Principles and Practices of Accounting - CAF - RL - 07

Table of Contents:
Chapter 1 – Theoretical Framework ..................................................................................................................4

Unit-1 Theoretical Framework .......................................................................................................................5
Unit-2 Accounting for Concepts, Conventions and principles .................................................................14
Unit-3 Capital and revenue expenditure and receipts .............................................................................21
Unit-4 Contingent liabilities and contingent assets..................................................................................24
Illustration .......................................................................................................................................................26
Unit-5 Accounting policies ............................................................................................................................27
Unit-6 Valuation principles and contingent assets ...................................................................................29
Chapter 2 – Accounting Process........................................................................................................................32
Unit-1 Journal Entries ....................................................................................................................................33
Unit-2 Ledgers .................................................................................................................................................38
Unit-3 Trial Balance .......................................................................................................................................41
Unit-4 Subsidiary Books .................................................................................................................................46
Unit-5 Cash Books ...........................................................................................................................................50
Unit-6 Rectification of Errors .......................................................................................................................55
Illustrations ......................................................................................................................................................63
Chapter 3 – Bank Reconciliation System .........................................................................................................74
Illustrations ......................................................................................................................................................87
Illustrations ....................................................................................................................................................102
Chapter 5 – Concept and Accounting of Depreciation ..............................................................................104
Questions: ..........................................................................................................................................................125
Illustrations ....................................................................................................................................................126
Chapter-6 Accounting for Special Transactions ..........................................................................................130
Unit-1 Bills of Exchange ...............................................................................................................................130
Unit -2 Sale of Goods on Approval or Return Basis .................................................................................145
Unit – 3 Consignment ...................................................................................................................................154
Unit – 4 Average Due-Date ..........................................................................................................................169
Illustrations ....................................................................................................................................................176
Unit – 5 Account Current .............................................................................................................................185
Illustrations ....................................................................................................................................................190
Chapter 7 – Preparation of Final Accounts of Sole Proprietors ................................................................193
Illustrations ....................................................................................................................................................207
Chapter – 8 Partnership ...................................................................................................................................215
Unit-1 Introduction .......................................................................................................................................215
Accounting www.indigolearn.com 2
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
Chapter 1 – Theoretical Framework
OBJECTIVES
The lists of topics which will be covered in this chapter are as follows:
1.1 Meaning and Scope of Accounting:
- Meaning and significance of Accounting.

- Difference between Book-Keeping and Accounting.
- Limitations of Accounting.
1.2 Accounting Concepts, Conventions and Principles:
- Understanding various accounting concepts, conventions, principles and assumptions

which govern Accounting.
- Characteristics of Financial Statements.
1.3 Capital and Revenue Expenditure and Receipts:
- Capital and Revenue Expenditure

- Capital and Revenue Receipts
1.4 Contingent Assets and Contingent Liabilities:
- Contingent Liabilities
- Contingent Liabilities Vs Liabilities
- Contingent Liabilities Vs Provisions
- Contingent Assets
1.5 Accounting Policies:
- Meaning of Accounting Policies

- Selection of Accounting Policies
- Changes in Accounting Policies
1.6 Valuation Principles and Accounting Estimates:
- 4 Valuation Principles
- Accounting Estimates
1.7 Accounting Standards:
- What are Accounting Standards

- Benefits and Limitations of Accounting Standards
1.8 Indian Accounting Standards:
- Need for Convergence towards Global Standards

- International Financial Reporting Standards
- Benefits of Convergence with IFRS
- Indian Accounting Standards (Indian AS)
Unit-1 Theoretical Framework
Meaning of Accounting:
American Institute of Certified Public Accountant defined Accounting as “Accounting is the

art of recording, classifying and summarizing in a significant manner and in term of Money,
transactions and events which are, in part at least, of a financial character and interpreting
the results thereof.”
In simple terms Accounting can be stated as the process of recording and maintaining the
Financial Information.
Procedures of Accounting:
Broadly the accounting procedures are divided into two categories:

1. Generating Financial Information
2. Using the Financial Information.
Procedure to Generate Financial Information comprises of the following 6 steps:
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.
A company carries on hundreds and thousands of transactions in a financial year and

the journal and ledger balances for all the transactions can run into hundreds of pages
which will be lot time consuming and confusing for the users of the Financial
Statements.
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.
The Financial Statements are communicated through the distribution of annual

accounting reports, mandatory fillings with the various statutory authorities.
Using the Financial Information and Users of Financial Statements (Accounting

Information):
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:
User’s of Financial Statements
Internal Users External Users
Management and Owners Investors, Lenders, Statutory

of the Business Authorities, Employees, etc.
Type of Financial Information needed by the users
Every information which Key information about

can affect the operations
1. Assets
of the business
2. Liabilities
3. Profitability
4. Capital
Users of Accounting Information/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:
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.
4. Suppliers and Creditors:

Suppliers and Creditors are interested in using the financial information of the
company with the same intention as the lenders.
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.
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
Systematic Determining Determining Providing Understandi

ally results of financial the users ng Solvency
recording recorded position of with the position of
all transactions the required the
transaction company information company
s
How the Objectives are achieved?
Through By By Annual Determining

Journal preparation preparation Reports and Liquidity
entries, of Profit & of Balance Statutory position in
Ledger and
Loss Sheet Fillings long run and
Trial
Accounts near future
Balance
Book-Keeping:
Book-Keeping can be stated as the process/activity to record the various transactions

entered by the entity in a systematic and timely manner.
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.
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.
Often, Book-Keeping is confused with Accounting. It is important to note that Book-Keeping

is a part of Accounting. Accounting in itself is a big domain and not restricted to Book-
Keeping.
The following table will enable you to understand the important points of Distinction
between Book-Keeping and Accounting:
Point of Distinction Book-Keeping Accounting

Objective Systematic Recording of Summarizing of Recorded
Transactions Transactions
Basis for It is basis for preparation of It is the basis for
Financial Statements communicating the results of
operations
Are Financial Financial Statements do not Financial Statements are part
Statements parts of form a part of Book-Keeping of Accounting
it?
Basis for Managerial Managerial Decisions cannot be Managerial Decisions are made
Decisions made on the basis of Book- based on the statements
Keeping prepared under Accounting
Sub-Fields There is no Sub-Field of Book- Accounting has various sub-
Keeping fields such as Managerial
Accounting, Financial
Accounting, Cost Accounting,
etc.
Sub-Fields of Accounting:
Book-Keeping can be stated as the process/activity to record the various transactions

entered
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:
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.
4. Social Responsibility Accounting:

With the increasing awareness about the social issues and involvement of the various
business houses in view to work for profit and support a cause along with the
advancement in the laws relating the CSR there has been a significant increase in the
spending towards social causes.
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.
5. Human Resource Accounting:

Of all the expenditure incurred by the businesses they can be measured by using the
standards, measurements and valuation principles provided by various laws,
regulations and AS.
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:
The Limitations of Accounting are as follow:
1. Non-Monetary items are not considered:

The most important factor to determine the worth of a business is their employee,
their skill and dedication which are nowhere found on the Financial Statements.
2. Balance Sheet is valid only for a particular point of time:

The Balance Sheet which reflects the financial position of the business is valid only
for a particular point of time. A single additional transaction can alter the balance
sheet drastically.
However, to overcome this limitation the auditors disclose the events occurring
after the balance sheet date.
3. Time Value of Money:

The Monetary factors such as Inflation, Time value of Money, etc. are ignored in
preparation of Accounting.
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.
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?
i) CEO of the company

ii) Employees of the company – Not an internal user
iii) CFO of the company
iv) Directors of the company
3. Limitation of Accounting is that it:
i) It does not use estimates.

ii) It accounts only for Monetary Items – Is a Limitation
iii) Accounts for time value of Money
iv) Balance Sheet is valid throughout the year.
Unit-2 Accounting for Concepts, Conventions and principles
Need for Accounting 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 Principles need to satisfy the following conditions:
1. They should be based on real assumptions.

2. They must be simple, understandable and explanatory.
3. They must be followed consistently.
4. They should be able to reflect future predictions.
5. They should be informational for the users.
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.
Let us look at the Concepts, Conventions and Principles:
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
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.
2. Money Measurement Concept:

As per this Concept only those transactions which can be measured in Monetary Terms
are to be recorded.
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.
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.
6. Going Concern Concept:

As per the Going Concern Concept it is assumed that the entity intends to continue its
operations for the foreseeable future and has no intentions of drastically reducing its
scale of operations.
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.
9. Dual Aspect Concept:

This concept is the basis on which the Double Entry System of Book-Keeping is based
on. As per this concept every transaction has 2 effects.
This can be summarized in the following manner:
Effect of Changes in Asset

i) In one Asset, in other Asset.
ii) In one Asset, in Liability.
iii) In one Asset, in other Asset.
iv) In one Asset, in Liability.
Effect of Changes in Liability

v) In one Liability, in other Liability.
vi) In one Liability, in Asset.
vii) In one Liability, in other Liability.
viii) In one Liability, in Asset.
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).
10. Conservatism Concept:

This Concept states that accountants should not record anticipated income but they
need to record the anticipated losses.
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.
11. Consistency Concept:

This Concept states that the enterprises should follow the accounting policies on a
consistent basis from one period to another and should change their accounting policy
only when the exceptional circumstances arise.
The intention of this concept is to ensure the comparability of financial statements

across a period of time. Financial Statements can be compared across a period of time
only when they are prepared using the same accounting policies and principles for the
period being compared.
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.
12. Materiality Concept:

This Concept allows the accountant to ignore all the other concepts of accounting
which have been discussed till now under the condition that the result of ignoring all
the other concepts will not make the financial statements materially misstated.
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.
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.
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.
10. Full, Fair and Adequate Disclosure:

Full disclosure states that nothing should be omitted from the Financial Statements.
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.
Questions:
1. Identify the effect on Asset and Liability of the following transactions.
i) Mr. A paid outstanding creditors balance of Rs.10,000

Asset decreases, Liability Decreases.
ii) Mr. B sold goods worth Rs.10,000 for cash?

Asset decreases (Inventory), Asset Increases (Cash/Bank).
2. Which of the following is not a qualitative characteristic of Financial Statement?
i) Comparability
ii) Completeness – Not an qualitative characteristics
iii) Relevance
iv) Reliability
3. A company needs to apply same method of depreciation due to which accounting

concept:
i) Consistency – For Consistency

ii) Money Measurement
iii) Periodicity
iv) Accrual
4. What are the situations under which company can change its Accounting Policy?
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.
For Eg: Cost of Goods Sold in relation to the sales made.
Factors determining whether expenditure is CAPITAL or REVENUE in nature:
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.
2. Is the Expenditure Recurring or Not?

The expenditure which are recurring on a fixed basis and whose benefit is exhausted
within a single accounting period is revenue expenditure. For eg: Salaries paid on
monthly basis.
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.
Revenue receipts are credited to the profit & loss account.
For Eg: Collection from Debtors for the sales made.
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.
Questions:
1. Identify which of the following is Capital/Revenue Expenditure or Capital/Revenue

Receipt.
i) Purchase of Computer worth Rs.1.00 lac by company dealing in computers for

maintaining its accounts.
Capital Expenditure (Even though it is dealing in computers it is purchased
the computer for maintaining its accounts and not for sale).
ii) Payment of Rent in advance for 2 years.

Rent Expense for current year is revenue expense but the rent paid for the
next year is capital expense.
iii) Cash Sale of Rs.1.00 Lac

Revenue Receipt
iv) Sale of old Fixed Asset by the company at a loss of Rs. 50 thousand.
Capital Receipt
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.
Contingent Liabilities Vs Liabilities:
Point of Distinction Contingent Liabilities Liabilities

Status of obligation
Uncertain Obligation. It may or Fixed present Obligation
may not arise in future
Outflow of Outflow of Resources to settle Outflow of Resources to settle
Resources the obligation is not fixed or the obligation is fixed.
probably estimable
Recognition in the Not Recognized in the Financial Recognized in the Financial
Financial Statements. Statements.
Statements.
Example Ongoing legal dispute, Amount due to Creditors
guarantee given in respect of
third parties
Contingent Liabilities Vs Provisions:
Point of Distinction Contingent Liabilities Provisions

Status of obligation Uncertain Obligation. It may or Obligation is present. However,
may not arise in future amount of obligation is
measured by estimate since it
is not fixed
Recognition in the Not Recognized in the Financial Outflow of Resources to settle
Financial Statements. the obligation probable and
Statements. estimable. Hence, recognized
in the Financial Statements.
Example Ongoing legal dispute, Provision for Doubtful debts,
guarantee given in respect of provision for depreciation.
third parties
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.
Questions:
1. Identify which of the following is Contingent Liability.
i) Ongoing Legal proceeding, the company expects to win the case.

Not a Contingent Liability. (It’s a Contingent Asset)
ii) Liability in respect of Bill Discounted by the company.

Contingent Liability.
iii) Company is planning to make an appeal against Income Tax demand of

Rs.5.00 Lac and has estimated that it has 70% probability of winning the
same.
Not a Contingent Liability. (Since it has not yet made the appeal, as of now it
is a liability due against the demand)
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
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.
Selection of Accounting Policies:

The Accounting Policies which are selected and on the basis of which the Financial
Statements will be prepared play a major role in preparing and presenting the Financial
Statements in a true and fair manner.
There are 3 main considerations in selection of Accounting Policies which are as presented
below:
Selection of Accounting Policy
Prudence Substance over Materiality

Form
Use of degree of Accounting Policies Accounting Policies

caution and should be selected in should be selected in
making an such a manner that such a manner that
educated they disclose the they disclose all the
judgment in intention of the transaction and events
selection transaction rather than which are material
accounting the legality of the enough to influence
policies same. the economic decision
of the users.
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.
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.
Its value as per Historical cost would be Rs.25.00 Lac.
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.
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.
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.
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/-.
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.
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.
Determine the value of Machine as per
i) Historical Cost
Rs.60/- Lacs
ii) Current Cost.

Rs.75/- Lacs.
iii) Realizable Value.

Rs.48/- Lacs
iv) Present Value.

Rs.85,14,000/- (10 Lacs X 8.514)
Chapter 2 – Accounting Process
OBJECTIVES
2.1 Journal Entries
2.2 Ledgers
2.3 Trial Balance
2.4 Subsidiary Book:
2.5 Cash Book:
2.6 Rectification of Errors
Unit-1 Journal Entries
Double Entry System:
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.
Advantages of Double Entry System:
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:
Debits and Credits are the 2 sides of same coin. For every debit there will always be an equal
and corresponding credit.
The Rules of Debit and Credit can be summarized as follow:
i) Increases in assets = debits & decrease in assets = credits.

ii) Increases in liabilities = credits & decreases in liabilities = debits.
iii) Increases in owner’s capital = credits & decreases in owner’s capital = debits.
iv) Increases in expenses = debits & decreases in expenses = credits.
v) Increases in revenue or incomes = credits & decreases in revenue or incomes = debits.
There are 2 methods of recording every transaction by under the Double Entry System.
13. Journal Entry – Traditional Approach:

To understand the traditional approach it is important to understand 2 important
factors
i) Classification of Accounts.
ii) Golden Rules of Accounting.
Classification of Accounts:
Classification of Accounts under traditional accounts is based on Personal and Impersonal

Accounts.
Accounts
Personal Accounts Impersonal Accounts
Real Accounts
Nominal Accounts
Interpretation of the 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.
Golden Rules of Accounting:
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:
Type of Account Debit Credit

Personal Account When Receiving When Giving
Real Account When it comes in When it Goes out
Nominal Account All the Expenses and Losses All Incomes and gains
Example on Journal Entry:
Prepare the Journal entries for the following transactions:
1. Mr. A Introduced capital of Rs.10.00 lac to start his business.

2. Purchased Machinery worth Rs.2.00 Lac by paying the entire amount.
3. Purchased goods on credit from Mr. B worth Rs. 50 Thousand.
4. Sold goods for Rs. 4.00 Lac to Mr.C and of Rs.1.00 Lac in cash.
The Journal entries for the above transaction are as follow:
14. Accounting Equation – Modern Approach:

The other approach to record the transactions is the Modern Approach of accounting
which is based on the Accounting Equation.
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.”
Assets = Liabilities + Owner’s Equity
The owner’s equity is computed as follow:
Contributed Capital
Add: Beginning Retained Earnings
Add: Profit earned during the period (Revenues – Expenses)
Less: Dividends distributed
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
Example on Modern Classification of Accounts:
Prepare the Journal entries for the following transactions:
1. Mr. A Introduced capital of Rs.10.00 lac to start his business.

2. Purchased Machinery worth Rs.2.00 Lac by paying the entire amount.
3. Purchased goods on credit from Mr. B worth Rs. 50 Thousand.
4. Sold goods for Rs. 4.00 Lac to Mr.C and of Rs.1.00 Lac in cash.
Questions:
4. Show the effect of the following transactions using the Traditional approach as well
as the Modern Approach.
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.
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”.
Important rules to be noted while 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:
Prepare the Purchase Account for the following transactions:
1. 10/08/2018 - Purchased goods of Rs.5.00 lac on credit from Mr. A.

2. 12/08/2018 - Purchased goods of Rs.1.00 lac in cash.
3. 15/08/2018 – Returned goods of Rs.1.00 lac Purchased from Mr. A
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.
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)
Unit-3 Trial Balance
What is a 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.
Objectives of Preparing a Trial Balance:
The Objectives of preparing a Trial Balance are as mentioned below:
i) Trial balance helps to establish arithmetical accuracy of the books of Accounts.

ii) Financial statements are normally prepared on the basis of agreed trial balance
otherwise the work may be cumbersome. So it can be stated that the preparation of
trail balance eases the preparation of Financial Statements.
iii) The trial balance serves as a summary of all the ledger balances.
LIMITATIONS OF TRIAL BALANCE:
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.
Format of TRIAL BALANCE:
Adjusted Trial Balance:

Sometimes it may happen that the trial balance does not agree even after entering all the
amounts correctly from the Ledgers. In such situations the entities use suspense account to
balance the trial balance. Wherein they transfer the difference in the suspense account and
agree the trial balance. This kind of trial balance which has suspense account in it is known
as Agreed Trial Balance.
Methods of preparing Trial Balance:

There are 3 different methods of preparing Trial Balance. The only difference in these 3
methods is the manner of presenting the ledger balances.
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.
3. TOTAL AND BALANCE METHOD:

This is a combination of the above mentioned 2 methods. Under this method the trial balance
shows the total columns as well as the balance columns.
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.
TRIAL BALANCE AS PER TOTAL METHOD:
Note: Here we have considered only the amount from the total column.
TRIAL BALANCE AS PER BALANCE METHOD:
Note: Here we have considered only the amount from the BALANCE column.
TRIAL BALANCE AS PER TOTAL & BALANCE METHOD:
Questions:
1. Prepare the Trial Balance as per the 3 different methods from the following details:
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.
3. Purchase Return Book

Records the return of the goods purchased on credit.
4. Sales Book
Records Credit sales of goods made by the entity.
5. Sales Return Book

Records sales return made by the customers.
6. Bills Receivable & Bills Payable

If the entity deals in promissory notes they record it in a separate subsidiary book for
all the Bill Receivable and Bills Payable.
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.
Advantages of Subsidiary Book:

The following are the advantages of the Subsidiary Books:
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
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.
5. Easiness in Locating errors:

If the Trial Balance does not agree, it is easy to identify the area where there might
be an issue due to the maintenance of various subsidiary books.
Difference between Principal Books and Subsidiary Books:
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.
Example on Subsidiary Book (Purchase Books):
Prepare the Purchase Book from the following transactions and post their balances in Ledger.
The purchase book for the above transactions is as follow:
The ledger posting for the above transactions recorded in the Purchase Book is as Follow:
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.
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.
Different Kinds of Cash Book.

There are mainly 3 kinds of Cash Book.
i) Simple Cash Book

ii) Two Column Cash Book
iii) Three Column Cash Book
Some organizations also maintain another form of cash book known as Petty Cash Book.
1. Simple Cash Book:

This is like a simple Cash Ledger Account. Wherein the deposits are recorded on the
debit side and the payments are recorded on the credit side.
Important points to be noted in this regard are:

i) Only Cash receipts and payments are recorded.
ii) The cash receipts total is always greater than cash payments total. Since
payments cannot be greater than the amount of cash available.
iii) Simple cash book is the ordinary cash ledger account.
Example on Simple Cash Book:

Record the following transactions in the simple cash book:
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.
Important points to be noted in this regard are:

i) The discount columns if prepared are not balanced. They are just totaled to
reflect the total discount received and total discount given.
ii) If the bank Column is prepared then the cash and bank column are recorded in
the same manner as the simple cash book. The balancing figure of the bank
balance will be the Balance in the Bank.
Example on double Column Cash Book:

Record the following transactions in the Double Column cash book preparing the discount
column:
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.
Example on Three Column Cash Book:

Record the following transactions in the Three Column cash book:
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.
Example on Petty Cash Book:

Record the following transactions in the Petty cash book:
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.
How the errors can occur?
1. Wrong Entry of amounts in the books of accounts.

For Eg: Sales of Rs. 15650/- recorded as sales of Rs.15065/-
2. Wrong posting of the Subsidiary Books.

For Eg: As per the Purchase Books the total purchases for the month of August 18 was
of Rs. 19250/- recorded as purchases of Rs.19520/- while posting it in the Ledger.
3. Posting the entries in the wrong account:

For Eg: Purchases from Mr. A are posted as purchases from Mr.B
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:
1. When recording the transaction in Journal.

2. While posting entries in the Ledger.
3. Balancing the Ledger Accounts.
4. Preparing the Trial Balance.
TYPES OF ERRORS:
Classification of errors can be understood from the following table:
TYPES OF ERROR
PRINCIPLE ERROR CLERICAL ERROR
Error of Error of Compensating

Omission Commission 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.
(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.
Steps to Locate the Error:

If the trial balance does not agree then it is a first indicator that there are errors in the
accounts and there can be various reasons the existence of errors which needs to be enquired
upon and rectified.
The following steps helps in identifying the errors:
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.
4. The Ledger accounts should be re balanced.
5. Recheck the casting of subsidiary books.
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.
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:
1. Before Preparation of Trial Balance

2. After the preparation of Trial Balance but before the preparation of the Final
Accounts.
3. After preparation of Final Accounts.
Rectification of error before preparation of trial balance:

These categories of errors are identified during or before preparation of the Trial Balance
and corrective entries need to be made to rectify the same.
The Rectification has to be done in 2 steps:

i) Pass a reverse entry of the wrong entry. This will nullify the effect of the wrong
entry.
ii) Pass the correct Journal entry to ensure that proper effect of transactions is
accounted.
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:
1. The Sales book total is under casted by Rs.10,000/-

2. Goods Sold to Mr. B for Rs.2000/- But the accountant credited Mr. B instead of
Debiting.
3. Discount received from Mr. C for Rs.500/- has been omitted from the discount column
of the cash book. However, the discount is properly accounted in Mr. C Account.
Rectification of error in the next accounting Period:

All the errors discussed so far were on the assumption that these errors have taken place
during the current year. However, sometimes the books of accounts for a particular period
are prepared along with the errors itself. These errors however, need to be rectified in the
following year.
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.
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.
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.
i) Purchase of a Fixed Asset was debited to Purchase Account for Rs.10,000.

Depreciation on Fixed Assets is levied at 20%.
ii) Sales account was understated by Rs.5,000.
iii) A credit purchase of goods from Mr. B for Rs.2,000 entered as a sales to Mr. B.
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:
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:
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
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
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
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
Dr. Furniture A/c Cr.

To Cash A/c 3,000 By Balance c/d 3,000
Dr. Salaries A/c Cr.

To Cash A/c 2,500 By Balance c/d 2,500
Dr. Shyam’s A/c Cr.

To Cash A/c 21,000 By Purchases A/c 25,000
To Purchase Returns 500 (Credit Purchases)
A/c
To Balance c/d 3,500
Dr. Purchases A/c Cr.
To Cash A/c (Cash 1,000 By Balance c/d 26,000
Purchases)
To Sundries as per 25,000
Purchases Book
(Credit Purchases)
Dr. Purchases Returns A/c Cr.
To Balance c/d 500 By Sundries as per 500
Purchases Return
Book
Total 500 Total 500
Dr. Ram’s A/c Cr.

To Sales A/c (Credit 30,000 By Sales Returns A/c 100
Sales) By Cash A/c
4,900
Dr. Sales A/c Cr.

To Balance c/d 30,500 By Cash A/c (Cash 500
Sales)
By Sundries as per 30,000
Sales Book (Credit
sales)
Dr. Sales Returns A/c Cr.

To Balance c/d 30,500 By Cash A/c (Cash 500
Sales)
By Sundries as per 30,000
Sales Book (Credit
sales)
Dr. Capital A/c Cr.

To Cash A/c 500 By Cash 10,000
To Balance 9,500
c/d
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.
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
• Purchased from Balaji Traders, Delhi

• 50 doz. Max Shoes @ Rs. 400 per doz.
• 100 pair Sports Shoes @ Rs.140 per paid.
• Less Trade discount @ 10%.
April 28th
• Purchased from Trupti Industries, Bahadurgarh
• 40 pair leather shoes @ Rs. 400 per pair
• 100 doz. Rosy Hawai Chappal @ Rs. 180 per doz
• Less Trade discount @ 10%.
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.
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.
• 100 Shirts @ Rs. 750 per shirt
• 10 overcoats @ Rs. 5,000 per overcoat
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
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
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
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
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
Chapter 3 – Bank Reconciliation System
OBJECTIVES
3.1 Understand Pass book
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.
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.
vi. Remitting money to another place or persons at a low cost.
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.
BANK PASS BOOK AND BANK STATEMENT:

Bank pass book and Bank Statements provides the details of the customer’s account in the
bank. Through the Bank Pass Book and Bank Statement the bank keeps its customers informed
of the entries made in their account. It is the customer’s duty to check the entries and
immediately inform the bank of any error that he may notice.
The bank balance shown in the passbook or the statement is known as pass book balance for
reconciliation purpose. The credit balance as per pass book at a particular point of time is
the deposit made by the customer while debit balance as per pass book is the overdraft
balance for the customer.
BANK RECONCILIATION STATEMENT:
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.
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”.
IMPORTANCE OF 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:
1. Timing of recording the transactions:

Due to the difference in the timing of recording the transaction.
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.
TRANSACTIONS OR EVENTS THAT FREQUENTLY CAUSE DIFFERENCES:

The following are the transactions and events that frequently cause a difference between
the balance as per the bank records and the organization records due to the difference in
the timing of recording these transactions.
1. Cheques issued but not presented for payment.
2. Cheques paid into the bank but not cleared.
3. Interest allowed by bank.
4. Interest and expenses charged by the bank.
5. Interest and dividends collected by the bank.
6. Direct payments by the bank.
7. Direct payment into the bank by a customer.
8. Dishonor of a bill discounted with the bank.
9. Bills collected by the bank on behalf of the customer.
10. Errors (This is not a timing difference)
Following is the table summarizing in brief the timings of different transactions
Sr.No. Transaction Time of recording in Time of recording in pass

cash Book
book
1 Issue of a cheque by the When the cheque is When it is presented to

account holder issued the bank for payment.
2 Depositing a cheque in When deposited in the When collected from the

the account Bank Account issuing party
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
5 Dishonor of cheque/bills When referring the When the cheque is

bank pass book
Receivable. Dishonored.
6 Bank charges levied by When referring the When charges are levied
the Bank bank pass book by the bank
7 Interest and dividend When referring the When interest or dividend

credited by the bank bank pass book is collected by the bank.
8 Interest debited by the When referring the When interest is charged

bank bank pass book by the bank
Example on Reconciliation of Timing Differences:

The following is the bank passbook and bank balance as per the cash book maintained by Mr.
A. for the month of September 2018.
Bank Pass Book
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:
The reconciliation can be done by 2 ways.

i) Arriving at the pass book balance from cash book or
ii) Arriving at the cash book balance from pass book.
We will reconcile the balance by arriving at the cash book balance from the pass book
balance.
Thus the balances have been reconciled.
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.
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:
i) Without preparation of the Adjusted Cash-Book and

ii) With the preparation of the Adjusted Cash-Book
Without preparation of the Adjusted Cash-Book

The reconciliation under this method can be done by taking any of the four balances as the
starting point and reconciling the causes of differences. The following table (Extracted from
the ICAI Study Material) provides the detailed analysis of how to reconcile the difference by
using the various starting point.
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 deposited but

not cleared Subtract Add Add Subtract
Cheque issued but not

presented to bank Add Subtract Subtract Add
Cheque directly
deposited in bank by a
customer Add Subtract Subtract Add
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
Bank charges levied by

bank Subtract Add Add Subtract
Locker rent levied by

bank Subtract Add Add Subtract
Wrong debit in the cash

book Subtract Add Add Subtract
Wrong credit in the

cash book Add Subtract Subtract Add
Wrong debit in the pass

book Subtract Add Add Subtract
Wrong credit in pass

book Add Subtract Subtract Add
Under casting of Dr.

side of bank account in
the cash book Add Subtract Subtract Add
Overcastting of Dr. side

of bank account in the
cash book Subtract Add Add Subtract
Under casting of Cr.

side of bank account in
the cash book Subtract Add Add Subtract
Over casting of Cr. side

of bank account the
cash book Add Subtract Subtract Add
Bill receivable
collected directly by
bank Add Subtract Subtract Add
Interest on bank
overdraft charged Subtract Add Add Subtract
If answer is If answer is If answer is

positive then it positive then it positive then it If answer is
is favorable is Unfavorable is Unfavorable positive then it is
balance as per balance as per balance as per Unfavorable
pass book i.e. pass book i.e. pass book i.e. balance as per
Cr. Balance as Dr. Balance as Dr. Balance as cash book i.e. Cr.
per Pass Book, per Pass Book, per Pass Book, Balance as per
if it is negative if it is negative if it is negative Cash Book, if it is
then it is then it is then it is negative then it
Unfavorable Favorable Favorable is Favorable
balance i.e.. balance i.e.. balance i.e.. balance i.e.. Dr.
Dr. Balance as Cr. Balance as Cr. Balance as Balance as per
Final Balance per Pass Book per Pass Book per Pass Book Cash Book
Note: The reconciliation statement can be presented as per the two methods:
i) Balance Presentation
ii) Plus-Minus Presentation
With preparation of the Adjusted Cash-Book:
Adjusted Cash Book:

When the balance in the cash book is first adjusted for certain adjustments before taking it
to the bank reconciliation statement, then it is known as adjusted cash book balance.
Adjusting the cash-book before preparing the bank reconciliation statement is completely
optional, if reconciliation is done during different months. But if reconciliation is done at
the end of the accounting year or financial year, the cash-book must be adjusted so as to
reflect the correct bank balance in the balance sheet.
While adjusting the cash-book the following adjustments are considered: -

1. All the errors (like wrong amount recorded in the cash-book, entry posted twice in the
cash-book, over/ under casting of the balance etc.) and omissions (like bank charges
recorded in the pass-book only, interest debited by the bank, direct receipt or
payment by the bank, dishonor of cheques/bills etc.) by the cash-book are taken into
care
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.
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.
5. On 6th September, 2018, the bank credited Rs.10,000 to A in error.
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.
Prepare the following details based on the above mentioned transactions:
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
Cash Book (Bank Column) of Mr. A for September 30, 2018
EXAMPLE 2:
From the following information (as on 31.3.2018), prepare a bank reconciliation statement
after making necessary amendments in the cash book
Particulars Amount Bank

balances as per the cash book (Dr.) 800,000
Cheques deposited, but not yet credited 45,000
Cheques issued but not yet presented for payment 35,000
Bank charges debited by bank but not recorded in the cash-book 2,500
Dividend directly collected by the bank 20,000
Insurance premium paid by bank as per standing instruction

Not intimated 18,000
Cash sales wrongly recorded in the Bank column of the cash-book 2,00,000
Customer’s cheque dishonored by bank not recorded in the cash-book 1,00,000
Wrong credit given by the bank 1,10,000
Also show the bank balance that will appear in the trial balance as on 31.3.2018.
The balance of Rs. 499,500/- will appear on the trial balance of 31st March 2018.
Questions:
From the following information (as on 31.3.2018), prepare a bank reconciliation statement
after making necessary amendments in the cash book
Particulars Amount Bank

balances as per the cash book (Dr.) 600,000
Cheques deposited, but not yet credited 85,000
Cheques issued but not yet presented for payment 70,000
Bank charges debited by bank but not recorded in the cash-book 1,000
Dividend directly collected by the bank 50,000
Insurance premium paid by bank as per standing instruction

Not intimated 45,000
Cash sales wrongly recorded in the Bank column of the cash-book 1,50,000
Customer’s cheque dishonored by bank not recorded in the cash-book 3,00,000
Wrong credit given by the bank 10,000
Also show the bank balance that will appear in the trial balance as on 31.3.2018.
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.
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
(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.
Chapter 4 – Inventories
OBJECTIVES
4.1 Understanding what is Inventory?
4.2 Methods of Inventory Valuation which are:
- FIFO
- LIFO
- Average Price
- Weighted Average Price
- Specific Identification
- Adjusted Selling price
4.3 Methods of Inventory Record Keeping.
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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.
The classification of an item as inventory also depends on how it is intended to be used.
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:
Cost of Goods Sold = Beginning Inventory + Purchases + Direct Expenses – Ending

Inventory
The effect of overstatement or understatement on the financial Statements of the entity is

as stated below:
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.
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.
2. Determination of Financial Positions:

Since inventories form a part of the current assets. They play an important role in
determining the current assets of the entity.
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.
BASIS OF INVENTORY VALUATION:
As per the conservatism principle of accounting, Inventories are always valued at the
“LOWER OF COST OR NET REALIZABLE VALUE”.
Cost of Inventory comprises of the following components:
1. All cost of purchase,

2. All Costs of conversion (Converting Raw Materials to Finished Goods) and
3. All other costs incurred in bringing the inventories to their present location and condition.
Amounts Excluded from the cost of inventories:
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
Net realizable value:
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.
INVENTORY RECORD SYSTEM:
There are 2 methods of recording inventory:
1. Periodic Inventory System

2. Perpetual Inventory System
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.
The cost of goods sold is determined as shown below:

Opening inventory (known) + Purchases (known) - closing inventory (physically counted) =
Cost of goods sold.
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.
PERPETUAL INVENTORY SYSTEM:
Under the Perpetual inventory system, the inventory balances are recorded after each
transaction involving inventory.
Under perpetual inventory system, closing inventory is determined as follows:

Beginning inventory + Purchases during the period – Cost of Goods Sold (known) = Closing
Inventory (balancing figure)
DISTINCTION BETWEEN PERIODIC AND PERPETUAL INVENTORY SYSTEM:
Periodic System Perpetual System
Based on Physical Verification Based on Book Records
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.
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
Loss of Goods is included in Cost of Loss of Goods Sold is included in Ending

Goods Sold Inventory
Simple and Less Expensive Method Costly Method
Requires closure of business on a Can be carried out with the ongoing

particular day to count the inventories operations of the business.
FORMULA/METHODS OF DETERMINING COST OF INVENTORY:
HISTORICAL METHODS:
1) Specific Identification Method:

Allocates specific cost to each of the goods identified.
This method is generally used to determine the cost of items which are not ordinarily
interchangeable and are relatively high in value like diamonds and precious stones.
2) FIFO (First In First Out) Method:

This method assumes that the goods which came in first will be sold first. The
ending inventory comprises of the latest purchases and the Cost of Goods Sold
comprises of the earliest purchases.
Example on First In First out (FIFO):

A trader has the following details of purchases of goods in which he deals
Date Quantity (In Units) Price Per Unit
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:
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
500 units @ Rs.13 per unit 6500
150 units @ Rs.15 per unit 2250
TOTAL 8750
Thus, the value of inventory using the FIFO Method has been computed.
3) LIFO (Last In First Out) Method:

This method assumes that the goods which came in last will be sold first i.e. the
most recent purchased goods are sold first.
The ending inventory comprises of the earliest purchases and the Cost of Goods Sold
comprises of the recent purchases.
LIFO method is based on the principle of matching current cost with current revenue
as cost of recently purchased or produced goods are charged to cost against each sale
Example on Last In First out (FIFO):

trader has the following details of purchases and issue of goods in which he deals
PURCHASES
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
October using LIFO Method:
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/-.
4) Simple Average Method:

This method is the easiest method of computing the value of inventory.
This method is used by entities using periodic inventory system.
The simple average price per unit of the output is computed by the following
formula:
Different Prices of all Purchases
Total Number of purchases
Example on Simple Average Method:

A trader has the following details of purchases and issue of goods in which he deals
PURCHASES
Oct 1 1000 10
Oct 5 500 12
Oct 15 200 15
Oct 25 500 13
2200 Units
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:
10+12+15+13 = Rs.12.5/- Per unit

4
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/-
5) Weighted Average Method:

This method is an advanced version of the simple average method.
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
Example on Weighted Average Method:

PURCHASES
Oct 1 1000 10
Oct 5 500 12
Oct 15 200 15
Oct 25 500 13
2200 Units
ISSUES
Oct 10 900
Oct 23 700
Oct 28 200
1800 Units
October using LIFO Method:
NON-HISTORICAL METHODS:
1) Adjusted Selling Price Method:

This method is known as retail inventory method. It is mainly used by retail business or
in business where the inventory comprises of items whose individual costs are not readily
determinable.
The cost of the inventory is determined by reducing the percentage of gross margins from
the sales value of the inventory.
Example on adjusted Selling Price Method:

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.
Goods purchased Rs.2,00,000/-

Packaging and transportation charges Rs.10,000/-
Sales during the year Rs.4,00,000/-
Sales price of closing inventories Rs.75,000/-
Cost of Purchases:
Rs.2,10,000/-
Estimated Gross Profit Margin:

Rs.4,75,000/-
Less: Purchases (Rs. 2,10,000/-)
Gross Profit Rs.2,65,000/-
Gross Profit Margin 55.79% (265000/475000)
Inventory Valuation:
Less: Gross Profit Margin @ 55.79% (Rs.41843)
Rs.33157
2) Standard Cost Method:

This method is used when the price of the goods which are purchased changes frequently
e.g. crude oil.
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.
Example on Inventories Taking:
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:
Inventories ascertained on 5th April Rs.5,00,000/-

Less: Purchases during the period 31 march to 5 April Rs.1,00,000/-
Rs.4,00,000/-
Add: Cost of Goods Sold during the period:

2,00,000 X (100/120) Rs.1,66,667/-
Inventory value on 31st March Rs.5,66,667/-
Questions:
Question 1:
PURCHASES
Oct 1 2000 25
Oct 5 1000 22
Oct 15 700 20
Oct 25 500 30
4200 Units
ISSUES
Oct 10 1500
Oct 23 1300
Oct 28 400
3200 Units
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.

Sales price of closing inventories Rs.1,50,000/-

Question 3:
Suppose a company that closes its books on 31st March, carried out the inventory taking on
the 25th of March and actual inventory was of Rs. 15,00,000 on 25th March, during the period
March 25 to March 31 purchases were Rs. 4,00,000 and sales were Rs. 9,00,000, the mark up
being 25% on cost. Compute the inventory on 31st of March.

Illustrations
Question: 1
A manufacturer has the following record of purchases of a condenser, which he uses while
manufacturing radio sets:
Date Quantity (units) Price Per Unit
December
4 900 50
10 400 55
11 300 55
19 200 60
28 800 47
2,600
1,600 units were issued during the month of December till 18th December
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-
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:
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
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.
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.

Chapter 5 – Concept and Accounting of Depreciation
OBJECTIVES
5.1 What is Depreciation and Objectives of providing depreciation?
5.2 Factors affecting depreciation

What is Depreciation?
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.
i. Wear and tear due to its use in business.

ii. Passage of time even when it is not being used.
iii. Obsolescence and outdating due to technological or other changes.
iv. Decrease in market value.
v. Depletion of the assets especially in case of mines and other natural reserves.
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.
The 3 important factors affecting the amount of depreciation are:
i. Estimated useful life of the asset
ii. Cost of the asset
iii. Residual value of the asset at the end of the of its estimated useful life
Objectives of Providing Depreciation:
The basic objectives for providing depreciation are as follow:
i. Correct income measurement.
ii. To find True Asset value.
iii. To Ensure Sufficient Funds are available for replacement.
iv. To determine the true cost of production.

Factors affecting Measurement of Depreciation:
Following factors are taken into consideration while computing the depreciation.
i. Cost of the asset
ii. Estimated useful life of the asset.
iii. Estimated scrap value at the end of useful life of the asset.
Example on computing the depreciable amount per annum:
For example, a machinery is purchased for Rs.5,00,000. The residual value is

estimated at Rs.50,000. It is estimated that the machinery will work for 10 years.
The cost to be allocated as depreciation in the accounting periods will be calculated
as:
Acquisition Cost Rs.500000

Less: Residual Value (Rs.50000)
Depreciable Amount Rs. 450000
(÷)Estimated Useful Life 5 years
Depreciation = Depreciable Amount Rs450000 = Rs.90000/- Per

Year
Estimated Useful Life 5 Years
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.
Examples of costs directly attributable costs are:

i. Cost of labor for bringing the asset to its present condition.
ii. Cost to prepare the site.
iii. Delivery and Handling costs
iv. Installation costs
v. Cost of testing
vi. Professional fees e.g. engineers & technicians hired to install the equipment
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.

Methods of Computing Depreciation:
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:
Straight Line Depreciation = Cost of Asset – Salvage Value

Useful Life of the Asset
Straight Line Depreciation Rate = Straight Line Depreciation X 100

Cost of the Asset
2. Diminishing Balance Method:
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.

The formula to compute the depreciation under the diminishing balance method is
as follow:
Diminishing Balance Depreciation = 1 X 100
Here, n = useful life of the asset
Accounting Entries under Straight Line and Diminishing Balance Method:
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.
Accounting Entries under the Provision Method:

For Charging Depreciation Account Dr.
Depreciation To Provision for Depreciation Account
Transferring Profit & Loss Account Dr.
Depreciation to To Depreciation Account
Profit & Loss Account
Accounting Entries under the Direct Method:
For Charging Depreciation Account Dr.
Depreciation To Asset Account
Transferring Profit & Loss Account Dr. To
Depreciation to Profit & Depreciation Account
Loss Account

Example:
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
i. Machinery and Depreciation Account under Straight Line Method:

i. Machinery and Depreciation Account under Diminishing Balance
Method:
3. Sum of Years Digit Method:
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:

Working Notes for the above computation:
1. Computation of Depreciation for 2010-2014:
(10+9+8+7+6)X (2000000-240000) = 40/55 X 1760000 = 1280000

10(10+1)/2
2. Computation of WDV as on 1-1-2015:
2000000 – 1280000 = Rs.720000/-
3. Depreciation for 2015:
(2000000 – 240000) X 5/55 = Rs160000/-
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.
The relevant Journal Entries involved in this method are as follow:

Accounting Entries under the Annuity Method:
For charging interest on Asset Account Dr.
asset account To Interest Account
For charging depreciation Depreciation Account Dr.
on asset To Depreciation\Provision for depreciation
Account
For transferring Profit & Loss Account Dr.
depreciation to Profit To Depreciation Account
and
Loss Account
For transferring interest Interest Account Dr.
to Profit and Loss To Profit & Loss Account
Account

5. Sinking Fund Method:
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.
Accounting Entries under the Sinking Fund Method in First

Year
For transfer of Depreciation Account Dr.
depreciation to Sinking To Sinking Fund Account
Fund
For charging depreciation Profit & Loss Account Dr.
to profit and loss account To Depreciation Account
For investment of Sinking Fund Investment Dr.
amount Account
of depreciation To Bank Account
For interest earned on Bank Account Dr.
sinking fund investment To Interest on Sinking Fund Investment
Account
Interest on Sinking Fund Investment Account Dr.

To Sinking Fund Account
Accounting Entries under the Sinking Fund Method in Subsequent Year
For transfer of Depreciation Account Dr.
depreciation to Sinking To Sinking Fund Account
Fund
For charging depreciation Profit & Loss Account Dr.
to profit and loss account To Depreciation Account
For investment of Sinking Fund Investment Dr.
amount Account
of depreciation To Bank Account
Bank Account Dr.

To Sinking Fund Investment Account
Sinking Fund Investment Account Dr.

To sinking Fund Account
Sinking Fund Account Dr.
To Sinking Fund Investment Account
For transfer of the amount Sinking Fund Account Dr.
to the extent of book value To Asset Account
of the asset from asset
account to Sinking Fund
Any surplus in Sinking fund Sinking Fund Account Dr.

account to be transferred To General Reserve Account
to General Reserve
Account
Profit & Loss Account Dr.

Any deficit, may be To Sinking Fund Account
transferred to Profit and
Loss Account

Example:
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.
During the three years following transactions took place:
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.

1. Machine Hours Method:
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
Compute the Annual Depreciation under Machine Hour Rate Method.
Statement showing the Annual Depreciation under Machine Hours Method
Year Annual Depreciation

1-2 3000/30000 X (2000000-400000) = Rs.160000/- Per Year
3-5 4000/30000 X (2000000-400000) = Rs.213333/- Per Year
6-7 6000/30000 X (2000000-400000) = Rs.320000/- Per Year
2. Production of Units Method:
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
method is applicable to machines producing product of uniform specifications.
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:

Yearly Production
1-3 100,000 units per year


Required
Determine the value of depreciation for each year using production units method.
Statement showing the Annual Depreciation under Yearly Production 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.
Extraction pattern is as follows:
Year Quantity of Mineral extracted
2015 1,000 tonnes

2016 2,000 tonnes
2017 2,000 tonnes

Statement showing the Annual Depreciation under 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/-
Profit or Loss on the sale or disposal of Property, Plant &

Equipment:
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.

Example:
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
Change in the Method of Depreciation:
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.
Whenever any change in depreciation method is made. Such change in method is

treated as change in accounting estimate as per Accounting Standards whose effect
needs to be quantified and disclosed. A change in an accounting estimate may affect
the current period or both the current period and future periods.
Example:
Cost of Machine: Rs.20,00,000

Residual Value: NIL
Useful life: 10 years.
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.

Revision of the Estimated Useful Life of Property, Plant & Equipment:
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:
A Machine costing Rs. 10,00,000 is depreciated on straight line basis, assuming 10

years working life and Nil residual value, for five years. The estimate of remaining
useful life after fifth year was re-evaluated for 8 years only.
Calculate depreciation for the sixth year.
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/-
Re-Evaluation of the Fixed Asset:
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.

Example:
A machine of cost Rs.15,00,000 is depreciated straight-line assuming 10 year working

life and zero residual value for three years. At the end of fourth year, the machine
was revalued upwards by Rs. 200,000 the remaining useful life was reassessed at 8
years.
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/-
Provision for Repairs and Renewals:
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
Actual repairs charged/incurred during the year ended

31.3.2016 Rs. 5,00,000
31.3.2017 Rs. 3,00,000
The company makes an annual provision of Rs.2,00,000 on repairs and renewals.
Prepare the Provision for Repairs and Renewals Account for the years 2015-2016 and
2016-2017.

Questions:
Question 1:
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.

Illustrations
Question: 1
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. of the original cost every year.
The books are closed on 31st December every year
Show the Machinery Account and Depreciation Account for the year 2015 and 2016.
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
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: 6
M/s Surya took lease of a quarry on 1-1-2013 for Rs. 1,00,00,000. As per technical estimate the
total quantity of mineral deposit is 2,00,000 tonnes
Depreciation was charged on the basis of depletion method. Extraction pattern is given in the
following table:
Year Quantity of Mineral extracted (in Tonnes)
2013 2,000
2014 10,000
2015 15,000
Show the Quarry Lease Account and Depreciation Account for each year from 2013 to 2015.
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:
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

31.03.2017 3,20,000
The company makes an annual provision of Rs. 4,00,000 on repairs and renewals.
Draw up the Provision for Repairs and Renewals Account for the years 2015-2016 and 2016-2017.
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.
• 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.
• 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.

Chapter-6 Accounting for Special Transactions
Unit-1 Bills of Exchange
BILL OF EXCHANGE
Bill of exchange Promissory note
Normal Trading Accommodation
Nature of Bill Other Aspect Date of Expiry
Bill at sight Dishonour of Bill

Due Date
Noting Charges
Bill after Date Days of Grace
Renewal of Bill
Bill on Demand Maturity Date
Insolvency
Retirement of Bill
Bills for collection
1. BILLS OF EXCHANGE
❖ Definition

▪ Instrument in writing,
▪ Containing an unconditional order signed by the maker,
▪ Directing certain person to pay a certain sum of money
▪ Only to or to the order of a certain person or to the bearer of the instrument.
▪ When such an order is accepted in writing on the face of the order itself,
▪ It becomes a valid bill of exchange.
❖ Concept
Goods are sold or services are provided
Seller extends a credit period to buyer
❖ Characteristics
➢ It must be in writing.
➢ It must be dated.
➢ It must contain an order to pay a certain sum of money.

➢ The promise to pay must be unconditional.
➢ The money must be payable to a definite person or to his order to the bearer.
➢ The draft must be accepted for payment by the party to whom the order is made.
➢ It should be properly stamped.
➢ Payment must be in legal currency of the country.
➢ A Bill of Exchange can be passed on to another person by endorsement.
Drawer: The party Acceptor: The party

which makes the order which accepts the order
is known as the is known as the
Drawer. acceptor.
Payee: The party to whom

the amount has to be paid is
known as the payee.
❖ Foreign Bill of Exchange

➢ A bill of exchange drawn for foreign trade operations known as Foreign Bill of Exchange.
➢ A foreign bill of exchange is one which is drawn in one country and is payable in another.
➢ It is generally drawn up in triplicate wherein each copy is sent by separate post so that at
least one copy reaches the intended party.
➢ Payment will be made only on one of the copies and when such payment is made the
other copies become useless.
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.

2. PROMISSORY NOTES
❖ 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.
3. BILLS OF EXCHANGE V/S PROMISSORY NOTES
BILLS OF EXCHANGE PROMISSORY NOTE
A bill contains an unconditional order to A promissory note contains only a promise

pay. to pay certain sum of money.
There are generally 3 parties (Drawer, There are 2 parties (Maker and Payee) in
Drawee and Payee) in bill of exchange. promissory note.
A bill is paid by Acceptor. A promissory note is paid by maker.
A bill is drawn by creditor. A promissory note is made by debtor.
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 a bill of exchange the liability of drawer In a promissory note the liability of a maker is
is secondary and conditional. primary and absolute.
A bill of exchange can be accepted A promissory note cannot be made

conditionally. conditionally.
In a bill of exchange, notice of dishonor Notice of dishonor is not required in case of

must be given. promissory note.
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
1) When a bill is drawn after sight
Term of the bill: Begins from the date of ‘sighting’ i.e. when the bill is accepted.
2) When a bill is drawn after date
Term of the bill: Begins from the date of drawing the bill.
5. EXPIRY /DUE DATE OF 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.
7. DATE OF MATURITY OF BILL
➢ 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-

▪ when no time for payment is specified, or
▪ when it is expressed to be payable on demand, or
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.
9. BILL AFTER DATE
➢ 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.
➢ A cheque cannot be a time instrument because the cheque is always payable on

demand.
➢ Though a cheque can be postdated and which can be presented on or after such
date.
➢ A cheque has validity of 90 days from its date after that it becomes void,
normally termed as ‘Stale Cheque’ as bank will not honour such cheque.
10. CALCULATION OF DUE DATE OF A BILL

When the bill is made payable at a
When the bill is made payable on a stated number of months(s) after date.
specific date.
That date on which the term of the bill

That specific date will be the due date shall expire will be the due date.
When the bill is made payable at a

stated number of days after date.
When the due date is a public holiday.
That date which comes after adding

stated number of days to the date of The preceding business day will be the
bill, shall be the due date. due date.
Note : the date of bill is excluded
When the due date is an

emergency/due unforeseen holiday.
The next following day will be the date.
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.

11. NOTING CHARGES
➢ 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”.
These officials present the bill for payment
If the money is If the bill is dishonoured

received, they will they will NOTE the fact
hand over the of dishonour, with the
money to the reasons and give the bill
original party. back to their client.
➢ 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.
12. RENEWAL OF BILL
When Acceptor is unable to pay the amount and he

himself moves that he should be given extension.
In consideration, the acceptor agrees to bear

interest for the extended tie period.
(Calculated from the date of renewal till the

date of expected settlement).
A new bill will be drawn and the old bill will

be cancelled.

The amount of the new bill may represent any of the following
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 acceptor has spare funds much before the

maturity date of the bill of exchange accepted
by him.
He approaches the payee of the bill of exchange

and asks him whether the payee is prepared to
accept cash before the maturity date.
The acceptor gets a certain rebate or interest or

discount for premature payment.
The rebate becomes the income of the acceptor

and expense of the payee.
14. ACCOMODATION BILLS
➢ 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.

When the three months period expires Sanju will send the requisite amount to
Manju and Manju will meet the bill.
➢ The same mechanism can be use when both the party needs money. In that case the
proceeds divided between the drawer and drawee according to mutual concern. The
discounting charges must also be borne by the two parties in the same ratio in which
the proceeds are divided.
➢ It may so happen that the drawer is not able to remit the proceeds to drawee on the
due date.
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.
15. BILL RECEIVABLE AND BILL PAYABLE BOOKS
➢ 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
16. JOURNAL ENTRIES IN BOOKS OF DRAWER
Particular
Amount
On receipt of Bill
Bills Receivable Account Dr.
To Drawee/Maker of the note
On Endorsement in favour of another Party( say Z)
Z A/c Dr.
To Bills Receivable Account
On discounting with bank

Bank Account Dr. (with the amount actually received

Discount Account Dr. (with the amount of loss or discount)
On the date of maturity ( Bill is honoured)

Cash Account Dr.
On the date of maturity ( Bill is dishonoured)
1) If the bill was kept till maturity then
Drawee / Maker of the note Dr.
2) If the bill was endorsed in favour of a creditor, the entry is :
To Bill payables
3) If the bill was discounted with the bank :
To Bank A/c
Entry for Noting charges
1) Suppose X received from Y a bill for 1,000. On Maturity the bill

is dishonoured and 10 is paid as noting charges. The entry in
this case will be
1,010
Y A/c Dr.
1,000
10
To Bank A/c
2) Suppose X had endorsed this bill in favour of Z
1,010
Y A/c Dr.

1,010
To Z
This is because Z will claim 1,010 from X and X has the right of
recovering 1,010 from Y.
3) If the bill has been discounted with a bank, entry will be
1,010
Y Dr.
1,010
To Bank A/c
In case of Insolvency
1) When drawee become insolvent
Drawee A/c Dr.
To Bills Receivable A/c
2) When something received from estate
Cash A/c Dr.
To Drawee A/c
3) Entry for Irrecoverable Amount
Bad debt A/c Dr.
To Drawee A/c
❖ In case of Renewal of bill
1) Cancellation of original Bill
Entries are same as explained for dishonour of

bill.
2) Entry for New bill
Bills Receivable A/c Dr.

To Drawee A/c
3) In case of interest charged for new period
Bills Receivable A/c Dr.
To Drawee A/c
To Interest Income A/c
In case of Retirement of Bill
Cash/ Bank A/c Dr.
Rebate on bills account Dr.
To Bills Receivable A/c
17. JOURNAL ENTRIES IN BOOKS OF DRAWEE
Particular
Amount
On acceptance of Bill
Drawer A/c Dr.
To Bills Payable A/c
On the date of maturity ( Bill is honoured)
Bills Payable A/c Dr.
To Cash/Bank A/c
On the date of maturity ( Bill is dishonoured)


To Drawer A/c
Entry for Noting charges
Legal expense A/c Dr.
To Drawer A/c
In case of Insolvency
1) When drawee become insolvent
To Drawer A/c
2) When final settlement Made
Drawer A/c Dr.
To Cash/Bank A/c
3) Entry for short payment
Drawer A/c Dr.
To Deficiency A/c
In case of Renewal of bill
Cancellation of original Bill
To Drawer A/c
Entry for New bill
Drawer A/c Dr.
To Bills Payable A/c
In case of interest charged for new period
Drawer A/c Dr.
Interest Charged A/c Dr.

To Bills Payable
In case of Retirement of Bill
Bills Payable Dr.
To Cash / Bank
To Rebate on bill discount
18. BILLS OF COLLECTION
Particular
Amount
Entries for Bills for Collection Process
Bills for Collection Account

Dr.
When the amount is realized the entry will be
Bank Account Dr.

To Bills for Collection Account
When the amount is not honoured, the entry will be
Party (from whom the bill was received) Dr.

To Bills for collection A/c

Unit -2 Sale of Goods on Approval or Return Basis
Sale Of Goods On Approval Or Return Basis
Accounting Treatment When The Business Send Goods
CASUALLY FREQUENTLY NUMEROUSLY
Transaction is Sales or return journal is

treated as prepared with four main Sales or return Sales or Return
ordinary sale. columns. day book Ledger
Treated as
Memorandu
m Books
Goods Goods Goods

sent on Balance
Returned Approved
approval
1. INTRODUCTION
In Normal Course of Business
Immediately
Goods sold to Treated as Sale Revenue being
Customer recognized

Sale on return or approval basis
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
❖ Features of sale of goods on approval or return basis

➢ There is a change in the possession of goods from one person to another.
➢ It does not involve transfer of ownership of goods. Ownership transfer when buyer
gives his approval or goods not returned in specific period.
➢ The customer does not incur any liability when the goods are merely sent to him.
Normally sales of good on return basis take place between a manufacture and a retailer.
In online sales, this practice is prevalent.

2. ACCOUNTING RECORDS
Accounting Entries depends on

Business send goods
CASUALLY
Business send goods

FREQUENTLY
Business send goods

NUMEROUSLY
❖ Business send goods Casually on sale or return basis
Sales transactions are few
Seller treat them as an

ordinary sale and record it as
normal sale
Goods are accepted or not Goods are returned within a

returned in specific time period specified time limit
No extra entry required A reverse entry passed to cancel

the previous transaction

Special cases
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)
❖ Business sends Goods Frequently on sale or return basis
If customer signifies his intention to

purchase or not respond in specific
Immediate sale time.
Sends goods
does not take
frequently Then ownership of good transfer to
place and no
buyer and the seller record sale .
entry recorded.
If customer return the goods
Then ownership of goods not

transfer to buyer and seller does
not record sale.
Ques. If no sale recorded then how is the transaction recorded?

Ans. Records of goods sent is maintained in a specially ruled Sale or Return Journal / Day
Book instead of passing entry for sale of goods.
This Day Book is divided into 4 main columns
(1) Goods sent on Approval

(2) Goods Returned
(3) Goods Approved
(4) Balance.
Goods Sent on Approval Goods returned Goods approved Balance
Date Particulars Folio Amt Particulars Folio Amt Particulars Folio Amt Amt
1 2 3 4 5 6 7 8 9 10 11

Procedure for recording transaction in sales or return journal/Day book
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 returned Entries are made in column 5 to 7, the price

of goods returned being entered to column
7.
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.
❖ When Business Sends Goods Numerously on Sale or Return Basis
Transaction
are numerous
Business maintains the

following books:
(a)Sale or Return Day book
(b) Sale or Return Ledger
‘Day book’ is the primary book and ‘ledger’ contains the

customer account and the ‘Sale or return Total account.
Procedure for recording transaction

At the time when goods send to customer on a sale or return basis
1. First recorded in sale or return day book.

2. In sale or return ledger, all the customers are individually
debited and the Sale or Return Account is credited with
the periodical total of the Sale or Return Day Book.
3.

When the goods are returned by the customer
1. They are recorded initially in the Sale or Return Day Book.

2. in the Sale or Return Ledger, the Sale or Return Account
is debited with the periodical total of the Sale or Return
Day Book and the individual customers are credited
When the goods are retained by the customer or no intimation

received within a specified time
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
❖ WHEN THE BUSINESS SENDS GOODS CASUALLY ON SALE OR RETURN BASIS
PARTICULAR AMOUNT
When goods are sent on sale or return basis
Trade receivable/ customer Account Dr. Invoice price
To Sales Account
1. When goods are rejected or returned within the specified time
Sales/Return Inwards Account Dr. Invoice price
To Customers/Trade receivables Account

2. When goods are accepted at invoice price
No entry required
3. When goods are accepted at a higher price than invoice price
Trade receivables /Customers Account Dr. Difference in

price
To Sales Account
4. When goods are accepted at a lower price than the invoice price
Sales Account Dr. Difference in

price
To Trade receivables / Customers Account
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
To Trade receivables / Customers Account
6 (b) These goods should be considered as inventories with the

customers and adjustment entry is
Inventories with Customers on Sale or Return Account Dr. Cost price or
market price
To Trading Account whichever is

( to increase the closing stock) less

❖ WHEN THE BUSINESS SENDS GOODS FREQUENTLY ON SALE OR RETURN BASIS
PARTICULAR AMOUNT
1. At the time of approval
Customer A/c Dr.
To Sales Account
2. At the time of preparing of Final Accounts

Cost or net
Goods with Customers on Sale or Return Account Dr.
realizable value
whichever is less
To Trading Account
❖ WHEN THE BUSINESS SENDS GOODS NUMEROUSLY ON SALE OR RETURN
PARTICULAR AMOUNT
IN THE MEMORANDUM SALE OR RETURN LEDGER
1) When goods are sent to the customer
Customer Account Dr.
To Sale or Return Account
2) When goods are returned
Sales or Return Account Dr.
To Customer Account
3) When goods are retained by the customer
Sales or Return Account Dr.
To Customer Account

IN THE REGULAR BOOKS
1) When goods are sent to the customer

No Entry
2) When goods are returned

No Entry
3) When goods are retained by the customer
Customer Account Dr.
To Sales Account
4) At the year end, if stock lies with customer
Inventories with Customers on Sale or Dr. Cost or net

realizable value
Return Account
To Trading Account Whichever is less

Unit – 3 Consignment
Goods Consigned
Consignor Consignee
Account Sale
Inventories of Consignor
Expense Unsold Advanced

Details of Balance
incurred on Commiss- inventories Payment or
sales made by due or
behalf of the ion Earned left with the security
the Consignee Remitted
consignor consignee deposited
❖

2. MEANING OF CONSIGNMENT ACCOUNT
To Consignee
❖ Definition
means to Send
Ram Send good to Shyam
On a condition that the goods

Principal Will be sold on behalf of and at Agent
(Mr. Ram) the risk of Ram. (Mr. Shyam)
Ownership: Remains with the consignor or the principal.
Invoicing : Consignor does not send an invoice. He only sends a proforma invoice.
What is Proforma Invoice?
It is a statement conveying information to the consignee regarding particulars of the good

sent. It looks like an 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.

Commission
Ordinary Del-credere
Commission Commission
Consignee is not Consignee is not

responsible for any responsible for any
bad debt bad debt
➢ Periodically, the consignees sends to the consignor a statement called Account Sales.
What is Account Sales?
➢ It sets out the sales made by the consignee

➢ The expenses incurred on behalf of the consignor
➢ The commission earned by the consignee and
➢ The balance due to the consignor.
Firms usually like to ascertain the profit or loss on each consignment or consignments to each
consignee.
3. DISTINCTIONS
❖ Consignment And Sale
S.No. Consignment Sale Basis

1. Ownership of the goods rests with The ownership of the Ownership
the consignor till the time they are goods transfers with the
sold by the consignee, no matter the transfer of goods from
goods are transferred to the the seller to the buyer.
consignee.
2. The consignee can return the Goods sold are the Return
unsold goods to the consignor. property of the buyer
and can be returned only

if the seller agrees
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 and Discount
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.
4. ACCOUNTING IN BOOKS OF CONSIGNOR
➢ A separate consignment account has to be prepared for each consignment.

➢ Each consignment account is a nominal-cum-personal account.
➢ Each consignment account constitutes a profit and loss account in respect of the
transactions to which it relates.

PARTICULAR AMOUNT COMMENTS
1. When goods are consigned or dispatched The personal

account of
Consignment Account consignee is not
Dr. debited and also
To Goods Sent on Consignment Account sales account is
not credited.
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
4. On receipt of account sales from the consignee
For sales proceeds

Account sales
Consignee’s Personal Account
Dr. contains details
of sales made by
To Consignment Account
consignee.

For expenses incurred by consignee
expenses
Consignment Account
Dr. incurred by
consignee
5. Cash or cheque or bank draft or bill of

exchange/promissory note received from the consignee
as settlement
Cash/Bank/Bills Receivable Account
Dr.
6. For bad debts
When del-credere commission is not paid to the

consignee
Entry is for Bad
Consignment Account
Dr. debt and not for
To Consignee’s Personal Account commission
When del-credere commission is paid to the

consignee
No entry is recorded as bad debts is to be borne by
consignee
7. For the goods taken over by the consignee
Consignee’s Personal Account

Dr.
8. For unsold consignment stock
Consignment Stock Account

Dr.

9. For commission payable to consignee
Consignment Account
Dr.
5. VALUATION OF INVENTORIES
Principle: Inventories should be valued at cost or net realizable value whichever is lower.
In the case of consignment
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.
Examples: Godown rent

Insurance of godown
Delivery charges
Salesman salaries.
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.
6. GOODS INVOICED ABOVE COST
Scenario: The proforma invoice is made out at a value higher than the cost.

Entries in the books of the consignor are made out on that basis.
Additional entries (before ascertaining profit) to remove the effect of loading:
PARTICULAR AMOUNT COMMENT
Goods sent on Consignment Account reversed to the

Dr. extent of loading
in order to debit
To Consignment Account the Consignment
A/c on cost basis
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.
Cost per unit: (total cost + normal loss)/total quantity.
8. ABNORMAL LOSS
➢ Abnormal loss is any accidental or unnecessary loss occurs.

➢ This amount should be credited to the Consignment Account and debited to the P&L
A/c.
➢ Abnormal loss cannot be considered in valuing the stock.
➢ Abnormal loss is valued just like inventories in hand.
➢ For the purpose of valuation of inventory in hand, it should be noted that while
normal loss is considered as part of cost of remaining goods, whereas abnormal loss is
ignored.
Special case
Valuing goods lost in transit : Consignee’s non-recurring expenses are not

included.
Valuing goods lost in consignee’s
godown : Consignee’s non-recurring expenses are
included.
❖ Distinction between Normal loss and abnormal loss
Basis Normal loss Abnormal loss
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.
Coverage by Insurance companies generally do not Insurance is generally

Insurance cover normal loss as it is expected to be available for abnormal losses.
Co. incurred on each consignment or storage
of goods.
Certainty Normal loss is almost certain however it Abnormal loss is because of
may vary from time to time. unforeseen events and is not
certain.

❖ Journal Entries
PARTICULAR AMOUNT COMMENT
Abnormal Loss Account Dr.
Insurance Company’s Account Dr. If abnormal loss is

recoverable from
To Abnormal Loss Account the insurance
company.
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.

Three Types of Commission
ordinary commission Del-credere Over-riding

• It is based on fixed Commission Commission
percentage of the gross • To increase the sale and • It is an extra commission
sales proceeds made by to encourage the allowed by the
the consignee. consignee to make consignor to the
• . It is given by the credit sales, the consignee to promote
consignor regardless of consignor provides an sales at higher price
whether the consignee additional commission then specified .
is making credit sales or generally known as del- • Depending on the
not. credere commission. agreement it is
• This type of commission • This additional calculated on total sales
does not give any commission when or on the difference
protection to the provided to the between actual sales
consignor from bad consignee gives a and sales at invoice
debts and is provided on protection to the price or any specified
total sales. consignor against bad price.
debts. • In order to encourage
• It is calculated on total the consignee to earn
sales unless there is any higher margins, it can
agreement between the also be in the form of
consignor and the share of additional
consignee to provide it profits made by
on credit sales only. consignee on sale of
goods.

10. RETURN OF GOODS FROM THE CONSIGNEE
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?
Valued at the price at which it was consigned to the consignee.
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.
11. ACCOUNT SALES
❖ Definition: An account sale is the periodical summary statement sent by the consignee
to the consignor
It contains details regarding:
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.
It is a summary statement and is different from Sales Account

PARTICULAR AMOUNT
1. On making sales
Cash/Bank Account/Debtors Dr.
To Consignor’s Personal Account
2. For expenses incurred and his commission
Consignor’s Personal Account Dr.
To Bank Account
3. For advance paid to consignor
To Bank Account
4. For recording bad debts
Bad Debts Account Dr.
To Customer’s Account
5. For writing out bad debts
When del-credere commission is not allowed

To Bad Debts Account
When del-credere commission is allowed
Commission Account Dr.

12. ACCOUNTING IN THE BOOKS OF CONSIGNEE
PARTICULAR AMOUNT
1. On making sales
Cash/Bank Account/Debtors Dr.
To Consignor’s Personal Account
2. For expenses incurred and his commission
To Bank Account
3. For advance paid to consignor
To Bank Account
4. For recording bad debts
To Customer’s Account
5. For writing out bad debts
When del-credere commission is not allowed

When del-credere commission is allowed

Commission Account Dr.
13. ADVANCE BY THE CONSIGNEE VS SECURITY AGAINST CONSIGNMENT
➢ 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.

Unit – 4 Average Due-Date
USES OF AVERAGE DUE DATE
For Where
calculation amount is
of Interest lent in
on drawings various
of partner installment
Where amount is
lent in one
installment
CALCULATION OF DUE DATE
If Bill/invoice is
payable
On a Specific Date At a stated no. of

months(s)/days after date
Due date will be on that date which

Due date will be on that comes after adding stated number of
specific date months/ days to the date of invoice/bill
+ 3 days of grace

1. INTRODUCTION
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 Average due date is important To simplify the calculation of interest.
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
Mathematical Definition of Average It is the mean or equated date on which a single

due date total payment may be made in lieu of different
payments on different dates without any loss to
either party.
Formula 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑢𝑒 𝐷𝑎𝑡𝑒 = 𝐵𝑎𝑠𝑒 𝑑𝑎𝑡𝑒 +

𝑇𝑜𝑡𝑎𝑙 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝑜𝑓 𝑎𝑚𝑜𝑢𝑛𝑡
❖ Uses of Average Due date
➢ For calculating interest on drawings of partners;

➢ For settling accounts between principle and agent;
➢ For settling contra accounts e.g. where parties sell goods to each other;
➢ For making lump sum payment against various bills drawn on different dates with
different due dates

❖ Points to be Remember
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.
If due date is in fraction, round it If amount is paid before due date,

off. rebate is given.
Whenever there is a sale of goods by

two persons to each other on
If amount is paid after due date, then different dates, the formula for
interest is charged.
calculating average due date
becomes.
𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑠
= 𝐵𝑎𝑠𝑒 𝑑𝑎𝑡𝑒 + 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝐴𝑚𝑜𝑢𝑛𝑡𝑠
2. CONCEPT OF DUE DATE (DATE OF MATURITY)
The due date of a When the amount

bill of exchange of a bill/invoice is
/invoice payable by the
drawee/ creditor
.
to drawer/debtor

• A Bill of exchange or promissory note matures on the date on which it falls
due.
• Every promissory note or bill of exchange (other than those payable on
Calculation of Due Date demand or at sight or on presentment) falls due on the third day after on
after Taking into which it is expressed to be payable.
Consideration Days of
Grace
• 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
• The instrument shall be deemed to be due on the preceding business day.

• If the preceding day is also a public holiday, it will fall on the day
preceding the previous day.
Calculation of Due Date • if the holiday happens to be emergency or unforeseen holiday then the
when the Maturity Day is date shall be the next following day.
a Holiday

3. TYPES OF PROBLEMS
(i) Calculation of average due date where one party is involved.
Take the earliest due date as starting day or base

date or “O” day for convenience. Any date
whatsoever, may also be taken as “O” day.
Consider the number of days from base date up to

each due date. Calculations may also be made in
month.
Multiply the number of days by the corresponding

amounts.
Add up the amount and products.
Divide the “Product total” by “Amount total” and

get result approximately upto a whole number.
This number is added in the base date to find the average due date.
Thus the formula is
Average Due date = Base date +/- Total of products

------------------------
Total of Amounts
Note: For calculation of no. of days, no. of days in each respective month involved are to be
considered individually

(ii) Calculation of average due date Where inter transactions between 2 Parties are
involved
➢ The steps are same as of previous case

➢ Only instead of paying gross amount they may go for new amount i.e. Purchase amount
and sales amount will be set off and thus here we take difference of amount and produce
as Net Amount.
Note: Earliest date of both parties is taken as the base date.
(iii) Calculation of average due date where amount is repaid in Instalments
Step 1
Calculate number of days/monthly/years from the date of

lending money to the date of each repayment .
Step 2
Find the total of such days/months/years.
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.
Thus, the formula for average due date is as follows :

Average due date = Date of loan + Sum of days /months/year from the date of lending to
the date of repayment of each installment
-----------------------------------------------------------------------
Number of Instalments
(iv) Calculation of average due date for determining interest on drawings
➢ 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.

Illustrations
UNIT 1: Bill of Exchange and Promissory notes
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: 6
Rita owed Rs. 1,00,000 to Siriman.
• On 1st October,2016, Rita accepted a bill drawn by Siriman for the amount at 3 months
• Siriman got the bill discounted with his bank for Rs. 99,000 on 3rd October,2016
• Before the due date, Rita approached Siriman for renewal of the bill.
• Siriman agreed on the conditions that Rs. 50,000 be paid immediately together with
interest on the remaining amount at 12% per annum for 3 months and for the balance, Rita
should accept a new bill at three months
• These arrangements were carried out
• But afterwards, Rita became insolvent and 40% of the amount could be recovered from
his estate
Pass journal entries (with narration) in the books of Siriman.
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’.

UNIT 2: Sale of goods on Approval or Return basis
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.

Make the adjustment entries and show how these items will appear in the Balance Sheet on 31st
March,2016. Show also the entries to be made during April,2016. Value of closing Inventories as
on 31st March,2016 was Rs.60,000.
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.

UNIT 3: Consignment
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: 4
Shri Mehta of Mumbai consigns 1,000 cases of goods costing Rs. 1,000 each to Shri Sundaram of
Chennai. Shri Mehta pays the following expenses in connection with consignment:
Carriage 10,000
Freight Charges 30,000
Loading Charges 10,000
Shri Sundaram sells 700 cases at Rs. 1,400 per case and incurs the following expenses:
Clearing Charges 8,500
Warehousing and Storage 17,000
Packing and Selling Expenses 6,000
It is found that 50 cases have been lost in transit and 100 cases are still in transit.
Shri Sundaram is entitled to a commission of 10% on gross sales. Draw up the Consignment
Account and Sundaram’s Account in the books of Shri Mehta.
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.

Unit- 4 Average Due- Date
Illustration – 1
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 - 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 5
Two traders X and Y buy goods from one another, each allowing the other one month’s credit.
At the end of 3 months the accounts rendered are as follows:
Date Goods Sold by X to Y

April 18 60.00
May 15 70.00
June 16 80.00
Date Goods Sold by Y to X
April 23 52.00
May 24 50.00
Calculate the date upon which the balance should be paid so that no interest is due either to X
or Y
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
Date Bills Receivables Tenure

01/06/2016 3,000 3 months
05/06/2016 2,500 3 months
09/06/2016 6,000 1 month
12/06/2016 1,000 2 months
20/06/2016 1,500 3 months
Date Bills Payable Tenure

29/05/2016 2,000 2 months
03/06/2016 3,000 3 months
9/06/2016 6,000 1 month
15 August 2016 was a Public holiday. However, 6 September 2016 was also declared as sudden
holiday
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.

Illustration 8
A and B, two partners of a fi rm, have drawn the following amounts from the firm in the year
ending 31st March 2015:
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
Interest at 6% p.a. is charged on all drawings. Calculate interest chargeable by using
1. Ordinary system
Average due date system. (assume 1 year = 365 days)

Unit – 5 Account Current
❖ Definition
An Account Current
▪ is a running statement of transactions
▪ between parties for a given period of time
▪ Includes interest allowed or charged on various items.
▪ It takes the form of a ledger account.
❖ Some of the situations when account current is prepared are:
It is prepared when frequent transactions

regularly take place between two parties. A consignee of goods can also prepare an
Account Current, if the latter is to settle the
An example is of a manufacturer who sells
account at the end of the consignment &
goods frequently to a merchant on credit interest is chargeable on outstanding
and receives payments from him in balance.
instalments at different intervals and
charges interest on the amount which
remains outstanding
An Account Current also is frequently It is prepared when two or more persons

prepared to set out the transactions are in joint venture and each co-venture is
taking place between a banker and his entitled to interest on their investment.
customer. Also, no separate set of book is maintained
for it.
❖ An Account current has two parties

Heading of an Account Current : “A in Account Current with B”.
2. PREPARATION OF ACCOUNT CURRENT
There are three ways of preparing an Account Current
By means
With help
of
of interest
products
table
By means of
products of
balances
❖ Preparation of Account Current with the help of Interest Tables-Individual Method

All the transactions are arranged in the form of an account
There are two additional columns on both the sides of such an account.
➢ One column is meant to indicate the number of days counted from the due date of each
transaction to the date of rendering the account
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

Template
Date Particulars Due Amt Days Int Date Particulars Due Amt Days In
`
2015 date ` 2015 date
➢ 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.
Preparation of Account Current by means of Products; Product Method
➢ The way of preparing the Account Current remains the same.

➢ In this method only the method of calculating interest is different.
➢ Interest columns are replaced by “product” columns.
➢ Product means the amount multiplied by the number of days for which it has been
outstanding.
The remaining steps are as follows:
Find out the balance of the products on the two sides.
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

Template
Date Particulars Due Amt Days Prod Date Particu Due Amt Days Pr
2015 date 2015 lars date
❖ Method of computing the numbers of Days
• Under this method the number of days are

Forward calculated from the due date of the transaction
to the date of closing the account.
Method
• Under this method, the number of the days

Backward are calculated from the opening date of
Method statement to the due date of transaction.
RED INK INTEREST
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
Red Ink interest is treated as negative interest

❖ Preparation of Account Current by Means of Product of Balances in case of Banks.
➢ Usually adopted in Banks.

➢ Under this method, the balance of account is taken out after every transaction.
➢ In this case, the number of days written against each transaction are the days counted
from its date or due date to the date of the following transaction.
➢ In the case of the last transaction, the number of days is counted to the close of the
period.
➢ Each amount is multiplied with the number of days.
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.
If net interest is payable to the customer “By Interest A/c”
If it is due from the customer “To Interest A/c”.

Illustrations
Illustration – 1
Prepare Account Current for Nath Brothers in respect of the following transactions with Shyam:
2015 Particulars Amount Due Date

(Rs.)
September 16 Goods sold to Shyam 200 due 1st Oct.
October 1 Cash received from Shyam 90
October 21 Good purchased from Shyam 500 due 1st Dec.
November 1 Paid to Shyam 330
December 1 Paid to Shyam 330
December 5 Goods purchased from Shyam 500 due 1st Jan.
December 10 Goods purchased from Shyam 200 due 1st Jan.
2016
January 1 Paid to Shyam 600
January 9 Goods sold to Shyam 20 due 1st Feb.
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)
01.07. 2016 Balance owing by Mr. Y Rs. 600
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 – 3
From the following particulars make up an Account Current to be rendered by S. Dasgupta to A.
Halder at 31st Dec. reckoning interest at 5% p.a. (assume 1 year = 365 days)

June 30 Balance owing by A. Halder 520
July 17 Goods sold to A. Halder 40
Aug. 1 Cash received from A. Halder 500
Aug. 19 Goods sold to A. Halder 720
Aug. 30 Goods sold to A. Halder 50
Sept. 1 Cash received from A. Halder 400
Sept. 1 A. Halder accepted Dasgupta’s Bill at 3 month date for 300
Oct. 22 Goods bought from A. Halder 20
Nov. 12 Goods sold to A. Halder 14
Dec. 14 Cash received from A. Halder 50
Illustration – 4
Following transaction took place between X and Y during the month of April, 2016
April Particulars Rs.

1 Amount payable by X to Y 10,000
7 Received acceptance of X to Y for 2 months 5,000
10 Bills receivable (accepted by Y) on 7.2.2016 is honoured
on this due date
10 X sold goods to Y (invoice dated 10.5.2016) 15,000
12 X received cheque form Y dated 15.5.2016 7,500
15 Y sold goods to X (invoice dated 15.5.2016) 6,000
20 X returned goods sold by Y on 15.4.2016 1,000
20 Bill accepted by Y is dis-honoured on this due date 5,000
You are required to make out an account current by products method to be rendered by X to Y
as on 30.4.2016, taking interest into account @ 10% p.a. (assume 1 year = 365 days)

Illustration – 5
On 2nd January, 2016 Vinod opened a current account with the Allahabad Bank Limited; and
deposited a sum of Rs.30,000.
Deposits Rs. Withdrawals Rs.

15th January 12,000 15th 26,000
February
12th March 8,000 10th April 30,000
10th May 16,000 15th June 14,000
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.

Chapter 7 – Preparation of Final Accounts of Sole Proprietors
OBJECTIVES
7.1 Financial Accounting of Non-Manufacturing Entities and Manufacturing Entities.
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.
7.4 Accounting for depreciation.
Financial Accounts of Non-Manufacturing Entities:
What is a Non-Manufacturing Entity?

Non-manufacturing entity is the entity, which is engaged in the purchase and sale of goods at
profit without processing of those goods. Non-manufacturing entities sell the goods in its original
form.
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.
Important Principles to be followed in preparation of Final Accounts:
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.
iv. Distinction between Personal and Business Income should be maintained.
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:

i. If an item of revenue or income is recorded in the Trading or Profit and Loss Account then
all the expenses relating to those revenue or income needs to be recorded in the same
period Trading and Profit & Loss Account irrespective of the fact whether or not payment
has been actually made.
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

Format of Trading Account:
Accounting Entries related to Trading Account:
1. Opening Inventory:
Trading A/c Dr.
To Opening Stock
2. Purchases:
Purchase A/c Dr.
To Vendor/Cash A/c
Trading A/c Dr.

To Purchases
3. Purchase Return:
Purchase Return A/c Dr.
To Purchases
4. Carriage, Freight Inwards:

Trading A/c Dr.
To Carriage, Freight Inwards A/c
5. Wages:
Trading A/c Dr.
To Wages A/c
6. Sales:

Debtors/Cash A/c Dr.
To Trading A/c
Sales A/c Dr.

To Trading A/c
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.
Profit & Loss Account:

Trading Account enables to determine the gross profit or loss derived from carrying out the trading
activities in which the organization is engaged in.
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.

Format of Profit & Loss Account:

Accounting Entries related to 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
To Debtor’s Account
Profit/Loss Account Dr.

To Bad Debts A/c
In case of Provision for Bad Debts is prepared then the bad debts are first recorded against
the provision

To Debtor’s Account
Provision for Bad Debts A/c Dr.

To Bad Debts A/c
6. Bad Debts Recovery
Bad Debts Recovered Account Dr.

To Profit/Loss Account
Closing Entries
The journal entries that are made for transferring various account to the trading and Profit & Loss
Account are known as Closing Entries.
1. For expenses to be recorded to Profit & Loss Account.

Profit and Loss Account Dr.
To Salaries Account
To Rent Account
To Interest Account
To Other Expenses Account
2. For revenues and gains to be recorded to Profit & Loss Account.
Discount Received Account Dr.

Bad debts Recovered Account Dr.
To Profit and Loss Account
3. Net Profit or Loss transferred to Capital Account
Net Profit
Profit and Loss Account Dr.
To Capital Account
Net Loss
Capital Account Dr.
To Profit and Loss Account
Other Adjustments and their treatment:
1. Abnormal loss of Inventory by accident or fire
Loss by Fire Account Dr.

To Purchases/Trading Account
Claim received from Insurance Company

Profit & Loss A/c Dr.
To Loss by Fire A/c
2. Goods sent on Approval basis
Sales A/c Dr.

To Trade receivables A/c
Sale on approval A/c Dr.

To Trading A/c
3. Goods used other than for sale
When goods are given away as donation

` Donation A/c Dr.
To Purchases A/c

When goods are used by the proprietor for his personal use
Drawings A/c Dr.
To Purchases A/c
When goods are distributed as free samples:-

Advertisement A/c Dr.
To Purchases A/c
When goods are used in business for construction of Fixed Asset:-

Fixed Asset A/c Dr.
To Purchases A/c
When goods are used for maintenance of Fixed Asset: -

Repair & Maintenance A/c Dr.
To Purchases A/c
4. Commission based on profit

Sometimes organizations offer the Managers and high level authorities a part of profit via
commission as a part of their compensation. The computation involved in the computation
of these commission and the journal entries to record the same are as stated below.
Commission based on Net Profit before charging such commission:
Commission = Profit before commission X Rate of Commission

100
Commission based on Net Profit after charging such commission:
Commission = Profit before commission X Rate of Commission

100 + Rate of Commission
Recording Commission in the Books of Accounts:
Commission A/c Dr.

To Commission Payable A/c
Profit/Loss Account Dr.

To Commission A/c
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.

Balance Sheet:
Balance Sheet is the statement which presents an organization Assets and Liabilities position on a
particular date.
Important points with regard to Balance Sheet:
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.
Format of Balance Sheet:

CLASSIFICATION OF ASSETS AND LIABILITIES
Assets are classified into the following categories:
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.
2. Long Term Assets: -

These are the assets which are meant for long term usage and are expected to last for more
than a year or the accounting cycle whichever is longer.
Long Term Assets are classified as Intangible Assets or Tangible Assets.
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.
Liabilities can be classified into the following categories:
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.
2. Long Term Liabilities:

These are the liabilities which are to be paid or settled at least after a year or the operating
cycle whichever is longer. For Eg, Long term loans, Borrowings, etc.
Example:
The following is the Trial Balance of ABC Co. on 31st Dec. 2018. Prepare the Balance Sheet.

Questions:
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.

Illustrations
Question: 1
Trial Balance for financial the year (FY) ended 31st March 2017 of M/s Deepakshi shows
following details:
Particulars Debit (Rs.) Credit (Rs.)
Purchases and sales 10,00,000 12,00,000
Debtors and Creditors 5,00,000 4,00,000
Opening Stock 2,00,000
Closing Stock 3,00,000
Other Expenses and Incomes 7,00,000 9,00,000
Fixed Assets and Long-term Liabilities 25,00,000 6,00,000
Capital 21,00,000
Total 52,00,000 52,00,000
Additional Information:
• Creditors balance as on 1st April 2016 is Rs. 3,00,000.
• You are required to calculate cost of goods sold and amount paid to creditors during the
year.
Question: 2
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:
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

Prepare Profit and Loss Account of M/s ABC Traders for the year ended on 31st March.
Show necessary closing entries in the Journal Proper of M/s. ABC Traders also.
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:

a. Inventories Rs. 14,50,000
b. Trade receivables Rs. 20,00,000
c. Cash at Bank Rs. 10,35,000
d. Trade payables Rs. 11,40,000
During the year he withdrew Rs. 6,00,000 for domestic use.
Draw up his Balance Sheet at the end of the year.
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

Opening Inventory 1,10,000
Freight Inward 40,000
Salaries 2,10,000
Other Administrative Expenses 1,50,000
Furniture 3,50,000
Trade receivables and Trade Payables 2,10,000 1,90,000
Returns 20,000 12,000
Discounts 19,000 9,000
Bad debts 5,000
Investments in Government Securities 1,00,000
Cash in Hand and cash at Bank 1,87,000
Total 18,31,000 18,31,000
Other Information:
(i) Closing Inventory was Rs. 1,80,000
(ii) Depreciate Furniture @ 10% p.a
1. Prepare Trading and Profit and Loss Account for the year ended on 31.3.2017.
Balance Sheet of Mr. Mohan as on that date.
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

Provision for bad debts 30,000
Purchases 14,00,000
Purchase Returns 26,000
Sales 23,00,000
Sales Returns 42,000
Salaries 1,10,000
Rent for Go down 55,000
Interest on loan from Vishwanath 27,000
Rates & Taxes 21,000
Discount allowed to Debtors 24,000
Discount Received from creditors 16,000
Freight on purchases 12,000
Carriage Outwards 20,000
Drawings 1,20,000
Printing and Stationery 18,000
Electricity Charges 22,000
Insurance Premium 55,000
General office expenses 30,000
Bad debts 20,000
Bank Charges 16,000
Motor car expenses 36,000
Capital a/c 16,20,000
Total 47,22,000 47,22,000
Prepare Trading and Profit and Loss Account for the year ended 31st March 2017 and the Balance
Sheet as at that date after making provision for the following:
I.Depreciate:
(a) Building used for business by 5 %
(b) Furniture and fixtures by 10 %:
One steel table purchased during the year for Rs. 14,000 was sold for same price but the
sale proceeds were wrongly credited to Sales Account
(c) Office equipment by 15 %:
Purchase of a typewriter during the year for Rs. 40,000 has been wrongly debited to
purchase
(d) Motor car by 20%
II.Value of stock at the close of the year was Rs. 4,40,000
III.Two month’s rent for Go down is outstanding
IV.Interest on loan from Viswanath is payable at 12 % per annum, this loan was taken on
01.05.2016
V.Reserve for bad debts is to be maintained at 5 % of Sundry Debtors
VI.Insurance premium includes Rs. 40,000 paid towards proprietor’s life insurance policy and
the balance of the insurance charges cover the period from 01.04.2016 to 30.06.2017.

Question: 12
Crimpson Ltd.’s profit and loss account for the year ended 31st March 2016 includes the
following information
Particulars Amt (Rs.)
(i) Depreciation 57,500
(ii) Bad debts written off 21,000
(iii) Increase in provision for doubtful debts 18,000
(iv) Proposed dividend 15,000
(v) Retained profit for the year 20,000
(vi) Liability for tax 4,000
Required:
State which one of the items (i) to (vi) above are –
(a) transfer to provisions;
(b) transfer to reserves; and
(c) neither related to provisions nor reserves.
UNIT 2: Final accounts of Manufacturing entities
Manufacturing
Business Entities
Manufacturing Profit & Loss

Trading Account Balance Sheet
Account Account
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

discloses the profit or loss on manufacture. Similarly, it may also be used to fix the
amount of production of profit sharing bonus when such schemes are in force.
Manufacturing costs are classified into :
+ Raw Material Consumed .…..….
+ Direct Manufacturing Wages ………
+ Direct Manufacturing Expenses ………
+ Direct Manufacturing Cost ………
+ Indirect Manufacturing expenses or
+ Manufacturing Overhead ………
Total Manufacturing Cost
Raw Material Consumed = Opening inventory of Raw Materials + Purchases – Closing inventory of
Raw Materials
Direct Manufacturing Expenses

Direct manufacturing expenses are costs, other than material or wages, which are incurred
for a specific product or saleable service.
Examples of direct manufacturing expenses are (i) Royalties for using license or technology if
based on units produced, (ii) Hire charge of the plant and machinery used on hire, if based
on units produced, etc.
When royalty or hire charges are based on units produced, these expenses directly vary with
production.
INDIRECT MANUFACTURING EXPENSES OR OVERHEAD EXPENSES
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

not consciously undertaken but results out of the production of the main product. It is usually very
diflcult to ascertain the cost of the product. Moreover, its value usually forms a very small
percentage of the main product.
By-product is a secondary product. This is produced from the same raw materials, which are
used for producing the main product and without incurring any additional expenses from the
same production process in which the main product is produced. Some examples of by-product
are given below:
(i) Molasses is the by-product in sugar manufacturing;
(ii) Butter milk is the by-product of a dairy which produces butter and cheese, etc.
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.

Chapter – 8 Partnership
Unit-1 Introduction
Business carried on by all or any one of them

acting for all. Sharing of profits and losses of the business.
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.
An agreement entered into by all persons

Existence of a business. concerned.
A partnership comes into existence only when A formal or written agreement is not necessary to
partners begin to carry on business in create a partnership.
accordance with their agreement.
An association of two or more persons.

Unlimited liability of all partners

❖ Why Partnership?
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
2. LIMITED LIABILITY PARTNERSHIP
The Limited Liability Partnership (LLP)

➢ Viewed as an alternative corporate business proposal that provides the benefits of
limited liability.
➢ Allows its members, the flexibility of organizing their internal structure as a
partnership, which is based on a mutually arrived agreement.
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.

➢ The provisions of the Indian Partnership Act, 1932 shall not apply to LLP unless stated.
➢ Every limited liability partnership shall have at least two partners.
❖ Who can become a partner in LLP?

Any individual or body corporate may be a partner in a LLP.
Provided that an individual shall not be capable of becoming a partner of a limited liability
partnership if
He has been found to be of unsound mind by a

Court of competent jurisdiction .
He is an undischarged insolvent.
He has applied to be adjudicated as an insolvent

and his application is pending.
❖ 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.
3. DISTINCTION BETWEEN ORDINARY PARTNERSHIP FIRM AND AN LLP
Key Elements Partnerships LLPs

1 Applicable Indian Partnership Act 1932 The Limited Liability
Law Partnerships Act, 2008
2 Registration Optional Compulsory with ROC
3 Creation Created by an Agreement Created by Law
4 Body No Yes
Corporate

5 Separate No Yes
Legal Entity
6 Perpetual Partnerships do not have It has perpetual
Succession perpetual succession succession and individual
partners may come and go
7 Number of Minimum 2 and Maximum 50 Minimum 2 but no
Partners maximum limit
8 Ownership of Firm cannot own any assets. The LLP as an
Assets The partners own the assets of independent entity can
the firm own assets
9 Liability of Unlimited: Partners are Limited to the extent of
Partners / severally and jointly liable their contribution
Members for actions of other partners towards LLP except in
and the firm and their case of intentional fraud
liability extends to personal or wrongful act of
assets omission or commission
by a partner.
10 Principal Partners are the agents of Partners are agents of the
Agent the firm and of each other firm only and not of other
Relationship partners
4. MAIN CLAUSES IN A PARTNERSHIP DEED
Name of the firm and the partners
Rate of interest to be allowed to each partner on his capital and

on his loan to the firm, and to be charged on his drawings
Commencement and duration of business
Amount of capital to be contributed by each partner
Whether a partner will be allowed to draw any salary
The ratio in which profits or losses are to be shared
Treatment of losses arising out of the insolvency of a partner

Any variations in the mutual rights and duties of partners
Amount to be allowed to each partner as drawings and the

timings of such drawings
Method of valuing goodwill on the occasions of changes in the

constitution of the firm.
Procedure by which a partner may retire and the method of
payment of his dues
Basis of the determination of the executors of a deceased
partner and the method of payment
Procedure to be allowed for settlement of disputes among

partners
Preparation of accounts and their audit
❖ Special Points
Registration of a deed Non registration restricts

is not compulsory. the partners or firm from
taking any legal action.
Partnership act will

apply in case of no
partnership deed or the
deed is silent on any
point.

Rules in the absence of Partnership Deed
No interest is to be allowed on capital
No interest is to be charged on the drawings
Profits and losses are to be shared equally
Interest at the rate of 6%.p.a is to be allowed on a partner’s loan to the firm
No partner has the right to a salary
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.
5. MAIN CLAUSES IN A PARTNERSHIP DEED
❖ 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.
Drawing cheques and Borrowing money on behalf

drawing, accepting and of the firm with or without
endorsing bills of exchange pledging the inventories-in-
and promissory notes in the trade.
name of the firm.

❖ In following cases , third parties cannot bind the firm unless all the partners have agreed
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.
7. PROFIT AND LOSS APPROPRIATION
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

For above adjustments, there is an additional account is prepared known as Profit and Loss
Appropriation Account.
Credit Side Debit Side
1. Net profit of the 1 .Salary to the

company partners
2. Interest on 2. Interest on
Drawings capital
8. FIXED AND FLUCTUATING CAPITAL
There are two methods of accounting
1) Fixed capital method

2) Fluctuating capital method
❖ Fixed Capital Method
There are two accounts under this method
1) Capital account: Initial capital contributions by the partners are credited.
2) Current Account: subsequent transactions and events are dealt with through current
accounts.
Unless a decision is taken to change it, initial capital account balance is not changed.
❖ Fluctuating Capital method

➢ No current account is maintained. Only one account is maintained.
➢ All such transactions and events are passed through capital accounts.
➢ Capital account balance fluctuates all the time.
9. INTEREST ON CAPITAL
➢ A partner get interest on capital only if there is an agreement for it.

➢ Normally, interest on capital for full year on the balance of capital at the beginning of
the year.
➢ If any fresh capital introduced, then the interest for the relevant period of utilization is
calculated.
➢ If any permanent withdraw of capital then the interest for the relevant period of
utilization is calculated.

➢ In case of fixed capital accounts, interest is calculated on the balance of capital
accounts only and no interest is payable / chargeable on the balance of current
accounts.
➢ Subject to contract between the partners, interest on capitals is to be provided out of
profits only.
➢ In case of insufficient profits, the amount of profit is distributed in the ratio of capital as
partners get profit by way of interest on capital only.
❖ What is insufficient profit?

When the interest on capital is more than the net profit.
10. INTEREST ON DRAWINGS
➢ 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
Withdrawals are made evenly in the Interest can be calculated on whole

beginning of each Month amount for 6.5 months
Withdrawals are made at the end of Interest can be calculated on whole
each month amount for 5.5 months
Withdrawals are mode at the Interest can be calculated on whole
beginning of each quarter amount for 7.5 months
Withdrawals are mode at the Interest can be calculated on whole
beginning of each quarter amount for 4.5 months
11. GUARANTEE OF MINIMUM PROFIT
➢ 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
Allocation of profit is done in a normal way
➢ If share of partner (who has been guaranteed minimum profit) is less than the amount of
guarantee profit

He takes minimum profit and the excess of guaranteed share of profit over
the actual share is borne by the remaining partners as per the agreement.
➢ Deficiency can be share in following ways

• Excess is payable by one of the remaining partners.
• Excess is payable by at least two or all the partners in an agreed ratio.
• Excess is payable by remaining partners in their mutual profit sharing ratio.
➢ If question silent about the nature of guarantee
The burden of guarantee is borne by the remaining partners in their mutual profit sharing
ratio.
12. CAPITAL RATIO – For sharing profits
➢ 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.
When capital is fixed When capital is fluctuating
Profits will be shared in The capitals for the purpose of

the ratio of given ratio would be determined
capitals with reference to time on the
basis of weighted average
method

13. JOURNAL ENTRIES
PARTICULAR AMOUNT
1. Introduction of capital
Bank A/c Dr.
To Partner’s Capital A/c
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.
6. Sharing of profit
Profit& Loss Appropriation A/c Dr.
7. In case of Loss
(Individual) Capital (or Current) Accounts of Partners Dr.
To Profit& Loss Appropriation A/c

Unit-2 Treatment of Goodwill
Change in profit sharing ratio Admission of partner
Necessity for
valuation of
goodwill
When business is dissolved or sold Retirement or death of partner
Annuity basis
Methods
Capitalization of Super profit
Basis valuation
of goodwill
Average Profit

Goodwill
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
❖ Why Goodwill arise?
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
❖ Recommendation of Accounting Standard
Accounting Standards require an enterprise to recognize an intangible asset, if

• It means that it must have some value and must be
An intangible asset must have the clearly identifiable.
characteristics of an asset • It can be sold without disposing other assets or
future benefits flowing from other assets.
An intangible asset should be • Future probable economic benefits means it has a

recognized only if future probable capacity to increased revenue from sales.
economic benefits will flow to the • It means that management can make reasonable
business enterprise estimates of future benefits.
• The cost is objectively verifiable.

The cost of the intangible asset can • If the cost cannot be measured reliably, then it
be measured reliably cannot be recognized as an asset.
* Internally generated goodwill or inherent goodwill will not be recognise
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.
In the event of reconstitution of the firm due to admission, or retirement or death of a

partner or even a change in the profit sharing ratio without reconstitution
➢ Goodwill of the firm is evaluated.

➢ The value of goodwill should not be brought into books of account because it is inherent
or self-generated goodwill since no money or money’ worth has been paid for it.
➢ The goodwill should be adjusted through capital accounts of the partner(s) of the firm.
➢ Goodwill account cannot be raised in the books of account, either on the reconstitution
of the firm or change in the profit sharing ratio.
➢ If goodwill account exists at the time of reconstitution of firm, It should be written off
immediately whether it is internally generated or goodwill has been bought for some
consideration.

2. METHOD FOR GOODWILL VALUATION
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 Profits Basis – Simple and weighted
➢ 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 Basis
➢ Goodwill is valued on the basis of super profits earned by the firm.
➢ Super profit can be calculated as follows:
Super Profit=Actual Profit-Normal 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.
Actual Profit: Actual Profit is average profit
Normal Profit: Normal rate of Return (NRR) x Capital Employed
Why super profit can be use?
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

profit because normal profit he can earn by joining any partnership firm.
Steps in calculation of Super profit
Identify the capital employed by the partnership

firm
Identify the average profit earned by the

partnership firm based on past few years’ figures
Determine normal rate of return prevailing in the

locality of similar firms
Apply normal rate of return on capital employed

to arrive at normal profit
Deduct normal profit from the average profit of

the firm. If the average profit of the firm is more
than the normal profit, there exists super profit
and goodwill.
How Goodwill calculate using Super Profit?
(a) Number of Years Purchase Method:

(i) Goodwill is generally valued by multiplying the amount of super profit
(ii) By certain number of years depending upon the expectation about the
maintenance of such profit in future.
(b) Annuity Method:

(i) Goodwill is valued by multiplying the amount of super profit of every year by the
discounting factor of every year and then adding them.
(ii) The major drawback of number of number of years purchase method is that time
value of money is not considered and in annuity method the time of value money
considered.
(c) Capitalization Basis:
(i) Value of whole business is determined applying normal rate of return.

(ii) Value (arrived at by applying normal rate of return) is higher than the capital
employed in the business, then the difference is goodwill.

Steps :
1) Determine the normal rate of return.

2) Find out the average profit of the partnership firm for which goodwill is to be
determined.
3) Determine the capital employed by the partnership firm for which goodwill is
to be determined.
4) Find out normal value of the business by dividing average profit by normal rate
of return.
5) Deduct average capital employed from the normal value of the business to arrive
at goodwill.
Goodwill = Normal Capital-Actual Capital

Normal capital = Average Profit/NRR
3. NEED FOR VALUATION OF GOODWILL
Whenever there is any change in the existing relationship of

the partners
Those who are sacrificing future profit should be compensated by

the others who are gaining.
Some partners have to sacrifice their future profit and some others
would gain.
The partners, who gain in terms of profit sharing ratio, have to

pay for such gain as a proportion to the value of goodwill.
The partners, who lose in terms of profit sharing ratio, receive

payments for the sacrifice as a proportion to the value of goodwill.

4. VALUATION OF GOODWILL IN CASE OF ADMISSION OF A PARTNER
When a new partner is admitted into a partnership
Certain adjustments in accounts become necessary
Because the new partner will acquire a share in the profits of

the firm and because of this, the old partners will stand to lose.
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.
➢ The above compensation is tackled through Goodwill. Compensation of goodwill is done

in profit sacrificing ratio.
➢ Kindly note that it is not necessary that the profit of the firm will remain 20000 after C’s
admission. Extra profits will arise and therefore, A and B will both get more than what they
previously got.
➢ The additional profits will be earned by the combined efforts of all the partners A, B and
C and hence no need that c compensate to A and B for extra profit in future.
As per the Accounting Standards, it is not recommended to raise goodwill account but
to show the adjustment of goodwill through partners’ capital accounts
5. ACCOUNTING TREATMENT OF GOODWILL
❖ Accounting Treatment of Goodwill in Case of Change in Profit Sharing Ratio

In case of change in profit sharing ratio, the value of goodwill should be determined
and preferably adjusted through capital accounts of the partners on the basis of
profit sacrificing ratio.
❖ Accounting Treatment of Goodwill in Case of Retirement or Death of a partner

➢ When a partner retired, the continuing partners will gain in terms of profit sharing ratio.
➢ They have to pay to retiring partner for his share of goodwill in the firm in the gaining
ratio.

➢ Similarly, in case of death of the partner, the continuing partners should bear the share
of goodwill due to the heirs of the deceased partner.
❖ Accounting treatment of Goodwill in case of Admission of a new partner
The goodwill should be recorded in the books

only when some consideration in money or
money’s worth as been paid for it.
only purchased goodwill should be recorded in

the books of the firm.
In case of admission of a partner, goodwill

cannot be raised in the books of the firm
because no consideration in money or money’s
worth is paid for it.
The adjustment of goodwill is done in Profit

Sacrificing ratio.
The profit sacrificing ratio is computed by

deducting the new profit sharing ratio from the
old profit sharing ratio. If differnece is positive
then it is a profit sacrifice and if it is negative
then it is profit gain.

Premium for goodwill When no cash When new partner
brought in cash by brought by new pays premium
new partner partner for goodwill privately.
• The premium for • The goodwill • No entry required.
goodwill shall be adjusted through • the amount to be
given in Profit debiting the new paid to each partner
sacrificing ratio by partner capital should be calculated
crediting their account and as per the profit
respective partner crediting those sacrificing ratio.
capital or current partner's capital
account . account who is going
to sacrifice
13. JOURNAL ENTRIES
PARTICULAR AMOUNT
Accounting treatment of Goodwill at the time of Admission
1. Premium for goodwill brought in cash by new partner
Bank A/c Dr.
To A Partner’s Capital A/c
To B Partner’s Capital A/c
(Goodwill adjustment in the profit sacrificing ratio)

2. When no cash brought by new partner for goodwill
C Partner’s Capital A/c Dr.(New partner)
To A Partner’s Capital A/c (old Partner)
To B Partner’s Capital A/c (old Partner)
(Adjustment for goodwill)
3. When new partner pays premium privately
No entry Required
Accounting treatment of Goodwill at the time of change in profit

sharing ratio
C Partner’s Capital A/c Dr. (gaining partner )
To A Partner’s Capital A/c (Sacrificing Partner)
To B Partner’s Capital A/c (Sacrificing Partner)
(Adjustment for goodwill)
Accounting Treatment of Goodwill in Case of Retirement or

Death of a partner
A Partner’s Capital A/c
B Partner’s Capital A/c
To C’s Partner Capital A/c
(C is going to retire and his share of goodwill adjusted to

existing partners’ capital accounts in profit gaining ratio)

Unit -3 Admission of Partner
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
❖ Reason for admitting New Partner

➢ For increasing the partnership capital.
➢ For strengthening the management of the firm.
❖ Effects for admitting New partner

➢ Desirable to bring all appreciation or reduction in the value of assets into accounts as on
the date of admission.
➢ Liabilities recorded, if not recorded.

➢ Liabilities written off, if not required to be paid.
➢ All profits which have accrued but not yet brought into books should be record.
➢ All losses which have occurred but not recorded should be recorded.
➢ The value of goodwill is to be assessed and proper accounting treatment is required to
bring the value of goodwill into books of accounts.
The purpose of such entries is to make an updated Balance Sheet on the date of admission.
REVLAUATION ACCOUNT OR PROFIT AND LOSS ADJUSTMENT ACCOUNT
❖ 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.
❖ Memorandum Revaluation Account

Memorandum Revaluation Account prepared when all the partners including the new partner
may agree to keep the assets and liabilities at the old values even when they agree to
revalue them.

Memorandum Revaluation Account has two parts
First Part Second Part

1. Entries for the revaluation 1.Entries made in the first part
of assets and liabilities are of Memorandum Revaluation
made in the usual way as Account are reversed in the
made in case of revaluation second part so that the values
account. of the assets and liabilities
remain unchanged.
2. No record for the
revaluation of assets and 2.The balance of the second
liabilities is made through the part is transferred to the
respective ledger accounts. capital accounts of all the
partners including new partner
3. The resultant profit or loss in their new profit and loss
on revaluation in the first part sharing ratio.
of this account is transferred
to the capital accounts of old
partners only in the old profit
and loss sharing ratio.
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.
❖ Difference between Revaluation Account and Memorandum Revaluation Account

Basis Revaluation Account Memorandum Revaluation
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.
No. of parts Revaluation account is not

Memorandum revaluation
divided into two parts. account has two parts: first
part for old partners and
second part for all partners
including the new partner.
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.

COMPUTATION OF NEW PROFIT SHARING RATIO
When new partner’s share is

• It is assumed that the old partner will share
given but the question is
the remaining share in their old profit sharing
silent about the sacrifice
ratio.
made by the old partners
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.
• Determine the share surrendered by the old

partners.
When the old partners • Find the new share of the old partners by
surrender a particular deducting share surrendered from their old
fraction of their share in share.
favour of new partner • Calculate share of the new partner by taking
the sum of surrendered share of old partners.
• Calculate the new ratio.

When the new partner
• The sacrificing partner share is calculated by
acquires his share entirely
deducting his sacrifice from his old share.
from any one of partner only
When the new partner

acquires his share from the • The sacrifice of each partner is deducted from
old partners in the certain their old shares.
ratio
❖ Some useful Definition
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.
Sacrificing ratio = Old Profit sharing ratio - New Profit sharing

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

HIDDEN GOODWILL
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
PARTICULAR AMOUNT Remarks
Accounting treatment of Revaluation of assets and liabilities

through Revaluation Account
(a) Revaluation A/c Dr. With the

reduction in
To Assets A/c the value of
the assets
(individually which show a decrease)
(b) Revaluation A/c Dr. With the

increase in
To Liabilities A/c the liabilities.
(Individually which have to be increased)
(c) Assets A/c Dr. With the

increase in
To Revaluation A/c the value of
the of assets.
(Individually which have to be increased)

(d) Liabilities A/c Dr. With the
reduction in
To Revaluation A/c the amount
liabilities.
(individually which show a decrease)
(e) Revaluation A/c Dr. With the

profit in the
To Capital A/c of the old partners old profit
sharing ratio.
( Sharing of Revaluation Profit)
with the loss

Capital A/c of the old partners Dr. in old profit
sharing ratio
To Revaluation A/c
( Sharing of Revaluation Loss)

through Memorandum Revaluation Account( Part – 1)
A) Assets A/c Dr. with increase

in the value
of individual
assets
Liabilities A/c Dr. With

decrease in
the value of
individual
liabilities

To Memorandum Revaluation A/c
B) Memorandum Revaluation A/c Dr.
To Assets A/c with increase

in the value
of individual
assets
To Liabilities A/c with

decrease in
the value of
individual
liabilities
Memorandum Revaluation A/c Dr If there is

profit on
To Old Partners’ Capital A/c revaluation.
Old Partners’ Capital A/C Dr. If there is loss

on
To Memorandum Revaluation A/c revaluation.

through Memorandum Revaluation Account( Part – 2)
REVERSE ENTRIES OF PART 1 (A &B)
Memorandum Revolution A/c Dr. (New profit

and loss
To All Partners’ Capital A/c sharing ratio)
(If there is Profit )

All Partners’ Capital A/c Dr. (New profit
and loss
To Memorandum Revaluation A/c sharing ratio)
(If there is loss)
Reserves or Profit & Loss A/c Dr. In the old

profit sharing
To Old Partners’ Capital A/c ratio
(Any reserve etc. lying in the Balance Sheet transferred to

the Capital Accounts of the old partners)
C’s Capital A/c ( Gaining Partner) In case of

Hidden
To A’s Capital A/c ( Sacrificing Partner) Goodwill
To B’s Capital A/c ( Sacrificing Partner)
(Being the share of C in the hidden goodwill adjusted

through capital accounts by crediting sacrificing partners
in their sacrificing ratio)

Unit-4 Retirement of Partner
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.
Retiring Partner Capital A/c … Dr.
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
To Retiring Partner’s Loan A/c
The loan is repaid as per the terms of retirement and entries will be passed accordingly.
Joint Life Policy
➢ 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.

➢ The objective of taking such a policy is to minimize the financial hardships to the event of
payment of a large sum to the legal representatives of a deceased partner or to the
retiring partner.
Accounting
Treatment
Expense Asset Reserve
1. When JLP is treated as expense
Payment of JLP premium JLP Premium A/c Dr.
To Bank A/c
Transfer of JLP to P&L Profit & Loss A/c Dr.
To JLP Premium A/c
On Maturity of Policy Bank A/c Dr.
To Partners Capital A/c (in PSR)
2. When JLP is treated as Asset
Payment of JLP premium Joint Life Policy A/c Dr.
To Bank A/c
Year End – Check with Surrender Value Profit & Loss A/c Dr.
Loss = JLP Balance – Surrender Value To Joint Life Policy A/c
On Maturity of Policy Bank A/c Dr.
To Joint Life Policy A/c

To Partner’s Capital A/c (In case of
gain)
3. Creation of JLP Reserve

Payment of JLP premium Joint Life Policy A/c Dr.
To Bank A/c
Year End Profit & Loss Appropriation A/c Dr.
Creation of Reserve To JLP Reserve A/c
Year End – Check with Surrender Value JLP Reserve Dr.
Loss = JLP Balance – Surrender Value To Joint Life Policy A/c
On Maturity of Policy JLP Reserve A/c
Balance in JLP A/c Transferred to Partners
Joint Life Policy – Individual
➢ 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.
Right in subsequent profits
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

Unit-5 Death of a Partner
The problems arising on the death of a partner are similar to those arising on retirement
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)
Right in subsequent profits
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
Amount payable to legal representatives
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

The following amounts will be deducted
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
To Retiring Partner’s Loan A/c
The loan is repaid as per the terms of retirement and entries will be passed accordingly.
Calculation of profits up to the death of a partner
➢ Profit is calculated through P&L Suspense account.

➢ Amount due to the deceased partner, it should be credited to his Executor’s Account.
➢ The representatives of the deceased partner are entitled to his/her share of profits
earned till the date of his/her death.

Ascertainment of
Profits
Time Basis Turnover/Sales Basis
Profit is assumed to
Assumed that profit is have been earned on
earned evenly the basis of
throughout the year profitability of previous
year
Joint Life Policy
➢ 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
Entry at time of receipt of amount from Joint Life Policy

Bank A/c Dr.
Entry to transfer gain on Joint Life Policy (balance in JLP)
Joint Life Policy A/c Dr. (Balance Figure)

To Partner’s capital A/c (PSR)
Entry to transfer Joint Life Policy (JLP) reserve
Joint Life Policy Reserve A/c

To Partner’s Capital A/c (PSR)
Joint Life Policy – Separate Policy
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.

Any gain on account of above will be credited to the continuing partners and executor (legal
representative)
Bank A/c Dr.

To Separate Life Policy of Deceased partner A/c
(Policy value received on death of a partner)
Separate Life Policy of Deceased Partner A/c Dr. (Sum Assured)

Separate Life Policy of Remaining Partners A/c Dr. (Surrender Value)
To Executor’s A/c
To Remaining partners A/c
(Distribution of balances)

Illustrations
Introduction to Partnership Accounting
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.

B drew Rs.1,000 on 30th June and Rs.500 on 30th September 2016. 12% p.a. interest on capital is
allowed and 10% p.a. interest on drawings is chargeable.
Date of closing 31.12.2016.
Calculate:
• profit sharing ratio

• interest on capital and
• interest on drawings
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

Goodwill
Partnership
Illustration – 1
Lee and Lawson are equal partnership. They agreed to take Hicks as one- fourth partner. For
this it was decided to find out the value of goodwill. M/s. Lee and Lawson earned profits during
2013-2016 as follows:
Year Profits
2013 1,20,000
2014 1,25,000
2015 1,30,000
2016 1,50,000
On 31.12.2016 capital employed by M/s. Lee and Lawson was Rs.5,00,000. Rate of normal profit
id 20%. Find out the value of goodwill following various methods.
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

20,000 65,000
65,000
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
The new profit-sharing ratio is 6:5:5.

Give journal entries and Balance Sheet if goodwill is adjusted through partner’s capital
accounts.
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.

Admission of a Partner
Illustration 1
The following is the Balance Sheet of Ram and Mohan, who share Profit in the ratio of 3:2 as on
1st January 2016:
Trade Payables 15,000 Buildings 18,000
Ram’s Capital 20,000 Plant and Machinery 15,000
Mohan’s Capital 25,000 Inventories 12,000
Trade Receivables 10,000
Bank 5,000
60,000 60,000
On this date Shyam was Admitted on the following:

1. He is to pay Rs.25,000as his capital and Rs.10,000as his share of goodwill for one fifth
share in profits.
2. The new profits sharing ratio will be 5:3:2
3. The assets are to be revalued as under:
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.

Illustration 2
A and B are partners sharing profits and losses in the ratio of 3:2. The Balance Sheet as on
31.3.2016 is given below:
Trade Payables 50,000 Freehold premises 2,00,000
Capital A/c Plant 40,000
A 2,00,000 Furniture 20,000
B 1,00,000 Office equipment 25,000
Inventories 30,000
Trade Receivables 25,000
Bank 10,000
3,50,000 3,50,000
On 1.4.2016 they admit C on the following terms:
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:

Trade payables 12,850 Land and Buildings 25,000
Outstanding Liabilities 1,500 Furniture 6,500
General Reserves 6,500 Inventory of goods 11,750
Capital Account: Trade receivables 5,500
Mr. Dalal – 12,000 Cash in Hand 140
Mr. Banerji – 12,000 Cash at Bank 960
Mr. Mallick - 5,000 29,000
49850 49850

The partners have agreed to take Mr. Mistri as a partner with effect from 1 st April 2016 on the
following terms:
1) Mr. Mistri shall bring Rs.5,000 towards his capital.

2) The value of Inventory should be increased by Rs.2,500 and furniture should be
depreciated by 10%.
3) Reserves for bad and doubtful debts should be provided at 10% of the Trade receivables.
4) The value of land and buildings should be enhanced by 20% and the value of the goodwill
be fixed at Rs.15,000.
5) The value of the goodwill be fixed at Rs.15,000.
6) General Reserve will be transferred to the partner’s Capital Accounts.
7) The new profit- sharing ratio shall be: Mr. Dalal 5/15, Mr. Banerji 3/15, and Mr. Mistri
2/15.
The outstanding liabilities include Rs.1,000 due to Mr. Sen which has been paid by Mr.
Dalal. Necessary entries were not made in the books.
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.

Illustration 5
A and B are partners of X & Co. sharing profits and losses in 3:2 ratio between themselves. On
31st March 2016, the Balance Sheet of the firm was as follows:

Capital A/cs: Plant and Machinery 20,000
A:37,000 Furniture and 5,000
B:28,000 65,000 Fittings 15,000
Inventories 20,000
Trade Payables 5,000 Trade Receivables 10,000
Cash in Hand
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:

Capital A/cs: Sundry fixed assets 60,000
A 45,000 Inventories 30,000
B 45,000 Bank 20,000

1,10,000 1,10,000
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.

Retirement of Partner
Retirement of Partner
Illustration 1
F, G and K were partners sharing profits and losses at the 2:2:1. K wants to retire on 31.12.2015.
given below is the Balance Sheet of the Partnership as well as other information:
Balance Sheet as on 31.12.2015
Capital A/cs: Sundry Fixed Assets 1,50,000
F 1,20,000 Inventories 50,000
K 80,000 Trade Receivables 70,000
G 60,000 (including Bills
Receivables
Reserves 10,000 Rs.20,000) 50,000
Trade Payables 50,000 Bank
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.

Illustration 2
K, L & M are partners- sharing profits and losses in the ratio 5:3:2. Due to illness, L wanted to
retire from the firm on 31.12.2015 and admit his son N in his place.
Balance Sheet of K, L and M as on 31.3.2015

Capital A/cs: Goodwill 30,000
F: 40,000 Furniture 20,000
K: 60,000 Trade receivables 50,000
G: 30,000 1,30,000 Inventory in trade 50,000
Cash and bank 50,000
Reserves 50,000 balance
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.
You are required to give:

i) Necessary journal entries
ii) Balance Sheet of M/s K, M and N
Capital Accounts of partners

Illustration 3
Dowell & Co. is a partnership firm with partners Mr. A, Mr. B and Mr. C, sharing profits and
losses in the ratio of 10:6:4. The Balance Sheet of the firm as at 31st March 2015 is as under:

Capital A/cs: Land 10,000
Mr. A:80,000 Buildings 2,00,000
Mr. B:20,000 Plant and Machinery 1,30,000
Mr. C: 30,000 1,30,000 Furniture 43,000
Reserves Investment 12,000
(inappropriate profit) 50,000 Inventories 1,30,000
Long term Debt 3,00,000 Trade Receivables 1,39,000
Bank O/D 44,000
Trade Payables 1,70,000
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 4
Red, White and Black shared profits and losses in the ratio of 5:3:2. They took out a joint life
policy in 2011 for Rs.50,000, a premium of Rs.3,000 being paid annually on the 10 th June.
The surrender value of the policy on 31st December of various years was as follows: 2011 nil;
2012 Rs.900;
2013 Rs.2,000;
2014 Rs.3,600.
Black retires on 15th April 2015.
Required
Prepare ledger accounts assuming no Joint Life Policy Account is Maintained.
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
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.

Illustration 6
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.

Illustration 7
K, L & M are partners sharing profits and losses in the ratio 5:3:2
• Due to illness, L wanted to retire from the firm on 31.03.2015 and admit his son N in his
place
Balance Sheet of K, L and M as on 31.3.2015

Liabilities Amount Amount Assets Amount
(Rs.) (Rs.) (Rs.)
Capital Goodwill 30,000
K 40,000 Furniture 20,000
L 60,000
M 30,000 Trade Receivables 50,000
1,30,000
Reserve 50,000 Inventory in Trade 50,000
Trade Payable 20,000
Cash and Bank 50,000
Balances
2,00,000 2,00,000
On Retirement of L assets were revalued –
• Goodwill Rs. 50,000

• Furniture Rs. 10,000
• 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
Required
i. Necessary journal entries
ii. Balance sheet of M/s K, M and N as on 01.04.2015
Capital accounts of partners.

Death of Partner of a Partner
Illustration 1
The following was the Balance Sheet of Om & Co. in which X, Y, Z were partners sharing profits
and losses in the ratio of 1:2:2 as on 31.3.2016. Mr. Z died on 31st December 2016. His account
has to be settled under the following terms.
Balance Sheet of Om & Co. as on 31.3.2016
Trade payables 20,000 Goodwill 30,000
Bank Loan 50,000 Building 1,20,000
General reserve 30,000 Computers 80,000
Capital accounts: Inventories 20,000
X: 40,000 Trade receivables 20,000
Y: 80,000 Cash at bank 20,000
Z:80,000 2,00,000 Investments 10,000
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.

Illustration 2
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.

Chapter 9 – Financial Statements of Not-For-Profit Organizations
OBJECTIVES
9.1 Receipts and Payments Account (Which is Equivalent to Cash Book).
9.2 Income and Expenditure Account (Which is Equivalent to Profit and Loss Account).
9.3 Balance Sheet for NPO.
9.4 Understanding various sources of Income for NPO and the separate kind of treatments
applicable to them.

What is a Not-for-Profit Organization?
A Not-for-Profit Organization is an entity which is not being operated for the purpose of earning
profit but for the benefit for the society. It is brought into existence with a view to serve a social
cause, not to earn profits for its owners.
Following are some of the forms of Not-For-Profit Organization:

1. Public Hospitals
2. Public Educational Institutions
3. Government Clubs
4. Temples, etc.
Receipt and Payment Account:
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:
1. It presents the summary of cash and bank transactions.

2. All the receipts and payments irrespective of the fact whether they are capital or revenue
in nature are accounted for.
3. This account is not maintained as part of the double entry system of accounting.
4. Surplus for the period i.e. Excess of Income over expenditure or Deficit i.e. Excess of
Expenditure over income for the period cannot be determined from this account since it
excludes all non-cash transactions. This is the limitation of the Receipt and Payment
Account.
Example on Receipt and Payment Account:
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
Prepare the Receipts and Payment Account.

Income and Expenditure Account:
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.
3. Cash as well as Non-Cash items are taken into consideration.
4. Income and Expenses which are capital in nature are excluded.
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.

4. Transfer the balance of the income and expenditure to the Accumulated/Capital Fund
Account.
5. Transfer the amounts which are capital in nature from the Receipt and Payment to the
Balance Sheet of the NPO.
6. Prepare the Closing Balance Sheet.
Example on Computing and Preparing a particular Income Account from the Receipt and
Payment information:
During 2018, Subscription received in cash is Rs. 70000.

It includes Rs.15000 for 2017 and Rs.10000 for 2019.
Also Rs.20000 has still to be received for 2018.
Prepare the Subscription Outstanding, Subscription and Advance Subscription Account for the year
ended March 31, 2018.
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:

A Balance Sheet is the statement which presents the balance of the assets and liabilities of an
accounting period at a given date. Normally it is prepared at the end of an accounting period after
the Income and Expenditure Account has been prepared. In NPO Accounting, the excess of total
assets over total outside liabilities is known as Capital Fund which presents the amount
contributed by the Members, receipt of special donations and surplus accumulated over the years.
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)
Depreciation on the Computers is charged at 15% and on Equipment is charged at 10%.

The Opening Balance Sheet is as presented below:

The Income and Expenditure Account is as presented below:
The computations done in arriving at the amounts mentioned in the above income and expenditure
account are as follow:

The Balance Sheet is as presented below:

Questions:
Question 1:
Following is the Receipt and Payment Account of Club ABC, 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.
Depreciation on the Computers is charged at 25% and on Equipment is charged at 15%.

Illustrations
Question: 1
The receipts and payments for the Swaraj Club for the year ended March 31, 2016 were:
• Entrance fees Rs.300;
• Membership Fees Rs.3,000;
• Donation for Club Pavilion Rs.10,000,
• Foodstuff sales Rs.1,200;
• Salaries and Wages Rs.1,200
• Purchase of Foodstuff Rs.800;
• Construction of Club Pavilion Rs.11,000;
• General Expenses Rs.600;
• Rent and Taxes Rs.400;
• Bank Charges Rs.160.
• Cash in hand–April. 1st Rs.200, March. 31st Rs.350
• Cash in Bank–April. 1st Rs.400; March. 31st Rs.590
You are required to prepare Receipts and Payment Account.
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

Net proceeds of Variety Balance at Bank as per Pass
Book:
Entertainment 780 Deposit Account 3,090
Donation for forth coming Current Account 150
Tournament 1,000 Cash in hand 250
7,820 7,820
You are given the following additional information:

Particulars April.1.2015 (Rs.) March.31.2016 (Rs.)
Subscription due 150 100
Amount due for printing etc. 100 80
Cheques unpresented being payment for 300 260
repairs
Estimated value of machinery and 800 1,750
equipment
Interest not yet entered in the Pass book 20
Bonus to Groundsman o/s. 300
For the year ended March. 31, 2016, the honorarium to the Secretary and Treasurer are to be
increased by a total of Rs 200.
Required: Prepare Income & Expenditure Account for period ending 31-03-2016 and the relevant
Balance Sheet.
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:
Subscription outstanding at the end of 2015 600

Subscription received in Advance on 31st December,2015 450
Subscription received in advance on 31st December,2016 270
Subscription outstanding on 31st December,2016 750
Salaries Outstanding at the beginning and the end of 2016 were respectively Rs.400 and Rs.450.
General Expenses include insurance prepaid to the extent of Rs.60. Audit fee for 2016 is yet
unpaid. During 2016 audit fee for 2015 was paid amounting to Rs.200.

The Club owned a freehold lease of ground valued at Rs.10,000. The club had sports equipment
on 1st January 2016 valued at Rs.2,600. At the end of the year, after depreciation, this
equipment amounted to Rs.2,700. In 2015, the Club has raised a bank loan of Rs.2,000. This was
outstanding throughout 2016. On 31st December 2016 cash in hand amounted to Rs.1,600.
Required: Prepare the Receipts and Payments Account for 2016 and Balance Sheet as at the end
of the year.
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
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

The Sportswriters Club gives the following Receipts and Payments Account for the year ended
March 31, 2016:
Receipts and Payments Account
Receipts Rs. Payments Rs.
To Balance b/d 4,820 By Salaries 12,000
To Subscriptions 28,600 By Rent and electricity 7,220
To Miscellaneous income 700 By Library books 1,000
To Interest on Fixed deposit 2,000 By Magazines and newspapers 2,172
By Sundry expenses 10,278
By Sports equipment’s 1,000
36,120 36,120
Figures of other assets and liabilities are furnished as follows:
Particulars As at March 31
Rs. Rs.
2015 2016
Salaries outstanding 710 170
Outstanding rent & electricity 864 973
Outstanding for magazines and newspapers 226 340
Fixed Deposit (10%) with bank 20,000 20,000
Interest accrued thereon 500 500
Subscription receivable 1,263 1,575
Prepaid expenses 417 620
Furniture 9,600
Sports equipment’s 7,200
Library books 5,000
The closing values of furniture and sports equipment’s are to be determined after charging
depreciation at 10% and 20% p.a. respectively inclusive of the additions, if any, during the year.
The Club's library books are revalued at the end of every year and the value at the end of March
31, 2016 was Rs. 5,250.
Required: From the above information you are required to prepare:
(a) The Club's Balance Sheet as at March 31, 2015;
(b) The Club's Income and Expenditure Account for the year ended March 31, 2016.
(c) The Club's Closing Balance Sheet as at March 31, 2016.
Question: 8

From the following balances and particulars of Republic College, prepare Income & Expenditure
Account for the year ended March 2016 and a Balance Sheet as on the date:
Rs. Rs.
Seminars & Conference Receipts 4,80,000
Consultancy Receipts 1,28,000
Security Deposit – Students 1,50,000
Capital Fund 16,06,000
Research Fund 8,00,000
Building Fund 25,00,000
Provident Fund 5,10,000
Tuition Fee Received 8,00,000
Government Grants 5,00,000
Donations 50,000
Interest & Dividends on Investments 1,85,000
Hostel Room Rent 1,75,000
Mess Receipts (Net) 2,00,000
College Stores-Sales 7,50,000
Outstanding expenses 2,25,000
Stock of-stores and Supplies (opening) 3,00,000
Purchases - Stores & Supplies 8,00,000
Salaries – Teaching 8,50,000
Research 1,20,000
Scholarships 80,000
Students Welfare expenses 38,000
Repairs & Maintenance 1,12,000
Games & Sports Expenses 50,000
Misc. Expenses 65,000
Research Fund Investments 8,00,000
Other Investments 18,50,000
Provident Fund Investment 5,10,000
Seminar & Conference Expenses 4,50,000
Consultancy Expenses 28,000
Land 1,00,000
Building 16,00,000
Plant and Machinery 8,50,000
Furniture and Fittings 6,00,000
Motor Vehicle 1,80,000
Provision for Depreciation:
Building 4,80,000
Plant & Equipment 5,10,000
Furniture & Fittings 3,36,000
Cash at Bank 6,42,000
Library 3,60,000
1,03,85,000 1,03,85,000
Adjustments:

Particulars Rs.
(1) Materials & Supplies consumed: (From college stores)
Teaching 50,000
Research 1,50,000
Students Welfare 75,000
Games or Sports 25,000
(2) Tuition fee receivable from Government for backward class Scholars 80,000
(3) Stores selling prices are fixed to give a net profit of 10% on selling
price
(4) Depreciation is provided on straight line basis at the following rates:
(1) Building 5%
(2) Plant & Equipment 10%
(3) Furniture & Fixtures 10%
(4) Motor Vehicle 20%

Chapter – 10 Company Accounts
TYPES OF COMPANIES
Balance
Sheet
Stateme
Prepraration
Notes to nt of
of Financial
Accounts Profit &
Statements
Loss
Cash
Flow
Stateme
nt

Unit-1 INTRODUCTION
COMPANY
A Company is a separate legal entity registered

under Companies Act, 2013
Company consists of individuals, called

shareholders by virtue of holding the shares of a
company,
Shareholders are authorised by law to elect a

board of directors
Through Board of Directors , the Companyt

performs its activities as an artificial person.

2. SALIENT FEATURES
A company can contract, sue

and be sued in its incorporated
name and capacity.
The liability of every shareholder is limited

to the amount he has agreed to pay (fully Ownership – Shareholders;
paid up value of shares) to the company on
the shares allotted to him. Management: Board of Directors, appointed
by the shareholders

❖ Why ‘Company’ form of organisation?
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
1. Government Company - Section 2(45) of the Companies Act, 2013

➢ Any Company in which not less than fifty-one per cent of the paid-up share capital
is held by
❖ the Central Government, or
❖ any State Government or Governments, or
❖ partly by the Central Government and partly by one or more State Governments,
➢ and includes a company which is a subsidiary company of such a Government
company.
2. Foreign Company - Section 2 (42) of the Companies Act, 2013,

Any company or body corporate incorporated outside India which –
✓ Has a place of business in India whether by itself or through an agent physically
or through electronic mode; and
✓ Conducts any business activity in India in any other manner.
3. Private Company - Section 2(68) of the Companies Act, 2013

A company which by its articles,
➢ restricts the right to transfer its shares;
➢ Prohibits any invitation to the public to subscribe for any securities of the
company.
➢ Shares of a Private Company are not listed on Stock Exchange.
➢ Exception

❖ One Person Company limits the number of its members to two hundred. Joint
membership will be considered as single member
❖ Employees – Present & past holding shares are not considered as members
4. Public Company - Section 2(71) of the Companies Act, 2013

➢ A company which is not a private company;
➢ Subsidiary of company which is not a private company shall also be considered as
public company even where such subsidiary company continues to be a private
company in its articles.
➢ A unlisted public company.
➢ No Minimum Paid-up Share Capital
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.
5. One Person Company - Section 2 (62) of the Companies Act, 2013

A company which has only one person as a member.
6. Small Company - Section 2(85) of the Companies Act, 2013

➢ A company, other than a public company
➢ paid-up share capital
▪ does not exceed Rs.50 lakhs or
▪ such higher amount as may be prescribed which shall not be more than
Rs.5 Crores; or
➢ turnover (as per its last profit and loss account)
▪ does not exceed Rs.2 Crores or
▪ such higher amount as may be prescribed which shall not be more than
Rs.20 crores
Note: The status of a company as a Small Company may change from year to year.
7. Listed Company - Section 2 (52) of the Companies Act, 2013

A company which has any of its securities listed on any recognised stock exchange.

8. Unlisted Company
The company, whose shares are not listed on any recognised stock exchange. An
unlisted company can be a public company or a private company.
9. Company limited by Shares - Section 2(22) of the Companies Act, 2013
Liability of its members is limited by the memorandum to the amount, if any, unpaid
on the shares respectively held by them.
10. Company limited by Guarantee - Section 2(21) of the Companies Act, 2013
Liability of its members limited by the memorandum to such amount as the members
may respectively undertake to contribute to the assets of the company in the event
of its being wound up.
11. Unlimited Company - Section 2 (92) of the Companies Act, 2013
A company not having any limit on the liability of its members.
12. Holding Company - Section 2 (46) of the Companies Act, 2103

A company of which one or more other companies companies are subsidiary companies.
13. Subsidiary Company - Section 2(87) of the Companies Act, 2013

➢ A company in which the holding company:
▪ Controls the composition of the Board of Directors (i.e. power to
appoint or remove all or a majority of the directors); or
▪ Exercises or controls > ½ of the total share capital either on its
• own or
• together with one or more of its subsidiary companies.
➢ Deemed Subsidiary Company - indirect control through the subsidiary company
(ies).

4. MAINTENANCE OF BOOKS OF ACCOUNTS – Section 128
➢ Who should maintan : Every company

➢ Where to maintain : Registered office
o What to maintain : Books of accounts and other relevant books and papers and
financial statement for every financial year which give a true and fair view of
the state of the affairs of the company
➢ Whose books : Company’s, Branch office’s or Company’s other offices, explaining the
transactions effected both at the registered office and its branches
➢ How to maintain :
o Method of Accounting- Accrual basis and according to the double entry system
of accounting
o Mode – Physical or electronic
5. PREPARATION OF FINANCIAL STATEMENTS
Requisites of Financial Statements (Section 129)

➢ Give a true and fair view of the state of affairs of the company or
companies
➢ Comply with the notified accounting standards
➢ Format
(i) If specific Act is applicable (Eg: Insurance Company, Banking
company, etc.) – as given in the respective statute
(ii) Schedule III of the Companies Act, 2013
➢ Part I: Balance Sheet
➢ Part II: Profit & Loss Account
➢ Board of Directors of the company shall lay financial statements at every
annual general meeting of a company

What are Financial Statements? (Section 2(40) of the Companies Act, 2013)
3 .
Balance Sheet as at the end of the financial year;
Profit and Loss Account, or an Income and

Expenditure Account for the financial year
Financial
Statements
Cash Flow Statement for the financial year;
include
Statement of Changes in Equity
Explanatory Note Annexed to, or forming part of, any

document referred above

Part I – Form of Balance Sheet
Name of the Company…………………….

Balance Sheet as at………………………
(Rs. in…)
Particulars Notes Figures as Figures as
No. at end of at end of
the the
current previous
reporting reporting
period period
EQUITY AND LIABILITIES
1. Shareholders’ funds
a. Share capital (A) xxx xxx
b. Reserves and Surplus (B) xxx xxx
c. Money received against share warrants xxx xxx
2. Share application money pending xxx xxx
3. allotment Non-current liabilities
a. Long-term borrowings (C) xxx xxx
b. Deferred tax liabilities (Net) xxx xxx
c. Other long-term liabilities xxx xxx
d. Long-term provisions (D) xxx xxx
4. Current liabilities
a. Short-term borrowings (E)
xxx xxx
b. Trade Payables
▪ Total outstanding dues to micro enterprises
xxx xxx
and small enterprises
▪ Total outstanding dues to creditors other
xxx xxx
than micro enterprises and small enterprises
c. Other current liabilities (F)
xxx xxx
d. Short-term provisions xxx xxx
Total xxx xxx
ASSETS
Non-current assets
1.
a. Property, Plant and Equipment
i. Tangible assets (G)
ii. Intangible assets (H) xxx xxx
iii. Capital Work-in-progress xxx xxx
iv. Intangible assets under development xxx xxx
b. Non-current investments (I) xxx xxx
c. Deferred tax assets (Net) xxx xxx
d. Long-term loans and advances (J) xxx xxx
e. Other non-current assets xxx xxx
Current assets xxx xxx
a. Current investments (K)
2. b. Inventories (L)
c. Trade receivables xxx xxx
d. Cash and cash equivalents (M) xxx xxx
e. Short-term loans and advances xxx xxx
f. Other current assets xxx xxx
Total xxx xxx
xxx xxx
xxx Xxx

Balance Sheet items to be explained in the Explanatory Note:
A. SHARE CAPITAL – for each class
✓ Authorised share capital - Number and amount.
✓ Issued; Subscribed & Fully paid; and Issued subscribed but not fully paid.
✓ The par value per share.
✓ Reconciliation of Shares outstanding
o at the beginning &
o at the end of the reporting period
✓ Calls unpaid
✓ Forfeited shares
B. RESERVES AND SURPLUS – subheads (Additions and deductions since last balance sheet
to be shown under each of the specified heads)
✓ Capital Reserves
✓ Capital Redemption Reserve (CRR)
✓ Securities Premium
✓ Debenture Redemption Reserve.
✓ Revaluation Reserve
✓ Surplus (the balance as per Profit and Loss statement)
✓ Other Reserves (specify the nature and purpose)
C. LONG TERM BORROWINGS - subheads

✓ Bonds/Debentures
✓ Term loans
o From Banks
o From Other parties
✓ Deferred payment liabilities
✓ Deposits
✓ Long term maturities of finance lease obligations
✓ Loans and advances from related parties
✓ Other loans and advances (specify nature)
D. OTHER LONG-TERM LIABILITIES

(a) Trade payables;
(b) Others.
E. LONG TERM PROVISIONS

✓ Provision for Employee Benefits (eg: gratuity, provident fund etc.)
✓ Other provisions (specify the nature)
F. SHORT TERM BORROWINGS
✓ Loans repayable on demand
▪ From banks
▪ From other parties
✓ Loans and advances from related parties
✓ Deposits

✓ Other loans and advances (specify the nature)
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
G. OTHER CURRENT LIABILITIES

✓ Current maturities of long-term debt
✓ Current maturities of finance lease obligations
✓ Interest accrued but not/and due on borrowings
✓ Income received in advance
✓ Unpaid dividends
✓ Application money received for allotment of securities and due for refund and
interest accrued thereon
✓ Unpaid matured deposits and interest accrued thereon
✓ Unpaid matured debentures and interest accrued thereon
✓ Other current liabilities (specify the nature)
H. SHORT TERM PROVISIONS

✓ Provision for Employee Benefits
✓ Other provisions (specify the nature)
✓
I TANGIBLE ASSETS - Classification

✓ Land
✓ Buildings
✓ Plant and Equipment
✓ Furniture and Fixtures
✓ Vehicles
✓ Office equipment
✓ Others (specify nature)
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

K. NON-CURRENT INVESTMENTS (Classify as Trade & Other Investments)
✓ Investment property;
✓ Investments in Equity Instruments;
✓ Investments in preference shares;
✓ Investments in Government or trust securities;
✓ Investments in debentures or bonds;
✓ Investments in Mutual Funds;
✓ Investments in partnership firms;
✓ Other non-current investments (specify nature)
L. LONG TERM LOANS AND ADVANCES

✓ Long-term loans and advances shall be classified as:
o Capital Advances;
o Security Deposits;
o Loans and advances to related parties (giving details thereof);
o Other loans and advances (specify nature).
✓ The above shall also be separately sub-classified as:
o Secured, considered good;
o Unsecured, considered good;
o Doubtful.
M. OTHER NON-CURRENT ASSETS

✓ Long-term Trade Receivables (including trade receivables on deferred credit
terms);
✓ Others (specify nature);
Long term Trade Receivables, shall be sub-classified as:

o Secured, considered good;
o Unsecured, considered good;
o Doubtful.
N. CURRENT INVESTMENTS
✓ Investments in Equity Instruments
✓ Investment in Preference Shares
✓ Investments in Government or Trust Securities
✓ Investments in Debentures or Bonds
✓ Investments in Mutual Funds
✓ Investments in Partnership Firms
✓ Other investments (specify nature)
O. INVENTORIES
✓ Raw materials
✓ Work-in-progress
✓ Finished goods
✓ Stock-in-trade (in respect of goods acquired for trading)

✓ Stores and spares
✓ Loose tools
✓ Goods in transit
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.
Q. CASH AND CASH EQUIVALENTS

✓ Balances with banks
✓ Cheques, drafts on hand
✓ Cash on hand
R. SHORT TERM LOANS AND ADVANCES

✓ Loans and advances to related parties (giving details thereof);
✓ Others (specify nature).
The above shall also be sub-classified as:

(a) Secured, considered good;
(b) Unsecured, considered good;
(c) Doubtful.
S. OTHER CURRENT ASSETS – Specify nature
T. CONTINGENT LIABILITIES AND COMMITMENTS

✓ Contingent liabilities
o Claims against the company not acknowledged as debt;
o Guarantees;
o Other money for which the company is contingently liable.
✓ Commitments
o Estimated amounts of contracts remaining to be executed on capital
account and not provided for;
o Uncalled liability on shares and other investments partly paid;
o Other commitments (specify nature).

PART II – Form of STATEMENT OF PROFIT AND LOSS
Name of the Company…………………….

Profit and Loss Statement for the year ended ………………………
(Rs.in……….)
Particulars Note Figures Figures for

No. for the the
current previous
reportin reporting
g period period
I. Revenue from operations xxx xxx
II. Other income xxx xxx
III. Total Revenue (I + II) xxx xxx
IV. Expenses: xxx xxx
Cost of materials consumed xxx xxx
Purchases of Stock-in-Trade xxx xxx
Changes in inventories of finished goods xxx xxx
Work-in- Progress and Stock-in-Trade
Employee benefits expense xxx xxx
Finance costs xxx xxx
Depreciation and amortization expense xxx xxx
Other expenses
xxx xxx
Total expenses xxx xxx
V. Profit before exceptional and extraordinary xxx xxx
items and tax (III-IV)
VI. Exceptional items xxx xxx
VII. Profit before extraordinary items and tax (V-VI) xxx xxx
VIII. Extraordinary Items xxx xxx
IX. Profit before tax (VII-VIII) xxx xxx
X. Tax expense:
(1) Current tax xxx xxx
(2) Deferred tax xxx xxx xxx xxx
XI. Profit (Loss) for the period from continuing xxx xxx
operations (VII-VIII)
XII. Profit/(Loss) from discontinuing operations xxx xxx
XIII. Tax expense of discontinuing operations xxx Xxx

XIV. Profit/(Loss) from discontinuing operations (after xxx xxx
tax) (XII-XIII)
XV. Profit (Loss) for the period (XI + XIV) xxx xxx
XVI. Earnings per equity share:
(1) Basic xxx xxx
(2) Diluted xxx xxx

Unit-2 Issue, Forfeiture and Re-issue of Shares
Procedure for raising funds through equity
COMPANY
(1) PROSPECTUS
APPLICATION &
CALL MONEY
(4)
(3)
SHARE SHARE
APPLICATION HOLDER
S
(2)
(5) Shares Allotted

Issue of prospectus
inviting applications for
shares from the public
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
Directors make Pro-rata

All application
allotment for allotment made
money returned
shares applied by Directors
Allotment money
received
Further calls
made and call
money received
Note: Section 53 of Companies Act,

2013 a company cannot issue Shares issued
shares at discount except for in for cash
case of sweat equity shares and
therefore any issue on discount by
the company will be void with
company being punishable with At face value At Premium
fine.
“Securities Premium
Account” is credited
with the entry for
“Share Capital
Account”
INTRODUCTION

Capital
Funds provided by the owners.
Business Organization Ownership Type of Capital Liability of Owners

Sole - Proprietorship Proprietor Capital Unlimited
Partnership Partners Partners' Capital Unlimited

Company Shareholders Share Capital Limited to issue price of
shares held
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’
❖ Face / Nominal Value of Share

The fixed value of a share printed on the share certificate.
❖ Share Price
Issue price – The value at which the share is issued [Face (+) Premium, if any
(–) Discount, 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

SHARE CAPITAL - Categories
Authorised Share Issued Share Capital Subscribed Share

Capital or Nominal Capital
Capital •It is the portion of the
authorised capital issued
by the company •It is part of Issued Share
•It is the maximum limit of Capital
capital which a company is •subscribed by the public
authorised to raise during •It includes the nominal
value of shares issued for •allotted by the company
its lifetime
•Cash
•Consideration other than •It also includes face value
•It is mentioned in 'Capital of shares issued by
Clause' of the Cash to
company for consideration
"Memorandum of • Promoters
other than cash.
Association" • Others
•It is disclosed on the face •The remaining portion of

of the Balance Sheet at the Authorised Share
face value capital which is not issued
either in cash or
consideration may be
termed as ‘Un-issued
Capital’
SHARE CAPITAL - Categories

Called-up Paid-up Share Subscribed Reserve Share
Share Capital Capital Share Capital capital
•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
•In balance sheet,

Called -up and
Paid-up share
capital are
showin together
1. Authorised Capital = Issued Capital + Unissued Capital.

2. Subscribed Capital differs based on subscription type
• Fully Subscribed: Subscribed Capital = Issued Capital
• Over Subscribed: Subscribed Capital > Issued Capital
• Under Subscribed: Subscribed Capital < Issued Capital
3. Called up Capital = Paid up Capital + Calls in arrears if any – Calls in advance if any
4. Uncalled capital = Issued Share Capital – Called up Share Capital
❖ Calls in advance
been paid by shareholder. It is shown separately, in the Balance Sheet as liability of the
company under the heading ‘Current Liabilities’ until the calls are made and the amount
actually becomes payable by the shareholder.

Types of Shares
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.
❖ Type of Preference Shares
Based on "Right to • Cumulative

accumulate dividends" • Non-Cumulative
Based on "Right to • Participating

participate in surplus • Non-Participating
• Redeembable
Based on Redemption
• Non-Redeemable
Based on Conversion • Convertible

into equity • Non-Convertible
(a) Cumulative Preference Shares

➢ It carries the right to a fixed amount of dividend or dividend at a fixed rate.
➢ Dividend on these shares accumulates unless it is paid in full
➢ The arrears of dividend are then shown in the balance sheet as a contingent
liability.
➢ In India, a preference share is considered cumulative unless otherwise stated.
➢ If arrears of dividend are outstanding for a period more than two years,
holders of such shares can vote on every resolution on every matter in the
general body meeting of the shareholders.

(b) Non-cumulative Preference Shares:
➢ It carries with it the right to a fixed amount of dividend.
➢ Dividend on these shares does not accumulate in the year with no profits
➢ The right to dividend expires every year.
(c) Participating Preference Shares

➢ These shares give the right to participate in the surplus profits, if any, after
the equity shareholders
o Every year for dividend at a stipulated rate
o At the time of winding up for distribution of profits (a pre-determined
proportion)
(d) Non-participating Preference Shares

➢ No additional rights in profits and in the surplus on winding-up,
➢ Unless otherwise specified, the preference shares are generally non-
participating.
(e) Redeemable Preference Shares

➢ The company will repay after the fixed period or even earlier at company’s
discretion.
➢ The repayment on these shares is called redemption and is governed by
Section 55 of the Companies Act, 2013.
(f) Non-redeemable Preference Shares

➢ No redemption arrangement agreed upon.
➢ According to Section 55, no company limited by shares shall issue
irredeemable preference shares or preference shares redeemable after
the expiry of 20 years from the date of issue.
➢ A Company may issue preference shares redeemable after 20 years for
such infrastructure projects as may be specified, under the Companies
Act, 2013.
(g) Convertible Preference Shares

➢ These shares give the right to get converted into equity shares at the
shareholder’s option.
(h) Non-convertible Preference Shares

➢ No right to get his holding converted into equity share
➢ Preference shares are non-convertible unless otherwise stated.
Special Points related to Preference Shares:
➢ They enjoy preferential rights in the matter of :
o Payment of dividend, and
o Repayment of capital
➢ Generally, holders of these shares do not get voting rights
➢ The cost of raising preference share capital is cheaper than raising debt
➢ The Companies Act, 2013 prohibits the issue of any preference share which is
irredeemable.
➢ Preference shares are cumulative and non-participating unless expressly stated
otherwise.

➢ Unless mentioned otherwise Preference Shares are Non-Cumulative, Non
Participating, Non- Convertible and Redeemable in nature.
➢ Dividend is generally cumulative.
❖ Equity Shares
Those shares, which are not preference shares are called Equity Shares.
Special Points for Equity Shares

➢ These shares carry voting rights.
➢ No preferential rights in the matter of payment of dividend or repayment of capital
➢ Dividend on equity shares is recommended by the Board of Directors and may vary
from year to year.
➢ Rate of dividend depends upon the dividend policy and the availability of profits after
satisfying the rights of preference shareholders.
➢ Companies Act, 2013 permits issue of equity share capital with differential rights as
to dividend.
Types of Equity Shares
Equity Equity
Shares Shares
Issued for
Issued for Cash consideration
other than Cash
ISSUE OF SHARES FOR CASH

Private Companies Public Companies
• Private Placement • Issue Prospectus

• Invite General Public to subscribe for
Shares
• Receive Share applications and
Application money (Section 39
Application money ≥ 5% of nominal
value)
• Allot Shares to subscribers as per SEBI
guidelines (A company cannot
proceed to allot shares unless
minimum subscription is received by
the company
❖ 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.
The amount of minimum subscription to be disclosed in prospectus by the Board of

Directors should consider the following
(a) Preliminary expenses,
(b) Commission payable on issue of shares,
(c) Cost of fixed assets purchased or to be purchased,
(d) Working capital requirements, and
(e) Any other expenditure for the day to day operation of the business.
Guidelines of the Securities Exchange Board of India (SEBI)
➢ Minimum subscription to be received in an issue shall not be less than 90% of the
offer through offer document.
➢ Non receipt of the minimum subscription of 90% of the issue, all application moneys
received shall be refunded:
o Non-underwritten Issue – within 15 days of the closure of the issue; and
o Underwritten Issue – within 7 days of the closure of the issue

o Underwritten issue where minimum subscription including devolvement obligations
paid by the underwriters is not received – within 60 days of the closure of the issue.
➢ The company has the right to reject or accept an application fully or partially.
o Accepted applications – Shareholders have to pay “Allotment Money”
o Rejected applications – Application money is refunded by the Company (delayed
refunds shall be paid with interest)
➢ ‘Calls’ (subsequent instalments of the issue price) made by company as given in prospectus.
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
≥ 5% of Face ≥ 25% of Issue

Value Price
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.

SUBSCRIPTION OF SHARES
❖ 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

JOURNAL ENTRIES – ISSUE OF SHARES
Event Entry Debit Credit Remarks
(Rs.) (Rs.)
Bank A/c Dr. xxxx Actual amount

(1) Receipt of
Application received.
Money
To Share Application Money A/c xxxxx Actual amount
received.
(Being application money received)
(1a) Refund of Share Application A/c Dr. xx Actual amount

Application refunded
money to To Bank A/c xx
applicants) (Being application money refunded)
(2) Allotment Share Allotment A/c Dr. xxxx Amount due on

of Share allotment
Share Application A/c Dr. xxxx Application amount

received on allotted
shares
To Share Capital A/c xxxxxx Amount due on

allotment and
application
(Being the sum due on allotment and

application money transferred to
capital account)
(2a) A part of Share Application A/c Dr. xxxx

shares applied
for are allotted
To Share Allotment A/c ** xxxx Application money
accepted for
allotment
To Shares Calls in advance A/c xxx Amount from

application money

adjusted for future
calls
To Bank A/c xx Excess amount to be

refunded
(Being application money adjusted)
** Credited to Share Capital A/c

subsequently
(3) Receipt of Bank A/c Dr. xxxx Amount actually

allotment received on
money allotment.
To Share Allotment A/c xxxx
(Being money received on

allotment)
(4) Call being Share Call A/c Dr. xxx Amount due on the
made call
To Share Capital A/c xxx
(Being share call made due at Rs……)
(5) Receipt of Bank A/c Dr. xxxx Amount called

Call Money actually received
To Share Call A/c xxxx
(Being share call money received)
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 ISSUED AT DISCOUNT
Shares are issued at DISCOUNT, if Issue Price < Nominal or Par Value
Discount = Nominal Value – Issue Price

Example:
Nominal Value Issue Price Discount (Rs.) Discount %
(a) (b) (c) = (a-b) (d)= [(c) ÷ (a) ]100
100 100 0 N.A
100 98 2 2%
100 110 N.A N.A
250 200 50 20%
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 ISSUED AT PREMIUM
Shares are issued at PREMIUM, if Issue Price > Nominal or Par Value
Premium = Issue Price -Nominal Value
Example:
Nominal Value Issue Price Premium (Rs.) Premium %
(a) (b) (c) = (b-a) (d)= [(c) ÷ (a) ]100
100 100 0 N.A
100 120 20 20%

100 90 N.A N.A
250 350 100 40%
Premium is generally called with the amount due on allotment, sometimes with the application
of money and rarely with the call money
❖ Securities Premium Account

➢ Premium amount is credited to a separate account called Securities Premium
Account.
➢ It is not a part of share capital. Rather, it represents a gain of a capital nature to the
company.
➢ It is shown under the heading, “Reserves and Surplus”, which is further shown as
“Shareholders’ Funds” in the Balance Sheet as per Schedule III.
❖ Utilisation of Securities Premium Account

It may be used by the company as given under Section 52 of the Companies Act, 2013:
(a) Towards issue of un-issued shares of the company to be issued to members of the
company as fully paid bonus securities.
(b) To write off preliminary expenses of the company.
(c) To write off the expenses of, or commission paid, or discount allowed on any of the
securities or debentures of the company.
(d) To provide for premium on the redemption of redeemable preference shares or
debentures of the company.
(e) For the purchase of own shares or other securities i.e. Buy back of shares.
Note Companies whose financial statements comply with the accounting standards
prescribed for them under Section 133 of the Companies Act, 2013.
JOURNAL ENTRIES – ISSUE OF SHARES AT PREMIUM
(1) Premium amount called with Application Money

(Rs.) (Rs.)
Bank A/c Dr. xxxx Total application

(1) Receipt of
Application money + Premium
Money amount

To Share Application Money A/c xxxxx Actual amount
received.
(Being application money received

for _____ shares @ Rs._____ per
share including premium)
(2) Allotment Share Application A/c Dr. xxxx No. of shares x

of Share Application money
per share
To Share Premium A/c Dr. xxxx No. of shares

allotted x Premium
per share
To Share Capital A/c xxxxxx No. of shares

allotted x Nominal
Value per share
(Being the application money

transferred to capital account)
(2) Premium amount called with Allotment Money

(Rs.) (Rs.)
Bank A/c Dr. xxxx Total application

(1) Receipt of
Application money + Premium
Money amount
To Share Application A/c xxxxx Actual amount

received.
(Being application money received

for _____ shares @ Rs._____ per
share including premium)
(2) Allotment Share Application A/c Dr. xxxx No. of shares x

of Share Application money
per share
Share Allotment A/c Dr. xxxx No. of shares

allotted x Allotment

& Premium amount
per share
To Share Capital A/c xxxxxx No. of shares

allotted x
Application &
allotment amount
per share
To Share Premium A/c Dr. xxxx No. of shares

allotted x Premium
per share
(Being Amount due on allotment of

shares @ Rs.____per share including
premium )
(3) Allotment Bank A/c Dr. xxxx Actual amt received

money
received To Share Allotment Money A/c xxxxx Total allotment
money + Premium
amount
(Being money received including

premium consequent upon
allotment)
OVER SUBSCRIPTION AND PRO-RATA ALLOTMENT
Number of shares offered (Public Issue) < Number of shares actually subscribed by the
public.
Reasons for oversubscription
➢ investors’ confidence in the company,

➢ previous performance of the company
➢ general economic conditions,
➢ pricing of the issue etc
Allotment for oversubscription
✓ 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

➢ Multiple applications by the same person not considered ➔ application money
refunded for applications
➢ All Applications accepted ➔ allotment done on pro-rata basis i.e. ‘Pro-rata
allotment’ means allotment in proportion of shares applied for.
Example
Shares offered to public 10,000
Applications received 12,000
Ratio 12,000:10,000 i.e. 6:5
For every 6 shares applied, 5 shares are allotted
✓ 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.

JOURNAL ENTRIES – OVER SUBSCRIPTION (PRO-RATA ALLOTMENT)
(Rs.) (Rs.)
Share Application A/c Dr. xxxx Application money x

(1) Rejected
applications no. of shares rejected
To Bank A/c xxxxx Actual amount received.
(Being application money refunded

for rejected applications as per
Board’s Resolution No….dated….)
(2) Pro-rata Share Application A/c Dr. xxxx Total money received –
Allotment (No. of shares allotted x
Application money per
share)
To Share Allotment A/c xxxxxx No. of shares allotted x

Allotment money per
share
(Being excess application money

adjusted against allotment money
as per Board’s Resolution
No….dated….)
CALLS IN ADVANCE & CALLS IN ARREARS

Calls made
Scenario I Scenario II Scenario III
Calls paid = Calls paid < Calls paid >

Calls made Calls made Calls made
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
➢ Amount not yet called up but paid by shareholders is known as Calls-in-advance.

➢ Interest at a rate not exceeding 12 % p.a. is to be paid on such advance call money.
➢ This amount is credited in Calls-in-Advance Account and shown separately under Current
Liabilities
❖ Interest on Calls in Arrears & Calls in Advance

Interest on Calls in Arrears Interest on Calls in Advance
Receivable by the Compay Payable by the Company to
from the Shareholders Shareholders
Maximum Rate (Table F Maximum Rate (Table F
prescribed) is 10% prescribed) is 12%
Interest period = Call due date Inerest period = Actual money
to actual money receipt date receipt date to Call due date
Directors have right to waive Shareholders are not entitled
off such interest on their to dividend on calls in advance
discretion Expense - debited to P&L A/c
Income - credited to P&L A/c
as a nominal account
JOURNAL ENTRIES – CALLS IN ADVANCE & CALLS IN ARREARS
(Rs.) (Rs.)
Calls in arrears A/c Dr. xx Amount of Unpaid Calls

(1a) Calls in
Arrears after call Bank A/c Dr. xxxx Amount received
made
To Share Allotment A/c xxx Total allotment money
due
To Share Calls A/c xxxx Total allotment money

due
( Being call money/ allotment

money received on .... shares at `
per share.)
Bank A/c Dr. xx

(1b) Calls in To Calls in Arrears A/c xx Amount of Unpaid calls
Arrears received received
(Being unpaid calls received)
(2a) Calls in Bank A/c Dr. xxx Call amount received in

Advance received advance
To Calls in Advance A/c xxx
(Being excess application money

received)
(2b) Call made Calls in Advance A/c Dr. xxx Call amount received
in advance
Bank A/c Dr. xx Remaining call money

received, if any
To Particulars Call A/c xxxx Call money due
(Being call in advance adjusted

and call money due received)
Shareholder’s A/c Dr. xxx

(3a)For interest
receivable on To Interest on Calls in arrears A/c xxx
Calls-in-Arrears
(Being interest on calls in arrears
at the rate of _____% due)
(3b) For receipt of Bank A/c Dr. xxx

interest
To Shareholder’s A/c Xxx
(Being interest money received)
(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
(Being interest on calls in advance

due)
(4b) For payment Shareholder’s A/c Dr. xxx Amount of interest

of interest paid
To Bank A/c xxx
(Being interest money received)

FORFEITURE OF SHARES
➢ 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
➢ Proper notice to the defaulting shareholder(s) should be served.

➢ Directors also have the right to cancel such forfeiture before the forfeited shares are
re-allotted.
➢ When shares are forfeited, the title of such shareholder is extinguished but the
amount paid to date is not refunded to him.
➢ The shareholder then has no further claim on the company.
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.
JOURNAL ENTRIES – FORFEITURE OF SHARES
Important Amounts to consider:

(i) Amount called-up (i.e., amount credited to capital) in respect of forfeited shares.
(ii) Amount already received in respect of those shares.
(iii) Amount due but has not been received in respect of those shares.

(Rs.) (Rs.)
Share Capital A/c Dr. xxxx No. of forfeited shares

(1a) Forfeiture of
x called-up value per
shares issued at
share
Par – No Calls-in-
Arrears To Forfeited Shares A/c xxx Amount already
received on forfeited
shares
To Share Allotment A/c xxx IF amount due but not

paid
To Share Call A/c xx IF amount due but not

paid
(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
To Forfeited Shares A/c xxx Amount already

shares
(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
To Forfeited Shares A/c xxx Amount already

shares

paid

paid

(2a) Forfeiture of Share Capital A/c Dr. xxx Call amount received in
shares issued at advance
Premium – IF
Premium received To Forfeited Shares A/c xxx Amount already
shares

paid

paid
Note: If the premium has already received by the company, it cannot be cancelled even if the
shares are forfeited in the future:

RE-ISSUE OF FORFEITURE OF SHARES
✓ 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
➢ Loss on re-issue should not exceed the forfeited amount.
➢ 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

Nominal value of each share Rs.10
Paid up amount on each forfeited share Rs.5
First Re-Issue 50 shares (Rs.6 per share collected to make it fully paid up)
Amount received [50x 6] Rs.300
Amount transferred from No. of shares x (Nominal Value – Amount Rs.200

Shares forfeited A/c to received on re-issue) i.e. [50 (10 – 6)]
Share Capital A/c
Surplus on Re-issue: Amount in Shares Forfeited A/c for shares Rs.50

Amount transferred to re-issued – Amount transferred to Share
Capital Reserve Capital A/c i.e.
[(50x5)-Rs.200]
Amount carried forward in Total Value of Shares Forfeited – Amount Rs.350
Shares Forfeited A/c transferred to Share Capital on re-issue –
Surplus transferred to Capital Reserve
[(120x5) – Rs.200 – Rs.50]
JOURNAL ENTRIES – FORFEITURE OF SHARES
(Rs.) (Rs.)
Bank A/c Dr. xx Actual amount received

(1) Re-issue of
shares Forfeited Shares A/c Dr. xxx Profit on re-issue
To Share Capital A/c xxx
(Being the re-issue of….shares @

Rs.…. each as per Board’s
Resolution No…. dated.)
(2) Surplus Forfeited Shares A/c Dr. xxxx

transferred to
To Capital Reserve A/c xx

Capital Reserve (Being the profit on re-issue,
A/c transferred to capital reserve).
ISSUE OF SHARES FOR CONSIDERATION OTHER THAN CASH
➢ 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.
When assets are purchased in exchange of shares
Assets Account Dr.

To Share Capital Account

Illustrations
Question: 1
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 30th June 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:
a. Rs.2 per share payable on application, to be received by 1st July 2016;
b. Allotment to be made on 10th July 2016 and a further Rs.5 per share (including the
premium) to be payable;
c. The final call for the balance to be made, and the money received by 30th April 2017.
Applications were received for 3,55,000 shares and were dealt with as follows:
i.Applicants for 5,000 shares received allotment in full;
ii.Applicants for 30,000 shares received an allotment of one share for every two applied for; no
money was returned to these applicants, the surplus on application being used to reduce the
amount due on allotment;
iii.Applicants for 3,20,000 shares received an allotment of one share for every four applied for;
the money due on allotment was retained by the company, the excess being returned to the
applicants; and
iv.the money due on final call was received on the due date.
You are required these transaction (including cash items) in the Journal of JHP Ltd.
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

By 20th May, 40,000 shares were applied for and all applications were accepted. Allotment was
made on 1st June. All sums due on allotment were received on 15th July; those on 1st call was
received on 20th October.
Journalise the transactions when accounts were closed on 31st March 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.

• The final call for the balance to be made, and the money received by 30th April 2017.
Applications were received for 3,55,000 shares and were dealt with as follows:
i.Applicants for 5,000 shares received allotment in full
ii.Applicants for 30,000 shares received an allotment of one share for every two applied for, no
money was returned to these applicants, the surplus on application being used to reduce the
amount due on allotment.
iii. Applicants for 3,20,000 shares received an allotment of one share for every four applied for,
the money due on allotment was retained by the company, the excess being returned to the
applicants.
iv.the money due on final call was received on the due date.
You are required to record these transactions (including cash items) in the Journal of JHP
Limited.
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.

Pass Journal Entries for the forfeiture.
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.

Unit-3 Issue of Debentures
Debentures
(Types)
Convertibility Permanence Negotiability

Security basis Priority
basis basis basis
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
It is one of the most commonly used debt instrument issued by the company to raise funds
for the business. Reason for opting Debentures: Benefits of Debt financing
✓ reduces the cost of the capital

✓ helps in designing appropriate capital structure of the company. REVLAUATION
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
➢ It is a fixed interest-bearing security where interest falls due on specific dates.

➢ Interest is payable at a predetermined fixed rate, regardless of the level of profit.
➢ The original sum is
o repaid at a specified future date or
o converted into
• shares or
• other debentures.
➢ It may or may not create a charge on the assets of a company as security.
➢ It is a document which evidences a loan made to a company.
➢ It can generally, be bought or sold through the stock exchange at a price above or
below its face value.

DISTINCTION BETWEEN DEBENTURES AND SHARES
Difference Debentures Shares
Holders - Creditors of the company. Owners of the company.

status
Voting No voting rights Holders have voting rights
Rights Thus, no threat to the existing control and thus issue will dilute
of the company. the existing control
Return on Interest is paid at a predetermined Dividend is paid at

Investment fixed rate. (i) a variable rate for
for the equity shares
holder (ii) fixed rate for
preference shares
Payment of Payable whether there is any profit or Payable only if profits are
Interest not. Interest on debentures has to be there.
paid
Deductible Interest is charge against profits and Dividends are

expense they are deductible as an expense in appropriation of profits
determining taxable profit of the and these are not
company. deductible.
Types Secured/Unsecured; Equity Shares;

Redeemable/ Irredeemable; Preference Shares.
Registered/Bearer;
Convertible / Non-convertible, etc.
Presentation “Long Term Borrowings” in the “Shareholder’s Fund” in

in financial Company’s Balance Sheet the Company’s Balance
statements Sheet.
Shares are shown under
detailed in ‘Share Capital’
of Notes to Accounts.
Convertibili Debentures can be converted into other Shares cannot be converted

ty debentures or shares as per the terms of into other shares in any
issue of debentures. circumstances.
Forfeiture Debentures cannot be forfeited for non- Shares can be forfeited

payment of call moneys. for non-payment of

allotment and call
moneys.
Redemption At maturity, debenture holders get back (i) Equity

their money as per the terms and shareholders:
conditions of redemption. cannot get back
their money
before the
liquidation of the
company
(ii) Preference
shareholders: can
get back their
money before
liquidation .
Winding up At the time of liquidation, debenture At the time of liquidation

holders are paid-out before the shareholders are paid at
shareholders. last, after paying
debenture holders, Trade
payable, etc.
TYPES OF DEBENTURES
Debentures
Convertibility Permanence Negotiability

Security basis Priority
basis basis basis
Secured Convertible Redeemable Registered First Mortgage
Second
Non- Mortgage
Unsecured Irredeemable Bearer
Convertible

1. Based on Security
(a) Secured Debentures: These are secured by a charge upon some or all assets of the
company. There are two types of charges:
(i) Fixed charge: It is a mortgage on specific assets. These assets cannot be sold
without the consent of the debenture holders. The sale proceeds of these
assets are utilized first for repaying debenture holders; and
(ii) Floating charge: It generally covers all the assets of the company including
future one.
(b) Unsecured or “Naked” Debentures: These are not secured by any charge
upon any assets. A company merely promises to pay interest on due dates and
to repay the amount due on maturity date.
2. Based on Convertibility
(a) Convertible Debentures: These will be converted into equity shares (either at
par or premium or discount) after a certain period of time from the date of its
issue. These debentures may be fully or partly convertible.
(b) Non-Convertible Debentures: These cannot be converted into shares in
future. As per the terms of issue, these debentures are repaid.
3. Based on Permanence
(a) Redeemable Debentures: These are repayable as per the terms of issue.
(b) Irredeemable Debentures: These are not repayable during the lifetime of the
company i.e. they are repaid at the time of liquidation. These are also called
perpetual debentures.
4. Based on Negotiability
(a) Registered Debentures: These are payable to a registered holder whose name,
address and particulars of holding is recorded in the Register of Debenture
holders. They are not easily transferable. Debenture interest is paid either to the
order of registered holder as expressed in the warrant issued by the company or
the bearer of the interest coupons.
(b) Bearer Debentures: These are transferable by delivery. These are negotiable
instruments payable to the bearer. No kind of record is kept by the company in
respect of the holders of such debentures. Therefore, the interest on it is paid to
the holder irrespective of any identity. No transfer deed is required for transfer
of such debentures.
5. Based on Priority
(a) First Mortgage Debentures: These are payable first, out of the property charged.
(b) Second Mortgage Debentures: These are payable after satisfying the first
mortgage debentures.
ISSUE OF DEBENTURES

Debentures
Issued at Issued at Issued at

Par Discount Premium
ISSUE OF DEBENTURES – JOURNAL ENTRIES
Debentures issued at Par
The debentures which are issued at par are issued at the same price as their nominal value
(Rs.) (Rs.)
Bank A/c Dr. xxxx

(1) Cash
received on
To Debentures Application A/c xxxx
application
(Being money received on __%
debentures @ Rs.___ each)
(2) Excess Debenture Application A/c Dr. xxx

money
refunded To Bank A/c xx Amount refunded
or adjusted
for future To Debenture Allotment A/c xxx Amount adjusted for
calls allotment
(Being excess money adjusted as per

Board’s resolution No…… dated……
(3) Debentures Debenture Application A/c Dr. xxxx

Allotted
To …… % Debenture A/c xxxx
(Being the allotment of ….%

Debentures of Rs….. each as per
Board’s resolution No….. dated……)

(4) Allotment Debenture Allotment A/c Dr. xxxx
money
being To ….% Debentures A/c xxxx
called
(Being allotment money being
called)
(5) Allotment Bank A/c Dr. xxxx

money
being To Debenture Allotment A/c xxxx
received
(Being allotment money received)
(6) Debenture Debenture Calls A/c Dr. xxxx

Call money
being To ….. % Debentures A/c xxxx
called
(Being call money made due)
(7) Call money Bank A/c Dr. xxxx

received
To Debenture Calls A/c xxxx
(Being call money received)
Debentures issued at Premium
➢ 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.)
Bank A/c Dr. xxxx

(1) Cash

received on To Debentures Application A/c xxxx
application
(Being money received on __%
debentures @ Rs.___ each)

money
refunded To Bank A/c xx Amount refunded
or adjusted
for future To Debenture Allotment A/c xxx Amount adjusted for
calls allotment


Allotted
To Securities Premium A/c xx Difference between

issue and nominal
value
(Being the allotment of ….%

Debentures of Rs….. each and
Premium amount transferred to
Securities Premium A/c as per
Board’s resolution No….. dated……)

money
called
(Being allotment money being
called)

money
received

Call money
called
Bank A/c Dr. xxxx

(7) Call money
received (Being call money received)
Debentures issued at Discount
➢ 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.)
Bank A/c Dr. xxxx

(1) Cash
received on
To Debentures Application A/c xxxx
application
(Being money received on __% debentures
@ Rs.___ each)

money
refunded To Bank A/c xx Amount
or refunded
adjusted
for future To Debenture Allotment A/c xxx Amount adjusted
calls for allotment


Allotted
Discount on Issue of Debentures A/c Dr. xx Difference
between issue
price and
nominal value
(Being the allotment of ….% Debentures

of Rs….. each and Discount amount
transferred to Discount on Issue of
Debentures A/c as per Board’s resolution
No….. dated……)

money
called
(Being allotment money being called)

money
received

Call money
called
(7) Call money Bank A/c Dr. xxxx

received
(Being call money received)

ISSUE OF REDEEMABLE DEBENTURES – JOURNAL ENTRIES
Redeemable
Debentures
Scenario (1) Scenario (2) Scenario (3)

Issued at Par Issued at Discount Issued at Premium
(1.1) (2.1) (3.1)

Redeemable at Par Redeemable at Par Redeemable at Par
(1.2) (2.2) (3.2)

Redeemable at Redeemable at Redeemable at
Discount Discount Discount
(1.3) (2.3) (3.3)

Redeemable at Redeemable at Redeemable at
Premium Premium Premium
Scenario Entry Debit Credit Remarks
(Rs.) (Rs.)
Bank A/c Dr. xxxxx

(1.1)
Issued at Par To Debenture Application A/c xxxxx Application
Redeemed at money
Par
Debenture Application A/c Dr. xxxxx Application

money
To ____% Debenture A/c Xxxxx
(Being application money transferred to Debenture A/c)

(2.1 & 2.2) Bank A/c Dr. xxxxx The difference
between the
Issued @ To Debenture Application A/c xxxxx amount received
Discount
(Being application money received) and amount
Redeemed @ payable in
Par/ Discount Debenture Application A/c Dr. xxxxx future is
considered as
Discount on issue of debentures A/c Dr. xx
loss on issue on
To ____% Debenture A/c xxxxx debentures and
is to be written-
(Being application money transferred to Debenture A/c on off over the life
allotment) of debentures.
(3.1 & 3.2) Bank A/c Dr. xxxxx

The gain on
paying less
Issued @ To Debenture Application A/c xxxxx
than what is
Premium received in
this scenario
Redeemed @ will not be
Par/Discount Debenture Application A/c Dr. xxxxx
recognised in
To ____% Debenture A/c xxxxx the books at
the time of
To Securities Premium A/c xx issue of
debentures as
(Being application money transferred to Debenture A/c on per the
conservatism
allotment) concept.
(1.3) Bank A/c Dr. xxxxx The redemption

premium is
Issued @ Par To Debenture Application A/c xxxxx recorded as a
Redeemed @ (Being application money received) loss on issue of
premium debentures
Debenture Application A/c Dr. xxxxx allotment time.
Debenture
To ____% Debenture A/c xxxxx
Redemption
(Being application money transferred to Debenture A/c) Premium A/c is
a personal
Bank A/c Dr. xxxx account
representing
Loss on issue of debenture A/c Dr. xxxx
company’s
(Amount equal to redemption premium) liability.
To __% Debenture A/c xxxxx

To __% Debenture Redemption Premium xxxxx
A/c
(Being call made subsequent to allotment)
(2.3) Bank A/c Dr. xxxxx The difference

between the
Issued @ To Debenture Application A/c xxxxx redemption
Discount
(Being application money received) price and par
Redeemed @ value plus
premium Debenture Application A/c Dr. xxxxx difference
between the
issue price and
(Being application money transferred to Debenture A/c) par value is
treated as
Bank A/c Dr. xxxx discount/loss on
issue of
Discount/Loss on issue of debenture A/c Dr. xxxx
debentures
(Amount equal to discount on issue + premium
on redemption)
To __% Debenture A/c xxxxx
To _% Debenture Redemption Premium A/c xxxxx
(Amount equal to premium payable on

redemption)
(3.3) Bank A/c Dr. xxxxx The premium

received at the
Issued @ To Debenture Application A/c xxxxx time of issue of
premium
(Being application money received) debentures is
Redeemed @ credited to
premium Debenture Application A/c Dr. xxxxx Securities
premium
account and
(Being application money transferred to Debenture A/c) premium paid at
the time of
Bank A/c Dr. xxxx redemption is a
loss to be
Discount/Loss on issue of debenture A/c Dr. xx
provided at the
(Amount equal to premium on redemption)

To __% Debenture A/c xxxxx time of issue of
debentures
To Securities Premium A/c xx
(Amount equal to premium on issue)
To _% Debenture Redemption Premium A/c xx
(Amount equal to premium payable on

redemption)
DEBENTURES AS COLLATERAL SOCIETY
Collateral security = Secondary or Supporting security for a loan

➢ Under this arrangement, the borrower agrees that a particular asset or a group of assets
of the company, will be realized and the proceeds there from will be applied to repay the
loan in the event that the amount due, cannot be paid.
➢ Sometimes companies issue their own debentures as collateral security for a loan or a
fluctuating overdraft.
o When the loan is repaid on the due date, these debentures are at once released
with the main security.
o In case, the company cannot repay its loan and the interest thereon on the due
date, the lender becomes the debenture holder who can exercise all the rights of
a debenture holder.
➢ The holder of such debentures is entitled to interest only on the amount of
loan, but not on the debentures.
Accounting Entries
There are two methods of showing these types of debentures in the accounts of a company.
➢ Method 1
No entry is made in the books of account of the company at the time of making issue of
such debentures.
In the ‘Notes to Accounts’ of Balance Sheet, the fact of the debentures being issued and
outstanding is shown by a note under the liability secured.
➢ Method 2
Under this method, the following accounting entry is made to record the issue of such
debentures:

Debentures Suspense A/c Dr.
To …..% Debentures A/c
(Being the issue
of…debentures collaterally as
per Board’s Resolution
No…..dated)
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 IN CONSIDERATION OTHER THAN FOR CASH
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:
(a) Sundry Assets A/c Dr. [Assets taken over]

To Sundry Liabilities A/c [Liabilities assumed]
To Vendors Account [Purchase
consideration]
(Being the assets and liabilities taken over)
(b) Vendors A/c Dr.
To Debentures A/c
(Being the issue of….% debentures to satisfy purchase consideration)
Further it should be noted that these debentures can be issued at par, premium and at
discount. In each case the second entry for issue of debentures would be done
accordingly i.e. “Securities Premium A/c” will be created in case of ‘issued at premium’
or “Discount on Issue of Debentures A/c” will be created in case of ‘issued at discount’.
Number of debentures to be issued is calculated as follows:-
1. When debentures are issued at par
No. of Debentures = Purchase Consideration

Par Value
2. When debentures are issued at premium

Par Value + Premium
3. When debentures are issued at discount

Par Value - Discount
TREATMENT OF DISCOUNT / LOSS ON ISSUE OF DEBENTURES
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.
The accounting entries would be as follows :
Profit and Loss A/c Dr.

To Discount on Issue of Debentures A/c
(Being the amount of discount on issue of debentures written-off)
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.

INTEREST ON DEBENTURES
➢ Interest payable on Debentures is treated as a charge against the profits of the

company.
➢ Interest on debenture is paid periodically and is calculated at coupon rate on the
nominal value of debentures.
➢ The company will pay interest net of tax to the debenture holders because the
company is under obligation to deduct tax at source at the rates applicable under
tax rules from time to time.
➢ The companies will deposit the tax so deducted with income tax authorities.
Following accounting entries are to be recorded in this regard:

(Rs.) (Rs.)
(1) For Interest A/c Dr. xxx

making
interest To ….% Debentures holders’ A/c xxx
due
(Being interest due on debentures)
…% Debentures holders’ A/c Dr. xxx

(2) Payment
of To TDS Payable A/c xxx
interest
and To Bank A/c x
deduction
of tax at (Being interest paid to the
source debenture holders after deducting
(TDS)
tax at source)
(3) Payment of TDS Payable A/c Dr. x

TDS
To Bank A/c x
(Being TDS deducted from interest

on debentures paid)
(4) Interest Profit & Loss A/c Dr. xxx

charged to
P&L A/c To Interest A/c xxx
(Being interest charged as expense

to P&LA/c)

Illustrations
Question: 1
Amol Ltd. issued 40,00,000, 9% debentures of Rs.50 each, payable on application as per term
mentioned in the prospectus and redeemable at par any time after 3 years from the date of
issue.
Record necessary entries for issue of debentures in the books of Amol Ltd.
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

X Ltd. issued 1,00,000 12% Debentures of Rs.100 each at a discount of 10% payable in full on
application by 31st May 2017. Applications were received for 1,20,000 debentures. Debentures
were allotted on 9th June 2017. Excess monies were refunded on the same date.
Pass necessary Journal Entries. Also show necessary ledger accounts
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.

Principles and Practices of Accounting - CAF - RL - 07

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Principles and Practices of Accounting - CAF - RL - 07

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Table of Contents:

Chapter 1 – Theoretical Framework ..................................................................................................................4

1.1 Meaning and Scope of Accounting:

- Meaning and significance of Accounting.

1.2 Accounting Concepts, Conventions and Principles:

- Understanding various accounting concepts, conventions, principles and assumptions

1.3 Capital and Revenue Expenditure and Receipts:

- Capital and Revenue Expenditure

1.4 Contingent Assets and Contingent Liabilities:

1.5 Accounting Policies:

- Meaning of Accounting Policies

1.6 Valuation Principles and Accounting Estimates:

1.7 Accounting Standards:

- What are Accounting Standards

- Need for Convergence towards Global Standards

Unit-1 Theoretical Framework

American Institute of Certified Public Accountant defined Accounting as “Accounting is the

Broadly the accounting procedures are divided into two categories:

Procedure to Generate Financial Information comprises of the following 6 steps:

A company carries on hundreds and thousands of transactions in a financial year and

The Financial Statements are communicated through the distribution of annual

Using the Financial Information and Users of Financial Statements (Accounting

Internal Users External Users

Management and Owners Investors, Lenders, Statutory

Type of Financial Information needed by the users

Every information which Key information about

Users of Accounting Information/Financial Statements:

4. Suppliers and Creditors:

Systematic Determining Determining Providing Understandi

How the Objectives are achieved?

Through By By Annual Determining

Book-Keeping can be stated as the process/activity to record the various transactions

Often, Book-Keeping is confused with Accounting. It is important to note that Book-Keeping

Point of Distinction Book-Keeping Accounting

Book-Keeping can be stated as the process/activity to record the various transactions

4. Social Responsibility Accounting:

5. Human Resource Accounting:

The Limitations of Accounting are as follow:

1. Non-Monetary items are not considered:

2. Balance Sheet is valid only for a particular point of time:

3. Time Value of Money:

i) CEO of the company

3. Limitation of Accounting is that it:

i) It does not use estimates.

Need for Accounting Concepts, Conventions and Principles:

Accounting Principles need to satisfy the following conditions:

1. They should be based on real assumptions.

Let us look at the Concepts, Conventions and Principles:

2. Money Measurement Concept:

6. Going Concern Concept:

9. Dual Aspect Concept:

This can be summarized in the following manner:

Effect of Changes in Asset

Effect of Changes in Liability

10. Conservatism Concept:

11. Consistency Concept:

The intention of this concept is to ensure the comparability of financial statements

12. Materiality Concept:

10. Full, Fair and Adequate Disclosure:

1. Identify the effect on Asset and Liability of the following transactions.

i) Mr. A paid outstanding creditors balance of Rs.10,000

ii) Mr. B sold goods worth Rs.10,000 for cash?

2. Which of the following is not a qualitative characteristic of Financial Statement?