5 4,000 hours per year
6 – 7 6,000 hours per year
Under this method depreciation of the asset is determined by comparing the annual
production with the estimated total production. The amount of depreciation is
computed by the use of following method:
Depreciation for the period = Depreciable Amount X Production during the period
Estimated total production The
Example:
A machine is purchased for Rs. 10,00,000. Its estimated useful life is 8 years. The
machine is expected to produce 10 lakh units during its life time. Expected
distribution pattern of production is as follows:
Determine the value of depreciation for each year using production units method.
Year Annual
Depreciation
1-2 100000/1000000 X 1000000 = Rs.100000/- Per Year
3-5 150000/1000000 X 1000000 = Rs.150000/- Per Year
6-7 125000/1000000 X 1000000 = Rs.125000/- Per Year
3. Depletion Method:
This method is used in industries where only a certain quantity of product is available.
This is used in case of mines, quarries etc. The depreciation rate is calculated by
dividing the cost of the asset by the estimated quantity of product likely to be
available. Annual depreciation will be the quantity extracted multiplied by the rate
per unit.
Example:
ABC & Co. took a quarry on 1-1-2015 for Rs. 1,00,00,000. As per technical estimate
the total quantity of mineral deposit is 5,000 tonnes. Depreciation was charged on
the basis of depletion method.
Year Annual
Depreciation
2015 1000/5000 X 10000000 = Rs.2000000/-
2016 2000/5000 X 10000000 = Rs.4000000/-
2017 2000/5000 X 10000000 = Rs.4000000/-
Whenever any depreciable asset is sold during the year, depreciation is charged on it
for the period it has been used in the sale year. The written down value after charging
such depreciation is used for calculating the profit or loss on the sale of that asset.
The resulting profit or loss on sale of the asset is ultimately transferred to profit and
loss account.
The book value of the asset as on 1st April, 2017 is Rs.25,00,000. Depreciation is
charged on the asset @20%. On 1st October 2017, the asset is sold for Rs.10,00,000.
In such a situation, profit or loss on the sale will be calculated as follows:
Particulars Amount
Book Value as on 1stApril 2017 2500000
Less: Depreciation for 6 months @ 15% (1st April to 1st October) 187500
Written Down Value as on 1st October 2017 2312500
Less: Sales Proceeds as on 1st October 2017 1000000
Loss on Sale of the Asset 1312500
If there has been a significant change in the expected consumption pattern of the
asset the method should be changed to reflect the changed pattern.
Example:
The company charges depreciation on straight line method for the first four years and
thereafter decides to adopt written down value method by charging depreciation @
15%. (Calculated based on useful life).
Compute the depreciation for the 5th year. Depreciation already charged for the first
4 years as per straight line method is Rs. 8,00,000. Therefore, WDV for 5 th year is Rs.
3,00,000 Therefore in the profit and loss account of the 5th year, the depreciation of
Rs. 3,00,000 (25% of Rs. 12,00,000) should be debited.
The residual value and the useful life of an asset needs to be reviewed every financial
year-end and, if the company expects a change in an estimated useful life of the
asset in accordance with Accounting Standards then the unamortized depreciable
amount needs to be charged over the remaining estimated useful life of the asset.
Example:
Particular Amount
s
Depreciation per year = Rs. 10,00,000 / 10 Rs.1000000/-
Depreciation on SLM charged for five years = Rs. 100,000 x 5 years = Rs.500000/-
Rs.500000
Book value of the asset at the end of fifth year = Rs. 10,00,000 – Rs. Rs.500000/-
5,00,000
Remaining useful life as per previous estimate 5 Years
Remaining useful life as per revised estimate 3 Years
Depreciation from the sixth year onwards = Rs.5,00,000 / 3 Rs.166667/-
As a Result of Re-evaluation of the fixed asset there can either be an increase in the
value of the Fixed Asset or a Decrease in the Fixed Asset.
If there is an increase in the fixed asset, in case revaluation is done first time then
the increase is credited directly to revaluation surplus. In case of Subsequent
Reevaluation, it is recognized in the Statement of Profit and loss to the extent it was
initially reduced and it also decreases the asset previously recognized in the
Statement of profit and loss.
If there is an increase in the fixed asset, Charged to the Statement of profit and loss
and if the subsequent revaluation decreases the asset value when it was increases
during the previous revaluation then the Decrease should be debited directly to
owners' interests under the heading of Revaluation surplus to the extent of any credit
balance existing in the Revaluation surplus in respect of that asset.
Particular Amount
s
Depreciation per year for the 3 years = Rs. 15,00,000 / 10 X 3 Rs.450000/-
Rs. Rs. Rs.1050000/-
Rs. Rs. Rs.1250000/-
Remaining useful life as per previous estimate 6 Years
Remaining useful life as per revised estimate 8 Years
Depreciation from the fifth year onwards = Rs.12,50,000 / 8 Rs.156250/-
Expenditure incurred for repairs, renewals and maintenance on Fixed Assets varies
over the life of the asset. Therefore, to equalize the charge of repairs and renewals,
sometimes a Provision for Repairs and Renewals Account is opened.
Total of such expenses that may be incurred over the working life is estimated
beforehand and the Average amount of the expenditure is debited to Profit and Loss
Account and credited to Provision for Repairs and Renewals Account irrespective of
actual expenses incurred.
Annually the Provision for Repairs and Renewals Account is debited and Repairs
Account is credited for actual expenses incurred. The balance in provision for Repairs
and Renewals Account is carried forward and in the end or on sale of the asset, the
account is closed by transfer to the Asset Account for any balance left.
Example:
The following particulars are available with regard to company’s Fixed Assets:
Balance in Prov. for Repairs and Renewals Account as on 31.3.2015 Rs. 10,00,000
Prepare the Provision for Repairs and Renewals Account for the years 2015-2016 and
2016-2017.
ABC Co. acquired a equipment on 1st July, 2016 at a cost of Rs.20,00,000 and
spent Rs.5,00,000 on its installation. The books are closed on 31st December
every year.
Prepare the Machinery Account and Depreciation Account for 2016 & 2017 using:
ii. Straight Line Method @ 20% Depreciation per annum
iii. Diminishing Balance Method @ 25% Depreciation per annum
Question 2:
On 1st April, 2013, ABC & Co. purchased the Equipment for Rs.10,00,000. The
life of the asset was only 3 years and would expire on 31st March, 2016.
ABC & Co. decided to set up a sinking fund.
2014 31st March: A contribution from profits of Rs. 5,00,000 was made and
this sum was invested.
2014 5th Oct.: Investments which originally costed Rs. 1,00,000 were sold for
Rs. 1,50,000 and the proceeds of sale were re-invested.
2015 31st March: A contribution from profits of Rs. 7,00,000 was made; interest
on investments of Rs. 50,000 was received and these amounts were reinvested.
2015 15th September: Investments which originally costed Rs. 6,00,000 were
sold at a profit of Rs. 50,000 and proceeds of sale were re-invested.
2016 31st March: Interest on investments Rs. 100,000 was received which was not
invested. All existing investments were sold for Rs. 15,40,000. A contribution from
profit of an amount required to make up the sinking fund to Rs. 25,00,000 was
made and this amount was not invested.
Prepare Sinking Fund and Sinking Fund Investment Account for the years 2013-
14, 2014-15, 2015-16.
Question: 2
Jain Bros. acquired a machine on 1st July,2015 at a cost of Rs. 14,00,000 and spent Rs. 1,00,000
on its installation. The firm writes off depreciation at 10% p.a. every year. The books are closed
on 31st December every year.
Show the Machinery Account on diminishing balance method for the year 2015 and 2016.
Question: 3
M/s Akash purchased a machine for Rs. 10,00,000. Estimated useful life and scrap value were 10
years and Rs. 1,20,000 respectively. The machine was put to use on 1.1.2010.
Show Machinery Account and Depreciation Account in their books for 2015 by using sum of years
digits method.
Question: 4
A machine was purchased for Rs. 30,00,000 having an estimated total working of 24,000 hours.
The scrap value is expected to be Rs. 2,00,000 and anticipated pattern of distribution of
effective hours is as follows
Year Particulars
1–3 3,000 hours per year
4–6 2,600 hours per year
7 – 10 1,800 hours per year
Determine Annual Depreciation under Machine Hour Rate Method.
Question:5
A machine is purchased for Rs. 20,00,000. Its estimated useful life is 10 years with a residual
value of Rs. 2,00,000.
The machine is expected to produce 1.5 lakh units during its lifetime. Expected distribution
pattern of production is as follows:
Year Units of Production per year
1–3 20,000 units
4–7 15,000 units
8 – 10 10,000 units
Determine the value of depreciation for each year using production units method.
Question: 7
A firm purchased on 1st January,2015 certain machinery for Rs. 5,82,000 and spent Rs. 18,000
on its erection. On July 1,2015 another machinery for Rs. 2,00,000 was acquired. On 1st
July,2016 the machinery purchased on 1st January,2015 having become obsolete was auctioned
for Rs. 3,86,000 and on the same date fresh machinery was purchased at a cost of Rs. 4,00,000.
Depreciation was provided for annually on 31st December at the rate of 10 per cent p.a. on
written down value
Prepare Machinery Account.
Question: 8
M/s Anshul commenced business on 1st January 2011, when they purchased plant and equipment
for Rs. 7,00,000. They adopted a policy of charging depreciation at 15% per annum on
diminishing balance basis and over the years, their purchases of plant have been:
Date Amount (Rs.)
01-01-2012 1,50,000
01-01-2015 2,00,000
On 1-1-2015 it was decided to change the method and rate of depreciation to straight line basis.
On this date remaining useful life was assessed as 6 years for all the assets purchased before
1.1.2015 and 10 years for the asset purchased on 1.1.2015 with no scrap value.
Calculate the difference in depreciation to be adjusted in the Plant and Equipment Account for
the year ending 31st December,2015.
Question: 9
A Machine costing Rs. 6,00,000 is depreciated on straight line basis, assuming 10 years working
life and Nil residual value, for three years. The estimate of remaining useful life after third year
was reassessed at 5 years.
Calculate depreciation for the fourth year
Question: 10
The following particulars are available from the books of a public company having a large fleet
of vehicles:
Particulars Amount (Rs.)
Balance in Provision for Repairs and Renewals Account as on
31.03.2016 11,50,000
Actual repairs charged/incurred during the year ended
31.03.2016 7,50,000
Question: 11
On 1st April,2013, Z Limited purchased the lease of property for Rs. 10,00,000. The lease would
expire on 31st March,2016. Z Ltd. decided to set up a sinking fund. The Sinking Fund was to be
credited (or debited) with an annual contribution from profit, the interest on the investments
and any profits (or losses) made on the realisation of the sinking fund investments. The sinking
fund was to be represented by specific investment, and any sums made available to the sinking
fund were to be immediately invested, except at the termination of the fund.
During the three years following transactions took place:
• 31st March,2014 A contribution from profits of Rs. 3,20,000 was made and this sum was
invested
• 13th Oct,2014 Investments which originally costed Rs. 1,10,000 were sold for Rs. 1,20,000
and the proceeds of sale were re-invested
• 31st March,2015 A contribution from profits of Rs. 3,20,000 was made; interest on
investments of Rs. 16,000 was received and these amounts were reinvested
• 9th August,2015 Investments which originally costed Rs. 2,10,000 were sold at a profit of
Rs. 20,000 and proceeds of sale were re-invested
• 31st March,2016 Interest on investments Rs. 48,000 was received which was not invested
• All existing investments were sold for Rs. 6,60,000
• A contribution from profit of an amount required to make up the sinking fund to Rs.
10,00,000 was made and this amount was not invested
Prepare Sinking Fund and Sinking Fund Investment Account for the years 2013-14, 2014-15, 2015-
16.
Question: 12
On 1st April,2013, Z Limited purchased the lease of property for Rs. 10,00,000. The lease would
expire on 31st March,2016. Z Ltd. decided to set up a sinking fund. The Sinking Fund was to be
credited (or debited) with an annual contribution from profit, the interest on the investments
and any profits (or losses) made on the realisation of the sinking fund investments. The sinking
fund was to be represented by specific investment, and any sums made available to the sinking
fund were to be immediately invested, except at the termination of the fund.
During the three years following transactions took place:
• 31st March,2014 A contribution from profits of Rs. 3,20,000 was made and this sum was
invested
• 13th Oct,2014 Investments which originally costed Rs. 1,10,000 were sold for Rs. 1,20,000
and the proceeds of sale were re-invested
• 31st March,2015 A contribution from profits of Rs. 3,20,000 was made; interest on
investments of Rs. 16,000 was received and these amounts were reinvested
• 9th August,2015 Investments which originally costed Rs. 2,10,000 were sold at a profit of
Rs. 20,000 and proceeds of sale were re-invested
• 31st March,2016 Interest on investments Rs. 48,000 was received which was not
invested. All existing investments were sold for Rs. 6,60,000
• A contribution from profit of an amount required to make up the sinking fund to Rs.
10,00,000 was made and this amount was not invested
Prepare Lease A/c and Depreciation A/c for the years 2013-2014, 2014-2015, 2015-2016.
BILL OF EXCHANGE
Retirement of Bill
1. BILLS OF EXCHANGE
❖ Definition
❖ Concept
❖ Characteristics
➢ It must be in writing.
➢ It must be dated.
➢ It must contain an order to pay a certain sum of money.
Example
1. A bill drawn in India on a person resident outside India and made payable
outside India.
2. A bill drawn outside India on a person resident outside India.
3. A bill drawn outside India and made payable in India.
4. A bill drawn outside India and made payable outside India.
❖ Definition
▪ A promissory note is an instrument in writing,
▪ Not being a bank note or 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.
❖ Characteristics
➢ It must be in writing.
➢ It must contain a clear promise to pay. Mere acknowledgement of a debt is not a promissory
note.
➢ The promise to pay must be unconditional “I promise to pay 50,000 as soon as I can”
is not an unconditional promise.
➢ The promiser or maker must sign the promissory note.
➢ The maker must be a certain person.
➢ The payee (the person to whom the payment is promised) must also be certain.
➢ The sum payable must be certain. “I promise to pay 50,000 plus all fine” is not certain.
➢ Payment must be in legal currency of the country.
➢ It should not be made payable to the bearer.
➢ It should be properly stamped.
➢ It does not require any acceptance.
There are generally 3 parties (Drawer, There are 2 parties (Maker and Payee) in
Drawee and Payee) in bill of exchange. promissory note.
The drawer and payee may be same In promissory note maker and payee cannot
person in case of bill of exchange be same person.
In case of dishonor, a bill of exchange Noting and protest is not required in case of
must be noted and protested. dishonor of a promissory note.
4.TERM OF A BILL
Term of the bill: Begins from the date of ‘sighting’ i.e. when the bill is accepted.
Term of the bill: Begins from the date of drawing the bill.
➢ The date on which the term of the bill terminates is called as ‘Expiry/Due Date of the bill’.
6. DAY OF GRACE
➢ Every instrument payable otherwise than on demand entitled to three days of grace.
➢ The date which comes after adding three days to the expiry/due date of a bill, is called
the date of maturity.
➢ The maturity of a promissory note or bill of exchange is the date at which it falls due.
➢ Every promissory note or bill of exchange gets matured on the third day after the day on
which it is expressed to be payable , except when it is expressed to be payable
(i) on demand,
(ii) at sight, or
(iii) on presentment
8. BILL AT SIGHT
➢ Bill at Sight means the instruments in which no time for payment is mentioned.
➢ A promissory note or bill of exchange is payable on demand-
Point to be remember
at sight or on presentment.
❖ At sight’ and ‘presentment’ means on
demand.
❖ An instrument payable on demand may be
presented for payment at any time.
❖ Days of grace is not to added to calculate
maturity for such types of bill.
❖ A cheque is always payable on demand.
➢ Bill after date means the instrument in which time for payment is mentioned.
➢ A promissory note or bill of exchange is a time instrument when it is expressed
to be payable-
▪ After a specified period. Point to be remember
▪ on a specific day The expression ‘after sight’ means-
▪ after sight
▪ on the happening of event ❖ In a promissory note, after presentment for
Which is certain to happen. sight.
❖ In a bill of exchange, after acceptance or noting
for non-acceptance or protest for non-
acceptance.
Point to be remember
1) When the bill is made payable at a stated number of months(s) after date, the term shall
expire on that day of the month which corresponds with the day on which the bill is dated.
If the month in which the period terminates has no corresponding day, the period shall be
deemed to expire on the last day of such a month. For example, a bill signed on January 31st
payable after 3 months will be due on April 30th.
2) The term of a Bill after sight commences from the date of acceptance of the bill whereas the
term of a bill after date commences from the date of drawing of bill.
➢ When the acceptor denies the payment of bill then it leads to dishonor of bill.
➢ If there is dishonour, or fear of dishonour, the bill will be given to a public official known
as “Notary Public”.
➢ For doing this activity, the officer charges a small fee known as noting charges.
The amount of noting charges is recoverable from the party which is responsible
for dishonour.
1) Where the drawee pays nothing: Total of amount of original bill as well as
the interest for the extended time period.
2) Where the drawee pays the interest amount at the time of renewal: Amount of
the Original bill.
3) Where the drawee makes part payment of the original bill: that part of total of
amount of original bill remain unpaid as well as the interest for the extended time
period on unpaid amount.
13. RETRIEMENT OF BILLS OF EXCHANGE AND REBATE
➢ The mechanism of bill can be used to raise finance without doing any trading activity.
For example: Sanju and Manju are two friends. Sanju needs fund for three months. . In
that case he may persuade his friend Manju to accept his draft. The bill of exchange
may then be taken by Sanju to his bank and get it discounted there. Thus, Sanju will be
able to make use of funds.
In such a case, the drawee may draw a bill on the drawer, and get it discounted with
the bank to honour the first bill.
➢ Bills receivable and bills payable books are journals (Day Books) to record in a
chronological order the details of bills receivable and bills payable.
➢ When large number of bill transactions take place in an organization, it is convenient to
maintain these books.
➢ Wherein any bill transaction takes place, the same is entered in the Day Books in the first
instance and then the posting to respective debtor or creditor and to Bills Receivable or
Bills Payable account done from the day book.
➢ Useful for following up the status of outstanding bills. LS
Particular
Amount
On receipt of Bill
Z A/c Dr.
To Bill payables
To Bank A/c
1,010
Y A/c Dr.
1,010
Y Dr.
1,010
To Bank A/c
In case of Insolvency
To Drawee A/c
To Drawee A/c
To Drawee A/c
To Interest Income A/c
Particular
Amount
On acceptance of Bill
To Cash/Bank A/c
To Drawer A/c
In case of Insolvency
To Drawer A/c
To Cash/Bank A/c
To Deficiency A/c
To Drawer A/c
To Cash / Bank
Particular
Amount
Treated as
Memorandu
m Books
1. INTRODUCTION
Immediately
Goods sold to Treated as Sale Revenue being
Customer recognized
Goods are
delivered to Customer Approved Treated as Sale
Goods sent to
customer with the and Revenue
customer
option to retain or being
return them within recognized
a specified period
Normally sales of good on return basis take place between a manufacture and a retailer.
In online sales, this practice is prevalent.
If at year end, goods are still lying with the customers and the specified time limit is yet to
expire
➢ Effect on Profit & loss A/c: The entry made for sales earlier reversed.
➢ Effect on Balance Sheet : Goods lying with the customer treated as ordinary inventory
(Calculated on Cost Price)
Date Particulars Folio Amt Particulars Folio Amt Particulars Folio Amt Amt
1 2 3 4 5 6 7 8 9 10 11
Goods sent to customer on approval basis Entries made only in column 1 to 4, the sale
price of goods entered in column 4.
If goods are retained by customer Entries are made in columns 8 to 10. The
individual amounts are then posted to the
debit of customer’s accounts in the Sales
Ledger and their total is credited to Sales
Account in the General Ledger.
Neither returned nor retained till end of the Shown as balance in column. The total of
year. this column, afterwards, will show the value
of goods with customers at the sale price.
Transaction
are numerous
1. In general ledger, Sales are recorded in the Sales Day Book and
thereafter, the total of the Sales Day Book is credited to Sales
Account and debited to the Individual Customers Account.
2. In Memorandum Sales or return ledger, To cancel the earlier
entries, individual customers are credited and the Sale or
Return Account is debited.
It is important to remember that Sale or return day book and sale or return ledger are
Memorandum Books, i.e., these records are not a part of regular books of accounts.
3. JOURNAL ENTRIES
PARTICULAR AMOUNT
To Sales Account
To Sales Account
4. When goods are accepted at a lower price than the invoice price
6 (a) At the year-end, when goods are lying with customer and the
specified time limit is yet to expire
Sales Account Dr. Invoice price
PARTICULAR AMOUNT
To Sales Account
whichever is less
To Trading Account
PARTICULAR AMOUNT
To Customer Account
To Customer Account
To Sales Account
Goods Consigned
Consignor Consignee
Account Sale
Inventories of Consignor
To Consignee
❖ Definition
means to Send
Invoicing : Consignor does not send an invoice. He only sends a proforma invoice.
❖ Features
➢ The consignee recovers from the consignor all expenses incurred by him on the
consignment. This however can be changed by agreement between the two parties
➢ It is also usual for the consignee to give an advance to the consignor in the form of
cash or a bill of exchange.
➢ The consignee receives a commission calculated on the basis of gross sale. It is
calculated on total sale and not merely on credit sale.
Ordinary Del-credere
Commission Commission
➢ Periodically, the consignees sends to the consignor a statement called Account Sales.
Firms usually like to ascertain the profit or loss on each consignment or consignments to each
consignee.
3. DISTINCTIONS
3. Consignor bears the loss of goods It is the buyer who will Onus of loss
held with the consignee. bear the loss if any, after
the transfer of goods.
4. The relationship between the The relationship between Relationship
consignor and the consignee is the seller and the buyer
that of a principal and agent. is that of a creditor and a
debtor.
5. Expenses done by the consignee to Expenses incurred by the Expenses
receive the goods and to keep it buyer are to be borne by
safely are borne by the consignor the buyer itself after the
unless there is any other agreement. transfer of goods.
Commission Discount
Commission may be defined as The term discount refers to any
remuneration of an employee or agent reduction or rebate allowed and is
relating to services performed in used to express one of the following
connection with sales, purchases, situations:
collections or other types of business An allowance given for the settlement
transactions and is usually based on a of a debt before it is due i.e. cash
percentage of the amounts involved. discount.
Commission earned is accounted
for as an income in the books of An allowance given to the whole
accounts, and commission allowed or sellers or bulk buyers on the list price
paid is accounted for as an expense or retail price, known as trade
in the books of the party availing discount. A trade discount is not shown
such facility or service. in the books of account separately and
it is shown by way of deduction from
cost of purchases.
Unlike normal
2. Expenses incurred by consignor
practice to
Consignment Account Dr. debiting expense
accounts first
To Supplier Account/Bank/Cash and then
transferring to
profit and loss
account,
expenses are
directly debited
to consignment
account
The consignee
3. When advance is received from the consignee
may remit some
Bank/Cash Account advance to
Dr. consignor.
To Consignee’s Personal Account
Consignment Account
Dr.
5. VALUATION OF INVENTORIES
Principle: Inventories should be valued at cost or net realizable value whichever is lower.
Cost means cost of the goods to the consignor + all expenses incurred till the goods reach the
premises of the consignee
Examples of expense
1) Packaging 2) Freight
3) Cartage 4) Insurance in transit
5) Octroi 6) Import duty
What is not include?
Expenses incurred after the goods have reached the consignee’s godown.
If the expected selling price of inventories on hand is lower than the cost, the inventories
should be valued at expected net selling price only, i.e. expected selling price less delivery
expenses, etc.
Scenario: The proforma invoice is made out at a value higher than the cost.
The amount of
Consignment Account Dr.
loading included in
To Inventory Reserve Account the value of the
closing Inventories
is unrealized profit
– hence reserve is
created by debit
to the
Consignment
Account
7. NORMAL LOSS
➢ Normal loss would be spread over the entire consignment while valuing inventories.
➢ No entry is recorded for normal loss.
➢ Normal loss considered as an expense for valuation of remaining inventory.
8. ABNORMAL LOSS
Special case
Occurrence Normal loss occurs due to inherent nature Abnormal loss occurs mainly
of the goods being shipped e.g. leakage, because of unforeseen
evaporation, loss of perishable goods etc. events e.g. accident or
natural calamity etc.
Time of Normal loss is not accounted for Abnormal loss is accounted
Accounting immediately and is loaded on the for immediately in profit
remaining goods. It gets accounted for as and loss account.
cost of remaining goods as and when they
are sold.
Impact on As normal loss is added to cost of Abnormal loss does not
gross profit remaining goods, it impact gross profit. impact gross profit.
To Consignment Account
If abnormal loss is
Consignee’s Personal Account Dr.
recoverable from
To Abnormal Loss Account the consignee.
If abnormal loss is
Profit & Loss Account Dr.
not recoverable
To Abnormal Loss Account
9. COMMISSION
❖ Definition: Commission is the remuneration paid by the consignor to the consignee for
the services rendered to the former for selling the consigned goods.
Consigned goods can be returned by the consignee because of many reasons like
poor quality
not upto the specimen
Destroyed in transit etc.
What is the value of returned goods?
Special Point
Expenses incurred by the consignee to send those goods back to the consignor are not taken
into consideration. This is generally called secondary freight in accounting terms.
❖ Definition: An account sale is the periodical summary statement sent by the consignee
to the consignor
1) sales made
2) Expenses incurred on behalf of the consignor.
3) Commission earned.
4) Unsold inventories left with the consignee.
5) Advance payment or security deposited with the consignor and the extent to which it has
been adjusted.
6) Balance payment due or remitted.
1. On making sales
To Bank Account
To Bank Account
To Customer’s Account
PARTICULAR AMOUNT
1. On making sales
To Bank Account
To Bank Account
To Customer’s Account
➢ The consignor insist the consignee for some advance payment for the goods consigned
at the time of delivery of goods.
➢ This advance payment is adjusted in full against the amount due by the consignee on
account of the goods sold.
Special case
If the advance money deposited by the consignee is in the form of security against the
goods consigned.
▪ Then the full amount is not adjusted against the amount due by the consignee to the
consignor on account of goods sold if, there is any unsold inventory left with the
consignee.
In that case proportionate security in respect of unsold goods is carried forward till the time
the respective goods held with the consignee are sold.
For Where
calculation amount is
of Interest lent in
on drawings various
of partner installment
Where amount is
lent in one
installment
If Bill/invoice is
payable
What is Average Due date Average Due Date is weighted average of due
dates of various transactions where amount of
each transaction is used as weight.
Why the concept of Average due date Where a person owing several amounts due on
developed different dates, desires to pay the total amount
payable by him/her on a particular date, so that
neither the debtor nor the creditor stands to lose
or gain anything by way of interest.
Unique Feature the party making payment neither suffers any loss
nor gains anything by this arrangement of making
a single payment
Selection of base date/ zero date: Such While ascertaining the number
a date may be the due date of the first of intervening days (plus or
transaction or the due date of the last minus) between the base date
transaction or any other due date and the due date of each
between the first and the last but transaction ignore the first
date and include the last day.
preferably earlier due date may be
taken.
• The bill is made payable at a stated number of months after date or after
sight or after certain events.
• the period stated shall be held to terminate on the date of the month
Calculating Due Date of which corresponds with the day on which the instrument is dated.
Bill or Note Payable Few • If the month in which the period would terminate has no corresponding
Months after Date or day, the period shall be held to terminate on the last day of such month.
Sight
This number is added in the base date to find the average due date.
Note: For calculation of no. of days, no. of days in each respective month involved are to be
considered individually
Step 1
Step 2
Step 3
Quotient will be the number of days/months/years by which
average due date falls away from date of commencement of
loan.
If instalment are same, we can use Simple mean concept i.e. Divide days by number of
items and no need for product.
➢ Amount is drawn by the owners of business on various dates but it may settled on one
day.
➢ When different amounts are due on different dates, but they are ultimately settled
on one day the interest may be calculated by means of Average Due Date.
➢ When interest is chargeable on drawings, and drawings are on different dates,
interest may be calculated on the basis of Average Due Date of drawings.
Question: 1
Vijay sold goods to Pritam on 1st September 2016 for Rs. 1,06,000. Pritam immediately accepted
three months bill. On due date Pritam requested that the bill be renewed for a fresh period of
two months. Vijay agrees provided interest at 9% was paid immediately in cash. To this Pritam
was agreeable. The second bill was met on due date.
Give Journal entries in the books of Vijay and Pritam.
Question: 2
On 1st January 2016, Ankita sells goods for Rs 5,00,000 to Bhavika and draws a bill at three
months for the amount. Bhavika accepts it and returns it to Ankita. On 1st March
2016, Bhavika retires her acceptance under rebate of 12% per annum.
Record these transactions in the journals of Ankita and Bhavika.
Question: 3
Journalize the following transactions in K. Katrak’s books
1 Katrak’s acceptance to Basu for Rs 2,500 discharged by a cash payment of Rs
1,000 and a new bill for the
balance plus Rs 50 for interest
2 G. Gupta’s acceptance for Rs 4,000 which was endorsed by Katrak to M. Mehta
was dishonored. Mehta paid Rs 20 noting charges. Bill withdrawn against cheque
3 D. Dalal retires a bill for Rs 2,000 drawn on him by Katrak for Rs 10 discount
4 Katrak’s acceptance to Patel for Rs 5,000 discharged by Patel. Mody’s acceptance
to Katrak for a similar amount
Question: 4
On 1st January,2016, Vilas draws a Bill of Exchange for Rs. 10,000, due for payment after 3
months on Eknath. Eknath accepts to this bill of exchange. On 4th March,2016. Eknath retires
the bill of exchange at a discount of 12% p.a.
You are asked to show the journal entries in the books of Vilas.
Question: 5
Mr. David draws two bills of exchange on 1.1.2016 for Rs 6,000 and Rs 10,000. The bills of
exchange for Rs 6,000 is for two months while the bill of exchange for Rs 10,000 is for three
months. These bills are accepted by Mr. Thomas.
On 4.3.2016, Mr. Thomas requests Mr. David to renew the first bill with interest at 18% p.a. for a
period of two months. Mr. David agrees to this proposal. On 20.3.2016, Mr. Thomas retires the
acceptance for Rs 10,000, the interest rebate i.e. discount being Rs 100. Before the due date of
the renewed bill, Mr. Thomas becomes insolvent and only 50 paisa in a rupee could be recovered
from his estate.
You are to give the journal entries in the books of Mr. David.
Question: 7
On 1st July,2016 Gorge drew a bill for Rs. 1,80,000 for 3 months on Harry for mutual
accommodation.
• Harry accepted the bill of exchange
• Gorge had purchased goods worth Rs. 1,81,000 from Jack
• On the same date Gorge endorsed Harry’s acceptance to Jack in full settlement
• On 1st September,2016, Jack purchased goods worth Rs. 1,90,000 from Harry
• Jack endorsed the bill of exchange received from Gorge to Harry and paid Rs. 9,000 in full
settlement of the amount due to Harry
• On 1st October,2016, Harry purchased goods worth Rs. 2,00,000 from Gorge
• Harry paid the amount due to Gorge by cheque
Give the necessary Journal Entries in the books of Harry and Gorge.
Question: 8
For the mutual accommodation of ‘X’ and ‘Y’ on 1st April,2016, ‘X’ drew a four month’s bill on
‘Y’ for Rs. 4,000
• ‘Y’ returned the bill after acceptance of the same date
• ‘X’ discounts the bill from his bankers @ 6% per annum and remit 50% of the proceeds to
‘Y’
• On due date ‘X’ is unable to send the amount due and therefore ‘Y’ draws a bill for Rs.
7,000, which is duly accepted by ‘X’
• ‘Y’ discounts the bill for Rs. 6,600 and sends Rs. 1,300 to ‘X’
• Before the bill is due for payment ‘X’ becomes insolvent. Later 25 paise in a rupee
received from his estate
Record Journal entries in the books of ‘X’.
Question: 1
CE sends goods to his customers on Sale or Return basis. The following transactions took place
during 2016:
Sept. 15 Sent goods to customers on sale or return basis at cost plus Rs.1,00,000
33 1/3 %
Oct. 20 Goods returned by customers Rs. 40,000
Nov. 25 Goods with customers awaiting approval Rs. 20,000
CE records sale or return transactions as ordinary sales. You are required to pass the necessary
Journal Entries in the books of CE assuming that accounting year closes on 31st December,2016.
Question: 2
S. Ltd. sends out its goods to dealers on Sale or Return basis. All such transactions are, however,
treated as actual sales and are passed through the Day Book. Just before the end of the accounting
year on 31.03.2016, 200 such goods have been sent to a dealer at Rs.250 each (cost Rs. 200 each)
on sale or return basis and debited to his account. Of these goods, on 31.03.2016, 50 were
returned and 70 were sold while for the other goods, date of return has not yet expired.
Pass necessary adjustment entries on 31.03.2016.
Question: 3
Caly Company sends out its gas containers to dealers on Sale or Return basis. All such transactions
are, however, treated as actual sales and are passed through the Day Book. Just before the end
of the financial year, 100 gas containers, which cost them Rs.900 each have been sent to the
dealer on ‘sale or return basis’ and have been debited to his account at Rs.1,200 each. Out of this
only 20 gas containers are sold at Rs.1,500 each.
You are required to pass necessary adjustment entries for the purpose of Profit and Loss Account
and Balance Sheet.
Question: 4
E Ltd. sends out its accounting machines costing Rs. 200 each to their customers on Sales or Return
basis. All such transactions are, however, treated like actual sales and are passed through the Day
Book. Just before the end of the financial year, i.e., on March 24, 2016, 300 such accounting
machines were sent out at an invoice price of Rs. 280 each, out of which only 90 accounting
machines are accepted by the customers Rs.250 each and as to the rest no report is forthcoming.
Show the Journal Entries in the books of the company for the purpose of preparing Final Accounts
for the year ended March 31, 2016.
Question: 5
A sends out goods on approval to few customers and includes the same in the Sales Account. On
31.3.2016, the Trade receivables balance stood at Rs. 1,00,000 which included Rs. 7,000 goods
sent on approval against which no intimation was received during the year. These goods were sent
out at 25% over and above cost price and were sent to-
• Mr. X – Rs. 4,000 and Mr. Y – Rs.3,000.
Mr. X sent intimation of acceptance on 30th April and Mr. Y returned the goods on 10th
April,2016.
Question: 6
On 31st December,2016 goods sold at a sale price of Rs. 3,000 were lying with customer, Ritu to
whom these goods were sold on ‘sale or return basis’ were recorded as actual sales.
Since no consent has been received from Ritu, you are required to pass adjustment entries
presuming goods were sent on approval at a profit of cost plus 20%. Present market price is 10%
less than the cost price.
Question: 7
• On 1st June 2019, Goods sent by Mr. A to Mr. B = 100 Units worth Rs 1000
• On 15th June 2019, Mr. B Accepted 50 units
• On 20th June 2019 Mr. B Returned 20 units
Question: 8
A firm sends goods on sale or return basis. Customers having the choice of returning the goods
within a month. During May 2016, the following are the details of goods sent
Date (May) Customers Value (Rs)
2 P 15000
8 B 20000
12 Q 28000
18 D 3000
20 E 1000
27 R 26000
Within the stipulated time, P and Q returned the goods and B, D, and E signified that they have
accepted the goods.
Show in the books of the firm, the Sale or Return Account and Customer- P for Sale or Return
Account on 15th June,2016.
Question: 9
X supplied goods on sale or return basis to customers, the particulars of which are as under:
Date of Dispatch Party’s Name Amount (Rs) Remarks
10.12.2016 M/s. ABC 10,000 No information till 31.12.2016
12.12.2016 M/s. DEF 15,000 Returned on 16.12.2016
15.12.2016 M/s. GHI 12,000 Goods worth Rs 2,000 returned on
20.12.2016
20.12.2016 M/s. DEF 16,000 Goods Retained on 24.12.2016
25.12.2016 M/s. ABC 11,000 Good Retained on 28.12.2016
30.12.2016 M/s. GHI 13,000 No information till 31.12.2016
Goods are to be returned within 15 days from the dispatch, failing which it will be treated as
sales. The books of ‘X’ are closed on the 31st December 2016.
Prepare the following accounts in the books of ‘X’.
(a) Goods on “sales or return, sold and returned day books”.
(b) Goods on sales or return total account.
Question: 1
Exe sent on 1st July,2019 to Wye goods costing Rs 50,000 and spent Rs1,000 on packing etc. On
3rd July,2019, Wye received the goods and sent his acceptance to Exe for Rs. 30,000, payable at
3 months. Wye spent Rs 2,000 on freight and cartage, Rs 500 on godown rent and Rs 300 on
insurance. On 31st December,2019 he sent his Account Sales (along with the amount due to
Exe). Showing that 4/5 of the goods had been sold for Rs55,000. Wye is entitled to a commission
of 10%. One of the customers turned insolvent and could not pay Rs600 due from him.
Show the necessary journal entries in the books of consignor. Also prepare ledger accounts.
Question: 2
Miss Rakhi consigned 1,000 radio sets costing Rs.900 each to Miss Geeta, her agent on
1st July,2016. Miss Rakhi incurred the following expenditure on sending the consignment.
Freight Rs.7,650
Insurance Rs.3,250
Miss Geeta received the delivery of 950 sets. An Account sale dated 26th November 2016 showed
that 750 sets were sold for Rs.9,00,000 and Miss Geeta incurred Rs.10,500 for carriage.
Miss Geeta was entitled to commission of 6% on the sales effected by her. She incurred expenses
amounting to Rs.2,500 for repairing the damaged radio sets remaining in the inventory.
Miss Rakhi lodged a claim with the insurance company which was admitted at Rs.35,000. Show
the Consignment A/c and Miss Geeta’s Account in the books of Miss Rakhi.
Question: 3
Vikram Milk Foods Co. Ltd. of Vikrampur sent to Sunder Stores, Sonepuri 5,000 kgs of baby food
packed in 2,000 tins of net weight 1 kg and 6,000 packets of net weight 1/2 kg for sale on
consignment basis. The consignee’s commission was fixed at 5% of sale proceeds. The cost price
and selling price of the product were as under
Particulars 1 Kg. tin ½ Kg. packet
Cost Price 10 6
Selling Price 15 7
The consignment was booked on freight “To Pay” basis, and freight charges came to 2% of
selling value. One case containing 50 (1kg. tins) was lost in transit and the transport carrier
admitted a claim of Rs. 450.
At the end of the first half-year, the following information is gathered from the “Account Sales”
sent by the consignee:
1. Sale proceeds:
a. 1,500 1Kg. tins
b. 4,000 ½ Kg. packets
2. Store rent and insurance charges Rs. 600
Find out the value of closing inventory on consignment.
Show the Consignment A/c and the Consignee’s A/c in the books of Vikram Milk Food Co. Ltd.
assuming that, the consignee had paid the amount due from him.
Question: 5
Ajay of Mumbai consigned to Vijay of Delhi, goods to be sold at invoice price which represents
125% of cost. Vijay is entitled to a commission of 10% on sales at invoice price and 25% of any
excess realised over invoice price.
1. The expenses on freight and insurance incurred by Ajay were Rs. 10,000.
2. The account sales received by Ajay shows that Vijay has affected sales amounting to Rs.
1,00,000 in respect of 75% of the consignment.
3. His selling expenses to be reimbursed were Rs. 8,000.
4. 10% of consignment goods of the value of Rs. 12,500 were destroyed in fire at the
Delhi godown and the insurance company paid Rs. 12,000 net of salvage.
5. Vijay remitted the balance in favour of Ajay.
Prepare consignment account and the account of Vijay in the books of Ajay along with the
necessary calculations.
Question: 6
Exe sent on 1st July,2019 to Wye goods costing Rs 50,000 and spent Rs1,000 on packing etc. On
3rd July,2019, Wye received the goods and sent his acceptance to Exe for Rs. 30,000, payable at
3 months. Wye spent Rs 2,000 on freight and cartage, Rs 500 on godown rent and Rs 300 on
insurance. On 31st December,2019 he sent his Account Sales (along with the amount due to
Exe). Showing that 4/5 of the goods had been sold for Rs55,000. Wye is entitled to a commission
of 10%. One of the customers turned insolvent and could not pay Rs. 600 due from him.
Show the necessary journal entries in the books of consignor. Also prepare ledger accounts.
Suggest a date on which all the bills may be paid out without any loss of interest to either party.
Illustration - 2
The following are the amounts due on different dates in between the same parties
Amount Due Date
(Rs.)
500 3rd July
800 2nd August
1,000 11th September
Suggest a date on which all the bills may be paid out without any loss of interest to either party.
Illustration – 3
Calculate Average Due date from the following information:
Date of Bill Term Amount (Rs)
August 10, 2015 3 months 6000
October 23, 2015 60 days 5000
December 4, 2015 2 months 4000
January 14, 2016 60 days 2000
March 08, 2016 2 months 3000
Illustration – 4
A owes B Rs 890 on 1st January 2015. From January to March, the following further transactions
took place between A and B:
January 16 A buys goods Rs 910
February 2 A receives Cash Rs 750
loan
March 6 A buys goods Rs 810
A pays the whole amount on 31st March 2015 together with interest at 5% per annum. Calculate
the interest by the average due date method.
Illustration 6
Manoj had the following bills receivables and bills payable against Sohan. Calculate the average
due date, when the payment can be received or made without any loss of interest
Illustration 7
Rs 10,000 lent by Dass Bros. to Kumar & Sons on 1st January 2011 is repayable in 5 equal annual
instalments commencing on 1st January 2012. Find the average due date and calculate interest
at 5% per annum, which Dass Bros. will recover from Kumar & Sons.
Date A Date B
Amount (Rs) Amount (Rs)
1st July 500 12th June 1000
30th 800 11th August 500
September
1st November 1000 9th February 400
28th February 400 7th March 900
1. Ordinary system
Average due date system. (assume 1 year = 365 days)
By means
With help
of
of interest
products
table
By means of
products of
balances
If no specific date is mentioned as the date on which payment is due, the date
of the transactions is presumed to be the due date.
➢ The other column is meant for writing interest. With the help of ready-made
tables, interest due on
different amounts at given
The interest columns of both the sides are totalled up
rates for different periods of
and the balance is drawn.
time is found out and this is
entered against each item
separately
Date Particulars Due Amt Days Int Date Particulars Due Amt Days In
`
2015 date ` 2015 date
Point to be remember
➢ While counting the number of days, the date of due date is ignored and the date
up to which the account is prepared, is included.
➢ While counting the number of days, for opening balances, the opening date as
well as date up to which the account is prepared, is counted.
Calculate interest at the given rate on the balance of the products for a single day.
Enter interest on the appropriate side in the amount column. This entry is
made on the side other than that on which the balance of products appears.
tre
Date Particulars Due Amt Days Prod Date Particu Due Amt Days Pr
2015 date 2015 lars date
Due date of a bill falls after the date of closing the account
No interest is allowed
Interest from the date of closing to such due date is written in “Red-Ink” in the
appropriate side of the ‘Account current. This interest is called Red-Ink interest
If it represents a
If the amount
credit balance, the
represents a debit
product is written in
balance, the product
the Cr. Product
is entered in the Dr.
column.
Product column
The Dr. Product and Cr. Product columns are then totalled up.
Interest is calculated on each total at the given rate of interest; and the net interest is
ascertained.
Prepare Account Current for Nath Brothers in respect of the following transactions with Shyam:
2016
January 1 Paid to Shyam 600
Illustration – 2
From the following particulars, make up an Account Current to be rendered by Mr. X to Mr. Y on
31st December, 2016 taking interest into account at the rate of 18% p.a. (1 year = 365 days)
30.07. 2016 Goods sold to Mr. Y (Credit Period allowed 1 Rs. 300
month)
01.08. 2016 Good purchased from Mr. Y (Credit Period Rs. 200
received 1 month)
01.09. 2016 Cash received from Mr. Y Rs. 100
01.09. 2016 Mr. Y accepted Mr. X’s Draft at 3 Months date Rs. 400
You are required to prepare the Account Current according to interest on individual transaction
under the Forward and Backward methods
Illustration – 4
Following transaction took place between X and Y during the month of April, 2016
Show Vinod’s a/c in the ledger of the Allahabad Bank. Interest is to be calculated at 5% on the
debit balance and 2% on credit balance. The account to be prepared as on 30th June, 2016.
Calculation may be made correct to the nearest rupee.
The lists of topics which will be covered in this chapter are as follows:
7.2 Preparation of Trading Account, Profit & Loss Account and Balance Sheet.
7.3 Understanding various adjustments which need to be presented in the Financial Statements
and their treatment.
To ascertain the results of the business the entity prepares the income statement i.e. the Profit
& Loss Statement and financial position i.e. Balance Sheet at the end of the accounting year.
The important principles to be followed in the preparation of the Final Accounts are as follow:
i. Distinction should be made between capital and revenue receipts and payments.
ii. Only the Income earned and Expense incurred in the current accounting period should be
accounted for in the current accounting period.
iii. All the different items of income and expenditure should be accumulated under major
heads of income and expense to disclose the sources from which capital has been raised
and the liabilities, which are outstanding for payment.
v. All material information needs to be disclosed which can impact the decision of the users.
Matching Principle:
As per this principle the expenses incurred to earn the revenue should be properly matched in the
same accounting period. The following point’s needs to be taken care while recording the revenue
and expense for the current period:
ii. If some expense has been incurred but the revenue for it will be received in the next year,
the expense should be carried forward as an asset and shown in the Balance Sheet.
It will be debited to the Profit and Loss Account only when the relevant income will also
be credited. This is the same logic based on which the depreciation on assets is charged.
iii. In the similar manner if some income has been received but the expense for the same will
be incurred in the next year, the income should be recorded as liability and shown in the
Balance Sheet.
It will be credited to the Profit and Loss Account only when the relevant expense is
debited.
iv. Exception to the above rule is that costs which have been incurred or is expected to be
incurred should only be debited to Profit and Loss Account. For example, if a fire has
occurred and has damaged the firm’s property the loss must be debited to the Profit and
Loss Account to the extent it is not covered by insurance.
Trading Account:
Trading Account enables to compute the Gross Profit or Gross Loss occurred due to carrying out
the business operations during the accounting period.
Gross Profit/Gross Loss is computed as the difference between the selling price and the Cost of
Goods Sold. The Cost of Goods sold is computed using the following formula:
Opening Stock
Add: Purchases
Add: Direct Expenses
Less: Closing Stock
Cost of Goods Sold
1. Opening Inventory:
Trading A/c Dr.
To Opening Stock
2. Purchases:
Purchase A/c Dr.
To Vendor/Cash A/c
3. Purchase Return:
Purchase Return A/c Dr.
To Purchases
5. Wages:
Trading A/c Dr.
To Wages A/c
6. Sales:
7. Sales Return:
Trading A/c Dr.
To Sales Return A/c
8. Closing Inventory:
Closing Inventory A/c Dr.
To Trading A/c
Note:
If Closing Stock appears in the Trial balance then the closing inventory is not recorded in the
trading account, it is directly presented in the balance sheet.
This is due to the fact that the entry has already been recorded to arrive at Cost of Goods Sold.
As per the valuation principle closing inventory is recorded at cost or net realisable value
whichever is less.
All the expenses which have not been recorded in the trading account form a part of the Profit &
Loss Account. All the income and gains except for sales form a part of the Profit & Loss Account.
1. Drawings:
Capital A/c Dr.
To Drawings
2. Income Tax
Capital A/c Dr.
To Income Tax A/c
3. Discount received
Profit/Loss A/c Dr.
To Discount Allowed A/c
4. Discount allowed
Discount Received A/c Dr.
To Profit/Loss A/c
5. Bad Debts
Bad Debts Account Dr.
To Debtor’s Account
In case of Provision for Bad Debts is prepared then the bad debts are first recorded against
the provision
Closing Entries
The journal entries that are made for transferring various account to the trading and Profit & Loss
Account are known as Closing Entries.
Net Profit
Profit and Loss Account Dr.
To Capital Account
Net Loss
Capital Account Dr.
To Profit and Loss Account
Example:
The following is the Trial Balance of ABC Co. on 31st Dec. 2018. Prepare the Trading and Profit &
Loss Account from the Trial Balance after passing the closing entries.
1. It is valid only for a particular date and not later. For Example, if the closing inventory for
December 31, 2018 was valued at Rs.1,00,000/- and the entity purchased inventory worth
Rs,50,000 on 1st January 2019 the Balance Sheet on 1st January 2019 would be different as
compared to 31st December 2018.
2. Balance sheet is prepared only after the preparation of the Profit and Loss Account.
1. Current Assets
These are the assets which are meant to be used or converted into cash as within the next
operating cycle or one year whichever is longer.
For Eg: Cash, Bank, Debtors, Closing stock, etc.
Intangible Assets are those Assets which have no physical existence i.e. which cannot be
touched, felt or seen. For Eg, Patents, Copyrights, etc.
Tangible Assets are those assets which have their physical existence and can be identified.
For Eg, Furniture, Equipments, Machinery, etc.
1. Current Liabilities:
These are the liabilities which must be settled or paid within in one year or operating cycle
whichever is higher. Current Liabilities are also known as Short Term Liabilities. For Eg,
Creditors, Bills Payable etc.
Example:
The following is the Trial Balance of ABC Co. on 31st Dec. 2018. Prepare the Balance Sheet.
Question 1:
The following is the Trial Balance of ABC Co. on 31st Dec. 2018. Prepare the Trading and Profit &
Loss Account from the Trial Balance after passing the closing entries.
Question 2:
The following is the Trial Balance of ABC Co. on 31st Dec. 2018. Prepare the Balance Sheet.
Question: 2
Particulars Amount (Rs.)
Opening Inventory 1,00,000
Purchases 6,72,000
Carriage Inwards 30,000
Wages 50,000
Sales 11,00,000
Returns inward 1,00,000
Returns outward 72,000
Closing Inventory 2,00,000
From the above information, prepare a Trading Account of M/s. ABC Traders for the year ended
31st March 2017 and Pass necessary closing entries in the journal proper of M/s. ABC Traders.
Question: 3
Revenue, Expenses and Gross Profit Balances of M/s ABC Traders for the year ended on 31st
March 2016 were as follows:
Particulars Amount (Rs.)
Gross Profit 4,20,000
Salaries 1,10,000
Discount (Cr.) 18,000
Discount (Dr.) 19,000
Bad Debts 17,000
Depreciation 65,000
Legal Charges 25,000
Consultancy Fees 32,000
Audit Fees 1,000
Electricity Charges 17,000
Telephone, Postage and Telegrams 12,000
Stationery 27,000
Interest paid on Loans 70,000
Question: 4
On 1st Jan. 2017 provision for Doubtful Debts existed at Rs. 40,000. Trade receivables on
31.12.2017 were Rs. 15,00,000. Bad debts totalled Rs. 1,00,000. It is required to write off the
bad debts and create a provision equal to 5% of the Trade receivable’s balance.
Question: 5
The following is the Trial Balance of C. Wanchoo on 31st Dec. 2017
Trial Balance on 31st December
Particulars Amount (Rs.) Amount (Rs.)
Capital Account 10,00,000
Inventory Account 2,00,000
Cash in hand 1,44,000
Machinery A/c 7,36,000
Purchases A/c 18,20,000
Wages A/c 10,00,000
Salaries A/c 10,00,000
Discount Allowed A/c 50,000
Discount Received A/c 30,000
Sundry Office Expenses A/c 6,00,000
Sales A/c 50,00,000
Sums owing by customer (Trade receivables) 8,50,000
Trade payables (sums owing to suppliers) 3,70,000
Total 64,00,000 64,00,000
Value of Closing Inventory on 31st Dec. 2017 was Rs. 2,70,000
Prepare Trading and Profit and Loss Account.
Question: 6
The balance sheet of Thapar on 1st January 2017 was as follows:
Liabilities Amount (Rs.) Assets Amount (Rs.)
Trade Payables 15,00,000 Plant and Machinery 30,00,000
Expenses Payable 1,50,000 Furniture and Fixture 3,00,000
Capital 50,00,000 Trade receivables 14,00,000
Cash at Bank 6,50,000
Inventories 13,00,000
Total 66,50,000 Total 66,50,000
During 2017, his Profit and Loss Account revealed a net profit of Rs. 15,30,000. This was after
allowing for the following:
(a) Interest on capital @ 6% p.a.
(b) Depreciation on Plant and Machinery @ 10% and on Furniture and Fixtures @ 5%
(c) A provision for Doubtful Debts @ 5% of the trade receivables as at 31st December 2017
But while preparing the Profit and Loss Account he had forgotten to provide for
(1) Outstanding expenses totalling Rs. 1,80,000
(2) Prepaid insurance to the extent of Rs. 20,000
His current assets and liabilities on 31st December 2017 were:
Question: 7
Balance Sheet as at 31st December 2017
Capital and Amount (Rs.) Assets Amount (Rs.)
Liabilities
Mahindra & Sons 5,60,000 Cash in Hand 43,000
Capital 20,00,000 Cash at Bank 2,67,500
Trade Receivables 7,49,500
Closing Inventory 9,00,000
Machinery and
Equipment 6,00,000
Total 25,60,000 Total 25,60,000
From the above given balance sheet prepare the relevant opening entry.
Question: 8
Shri Mittal gives you the following Trial Balance and some other information
Trial Balances as on 31st March 2017
Particulars Amount (Rs.) Dr. Amount (Rs.) Cr.
Capital 8,70,000
Purchases and Sales 6,05,000 12,10,000
Opening Inventory 72,000
Trade receivables and Trade payables 90,000 1,70,000
14% Bank Loan (loan taken at year end) 2,00,000
Overdrafts (overdraft taken at year end) 1,12,000
Salaries 2,70,000
Advertisements 1,10,000
Other expenses 60,000
Returns 40,000 30,000
Furniture 4,50,000
Building 8,90,000
Cash in Hand 5,000
Total 25,92,000 25,92,000
Closing Inventory on 31st March 2017 was valued at Rs. 1,00,000.
Prepare final accounts of Shri Mittal for the year ended 31st March 2017.
Question: 9
Mr. Mohan gives you the following trial balance and some other information
Particulars Amount (Rs.) Amount (Rs.)
Capital 6,50,000
Sales 9,70,000
Purchases 4,30,000
Question: 10
The Balance Sheet of Mr. Popatlal, a merchant on 31st March,2017 stood as below
Capital and Amount (Rs.) Assets Amount Amount (Rs.)
Liabilities (Rs.)
Capital 2,40,000 Fixed Assets 1,25,600
Trade payables 1,64,000 Inventories 2,06,400
Bank Overdraft Trade Receivables
1,46,000 Less 1,88,000
Provision
6,200
Cash 1,81,800
36,200
Total 5,50,000 Total 5,50,000
Show opening journal entry on 1st April,2017 in the books of Mr. Popatlal.
Question: 11
The following is the schedule of balances as on 31.3.17 extracted from the books of Shri
Gavaskar, who carries on business under the same name and style of Messrs Gavaskar Viswanath
& Co., at Bombay
Particulars Amount (Rs.) Dr. Amount (Rs.) Cr.
Cash in Hand 14,000
Cash at Bank 26,000
Sundry Debtors 8,60,000
Stock on 01.04.2016 6,20,000
Furniture & fixtures 2,14,000
Office equipment 1,60,000
Buildings 6,00,000
Motor Car 2,00,000
Sundry Creditors 4,30,000
Loan from Viswanath 3,00,000
Manufacturing
Business Entities
Introduction
The manufacturing entities generally prepare a separate Manufacturing Account as a part of Final
accounts in addition to Trading Account, Profit and Loss Account and Balance Sheet. The
objective of preparing Manufacturing Account is to determine manufacturing costs of
finished goods for assessing the cost effectiveness of manufacturing activities. Manufacturing
costs of finished goods are then transferred from the Manufacturing Account to Trading Account.
Purpose
A manufacturing account serves the following functions:
(1) It shows the total cost of manufacturing the finished products and sets out in
detail, with appropriate classifications, the constituent elements of such cost. It
is, therefore, debited with the cost of materials, manufacturing wages and
expenses incurred directly or indirectly on manufacture.
(2) It provides details of factory cost and facilitates reconciliation of financial books
with cost records and also serves as a basis of comparison of manufacturing
operations from year to year.
(3) The Manufacturing Account may also be used for various other purposes. For
example, if the output is carried to the Trading Account at market prices, it
These are also called Manufacturing overhead, Production overhead, Works overhead, etc.
Overhead is defined as total cost of indirect material, indirect wages and indirect expenses.
Overhead = Indirect Material + Indirect Wages + Indirect Expenses
Indirect material means materials which cannot be linked directly with the units produced, for
example, stores consumed for repair and maintenance work, small tools, fuel and lubricating
oil, etc.
Indirect wages are those which cannot be directly linked to the units produced, for example,
wages for maintenance works, holding pay, etc.
Indirect expenses are those which cannot be directly linked to the units produced, for example,
training expenses, depreciation of plant and machinery, depreciation of factory shed, insurance
premium for plant and machinery, factory shed, etc.
Accordingly, indirect manufacturing expenses comprise indirect material, indirect wages and
indirect expenses of the manufacturing division.
BY-PRODUCTS
In most manufacturing operations, the production of the main product is accompanied by the
production of a subsidiary product which has a value on sale. For example, the production of
hydrogenated vegetable oil is accompanied by the production of oxygen gas and the production
of steel yields scrap. The subsidiary product is termed as a by-product because its production is
By-products generally have insignificant value as compared to the value of main product. They
are generally valued at net realizable value, if their costs cannot be separately identified. It is often
treated, as “Miscellaneous income” but the correct treatment would be to credit the sale value of the by-
product to Manufacturing Account so as to reduce to that extent, the cost of manufacture of main
product
Question: 1
1,00,000 units were produced in a factory Per unit material cost was Rs.10 and per unit labour
cost was Rs.5. That apart it was agreed to pay royalty @ Rs.3 per unit to the Japanese
collaborator who supplied technology.
Required: Calculate Manufacturing Cost.
Question: 2
Mr. Vimal runs a factory which produces soaps. Following details were available in respect of his
manufacturing activities for year ended on 31.03.2016.
Particulars Amt. (Rs.)
Opening Work-in-Process (10,000 units) 16,000
Closing Work-in-Process (12,000 units) 20,000
Opening inventory of Raw Materials 1,70,000
Closing inventory of Raw Materials 1,90,000
Purchases 8,20,000
Hire charges of machine @ Rs. 0.60 per unit manufactured
Hire charges of factory 2,20,000
Direct wages-Contracted @ Rs.0.80 per unit manufactured and @ Rs.0.40
per unit of
Closing W.I.P.
Repairs and Maintenance 1,80,000
Units produced – 5,00,000 units
Prepare a Manufacturing Account of Mr. Vimal for the year ended 31.3.2016.
Unit-1 Introduction
If the person carrying on the business The persons concerned must agree to share the
acts not only for himself but for others profits of the business.
also so that they stand in the positions
of principals and agents, they are A provision for sharing of loss is not
partners. necessary.
Due to the financial and managerial demands of the present day business world. In
Partnership, two or more individuals may decide to pool their financial and non-financial
resources to carry on a business
Law Definition
Section 2 of the Limited Liability Partnership (LLPs) Act, 2008 defines LLP
As a partnership formed and registered under this Act
AND
“limited liability partnership agreement” means any written agreement
1) between the partners of the limited liability partnership
2) between the limited liability partnership and its partners
Which determines the mutual rights and duties of the partners and their rights and duties
in relation to that limited liability partnership.
❖ Features
➢ The LLP will be a separate legal entity
▪ Liable to the full extent of its assets.
▪ The liability of the partners being limited to their agreed contribution in the
LLP which may be of tangible or intangible nature.
▪ No partner would be liable on account of the independent or un- authorized
actions of other partners or their misconduct.
The liabilities of the LLP and partners who are found to have acted with intent to
defraud Creditors or for any fraudulent purpose shall be unlimited for all or any of the
debts or other liabilities of the LLP.
➢ It is taxed as a partnership, but has the benefits of being a corporate, or more
significantly, a juristic entity with limited liability.
He is an undischarged insolvent.
❖ What happen if the number of partner reduced to one and the LLP carried business for
more than 6 month.
The only partner of LLP who carries the business after 6 month and has the knowledge
of the fact he is carrying the business alone, shall be liable personally for the
obligations of the LLP incurred during that period.
❖ Special Points
In the absence of an agreement to the contrary, the interest and salary payable to a partner
will be paid only if there is profit.
❖ In case of a trading firm, the implied power of partners are the following
Receiving payments on
Engaging servants for the
Buying and selling of goods behalf of the firm and
business of the firm.
giving valid receipt.
Submitting a Compromise or
dispute relating to relinquishment of
the firm arbitration any claim or portion
of claim by the firm
Withdrawal of a suit
Opening a bank Acquisition of
or proceeding filed immovable
on behalf of the account on behalf
of the firm in the property belonging
firm to the firm
name of a partner
Admission of any
Entering into
liability in a suit or
partnership on
proceedings against
behalf of the firm
the firm
6. ACCOUNTS
❖ Partnership Act doesn’t specify any format for preparation of accounts of Partnership Firm
❖ Capital Account
➢ May be, there are multiple capital account.
➢ Partner withdraw money which either can be debited to capital account or separately
debited to Drawing account.
❖ In a Trial Balance of a partnership firm, one may find Capital Accounts of partners as well as
Drawings Accounts.
Profit has to be divided between the partners in a certain profit sharing ratio after making
necessary adjustments stated in the partnership deed such as
1) Interest on capitals
2) Interest on Drawings and loans
3) Salaries or/and commission to partners
2. Interest on 2. Interest on
Drawings capital
➢ Interest will be charged according to the time that elapses between the taking
out of the money and the end of the year or till the time it was repaid whichever
is earlier.
➢ If the dates on which amounts are drawn are not given, then interest for six
months on the whole of the amount will be charged
➢ One partner can enjoy the right to have minimum amount of profit in a year as per the
terms of the partnership agreement.
➢ If share of partner (who has been guaranteed minimum profit) is more than the amount of
guarantee profit
➢ If share of partner (who has been guaranteed minimum profit) is less than the amount of
guarantee profit
The burden of guarantee is borne by the remaining partners in their mutual profit sharing
ratio.
➢ When capital is fixed: Profits will be shared in the ratio of given capitals
➢ Partners may agree to share profits and losses in the capital ratio.
PARTICULAR AMOUNT
1. Introduction of capital
2. Withdrawal of capital
Drawings A/c Dr.
To Bank A/c
3. Interest on Capital
Interest on capital A/c Dr.
To (Individual) Capital (or Current)
Accounts of Partners
4. Interest on Drawings
(Individual) Capital (or Current) Accounts of Partners A/c
Dr.
To Interest on Drawings A/c
5. Salary to partners
Salary A/c Dr.
To (Individual) Capital (or Current)
Accounts of Partners
6. Sharing of profit
Profit& Loss Appropriation A/c Dr.
To (Individual) Capital (or Current)
Accounts of Partners
7. In case of Loss
(Individual) Capital (or Current) Accounts of Partners Dr.
To Profit& Loss Appropriation A/c
Necessity for
valuation of
goodwill
Annuity basis
Methods
Capitalization of Super profit
Basis valuation
of goodwill
Average Profit
Goodwill is nothing
more than the The capacity of a
probability that old business to earn
customer will resort super profits in the
to old place again future.
and again.
Goodwill is an
It is necessary that intangible asset ; it
goodwill has some cannot be seen; it
monetary or saleable cannot be felt; it
vlaue cannot be transported
physically
Due to
➢ Locational advantage
➢ Better customer service
➢ Possession of a unique patent right
➢ Personal reputation of the partner
➢ Quality of the goods sold.
➢ possession of near monopoly right
➢ Possession of trademarks and patents
➢ Presence of managerial skill.
➢ Cost of research and development.
➢ Possession of special contracts
Goodwill should be recorded in the books only when some consideration in money or money’
worth has been paid for it. Only purchased goodwill should be recorded in the books of
account.
Three Methods
➢ Average profit basis,-Simple and Weighted.
➢ Super profit basis-Number of Year Purchase, Annuity basis, and Capitalization of Super
Profit.
➢ Capitalization basis- Average Profits.
➢ Average profit of past years can be calculated by using Simple average or weighted
average method.
➢ The no. of years for average profit and no. of years of purchase profit are decided on the
basis of judgment and negotiation.
➢ For averaging the past profit, either simple average or weighted average may be
employed depending upon the circumstances.
Weighted average profit : If there exists clear increasing or decreasing trend of profits.
Simple average profit : If there is no clear trend of profit.
Super Profit: Excess profit that can be earned by a firm over and above the normal profit
usually earned by similar firms under similar circumstances.
1) The partner who gains excess earning owing to reconstitution of firm should
compensate to partners sacrificing their share in the reconstitution.
2) The partner who gains in terms of profit sharing ratio has to contribute only for excess
Some partners have to sacrifice their future profit and some others
would gain.
For Example: A and B are partners sharing profits in the ratio of 3:2. C is admitted and given one
fourth share in profits.
1) If their profits are 20,000, A will get 12,000 and B will get 8,000.
2) C got 5000 and remaining 15000 will be divided between A and B.
3) A got 9000 and B got 6000.
4) Due to C’s admission, A loses 3,000 per year and B loses 2,000 per year.
5) C will have to compensate A and B for this loss.
PARTICULAR AMOUNT
No entry Required
Profit/loss on
revaluation
Reserves lying account is ts/f
in the balance to old partners
sheet in their old
transferred to profit sharing
Adjustment of the capital ratio
goodwill accounts of old
amongst the old partners in
partners in their old profit
their sacrificing sharing ratio.
Revaluation ratio
Account or
Profit and
Loss
Adjustment
Account for
revaluation
of assets and
liabilities
INTRODUCTION
The purpose of such entries is to make an updated Balance Sheet on the date of admission.
❖ Revaluation Account
➢ Revaluation account is debited with all reduction in the value of assets and increase in
liabilities.
➢ Credited with increase in the value of assets and decrease in the value of liabilities.
➢ The difference in two sides of the account will show profit or loss.
➢ This is transferred to the Capital Accounts of old partners in the old profit sharing ratio.
❖ Why Revaluation?
When a new partner is admitted into the partnership, assets are revalued and liabilities are
reassessed.
Special Points
1. If there is a profit in the first part there will be a loss of the same amount in the second
part and vice versa.
2. The result of the first part of Memorandum Revaluation Account is shared by old partners
in the old profit sharing ratio, while the result of the second part is shared by all
partners including the new one in the new profit sharing ratio.
Account
Asset and Liabilities Assets and liabilities appear in Assets and liabilities appear in
the new balance sheet at the the new balance sheet at the
new or revalued figures. old figures.
Sharing of Net results transferred to old partners’ The balance of the first part
capital accounts in the old is transferred to old partner’s
profit sharing ratio capital accounts in the old
profit sharing ratio while the
balance of the second part is
transferred to all partners
including the new partner in
the new profit sharing ratio.
When new partner • The new ratio of the old partners will be
purchases his share from old calculated by deducted the proportion given to
partner’s in a particular the new partner from the shares of old
ratio partner.
1) Sacrificing Partner : The partners whose shares have decreased as a result of change are
known
as sacrificing partners.
2) Sacrificing Ratio : Ratio in which the old partners sacrifice their share in favor of new
Partner is called sacrificing ratio.
3) Gaining Partners : The partners whose shares have increased as a result of change are
known as
gaining partners.
4) Gaining Ratio: The ratio in which the partners have agreed to gain their shares in profit
from
the other partner or partners, is known as gaining ratio.
Gaining Ratio = New Profit sharing ratio - Old Profit sharing ratio
When the value of the goodwill of the firm is not specifically given, the value of goodwill has to be
inferred
Particulars `
Incoming partner’s capital x Reciprocal of share of incoming partner xxx
Less: Total capital after taking into consideration the xxx
capital brought in by incoming partner
Value of Goodwill xxx
JOURNAL ENTRIES
To Revaluation A/c
When a partner retires from a firm, the treatment of various items like revaluation of assets,
goodwill treatment, sacrifice/gain ratio, reserves etc., are similar to that of admission of a
partner into a partnership firm. The only additional treatment which is required is to settle the
amount due to outgoing partner.
Important Points:
1. The revaluation gain/loss belongs to all the partners (before retirement) and is
distributed in existing profit sharing ratio.
2. The reserves are distributed to all partners in existing profit sharing ratio.
3. The goodwill is adjusted on the basis of gain ratio or sacrifice ratio. (Can be done using
table adjustment)
4. The settlement to partner is done based on agreement between partners as discussed
below.
Settlement
1. The final amount standing to the credit of capital account may be paid in full to the
retiring partner.
To Bank A/c
2. If the amount is not settled in full, the balance amount is transferred to loan account.
To Bank A/c
The loan is repaid as per the terms of retirement and entries will be passed accordingly.
➢ A partnership firm may decide to take a Joint Life Insurance Policy on the lives of all
partners.
➢ The firm pays the premium and the amount of policy is payable to the firm on the death
of any partner or on the maturity of policy whichever is earlier.
Accounting
Treatment
To Bank A/c
To Bank A/c
Year End – Check with Surrender Value Profit & Loss A/c Dr.
To Bank A/c
➢ All the partners may take individual life policies for each of them by paying the premium
from the firm.
➢ In the event of retirement, the retired partner is entitled for the surrender value of the
life policies of all the partners.
If account of retiring
partner is not settled
Business is continued by
remaining partners
Share in profits
Interest @6% per annum
attributable to his
on his share
property in partnership
Important Points:
5. The revaluation gain/loss belongs to all the partners and is distributed in existing profit
sharing ratio.
6. The reserves are distributed to all partners in existing profit sharing ratio.
7. The goodwill is adjusted on the basis of gain ratio or sacrifice ratio. (Can be done using
table adjustment)
8. The treatment of Joint Life Policy would be different as the firm would receive the sum
assured on the policy.
9. The amount due to the deceased partner would be paid to the legal heirs.
10. Business may be continued by other partners (also known as reconstitution of partnership)
If account of deceased
partner is not settled
Business is continued
by remaining partners
Share in profits
attributable to his Interest @6% per
property in annum on his share
partnership
1. The amount standing to the credit to the capital account of the deceased partner
2. Interest on capital, if provided in the partnership deed up to the date of death
3. Share of goodwill of the firm;
4. Share of undistributed profit or reserves;
5. Share of profit on the revaluation of assets and liabilities;
6. Share of profit up to the date of death;
7. Share of Joint Life Policy.
8. Share in profits after death if account is not settled
1. Drawings
2. Interest on drawings
3. Share of loss on revaluation of assets and liabilities
4. Share of loss up to the date of death
Settlement
3. The final amount standing to the credit of capital account may be paid in full to the
retiring partner.
To Bank A/c
4. If the amount is not settled in full, the balance amount is transferred to loan account.
To Bank A/c
The loan is repaid as per the terms of retirement and entries will be passed accordingly.
Profit is assumed to
Assumed that profit is have been earned on
earned evenly the basis of
throughout the year profitability of previous
year
➢ The firm will receive the sum assured on joint life policy
➢ The gain on joint life policy will be credited to the partners in profit sharing ratio
➢ The joint life policy reserve will be credited to the partners in profit sharing ratio
If the firm has taken separate policy for each partner, then at the time of death of partner,
➢ The firm will receive sum assured on the policy of deceased partner
➢ The policy of other partners will be valued at surrender value.
Illustration 1 & 2
A and B start business on 1st January 2016, with capitals of Rs. 30,000 and Rs.20,000. According
to the Partnership Deed, B is entitled to salary of Rs.500 per month and interest is to be allowed
on capitals at 6% per annum. The remaining profits are to be distributed amongst the partners in
the ratio of 5:3. During 2016 the firm earned a profit, before charging salary to B and interest on
capital amounting to Rs.25,000. During the year A withdraw Rs.8,000 and B withdrew Rs.10,000
for domestic purposes.
Give Journal entries relating to division of profit.
Illustration – 3
Ram, Rahim and Karim are partners in a firm. They have no agreement in respect of profit-
sharing ratio, interest on capital, interest on loan advanced by partners and remuneration
payable to partners. In a matter of Distribution of profits, they have put forward the following
claims:
i) Ram, who has contributed maximum capital demands interest on capital at 10% p.a.
and share of profit in the capital ratio. But Rahim and Karim do not agree
ii) Rahim has devoted full time for running the business and demands salary at the rate of
Rs.500 p.a. But Ram and Karim do not agree.
Karim demands interest on loan of Rs.2,000 advanced by him at the market rate of interest
which is 12% p.a.
How shall you settle the dispute and prepare Profit and Loss Appropriation after transferring 10%
of the divisible profits to Reserve? Net profit before taking into account any of the above claims
amounted Rs.45,000 at the end of the first year of their business.
Illustration – 4
A and B start business on 1st January,2016 with capitals of Rs.30,000 and Rs.20,000. According to
the Partnership Deed, B is entitled to a salary of Rs. 500 per month and interest is to be allowed
on opening capitals at 6% per annum. The remaining profits are to be distributed amongst the
partners in the ratio of 5:3. During 2016, the firm earned a profit, before charging salary to B
and interest on capital amounting to Rs.25,000.
During the year A withdrew Rs.8,000 and B withdrew Rs.10,000 for domestic purposes. Prepare
Profit and Loss Appropriation Account.
Illustration 5
Prepare Partner’s capital account for Illustration – 4
Illustration – 6
A and B are partners sharing profits and losses in the ratio of their effective capital.
They had Rs.1,00,000 and Rs. 60,000 respectively in their Capital Accounts as on 1 st January
2016. A introduced a further capital of Rs.10,000 on 1st April 2016 and another Rs.5,000on 1st
July 2016. On 30th September 2016 A withdrew Rs.40,000.
On 1st July 2016, B introduced further capital of Rs.30,000. The partners drew the following
amounts in anticipation of profit.
A drew Rs.1,000 per month at the end of each month beginning from January 2016.
Illustration 7
A and B were partners in a firm sharing profits and losses in the ratio of 3:2. They admit C for
1/6th share in profits and guaranteed that his share of profits will not be less than
Rs.2,50,00,000. Total profits of the firm for the year ended 31st March 2017 were Rs.9,00,000.
Calculate share of profits for each partner when:
1. Guarantee is given by firm
2. Guarantee is given by A
3. Guarantee is given by A and B equally
Illustration – 2
The following particulars are available in respect of the business carried on by Rathore
S.No. Particulars Rs.
1) Capital invested 1,50,000
2) Trading Results
2013 profit 40,000
2014 profit 36,000
2015 loss 6,000
2016 profit 50,000
3) Market Rate of interest on investment
10%
4) Rate of risk return on capital invested in business
2%
5) Remuneration from alternative
Employment of the proprietor Rs.6,000 per annum
(if not engaged in business)
You are required to compute the value of goodwill on the basis of 5 years purchase of super
profit of the business calculated on the average profits of the last four years.
Illustration – 3
The following is the balance Sheet of Yellow and Green as at 31st December 2016:
Liabilities Rs. Assets Rs.
Trade payables 20,000 Cash at Bank 10,000
Capital: Sundry Assets 55,000
Yellow 25,000
Green
The partners shared profits and losses in the ratio 3:2. On the above date, Black was admitted
as partner on the condition that he would pay Rs.20,000 as capital.
Goodwill was to be valued at 3 years purchase of the average of four years profits which were:
Rs. Rs.
2012 9,000 2014 12,000
2013 14,000 2105 13,000
Illustration – 4
With the information given in illustration 3, give Journal Entries assuming that goodwill is
brought in cash.
Illustration – 5
With the information given in illustration 3, assuming that goodwill is paid privately.
Illustration – 6
A, B and C are equal partners. They wanted to change the profit-sharing ratio into 4:3:2. Make
the necessary journal entries. Goodwill of the firm is valued at Rs.90,000.
Illustration – 7
A, B and C are partners sharing profits and losses in the ratio of 4:3:3.
They decided to change the profit-sharing ratio to 7:7:6. Goodwill of the firm is valued at
Rs.20,000. Calculate the sacrifice/gain by the partners and make necessary journal entry.
60,000 60,000
Rs.
Building 25,000
Machinery 12,000
Inventories 12,000
Trade receivables (Because of Doubtful debts) 9,500
4. It was found that there was a Lability for Rs.1,500 for goods received but not recorded in
books.
Give journal entries to record the above. Also, give the Balance Sheet of the partnership firm after
Shyam’s admission.
3,50,000 3,50,000
1. C will bring Rs.50,000 as a capital and Rs.10,000 for goodwill for 1/5 share;
2. Provision for doubtful debts is to be made on trade receivables @2%
3. Inventory to written down by 10%
4. Freehold premises are to be revalued at Rs.2,40,000, plant at Rs.35,000 furniture
Rs.25,000 and office equipment Rs.27,500.
5. Partners agreed that the values of the assets and liabilities remain the same and as such,
there should not be any change in the book values as a result of the above-mentioned
adjustments.
You are required to make necessary adjustments in the capital Accounts of the partners and show
the Balance Sheet of the New Firm.
Illustration 3
Dalal, Banerji and Mallick are partners in a firm sharing profits and losses in the ratio 2:2:1.
Their Balance Sheet as on 31st March 2016 is as below:
49850 49850
Prepare i) Revaluation Account, ii) The Capital Accounts of the partners, iii) Balance Sheet of the
firm after admission of Mr. Mistri
Illustration 4
A and B are in a partnership sharing profits and losses in the proportion of three- fourth
respectively. Their Balance Sheet as on 31st March 2016 was as follows:
Cash Rs.1,000: trade receivable Rs.25,000; inventory Rs.22,000; plant and machinery Rs.4,000;
trade payables Rs.12,000; bank overdraft Rs.15,000; A’s Capital Rs.15,000; B’s Capital
Rs.10,000.
1) C to purchase one-third of the goodwill for Rs.20,000 and provide Rs.10,000 as capital.
Goodwill not to appear in books.
2) Further profits and losses are to share by A B and C equally.
3) Plant and machinery is to be reduced by 10% and Rs.500 is to provide for estimated bad
debts. Inventory is to be taken at a valuation of Rs.24,940.
4) By brining in or withdrawing cash and capitals of A and B are to be made proportionate to
that of C on their profit-sharing basis.
Set out entries to the above arrangement in the firm’s journal and give the partners’capital
accounts in tabular from.
70,000 70,000
X agrees to join the business on the following conditions as and from 1.4.2016:
a) He will introduce Rs.25,000 as his capital and pay Rs.15,000 to the partners as premium
for goodwill for 1/3rd share of the future profits of the firm.
b) A revaluation of assets of the firm will be made by reducing the value of plant and
machinery to Rs.15,000, inventory by 10%, furniture and fittings by Rs.1,000 and by
making a provision of bad and doubtful debts at Rs.750 on trade receivables.
Prepare profit and losses adjustment account, capital accounts of partners including partner X
assuming that the relative ratios of the old partners will be in equal proportion after admission.
Illustration 6
A and B are in partnership sharing profits and losses equally. The Balance Sheet M/s. A and B as
on 31.12.2016, was as follows:
On 1.1.2017 they agreed to take C as 1/3rd partner to increase the capital base to Rs.1,35,000. C
agrees to pay Rs.60,000. Show the necessary journal entries and prepare partner’s capital
accounts.
3,20,000 3,20,000
F and G agrees to share profits and losses at the ratio of 3:2 in future. Value of Goodwill is taken
to be Rs.50,000. Sundry fixed Assets are revalued upward by Rs.30,000 and inventories by
Rs.10,000. Bills Receivable dishonoured Rs.5,000 on 31.12.2015 but not recorded in the books.
Dishonour of bill was due to insolvency of the customer. F and G agree to bring sufficient cash to
discharge claim of K and to make their capital proportionate. Also, they wanted to maintain Rs.
75,000 bank balance for working capital.
Required:
Pass necessary journal entries and draft the balance Sheet of M/s F & G. Also prepare capital
accounts of partners and the Balance Sheet of M/s F& G after K’s retirement.
2,00,000 2,00,000
On the retirement of L assets were revalued: Goodwill Rs.50,000, furniture Rs.10,000 and
inventory in trade Rs.30,000. 50% of the amount due to L was paid off in cash and the balance
was retained in the firm as capital of N. On admission of the new partner, goodwill has been
written off. M is paid off his extra balance to make capital proportionate.
6,64,000 6,64,000
It was mutually agreed that Mr. B will retire from the partnership and in his place Mr. D will be
admitted as a partner with effect from 1st April 2015. For this purpose, the following
adjustments are to be made:
a) Goodwill is to be valued at 1 lakh but the same will not appear as an asset in the books of
the reconstituted firm.
b) Building and plant and machinery are to be depreciated by 5% and 20% respectively.
Investments are to be taken over by the retiring partner at Rs.15,000. Provision of 20% is
to be made on trade receivables to cover doubtful debts.
c) In the reconstituted firm, the total capital will be Rs.2 lakhs which will be contributed by
Mr. A, Mr.C and Mr. D in their new profit- sharing ratio, which is 2:2:1.
1) The surplus funds, if any will be used for repaying bank O/D.
2) The amount due to retiring partner shall be transferred to his loan account.
Required:
Prepare i) Revaluation account
ii) Partners capital accounts:
iii)Bank account and
iv)Balance Sheet of the reconstituted firm as on 1st April 2015.
Illustration 5
A, B and C are in partnership sharing profits and losses at the ratio of 5:3:2. The balance sheet
of the firm on 31.12.2015 was as follows:
Balance Sheet
Liabilities Rs. Assets Rs.
Capital A/cs : Sundry Fixed Assets 80,000
A 50,000 Inventories 50,000
B 40,000 Trade receivables 30,000
C 30,000 Joint Life Policy 20,000
Bank loan 40,000 Bank 10,000
Trade payables 30,000
1,90,000 1,90,000
On 1.1.2016 A wants to retire B and C agreed to continue at 2:1. Joint Life Policy was taken on
1.1.2010 for Rs.1,00,000 and its surrender value as on 31.12.2015 was Rs.25,000.
For the purpose of A’s retirement goodwill was raised for Rs.1,00,000.
Sundry Fixed Assets was revalued for Rs.1,10,000. But B and C did not prefer to show such
increase in assets in the Balance Sheet.
Also, they agreed to bring necessary cash to discharge 50% of the A’s claim, to make the bank
balance Rs25,000and to make their capital proportionate.
Required:
Prepare necessary journal entries.
A, B & C were in partnership sharing profits in the proportions of 5:4:3. The balance sheet of the
firm as on 31st March 2015 was as under:
Liabilities Amount Assets Amount
(Rs) (Rs)
Capital Goodwill 40,000
accounts:
A 1,35,930 Fixtures 8,200
B 95,120 Inventories 1,57,300
C 61,170 Trade 93,500
receivables
Trade payables 41,690 Cash 34,910
3,33,910 3,33,910
A had been suffering from ill-health and gave notice that he wished to retire. An agreement
was, therefore, entered as on 31st March 2015, the terms of which were as follows:
1. The profit and loss account for the year ended 31st March 2015 which showed a net profit
of Rs 48,000 was to be re-opened. B was to be credited with Rs 4,000 as bonus, in
consideration of the extra work which had devolved upon him during the year. The profit
sharing was to be revised as from 1st April 2014 as 3:4:4
2. Goodwill was to be valued at two years’ purchase of the average profits of the preceding
five years. The fixtures were to be valued by an independent valuer. A provision of 2%
was to be made for doubtful debts and the remaining assets were to be taken at their
book values.
The valuations arising out of the above agreement were goodwill Rs 56,800 and fixtures Rs
10,980.
B and C agreed, as between themselves, to continue the business, sharing profits in the ratio of
3:2 and decided to eliminate goodwill from the balance sheet, to retain the fixtures on the
books at the revised value, and to increase the provision for doubtful debts to 6%.
You are required to submit the journal entries necessary to give effect to the above
arrangements and to draw up the capital account of the partners after carrying out all adjusting
entries as stated above.
• Due to illness, L wanted to retire from the firm on 31.03.2015 and admit his son N in his
place
2,00,000 2,00,000
3,00,000 3,00,000
Goodwill is to be calculated at the rate of two years purchase on the basis of average of three
years profits and losses. The profits and losses for three years were detailed as below:
Year ending on Profits/loss
31.3.2016 30,000
31.3.2015 20,000
31.3.2014 (10,000) loss
Profit for the period from 1.4.2016 to 31.12.2016 shall be ascertained proportionately on the
basis of average profits and losses of the preceding three years. During the year ending on
31.3.2016 a car costing Rs.40,000 was purchased on 1.4.2015 and debited to traveling expenses
account on which depreciation is to be calculated at 20% p.a. this asset is to be brought into
account at the depreciated value.
Other values of assets were agreed as follows:
Inventory at Rs.16,000, Building at Rs.1,40,000, Computers at Rs. 50,00; investments at
Rs.6,000. Trade receivables were considered good.
Required
i) Calculate goodwill and Z’s share in the profits of the firm for the period 1.4.2016 to
31.12.2016
ii) Prepare revaluation account assuming that other items of assets and liabilities
remained the same
Prepare partners’ capital accounts and balance sheet of the firm Om & Co. as on 31.12.2016.
The partnership agreement of a firm consisting of three partners- A, B and C (who share profits
in proportion of ½ ¼ and ¼ and whose fixed capitals are Rs.10,000; Rs.6,000 and Rs.4,000
respectively) provides as follows:
a) That partners be allowed interest at 10 per cent per annum on their fixed capitals, but no
interest be allowed on undrawn profits or charged drawings.
b) That upon the death of a partner, the goodwill of the firm be valued at two years’
purchase of the average net profits (after charging interest on capital) for the three years
to 31st December preceding the death of a partner.
That an insurance policy of Rs.10,000 each to be taken in individual names of each partner, the
premium is to be charged against the profit of the firm.
a) Upon the death of a partner, he is to be credited with his share of the profits, interest on
capitals etc. calculated upon 31st December following his death.
b) That the share of the partnership policy and goodwill be credited to a deceased partner
as on 31st December following his death.
c) That the partnership books be closed annually on 31st December.
A died-on 30th September 2016, the amount standing to the credit of his current account on 31 st
December 2015 was Rs.450 and from that date to the date of death he had withdrawn Rs.3,000
from the business.
An unrecorded liability of Rs.2,000 was discovered on 30th September 2016. It was decided to
record it and be immediately paid off.
The trading result of the firm (before charging interest on capital) had been as follows: 2013
profit Rs.9,640; 2014 profit Rs.6,720; Loss Rs.640; 2016 Profit Rs.3,670
Assuming the surrender value of the policy to be 20 percent of the sum assured.
Required
Prepare an account showing the amount due to A’s legal representative as on 31 st December
2016.
The lists of topics which will be covered in this chapter are as follows:
9.2 Income and Expenditure Account (Which is Equivalent to Profit and Loss Account).
9.4 Understanding various sources of Income for NPO and the separate kind of treatments
applicable to them.
A Receipt and Payment Account is similar to cash book except it does not include the date column.
The key features of the Receipt and Payment account are as stated below:
The receipts and payments for the ABC, NPO for the year ended March 31, 2018 were:
Particulars Amount (INR)
Entrance fees 1000
Membership Fees 5000
Donation for Club Building 15000
Food sales 3500
Salaries and Wages 5500
Purchase of Food 2000
Construction of Club Pavilion 13000
General Expenses 1000
Rent and Taxes 500
Bank Charges 250
Opening Cash in hand Balance 5000
Closing Cash in hand Balance 1500
Opening Cash in Bank Balance 2000
Closing Cash in Bank Balance 3500
Income and Expenditure account can be considered as the PROFIT AND LOSS ACCOUNT for the
NPO. The key features of the Receipt and Payment account are as stated below:
1. It is the revenue account for the NPO which is prepared at the end of the accounting period
of the NPO.
2. It is prepared using the Matching Principle i.e. current year revenue and expenses are
recorded in the current accounting period only irrespective of the status of their payment.
Preparing the Income and Expenditure Account from the Receipt and Payment
Account:
Income and Expenditure account and the Balance Sheet for the NPO can be prepared from the
Receipt and Payment Account by making necessary adjustment with respect to the income earned
and expense incurred during the current period.
The following steps needs to be followed to prepare the income and expenditure and balance
sheet using the Receipt and Payment Account.
1. Prepare the Opening Balance Sheet to arrive at the opening balance of the accumulated
fund.
2. Prepare Ledger Accounts for the various income and expenses through which the accruals
and outstanding at the beginning and end of the period needs to be adjusted to arrive at
the income and expense for the current period.
3. Post the debit and credit of the Receipt and Payment to the Credit of the Income and
Expenditure Account for adjusting the accrual and outstanding.
5. Transfer the amounts which are capital in nature from the Receipt and Payment to the
Balance Sheet of the NPO.
Example on Computing and Preparing a particular Income Account from the Receipt and
Payment information:
The balance in Advance Subscription Account of Rs.10000/- will appear on the liabilities side and
in Outstanding subscription Account of Rs.20000/- will appear on the Asset Side.
Balance Sheet:
Example on preparing the Income and Expenditure account and Balance Sheet from the
receipt and Payment Account.
Following is the Receipt and Payment Account of Club XYZ, an NPO for the year ended March 31,
2018 along with the details of the opening and closing balance of Assets and Liabilities for the
year ended.
Prepare the Income and Expenditure and Balance Sheet for the year ended March 31, 2018.
(Miscellaneous)
The computations done in arriving at the amounts mentioned in the above income and expenditure
account are as follow:
Prepare the Income and Expenditure and Balance Sheet for the year ended March 31, 2018.
Question: 2
During 2016, subscription received in cash is Rs.42,000. It includes Rs.1,600 for 2015 and Rs.600
for 2017. Also, Rs.3,000 has still to be received for 2016.
Calculate the amount to be credited to Income and Expenditure Account in respect of
subscription.
Question: 3
Suppose salaries paid during 2016 were Rs 23,000. The following further information is
available:
Salaries unpaid on 31st March,2015 1,400
Salaries pre-paid on 31st March,2015 400
st
Salaries un-paid on 31 March,2016 1,800
st
Salaries pre-paid 31 March,2016 600
Required: Calculate the amount to be debited to Income and expenditure account in respect of
salaries and also, show necessary ledger accounts.
Question: 4
The following was the Receipts and Payments Account of Exe Club for the year ended March. 31,
2016 (All the figures in thousands)
Receipts Rs Payments Rs
Cash in hand 100 Groundsman’s Fee 750
Balance at Bank as per Pass Moving Machine 1,500
Book:
Deposit Account 2,230 Rent of Ground 250
Current Account 600 Cost of Teas 250
Bank Interest 30 Fares 400
Donations and Subscriptions 2,600 Printing & Office Expenses 280
Receipts from teas 300 Repairs to Equipment 500
Contribution to fares 100 Honorarium to Secretary and
Sale of Equipment 80 Treasurer of 2015 400
Question: 5
The Income and Expenditure Account of the Youth Club for the Year 2016 is as follows:
Expenditure Rs. Income Rs.
To Salaries 4,750 By Subscription 7,500
To General Expenses 500 By Entrance Fees 250
To Audit Fee 250 By Contribution for annual 1,000
dinner
To Secretary’s Honorarium 1,000 By Annual Sport meet receipts 750
To Stationery & Printing 450
To Annual Dinner Expenses 1,500
To Interest & Bank Charges 150
To Depreciation 300
To Surplus 600
9,500 9,500
This account had been prepared after the following adjustments:
Particulars Amount (Rs.)
Question: 6
From the following Income and Expenditure Account and the Balance Sheet of a club, prepare its
Receipts and Payments Account and Subscription Account for the year ended 31st March 2016:
Income & Expenditure Account for the year 2015-16
Expenditure Rs. Income Rs.
Upkeep of Ground 10,000 By Subscriptions 17,320
Printing 1,000 By Sale of 260
Newspapers (Old)
Salaries 11,000 By Lectures 1,500
Depreciation on 1,000 By Entrance Fee 1,300
Furniture
Rent 600 By Misc. Income 400
By Deficit 2,820
23,600 23,600
Balance Sheet as at 31st March 2016
Liabilities Rs. Assets Rs.
Subscription in Advance Furniture 9,000
(2016-17) 100 Ground and Building 47,000
Prize Fund: Opening Balance Prize Fund
Add: Interest 25,000 Investment
1,000 Cash in Hand 20,000
Less: Prizes 26,000 Subscription 2,300
General Fund: (2,000) 24,000 (outstanding) (2015-
Opening Balance 16)
Less: Deficit 56,420 700
(2,820)
Add: Entrance Fee 53,600
1,300 54,900
79,000 79,000
The following adjustments have been made in the above accounts:
1. Upkeep of ground Rs.600 and Printing Rs. 240 relating to 2014-2015 were paid in 2015-16.
2. One-half of entrance fee has been capitalised by transfer to General Fund.
3. Subscription outstanding in 2014-15 was Rs.800 and for 2015-16 Rs.700.
4. Subscription received in advance in 2014-15 was Rs.200 and in 2015-16 for 2016-17 Rs.
100.
Question: 7
Question: 8
Adjustments:
Balance
Sheet
Stateme
Prepraration
Notes to nt of
of Financial
Accounts Profit &
Statements
Loss
Cash
Flow
Stateme
nt
Large amount of money, modern technology, large human contribution etc. is required to
increase the scale of operations so as to provide goods and services to the ever-increasing needs
of the growing population of consumers, which is not possible to arrange under partnership or
proprietorship. This led to the inception of the concept of ‘Company’ or ‘Corporation’.
3. TYPES OF COMPANIES
Note:The minimum paid-up share capital requirement of INR 1,00,000 (in case of
a private company) and INR 5,00,000 (in case of a public company) has been done away
with under Companies Act, 2013.
3 .
FA. TRADE PAYABLES - Outstanding dues to Micro, Small and Medium Enterprises
✓ Principal amount and interest due thereon remaining
✓ Amount of interest paid
✓ Amount of interest due and payable for period of delay
✓ Amount of interest accrued and remaining unpaid
J. INTANGIBLE ASSETS
✓ Goodwill
✓ Brands /trademarks
✓ Computer software
✓ Mastheads and publishing titles
✓ Mining rights
✓ Copyrights, and patents and other intellectual property rights, services and
operating rights
✓ Recipes, formulae, models, designs and prototypes
✓ Licenses and franchise
✓ Others (specify nature)
O. INVENTORIES
✓ Raw materials
✓ Work-in-progress
✓ Finished goods
✓ Stock-in-trade (in respect of goods acquired for trading)
P. TRADE RECEIVABLES
✓ Secured, considered good
✓ Unsecured, considered good
✓ Doubtful
Aggregate amount of Trade Receivables outstanding for a period exceeding six months
from the date they are due for payment should be separately stated.
(Rs.in……….)
COMPANY
(1) PROSPECTUS
APPLICATION &
CALL MONEY
(4)
(3)
SHARE SHARE
APPLICATION HOLDER
S
(2)
(5) Shares Allotted
Applications
received & Share
application
money received
Under subscription
Full subscription Over subscription
(Issued >
(Issued = Subscribed) (Issued < Subscribed)
Subscribed)
Minimum Minimum
subscription subscription NOT
received received
Allotment money
received
Further calls
made and call
money received
“Securities Premium
Account” is credited
with the entry for
“Share Capital
Account”
INTRODUCTION
SHARE CAPITAL
❖ Share
Total capital of the company is divided into a number of small indivisible units of a fixed
amount called shares. The capital of the company is called ‘Share Capital’
❖ Share Price
Issue price – The value at which the share is issued [Face (+) Premium, if any
Book building - Process through which company determines it's share prices. Under this
method company determines a price band of its shares and on the basis of bids received
from potential investors at various prices within the price band finally fixes its issue price
Market Price – The value at which the share is traded on the stock exchange
•It is the portion •It is the portion •It is part of •It is the portion
of the issue price of called up Issued Share of the uncalled
of shares which a capital which is Capital capital which a
company has paid by the company has
demanded or shareholders. •subscribed by decided to call
called from the public only in case of
shareholders •allotted by the liquidation of the
• A particular company
amount called by company
•The balance, the company and
which the not paid by the •It also includes •As per Section 65
company has shareholder(s), face value of of the Companies
decided to fully or partially, shares issued by Act, 2013, a
demand in future is known as company for Company may
may be referred ‘unpaid calls’ or consideration decide by passing
to as Uncalled ‘installments (or other than cash. a resolution
Capital." Calls) in Arrears’
• Paid up Capital =
Called up Capital
– Installments in
Arrears
SHARES
Preference
Equity
❖ Preference Shares
As per Section 43 of the Companies Act, 2013, Preference shareholders
➢ are assured of a preferential dividend at a fixed rate during the life of the company.
➢ carry a preferential right over other shareholders to be paid first in case of winding
up of the company.
• Redeembable
Based on Redemption
• Non-Redeemable
❖ Equity Shares
Those shares, which are not preference shares are called Equity Shares.
Equity Equity
Shares Shares
Issued for
Issued for Cash consideration
other than Cash
❖ Minimum Subscription
A public limited company cannot make any allotment of shares unless
➢ minimum subscription stated in the prospectus has been subscribed and
➢ application money for such shares has been paid to and received by the company.
Note: The issue price of shares is generally received by the company in instalments:
First instalment Application Money
Second Instalment Allotment Money
Third Instalment First Call Money
Fourth Instalment Second Call Money and so on.
Last Instalment Final Call Money
Application money
Companies Act,
SEBI Regulations
2013 - Section 39
Section 24 of the Companies Act, 2013 - Matters related to issue and transfer of securities
will be administered by the SEBI and not by the Company Law Board. Thus the application
money has to be minimum of 25% of Issue price.
❖ Full Subscription
Number of shares offered for subscription = Number of shares actually subscribed by the
public
❖ Under Subscription
Number of shares offered for subscription > Number of shares actually subscribed by the
public.
Important Note: shares can be allotted, in this case, only when the minimum
subscription is received.
➢ Minimum subscription received ➔ Proceed for allotment
➢ Minimum subscription not received ➔ Refund the amount received on
application, as per guidelines
❖ Over Subscription
Number of shares offered (Public issue) < Number of shares actually subscribed by the
public.
➢ Applications rejected ➔ application money refunded
➢ Applications accepted
o All shares applied are allotted ➔ No refund
o Part of the shares applied are allotted ➔ excess amount received can be used
for allotment or call money
(Rs.) (Rs.)
(4) Call being Share Call A/c Dr. xxx Amount due on the
made call
Note: Sometimes separate Application and Allotment Accounts are not prepared and entries
relating to application and allotment monies are passed through a combined account “Share
Application & Allotment Account”.
Shares are issued at DISCOUNT, if Issue Price < Nominal or Par Value
100 98 2 2%
Important Note: As per Section 53 of the Companies Act, 2013, a Company cannot issue shares
at a discount except in the case of issue of sweat equity shares (issued to employees and
directors). Thus, any issue of shares at discount shall be void (if issued to general public).
Shares are issued at PREMIUM, if Issue Price > Nominal or Par Value
Example:
Premium is generally called with the amount due on allotment, sometimes with the application
of money and rarely with the call money
(Rs.) (Rs.)
(Rs.) (Rs.)
Number of shares offered (Public Issue) < Number of shares actually subscribed by the
public.
✓ Shares can be allotted to the applicants by a company in any manner it thinks proper.
➢ Some Applicants rejected in full and remaining accepted in full➔ application money
refunded to such applicants
Example
✓ Excess amount received is treated as an advance against allotment and calls and
thereby adjusted against the amount due on allotment or calls.
✓ Surplus money after making adjustment against future calls is returned to the
applicants.
✓ The applicants are informed about the allotment procedure through an
advertisement in leading newspapers.
(Rs.) (Rs.)
(2) Pro-rata Share Application A/c Dr. xxxx Total money received –
Allotment (No. of shares allotted x
Application money per
share)
Calls in
All Dues paid Calls in Arrears
Advance
❖ Calls in Arrears
➢ The total unpaid amount on one or more instalments called but shareholder failed to pay
is known as Calls-in-Arrears or Unpaid Calls.
➢ It is the uncollected amount of capital from the shareholders;
➢ It is shown by way of deduction from ‘called-up capital’ to arrive at paid-up value of the
share capital.
❖ Calls in Advance
(Rs.) (Rs.)
(2b) Call made Calls in Advance A/c Dr. xxx Call amount received
in advance
(4a) For interest Interest on Calls-in-AdvanceA/c Dr. xxx Amount of interest due
payable on Calls- for payment
in-Advance due To Shareholder’s A/c xxx
➢ Forfeiture of shares is the action taken by a company to cancel the shares, WHEN
shareholders fail to pay their allotment and/or calls on the due dates
➢ The directors are usually empowered by the Articles of Association to forfeit those
shares by strictly following the rules and regulations in the Articles of Association
➢ When shares are forfeited, the title of such shareholder is extinguished but the
amount paid to date is not refunded to him.
Forfeiture of Shares
Scenario I Scenario II
Scenario III***
Shares issued at Par Shares issued at
Fully paid Shares
Premium
*** Forfeiture for non-payment of calls, premium, or the unpaid portion of the face value of the
shares is one of the many causes for which a share may be forfeited. But fully paid-up shares
may be forfeited for realization of debts of the shareholder if the Articles specifically provide
it.
(Rs.) (Rs.)
(1b) Forfeiture of Share Capital A/c Dr. xxxx No. of forfeited shares x
shares issued at called-up value per
Par – With Calls-in- share
Arrears
To Calls in Arrears A/c xx Total Amount due but
not paid
(2a) Forfeiture of Share Capital A/c Dr. xxx Call amount received in
shares issued at advance
Premium – IF
Premium NOT Securities Premium A/c Dr. Amount of Security
received premium not received
Note: If the premium has already received by the company, it cannot be cancelled even if the
shares are forfeited in the future:
✓ A forfeited share is merely a share available to the company for sale and remains vested in
the company as an obligation to dispose it off.
✓ Reissue of forfeited shares is not allotment of shares but only a sale. In practice, forfeited
shares are disposed off, by auction.
✓ These shares can be re-issued at any price so long as the total amount received (from the
original allottee and the second purchaser) for those shares is not less than the amount in
“Calls-in-arrears” on those shares.
Re-issue of Shares
Scenario I Scenario II
Loss on Re-issue Profit on Re-issue
❖ Important Points
➢ When the shares are re-issued at a loss, such loss is to be debited to “Forfeited Shares
Account”.
➢ If the loss on re-issue is less than the total amount forfeited, the surplus should be
transferred to Capital Reserve.
➢ When only a portion of the forfeited shares are re-issued, then the profit made on re-
issue of such portion of shares only must be transferred to Capital Reserve.
➢ If the shares are re-issued at a price which is more than the face value of the shares, the
excess amount will be credited to Securities Premium Account.
➢ The forfeited amount on shares (amount originally paid-up) not yet reissued should be
shown under the heading ‘share capital.’
➢ If the re-issued amount and forfeited amount (taken together) exceeds the face value of
the shares re-issued, it is not necessary to transfer such amount to Securities Premium
Account.
➢ The credit balance of forfeited shares account cannot be considered a surplus until the
shares forfeited have been re-issued, because the company may, on re-issue, allow the
discount to the new purchaser equivalent to the amount held in credit in this regard in
the forfeited shares Account
❖ Calculation of Profit on Re-issue of Forfeited Shares
Example
No.of shares forfeited 120
First Re-Issue 50 shares (Rs.6 per share collected to make it fully paid up)
Amount received [50x 6] Rs.300
(Rs.) (Rs.)
➢ A public limited company generally, issue their shares for cash but it may issue shares
o in a direct exchange for land, buildings or other assets.
o in payment for services rendered by promoters, lawyers in the formation of
the company.
➢ These shares should be shown separately under ‘Share Capital’.
➢ Within specified time of allotment, the company must produce before the Registrar
a written contract of sale of service in respect of which shares have been allotted.
Question: 2
A company had an authorised capital of Rs.10,00,000 divided into 1,00,000 equity shares of
Rs.10 each. It decided to issue 60,000 shares for subscription and received applications for
70,000 shares. It allotted 60,000 shares and rejected remaining applications. Up to 31-3 -2017,
it has demanded or called Rs.9 per share. All shareholders have duly paid the amount called,
except one shareholder, holding 5,000 shares who has paid only Rs.7 per share.
Prepare a balance sheet assuming there are no other details.
Question: 3
A company invited applications for 10,000 equity shares of Rs.50 each payable on:
1. Application Rs.15;
2. Allotment Rs.20,
3. on first and final call Rs.15.
Applications are received for 10,000 shares and all the applicants are allotted the number of
shares they have applied for and instalment money was duly received by the company.
Show Journal entries in the books of the company.
Question: 4
On 1st April 2017, A Ltd. issued 43,000 shares of Rs. 100 each payable as follows:
• Rs.20 on application;
• Rs.30 on allotment;
• Rs.25 on 1st October 2017; and
• Rs. 25 on 1st February 2018
Question: 5
Pant Ltd. invited applications for 50,000 equity shares at Rs.50 each, which are payable as on
application Rs.20, on allotment Rs.10 and on first and final call Rs.20. The company received
applications for 60,000 shares. The directors accepted application for 50,000 shares and
rejected the rest.
Show Journal entries if company refunded the application money to rejected applicants and
allotment money was received for 45,000 shares.
Question: 6
The Delhi Artware Ltd. issued 50,000 equity shares of Rs 100 each and 1,00,000 preference
shares of Rs.100 each. The Share Capital was to be collected as under:
Particulars Equity Shares Preference
Rs. Shares Rs.
On Application 25 20
On Allotment 20 30
First Call 30 20
Final Call 25 30
All these shares were subscribed. Final call was received on 42,000 equity shares and 88,000
preference shares.
Prepare the cash book and journalise the remaining transactions in the books of the company.
Question: 7
On 1st October 2017 Pioneer Equipment Limited received applications for 2,50,000 Equity Shares
of Rs. 100 each to be issued at a premium of 25 per cent payable as:
On Application Rs.25
On Allotment Rs.75 (including premium)
Balance Amount on Shares As and when required
The shares were allotted by the Company on October 20, 2017 and the allotment money was
duly received on October 31, 2017.
Record journal entries in the books of the company to record the transactions in connection with
the issue of shares
Question: 8
JHP Limited is a company with an authorised share capital of Rs.10,00,000 in equity shares of
Rs.10 each, of which 6,00,000 shares had been issued and fully paid on 30thJune, 2016. The
company proposed to make a further issue of 1,00,000 of these Rs.10 shares at a price of Rs.14
each, the arrangements for payment being:
• Rs.2 per share payable on application, to be received by 1st July 2016.
• Allotment to be made on 10th July 2016 and a further Rs.5 per share (including the
premium) to be payable.
Question: 9
Shreyas Ltd. did not receive the first call on 10,000 equity shares @ Rs. 3 per share which was
due on 1.7.2016. This amount was received on 1.4.2017.
Open Calls in arrears account and journalise the entries in the books of the company on 1.7.2016
and 1.4.2017. Also show an extract of Balance Sheet on 31.3.2017.
Question: 10
Rashmi Limited issued at par 1,00,000 Equity shares of Rs.10 each payable:
• Rs.2.50 on application;
• Rs.3 on allotment;
• Rs. 2 on first call and balance on the final call.
All the shares were fully subscribed. Mr. Nair who held 10,000 shares paid full remaining
amount on first call itself. The final call which was made after 3 months from first call was fully
paid except a shareholder having 1000 shares who paid his dues amount after 2 months along
with interest on calls in arrears. Company also paid interest on calls in advance to Mr. Nair.
Give journal entries to record these transactions
Question: 11
A Ltd forfeited 30,000 equity shares of Rs.10 fully called-up, held by Mr. X for non-payment of
final call @ Rs.4 each. However, he paid application money @ Rs.2 per share and allotment
money @ Rs.4 per share. These shares were originally issued at par.
Give Journal Entry for the forfeiture
Question: 12
X Ltd forfeited 20,000 equity shares of Rs.10 each, Rs. 8 called-up, for non-payment of first call
money @ Rs. 2 each. Application money @ Rs. 2 per share and allotment money @ Rs.4 per share
have already been received by the company.
Give Journal Entry for the forfeiture (assume that all money due is transferred to Calls-in-
Arrears Account).
Question: 13
X Ltd. forfeited 5,000 equity shares of Rs.100 each fully called-up which were issued at a
premium of 20%.
Amount payable on shares were:- on application Rs.20; on allotment Rs.50 (including premium);
on First and Final call Rs.50. Only application money was paid by the shareholders in respect of
these shares.
Question: 14
Mr. Shami has applied for 1,000 shares of Company XYZ Ltd. paying application money @ Rs. 2
per share but has been allotted only 600 shares. The shares have a face value of Rs.10 and a
premium of Rs. 2 per share, which are payable as: on Allotment- Rs.5 (including premium) and
on final call Rs. 5. Now in case Mr. Shami doesn't pay allotment money and final call and his
shares are forfeited, then following entry will be passed on forfeiture:
Question: 15
Mr. Long who was the holder of 2,000 preference shares of Rs.100 each, on which Rs. 75 per
share has been called up could not pay his dues on Allotment and First call each at Rs.25 per
share. The Directors forfeited the above shares and reissued 1500 of such shares to Mr. Short at
Rs. 65 per share paid-up as Rs.75 per share.
Give Journal Entries to record the above forfeiture and re-issue in the books of the company.
Question: 16
Beautiful Co. Ltd issued 30,000 equity shares of Rs.10 each payable as
• Rs.3 per share on Application,
• Rs.5 per share (including Rs.2 as premium) on Allotment and
• Rs.4 per share on Call.
All the shares were subscribed. Money due on all shares was fully received except from Ram,
holding 500 shares, who failed to pay the Allotment and Call money and Shyam, holding 1,000
shares, who failed to pay the Call Money. All those 1,500 shares were forfeited. Of the shares
forfeited, 1,250 shares (including whole of Ram’s shares) were subsequently re-issued to Jadu as
fully paid up at a discount of Rs.2 per share.
Pass the necessary entries in the Journal of the company to record the forfeiture and re-issue of
the share. Also prepare the Balance Sheet of the company.
Question: 17
X Co. Ltd. was incorporated with an authorized share capital of 90,000 equity shares of Rs.10
each. The company purchased land and buildings from Y Co. Ltd for Rs.4,00,000 payable in fully
paid-up shares of the company. The balance of the shares was issued to the public, which were
fully subscribed and paid for.
You are required to pass Journal Entries and to prepare the Balance Sheet.
Debentures
(Types)
First
Secured Convertible Redeemable Registered
Mortgage
Second
Non- Mortgage
Unsecured Irredeemable Bearer
Convertible
Introduction
Sources of
Finance for
Companies
Borrowed
Own Funds Funds /
Debt
Loans from
Share
Profits Debentures Banks &
Capital
Institutions
Equity Preference
Debenture
A Bond
Company issues under its
seal
Acknowledges a Debt
Provides repayment of
principal and interest
Section 2 (30) of the Companies Act, 2013 - “Debenture” includes debenture stock, bonds or
any other instrument of a company evidencing a debt, whether constituting a charge on the
assets of the company or not.
Thus, debenture may be Secured Debenture or Unsecured Debenture. Those debentures that
have charge on the assets of the company are called “Secured Debentures”
❖ Charge on Assets
➢ It is a right of a lender (debenture holder, in this case) to be paid from a
borrower's (Company’s) assets if the debt is not paid on time as promised.
➢ The nature of the charge and the assets charged are described in the Bond.
➢ The charge is not valid unless registered with the Registrar, and the certificate
registering the charge is printed on the bond.
➢ It is also customary to create a trusteeship in favour of one or more persons in
the case of mortgage debentures.
➢ The trustees of debenture holders have all powers of a mortgage of a property
and can act in whatever way they think necessary to safeguard the interest of
debenture holders.
Note: No company shall issue any debentures carrying any voting rights.
❖ Features of Debentures
Payment of Payable whether there is any profit or Payable only if profits are
Interest not. Interest on debentures has to be there.
paid
TYPES OF DEBENTURES
Debentures
Second
Non- Mortgage
Unsecured Irredeemable Bearer
Convertible
ISSUE OF DEBENTURES
The debentures which are issued at par are issued at the same price as their nominal value
(Rs.) (Rs.)
➢ The debentures, which are issued at a premium, are issued at a higher price than their
nominal value.
➢ Debentures are issued at a premium by a company when the market rate of interest is
lower than the debentures interest rate.
➢ The premium on debentures is credited to ‘Securities Premium Account’ as
‘Debentures’ are covered in the definition of ‘securities’ u/s 2(h) of the Securities
Contracts (Regulation) Act.
➢ Utilisation of such Debenture Premium is restricted as it is governed by Section 52 of
the Companies Act, 2013.
(Rs.) (Rs.)
➢ The debentures which are issued at a discount are issued at a lower price than nominal
value
➢ The Companies Act does not impose any restriction on the price at which debentures can
be issued. Unlike shares, there is no limit for discount on issue of debentures.
➢ The company issues debentures at a discount when the market rate of interest is higher
than the debenture interest rate.
➢ The difference between the nominal value of debentures and cash received is
transferred to “Discount on Issue of Debentures Account”.
➢ Such “Discount on Issue of Debentures” is written-off proportionately in subsequent
years by charging to the Statement of Profit and Loss. It is considered a normal practice
to amortize discount on issue of debentures over the period of benefit, i.e., normally 3
to 5 years.
➢ The Discount on issue of debentures is considered as incremental interest expense.
The true expense (net borrowing cost) for a particular accounting period is, therefore,
the total interest payment plus the discount written off.
(Rs.) (Rs.)
Redeemable
Debentures
(Rs.) (Rs.)
The Debentures Suspense Account will appear on the assets side of the Balance Sheet
under Other Non- Current Assets and Debentures on the liabilities side of the Balance
Sheet. When the loan is repaid, the entry is reversed in order to cancel it.
Students should note that the Method 1 is much more logical from the accounting point of view.
Therefore, it is advised to follow Method 1.
Debentures, just like shares, can also be issued for consideration other than for cash, such as
for purchase of land, machinery, etc.
In this case, the following entries are passed:
The discount on issue of debentures is amortised over a period between the issuance date
and redemption date.
It should be written-off in the following manner depending upon the terms of redemption:
(a) If the debentures are redeemable after a certain period of time, the total amount of
discount should be written-off equally throughout the life of the debentures (applying
the straight-line method). The main advantage of this method is that it spreads the
burden of discount equally over the years.
(b) If the debentures are redeemable at different dates, the total amount of discount
should be written-off in the ratio of benefit derived from debenture loan in any
particular year (applying the sum of the year’s digit method). This method is suitable
when debentures are redeemed by unequal instalments.
Loss on issue of debentures is also a capital loss and should be written off in a similar
manner as discount on debentures issued.
In the balance sheet both the items (Discount and Loss) are shown as Non-current/ current
assets depending upon the period for which it has to be written off.
(Rs.) (Rs.)
Question: 2
Atul Ltd. issued 1,00,00,000, 8% debenture of Rs.100 each at a discount of 10% redeemable at
par at the end of 10th year.
Money was payable as follows:
• Rs.30 on application
• Rs. 60 on allotment
Record necessary journal entries regarding issue of debenture.
Question: 3
Koinal Chemicals Ltd. issued 15,00,000, 10% debenture of Rs.50 each at premium of 10%,
payable as Rs.20 on application and balance on allotment. Debentures are redeemable at par
after 6 years. All the money due on allotment was called up and received.
Record necessary entries when premium money is included in application money.
Question: 4
Modern Equipment’s Ltd. issued 4,00,000, 12% debentures of Rs. 100 payables as follows:
• On application Rs.30
• On allotment Rs. 70
The debenture was fully subscribed, and all the money was duly received. As per the terms of
issue, debentures are redeemable at Rs.110 per debenture. Record necessary entries regarding
issue of debentures.
Record necessary entries regarding issue of debentures.
Question: 5
Agrotech Ltd. issued 150 lakh 9% debentures of Rs.100 each at a discount of 6%, redeemable at a
premium of 5% after 3 years payable as:
• Rs.50 on application and
• Rs. 44 on allotment.
Record necessary journal entries for issue of debentures.
Question: 6
Simmons Ltd. issued 1,00,000, 12% Debentures of Rs.100 each at par payable in full on
application by 1st April, Application were received for 1,10,000 Debentures. Debentures were
allotted on 7th April. Excess money refunded on the same date.
You are required to pass necessary Journal Entries (including cash transactions) in the books of
the company.
Question: 7
Question: 8
X Ltd. obtains a loan from IDBI of Rs.1,00,00,000, giving as collateral security of Rs.1,50,00,000
(of Rs.10 each), 14%, First Mortgage Debentures.
Question: 9
X Company Limited issued 10,000 14% Debentures of the nominal value of Rs.50,00,000 as
follows:
(a) To sundry persons for cash at 90% of nominal value of Rs.25,00,000.
(b) To a vendor for purchase of fixed assets worth Rs.10,00,000 – Rs.12,50,000 nominal
value.
(c) To the banker as collateral security for a loan of Rs.10,00,000 –
Rs.12,50,000 nominal value.
Pass necessary Journal Entries.
Question: 10
HDC Ltd issues 1,00,000, 12% Debentures of Rs.100 each at Rs.94 on 1st January 2017. Under the
terms of issue, the debentures are redeemable at the end of 5 years from the date of the issue.
Calculate the amount of discount to be written-off in each of the 5 years.
Question: 11
A company issued 12% debentures of the face value of Rs.10,00,000 at 10% discount on 1-1-
2017.
Debenture interest after deducting tax at source @ 10% was payable on 30th June and 31st of
December every year. All the debentures were to be redeemed after the expiry of five-year
period at 5% premium.
Pass journal entries for the accounting year 2017.