FYBMS-Introduction-to-Financial-Accounts-SEM-I-munotes

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1 1 INTRODUCTION TO FINANCIAL ACCOUNTS Unit Structure : 1.1 Meaning and Scope of Accounting 1.2 Meaning of Book-Keeping , Features, Objectives of Book-Keeping, Important terms used in Book-keeping 1.3 Types of Accounts and Rules of Book-Keeping 1.4 Accounting Concepts, Conventions and Principles 1.5 Introduction to Accounting Standards 1.6 International Financial Reporting Standards (IFRS) 1.7 Accounting in Computerised Environment Review Questions OBJECTIVE After Studying the module student would be able to:- • Understand Scope and Meaning of Accounting • Understand various Users of Financial Statements • Know the Concepts and Conventions used in Accounting • Study Indian Accounting standards and International Financial Reporting Standards 1.1 MEANING AND SCOPE OF ACCOUNTING Business is carried on for the purpose of earning profits. Every business involves exchange of goods or services. A trader purchases and sells goods or services for the purpose of earning profits. In other words when a person carries on business he has to enter into various types of transactions. Transactions means giving or taking money or money's worth. A businessman enters in to various types of transactions such as Purchasing goods, selling goods, Paying electricity bill Paying salary, Receiving commission etc. A businessmen enters in to various types of transactions for the purpose of earning profits. At the end of the year he would like to know how much profit he has earned. Each and every transaction affects the profits of the business, for example when salary is paid to the employee the profits are reduced and when commission is received the profits increase. munotes.in

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2 If we want to find the profits of a business we have to consider all the transactions to find the profits as each and every transaction affects the profit. The transactions are numerous and it is not possible to remember all the transactions of the business. Therefore it becomes necessary that all the transactions should be recorded (written) in a proper form. 1.2 MEANING OF BOOK-KEEPING BOOK KEEPING IS THE SYSTEM BY WHICH BUSINESS TRANSACTIONS ARE MATICALLY RECORDED IN THE BOOKS Definition of Book-Keeping: Let us study definition of Book- keeping given by some eminent authors J.R.Batliboi: Book-keeping is the art of recording business transactions in a set of books. R.N. Carter: The Science and art of correctly recording in the books of accounts all those business transactions that result in the transfer of money of money's worth. 1.2.1 Features of Book-keeping 1) It is an art of recording business transactions. 2) Book- keeping involves recording of money transactions only. It means transactions must involve money or money's worth non-monetary transactions are not recorded. 3) Recording of transactions is done in a systematic manner and according to the rules. 1.2.2 Objectives of Book-Keping: Following are the objectives of book- keeping 1) To find the amount of profit or loss made during a year. 2) To find the amount of his capital in the business. 3) To find the amount of his assets and liabilities on a particular date. 4) To ascertain the financial position of the business. 1.2.3 Important Terms used in Book- Keeping 1) Debtor: Debtor means a person who has to pay something to us. A debtor is a person who owes something. In other words a debtor is a person from whom we have to receive something. For example if we sell goods to Mr. D on credit then Mr. D becomes our debtor .If Mr. A buys goods on credit from Mr. B For Rs. 700. In this Case Mr. A will be called a debtor as he owes (has to Pay) Rs. 700 to Mr. B. 2) Creditor: A creditor is a person to whom we have to pay something. A creditor is a person to whom we owe something. In other words a creditor is a person who has to receive something from us. For munotes.in

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Accounts example if we buy goods on credit from Mr. X then Mr. X becomes our creditor. If Mr. A buys goods on credit from Mr. B for Rs. 700. In this case Mr. B will be called a creditor as has to receive Rs.700 from Mr. A. 3) Assets: Assets means all kinds of properties owned by a persons. Land and Building, Plant and Machinery, Cash Balance, Bank balance etc. are all examples of assets. 4) Liabilities: Liabilities means all sum of money which is payable to others. For example if Electricity bill is not paid then it is liability on us because the amount is payable. 5) Capital: Capital means the amount which businessman as invested in the business. For example if Mr. A starts business with Rs. 50,000 then that amount would be his capital in the business. If he brings furniture of Rs.5,000 in the business, this would also amount to his capital in the business. Capital is the amount that belongs to the trader him self which is used in the business. Capital = Assets – Liabilities 6) Drawings: Drawing means amount withdrawn (taken out) by a businessman from business for his personal use. Drawing may in the form of cash or goods. Drawing reduces the capital of the business. 7) Solvent: A solvent is a person whose Assets are more than liabilities. or A solvent is a person whose liabilities are less than Assets. For example if Mr. X has cash Rs. 5000. Building Rs.8,000. and he has to pay Rs. 3000 to Mr. Y then his assets are worth Rs.13,000 and liabilities Rs.3,000. So, Mr. X is solvent. 8) Insolvent: An Insolvent is a person whose liabilities are more than his assets. or An insolvent is a person whose assets are less than his liabilities. For examples if assets of Mr. A are Rs. 10,000 and he has to Pay Rs. 15,000 to Mr. B then Mr. A is Insolvent because his assets are less then his liabilities. 9) Goods: Goods means all those articles and commodities in which a businessman deals. For example if Mr. A carries on business of Cloth then Cloth would be goods for him. If Mr. B is a Chemist then Medicines would be goods for him. Thus if you are dealing in furniture then furniture would be goods for you. With a commodity is to be regarded as goods or not does not depend upon the commodity but it depends upon the type of business which you are carrying on. 10) Profit : Profit is the excess of revenue or Income over the expenditure or expenses . 11) Loss : Loss is the excess of Expenditure or Expenses over the Income or Revenue. munotes.in

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4 12) Transaction: Exchange of goods and services for money or Money’s worth between two or more persons or parties is known as Transactions. There are two type of Transactions. a. Cash Transaction: When goods are exchange for cash it is know as Cash Transaction. Example: A Purchased Goods from B and paid cash. b. Credit Transaction: When cash is not paid or received for exchanges for goods and services it is know as Credit Transaction. E.g. A purchased goods from B on Two months Credit. 13) Contingent Liabilities: These are liabilities which may arise on happening or non – happening of a specific event in future. These liabilities are not recorded in the books of account until they arise. E.g. A pending Suit in a coat filed by customer by demanding compensation for adverse effects of product after use. 14) Capital Expenditures: Cost incurred in acquiring an assets is called a capital expenditure. All capital expenditure, to repeat, is treated as asset and shown in the balance sheet. E.g. A Machinery costing Rs. 2,00,000/- was imported on which custom duty, freight and insurance Rs. 20,000/- incurred. Expense paid for customs duty, freight and insurance are capital expenditure. 15) Revenue Expenditure: Expenditure incurred for acquiring or producing goods for Resale is called Revenue Expenditure. In other words, expenses incurred for carrying day to day business activity is called Revenue Expenditure. E.g. Salary paid to employee. All Revenue Expenditure has to be deducted from income earned by the firm. Hence it will be taken to Profit & loss Account. 16) Deferred Revenue Expenditure: Expenditure is of a revenue nature but the benefit of the expenditure is available for following Two or more years. Such expenses are called Deferred Revenue Expenses. E.g. Advertising Expenses: Normal annual advertising expenses are written – off to profit and loss account annually. Suppose a heavy advertisement campaign is carried out. The benefit of this will be available for next Two or Three years. Then so much of such expenditure as benefit In the current may be considered ‘Revenue’ and written off to profit loss account. The balance is carried as ‘Deferred Revenue Expenditure’ and appears in the balance sheet on assets side. 17) Discount: An allowance of concession allowed or received for carrying business transaction. There are two types of discount: munotes.in

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Accounts (a) Cash Discount: Discount allowed for spot is known as cash discount. It is generally allowed by the creditor to his debtor for immediate payment of amount due. This appears in the books of the accounts. (b) Trade Discount: This discount or concession allowed for trading purpose is known as trade discount. It is usually allowed by manufacturer to a wholesaler or by a wholesaler to a retailer. It is allowed as a deduction from invoice or printed price or catalogue price. This discount is not recorded in the books of account. 18) Accounting Year: Business is going concern. So, the life of business is for infinite number of years. To know about his business dealing and position he breaks the life of business into small respective periods. Such periods consists of twelve months. Such year is known as accounting year. An accounting year may be calendar year, which begins on 1st January an ends on 31st December or financial year which begins on 1st April and ends on 31st March next year or other period i.e. Diwali to Diwali etc. 19) Trading Concern: The organization which is engaged in trading activities is known as trading concern. Aim of such organization is to earn profit. 20) Not for profit concern or non – trading concern : The organization which are not engaged in trading activities are called non- trading concern. Such concerns renders social service such as promotion of literature, culture, art, sport, education etc. Aim of such organization is not to earn profit but to give services. 1.3 TYPES OF ACCOUNTS AND RULES OF BOOK-KEEPING Accounts may be classified as under 1) PERSONAL ACCOUNTS. 2) IMPERSONAL ACCOUNTS. Impersonal accounts can be further divided into A) REAL ACCOUNTS B) NOMINAL ACCOUNTS ACCOUNTS PERSONAL A\C IMPERSONAL A\C REAL A\C NOMINAL A\C munotes.in

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6 Personal Accounts: Personal accounts are accounts relating to various individuals, firms, limited companies etc. with whom a businessman deals. A separate account is maintained for each person. Example Mr. X a/c Mr. Y a/c, M & Co a/c, Reliance limited A/c, etc. In other words, the term person not only includes individuals but also includes artificial persons such as a Firm, Limited companies, etc. Separate account is maintained for each person. Real Accounts: These are the accounts of properties and assets of the business. For example Machinery a/c, Furniture a/c, Cash A/c, Goods A/c, Building a/c, Goodwill a/c. A separate account is maintained for each type of asset. Nominal Accounts: These are the accounts of expenses, losses, incomes and gains. A separate account is maintained for each Expenses and income. Examples of expenses are Electricity charges, Telephone charges, Salary paid, Discount allowed, etc. Examples of Incomes are commission received, Rent received, Interest received, etc. Nominal accounts are different from personal accounts and real accounts. As already stated above personal accounts are accounts of various persons and real accounts are accounts of assets and properties. The persons and properties can be seen or touched but nominal accounts are accounts of expenses and incomes, which cannot be seen or touched. One cannot see or touch an expense or income but one can only feel it. For example when you pay salary, We give cash to the employee, and we say that salary is a expenses, we only feel that some expenses have been incurred. Nominal Accounts Are Also Called Fictitious Accounts Ex. 1 Mention the nature of the following accounts: 1. Copal Dev's A/c. 2. Goods A\C 3. State bank of India A/c. 4. Printing and stationery A/c. 5. Discount A\C 6.Vijaya 's A/c. 7. Carriage inward A/c. 8.Commission Received A/c. 9.Investment A\C. 10.Machinery A\C. 11. Repairs to machinery A/c. 12. Loss by Fire Account. 13.Shares A/c 14. Live Stock A/c. 15. Audit Fees A/c. 16.Dadar Library's A/c. 17.Capital A/c 18. Drawing A/c 19.Bad debts A/c. 20.Interest received A/c. 19.Dividend Received A/c. 20.Insurance premium A/c. 21.Brokerage A/c 22.Freight A/c 23.Lion's club A/c. 24. Bank of Baroda A/c. 25.Eagle Pvt. limited A/c. 26. Premises A/c. 27. Leasehold premises A/c. 28. Drawing A/c. 27. Trade Expenses A/c. 28.Bank charges A/c. 29.Prepaid insurance A/c. 30. Outstanding Wages A/c. munotes.in

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Accounts The Rules of Debit and Credit As already stated Book-keeping is an art and science of recording business transactions in a systematic manner. We will be studying double entry system of Book-keeping. Under double entry system, each transaction has two aspects. These aspects are called as debit aspect and credit aspect. In other words, every transaction has a debit aspect and a credit aspect and the debit is equal to credit. When we record a transaction some accounts are debited and some accounts are credited but the amount of debit and credit is equal. Rules of Personal Account Debit the Receiver and Credit the Giver A receiver means a person who receives something from us. When a person receives something from us, he is a receiver and his account should be debited. For example Cash paid to Mr. Manoj. Manoj is the receiver so his account should be debited. A giver means a person who gives something (Goods or Service) to us When a person gives something to us He is a giver and his account should be credited. For Example Cash received from Mr. Sunil. Sunil is the giver so his account should be credited. In some transactions a person receives something as well as gives something at the same time. In such transactions he is a receiver and giver at the same time so his account should be neither debited nor credited. For example sold goods to Y for cash. In such transactions Y is the receiver of goods and giver of cash so his account will be neither debited nor credited. Note While finding whether a party is a receiver or giver we should not consider ourselves as giver or receiver. This rule is applicable only to outside parties. We should consider only outside parties for finding out whether they are receiver or giver. In other words only outside parties can be receiver or giver. Ex. 2 Find the receiver and giver in the following cases. 1. Sold goods to Mr. Prakash on credit. 2. Purchased goods from Ravi on credit 3. Paid cash to Anil Kapoor. 4. Received cash from Amir Khan. 5. Gave Loan to Sunil 6. Received loan from Ajay 7. Sold goods to Sanjay for cash. 8. Purchased goods from Mahesh for cash 9. Sold Machinery to Raju on credit munotes.in

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8 10. Sold Machinery to Kirit and received cash 11. Paid Rs. 500 to Rajesh. 12. Paid Rs. 500 as Rent to Rohit. 13. Paid Salary to Pankaj. 14. Received Rs. 100 from Jayesh 15. Received Commission Rs. 200 from Ashok. 16. Paid Electricity charges to BSES LTD. RULE OF REAL ACCOUNT DEBIT WHAT COMES IN CREDIT WHAT GOES OUT As already discussed real accounts are accounts relating to property and assets such as cash, goods, building, etc. Whenever some assets such as cash, goods or building comes in we should debit that asset account. Whenever some assets such as cash goods or building goes out of business we should credit the asset account. Ex.3 Let us find whether Real accounts in the transactions given below should be debited or credited. 1. Sold goods to Mr. Ashok Rs 500 on credit 2. Purchased a Typewriter. 3. Purchased a building for Rs 50,000 and paid by cash. 4. Paid cash to Verma Rs 1000. 5. Paid Electricity charges Rs 1000. 6. Paid salary Rs 100 RULE OF NOMINAL ACCOUNT DEBIT ALL EXPENSES AND LOSSES. CREDIT ALL INCOMES AND GAINS. Nominal accounts are accounts relating to expense, losses, incomes and gains. One of the important characteristics of nominal account is that we cannot see the items to which the account relates. We can only feel about it. These accounts are also known as fictitious accounts. Whenever we incur some expenses and losses we should debit expenses or losses accounts and whenever there is a income or gain we should credit income or gain account. Ex.4 Let us find whether Nominal accounts should be debited or credited in the following transactions. 1. Paid Rent Rs 400. 2. Paid Salary Rs. 500 to Mr. Pankaj. 3. Paid Interest Rs 1000 to Ashok. munotes.in

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Accounts 4. Paid Traveling expenses Rs 2,000. 5. Received commission from Mahesh Rs. 500. 6. Paid Freight Rs.500 to Railway. 1.4 ACCOUNTING CONCEPTS, CONVENTION AND PRINCIPLES 1.4.1. Accounting Concepts Accounting concepts means the assumption or condition on which the whole accounting structure stands . They are predetermined conditions which a book keeper must keep in mind while recording transaction in the books of accounts. 1. Entity Concept: This concept is also Known as "Business Entity Concept" " Accounting Entity Concept" This concept requires that the business and the persons who control and own the business are two different entities. An accounting entity is regarded as separate and distinct from its owners. Due to this concept, the owners and his business are considered to be separate. I.E as two separate entities. All transactions of the business are recorded from the point of view of the business. Personal activities of the owners are not recorded in the accounting books of the business. 2. Money Measurement Concept: This concept states that only those facts will be recorded in the accounts which can be expressed in terms Money. If a fact cannot be measured in terms of Money, then such a fact will not be recorded in the accounts Books. Money is a common denomination in which all transactions are measured for the purpose of recording in the books of accounts. If different transactions are not expressed, in terms of money, it will become meaning less to present the transaction. For example if two tables and 5 Chairs are purchased. The various quantities of tables and chairs cannot be added. however the value of two tables and 5 chairs can be measured in terms of Money and their values can then be added. 3. Cost concept: This concept requires that Assets should be valued at acquisition cost. rather than at its Market Values. Though assets can be disclosed in the balance sheet at different values such as market value, Realisable value etc. It is proper to show asset at cost as valuing asset at cost is free from Bias. All other values involve a element of subjectivity in the valuation of the asset. For example an asset may be purchased for Rs 50,000, its market value be Rs 70,000. However Many a times, Market value of an asset may not be available. Also Many a times Market value is not real market value but it is based on estimation. munotes.in

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10 4. Going Concern Concept: According to this concept, the enterprises is normally viewed as a going concern. It means that it is assumed that the enterprise will continue its operations is near or foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation. It is also assumed that the enterprise will not materially curtail down its operation in near future. While preparing Financial statements, it is assumed the Business activity will continue and there is no intention to close the business. This concept is a Fundamental Accounting Assumption. 5. Realisation Concept: This concept requires that profits should be accounted for only when it is actually realised. This means that revenue or profit should be recognised only when sale is effected or services are rendered. For example if the Market value of an Asset has increased, but the profit should be recognised only when the asset is sold. However it should be noted that revenue may be recognised before cash is received. It is not necessary that cash should be received. However Revenue should be recognised only if a legal right to receive cash is established. 6. Accrual Concept This Concept requires that Revenues and costs should be recognised as and when they are earned or incurred and not as and when money is received or paid. In other words we should follow mercantile system of Accounting and not cash system of Accounting. In cash system of Accounting Revenue is recognised only when cash is received and expenses are recorded when cash is paid. However this concept requires that, income and expenditure should be recorded in the period to which the expense belong and not in the period in which income are received or expenses are paid 7. Dual Aspect. This concept is the core of Accountancy. According to this concept, every business transaction is recorded in the books has of accounts has two aspects. The two fold aspects are increase or decrease in assets and liabilities. Every transactions or event has two aspects such as 1. It increases one asset and decreases another asset 2. It increases and asset and increases Liability (including Capital) 3. It decreases one asset and decreases a liability (including Capital) munotes.in

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Accounts For example when expenses are incurred, cash is reduced and capital also reduces. When Machine is purchased, cash is reduced and book value of Machine increases. 1.4.2. Accounting Conventions:- Accounting convention are the customs or traditions usually adopted in preparation of accounting conducts or statements. Accounting systems have been developed in response to the needs of the management and the outside creditors for making economic decisions. 1. Convention of Consistency: This concept requires that Accounting policies adopted in preparing the financial statements should be consistently followed. In other words the Accounting policies should not be changed unless it is absolutely necessary. If Accounting policies such as Method of depreciation, method of valuation of closing stock etc are frequently changed then it becomes meaning less to compare the financial statements of two different period in which different accounting policies have been followed. 2. Convention of Disclosure: This means that the accounts must be honestly prepared and they must disclose all material information. The accounting reports should disclose full and fair information to the proprietors, creditors, investors and others. This convention is specially significant in case of big business like Joint Stock Company where there is divorce between the owners and the managers. Therefore, The Indian Companies Act, 1956 not only requires that the accounts of the company must give a true and fair view of the state of affairs of the company but it has also prescribed the contents and forms of Profit and Loss Account and Balance Sheet. 3. Convention of Materiality: The accountant should attach importance to material detail and ignore insignificant details. If this is not done accounts will be overburdened with minute detail. As per the American Accounting Association, “ an item should be regarded as material, if there is a reasons to believe that knowledge of it would influence the decision of informed investor.” Therefore keeping the convention of materiality in view, unimportant items are either left out or merged 4. Convention of Conservatism: This convention cost of safety is a rule in the minds of businessman. As per this convention, all anticipated losses are taken into account but no profits are accounted until they arise. munotes.in

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12 1.5 INTRODUCTION TO ACCOUNTING STANDARDS: Accounting standards are authoritative standards for financial reporting and are the primary source of generally accepted accounting principles (GAAP). Accounting standards specify how transactions and other events are to be recognized, measured, presented and disclosed in financial statements. An accounting standard is a common set of principles, standards, and procedures that define the basis of financial accounting policies and practices. 1.5.1. AS-1: Disclosure of Accounting Policies It states that an enterprise needs to disclose significant accounting policies followed by it to prepare and present its financial statements. The information presented in the financial statements of an organisation is of its financial position. The profit or loss can be affected to a large degree by the accounting policies followed. The accounting policies followed vary from organisation to organisation. It is important to disclose significant accounting policies followed to make the financial statements understandable. The disclosure is required by law in certain cases. In recent years, organisations in India have adopted the practice of including a separate statement of accounting policies followed in their annual reports to shareholders. Many organisations followed by them in the notes to their financial statements, but there is no consistency in the disclosures among organisations. In other words, the disclosure forms part of accounts in some cases, while in others it is given as supplementary information. The purpose of this standard is to promote a better understanding of financial statements by establishing the practice of disclosure of significant accounting policies followed and the manner in which they are disclosed in the financial statements. Such disclosure would also facilitate a more meaningful comparison between financial statements of different organisations. 1.5.2. AS-6 Depreciation It deals with depreciation of the tangible asset. Hence, only the historical cost, accumulated depreciation on the asset and total depreciation for the period for each class of asset will be recorded. Depreciable value of asset is not to be disclosed according to AS-6. Depreciable assets are assets which [1] are expected to be used during more than one accounting period; and [2] have a limited useful life; and [3] are held by an enterprise for use in the production or supply or for administrative purposes. munotes.in

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Accounts Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for historical cost less the estimated residual value. Useful life is the period over which a depreciable asset is expected to be used by the enterprise. The useful life of a depreciable asset is shorter than its physical life. There are two method of depreciation: 1] Straight Line Method (SLM) 2] Written Down Value Method (WDVM) Note: A combination of more than one method may be used. 1.5.3. AS-9 Revenue Recognition As per the AS 9 Revenue Recognition issued by ICAI “Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, rendering of services & from various other sources like interest, royalties & dividends” Revenue has to be measured by the amount charged to the clients for the sale of goods and services. However, in the case of the agency relationship, the revenue has to be measured by the amount charged for commission and not on the gross inflow of the cash, receivables or other consideration. There are few exceptions to the above-mentioned statement where the special consideration applies • Revenue arising from Construction Contracts • Revenue arising from hire-purchase, lease agreements • Revenue arising from government grants and other similar subsidies • Revenue of Insurance companies arising from insurance contracts 1. Revenue recognition emphasizes on the timing of recognition of revenue in the statement of profit and loss of an enterprise 2. The amount of revenue arising from a transaction is usually determined by an agreement between the parties involved in the transaction 3. When uncertainties arise regarding the determination of the amount or its associated costs, these uncertainties may influence the timing of the revenue 1.5.4. AS-10 Accounting for Fixed Assets Accounting Standard on Accounting for Fixed Assets has now been deprecated , and new revised A.S - 10 Property, Plant and Equipment has been issued by ICAI . Fixed Asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. (It is expected to be used for more than one accounting period.) munotes.in

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14 The cost of fixed asset includes:  Purchase price  Import Duties and other non-refundable taxes  Direct cost incurred to bring the asset to its working condition  Installation cost  Professional fees like fees of architects  General overhead of enterprise when these expenses are specifically attributable to acquisition/preparation of fixed assets  Any expenses before the commercial production, including cost of test run and experimental production Any expenses before the asset is ready for use not put to use  Loss on deferred payment arising out of foreign currency liability.  Price adjustment, changes in duties and similar factors. The cost of fixed asset is deducted with:  Trade discounts and rebates Kindly refer ICAI website for detailed notes on Accounting standards. 1.6 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) International companies follow the International Financial Reporting Standards (IFRS), which are set by the International Accounting Standards Board and serve as the guideline for non-U.S. GAAP companies reporting financial statements. They were established to bring consistency to accounting standards and practices, regardless of the company or the country. IFRS is thought to be more dynamic than GAAP in that it is regularly being revised in response to an ever-changing financial environment. 1.6.1. IAS-1: Presentation of Financial Statements IAS 1 sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. It requires an entity to present a complete set of financial statements at least annually, with comparative amounts for the preceding year (including comparative amounts in the notes). A complete set of financial statements comprises: • a statement of financial position as at the end of the period; • a statement of profit and loss and other comprehensive income for the period. Other comprehensive income is those items of income and expense that are not recognised in profit or loss in accordance with IFRS Standards. IAS 1 allows an entity to present a single combined munotes.in

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Accounts statement of profit and loss and other comprehensive income or two separate statements; • a statement of changes in equity for the period; • a statement of cash flows for the period; • notes, comprising a summary of significant accounting policies and other explanatory information; and • a statement of financial position as at the beginning of the preceding comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. An entity whose financial statements comply with IFRS Standards must make an explicit and unreserved statement of such compliance in the notes. An entity must not describe financial statements as complying with IFRS Standards unless they comply with all the requirements of the Standards. The application of IFRS Standards, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. IAS 1 also deals with going concern issues, offsetting and changes in presentation or classification. 1.6.2. IAS-2: Inventories IAS 2 provides guidance for determining the cost of inventories and the subsequent recognition of the cost as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The cost of inventories includes all costs of purchase, costs of conversion (direct labour and production overhead) and other costs incurred in bringing the inventories to their present location and condition. The cost of inventories is assigned by: • specific identification of cost for items of inventory that are not ordinarily interchangeable; and • the first-in, first-out or weighted average cost formula for items that are ordinarily interchangeable (generally large quantities of individually insignificant items). When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. munotes.in

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16 1.7 ACCOUNTING IN COMPUTERISED ENVIRONMENT Computerised Accounting System (CAS) is a software that helps businesses to manage the big financial transactions, data, reports, and statements with high efficiency, speed, and better accuracy. A computerized accounting system is a software application that automates financial records and reporting processes to make them faster, more accurate, and easier to manage. It reduces the manual entry of data, eliminates redundant operations, and reduces accounting error risk with built-in controls. 1.7.1. Salient Features of CAS Following are the salient features required for CAS software: Simple and Integrated: It is designed to automate and integrate all the business operations, such as sales, finance, purchase, inventory and manufacturing. CAS is integrated to provide accurate, up-to-date business information rapidly. The CAS may be integrated with enhanced MIS (Management Information System), Multi-lingual and Data Organisation capabilities to simplify all the business processes of the organisation easily and cost-effectively. Transparency and Control: It provides sufficient time to plan, increases data accessibility and enhances user satisfaction. With computerised accounting, the organisation will have greater transparency for day-to-day business operations and access to the vital information Accuracy and Speed : It provides user-definable templates (data entry screens or forms) for fast, accurate data entry of the transactions. It also helps in generalising desired documents and reports. Scalability: It enables in changing the volume of data processing in tune with the change in the size of the business. The software can be used for any size of the business and type of the organisation. Reliability: It makes sure that the generalised critical financial information is accurate, controlled and secured. 1.7.2. Application of CAS in various areas of accounting: The applications of computerized accounting system are as follows: (i) Maintaining accounting records: In computerized accounting system, accounting records can be maintained easily and efficiently for long time period. It does not require a large amount of physical space. It facilitates fast and accurate retrieval of data and information. (ii) Inventory management: Computerized accounting system facilitates efficient management of inventory, fast moving, slow moving and obsolete inventory can be identified. Updated information about availability of inventory, Level of inventory etc, can be obtained instantly. munotes.in

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Accounts (iii) Payroll Preparation: Payroll involves the calculation of amount due to an employee. Pay of an employee may be calculated based on hours/days worked or units produced. (iv) Report generation: Computerized accounting system helps to generate various routine and special purpose reports. (v) Data import/export: Accounting data and information can be imported from or exported to other users within the organisation as well as outside the organisation. (vi) Taxation: Computerized accounting system helps to compute various taxes and to deduct these and deposit the same to the Government account. Review Questions: 1. Write Short note on: Salient features of CAS 2. Write short note on: AS- 6 3. Explain Briefly Accounting Concepts and Conventions 4. Explain IFRS V/S Accounting Standards 5. Objectives of Book-Keeping.  munotes.in

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18 2 ACCOUNTING TRANSACTIONS Unit Structure : 2.1 Accounting Cycle 2.2 What is Journal 2.3 Ledger 2.4 Subsidiary Books 2.5 Cash Book 2.6 Expenditure and Receipts Review Questions OBJECTIVE After Studying the module student would be able to:-  Understand What is Journal, ledger, Subsidiary book  Understand difference between Expenditure and Receipts.  Know various Types of Subsidiary and Cash books 2.1 WHAT IS THE ACCOUNTING CYCLE? The accounting cycle is a basic, eight-step process for completing a company’s bookkeeping tasks. It provides a clear guide for the recording, analysis, and final reporting of a business’s financial activities. A businessman has to record the transactions of the business to find the profit or loss of the business. Transactions are recorded by double entry system of Book-keeping. As already stated in double entry system every transaction has two aspects i.e. Debit aspect and Credit aspect. Step 1: Identify Transactions Step 2: Record Transactions in a Journal Step 3: Posting Step 4: Unadjusted Trial Balance Step 5: Worksheet Step 6: Adjusting Journal Entries Step 7: Financial Statements Step 8: Closing the Books munotes.in

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19 Accounting Transactions 2.2 WHAT IS JOURNAL? Journal is a book in which transactions are first recorded. Journal is called the book of original entry or prime entry. Each Transaction is first recorded in the Journal. The transactions are recorded in Journal by means of Journal entry. Journal must have the following five columns: 1. Date 2. Particulars 3. Ledger Folio 4. Debit Amount 5. Credit Amount FORM OF JOURNAL Date Particulars LF Debit Credit
Date Column: It gives the date on which a transaction takes place. Particulars Column: It shows the account to be debited and the account to be credited. Narration is also written in this column below each entry. L.F. Column: It shows the Folio or page number of the ledger account where posting is done. Debit Rs. column & Credit Rs. column: These columns show the amount to be debited or credited with in the accounts specified in particulars column. Some importance Terms: (1) On Account: Some times, only part payment is made to the supplier or received from the customer. In such case, it is said that amount paid or received on account. (2) In Full Settlement: Some times payment is made or received short of what is actually due. The short payment or receipt is due to discount or other factors. In such case, amount is said to be received/paid in full settlement. (3) Bad debts: When a loss occurred because amount can not be recovered from debtor or customer, then such loss is called bad debts. (4) Bad debts recovery: It refers to the receipt of amount which was earlier consider as irrecoverable and was written of as bad debts. munotes.in

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20 Introduction to Financial Accounts
20 Trade Discount and Cash Discount The term discount means any concession allowed by one person to another. Discount is an expense of the person who allows the discount and it is the income of the person who receives the discount. Two types of discounts are allowed in the business. 1. Trade Discount 2. Cash Discount Trade Discount Trade discount is allowed by a seller to the buyer to Encourage the buyer to buy large quantity of goods. Trade discount is allowed on the list price or marked price of the goods. Marked price of goods means the price written on the goods. For example if the marked price of the goods is Rs 5000 and trade discount allowed is 10%. Then the discount will be Rs 500 and the goods will be sold for Rs 4,500. The price at which the goods are sold is also called NET PRICE OF THE GOODS. Cash Discount Cash discount is allowed to encourage early payment. Cash discount is allowed by a creditor to debtor so that the debtor makes early payments. Cash discount is allowed in two types of transactions a) When the buyer of the goods makes immediate payment at the time of purchase of goods b) When the debtor makes the payment and the creditor allows the discount. When cash discount is allowed at the time of purchase of goods by the buyer, cash discounted is calculated on the NET PRICE. For example A sells goods to B. The marked price of the goods is Rs 100 and A allows trade discount of 10%. The net price of the goods is Rs 90. If B makes immediate payment and a allows cash discount of 10%. This 10% will be calculated on the net price of the goods and not on the marked price. The cash discount will be Rs. 9 i.e. 10% of Rs 90. and B will pay Rs. 81 ie. (90 - 9) to A. When cash discount is allowed by a creditor to his debtor, cash discount is calculated on the amount settled. For example X has to pay Rs 1,000 to Y. Y may allow 10 % cash discount to X. In that case X will Get a discount of 10% of Rs 1,000 i.e. Rs 100 and he will pay Rs 900 to Y. munotes.in

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21 Accounting Transactions TRADE DISCOUNT CASH DISCOUNT 1. Trade discount is allowed to
encourage the encourage the buyer
to buy more quantity of goods. 1. Cash discount is allowed to
encourage early payments. 2. Trade discount is calculated on
list price 2. Cash discount is calculated on
Net price or amount settled. 3. Trade discount is allowed at the
time of buying goods. 3. Cash discount is allowed at the
time of buying the goods or at the
time of making payment. 4. Trade discount is not recorded in
the books of accounts. 4. Cash discount is recorded in the
books of accounts. Important Points for Recording Entries For Discount. 1. Remember the order given below in which discount is allowed. MARKED PRICE OF GOODS XXXXX LESS TRADE DISCOUNT XXXXX PRICE OF GOODS SOLD OR PURCHASED XXXXX LESS CASH DISCOUNT XXXXX CASH RECEIVED OR PAID XXXXX 2. When goods are sold, goods account is credited at NET PRICE When goods are purchased, goods account is debited with NET PRICE. In other words goods are recorded at NET PRICE AND NOT AT MARKED PRICE. 3. Cash account is debited or credited with actual cash received or paid. 4. Trade account is not recorded in the books of accounts. Cash discount is recorded in the books of accounts. 5. When goods are purchased, and cash is paid immediately the buyer may receive cash discount, In that case we must credit discount account as discount is an income. Discount account is a nominal account. Important Note: The Students should note that they should not apply the rule of real account to discount account. The students should not debit discount account when discount is received thinking that discount is coming in. 6. When goods are sold, and cash is received immediately the seller may give cash discount, In that case discount account will be debited as discount allowed is a expense of seller. Discount account is a nominal account. The students should note that they should not apply the rule munotes.in

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22 Introduction to Financial Accounts
22 of real account to discount account. The students should not credit discount account when discount is allowed (given) thinking that discount is going out. In short. When discount is received discount account is credited when discount is allowed discount account is debited An entity named Orange Ltd. has the following financial accounting transactions. 1. It deposits Rs.10,000 into Bank 2. It buys goods worth Rs.50,000 from Apple Ltd. 3. It sells goods worth Rs.35,000 to Melon Ltd. 4. It pays Rs.12,000 as Rent for its premises 5. It earns Rs.3,000 as interest on bank account. First of all, let us identify the accounts involved in these transactions and classify them into the different types of accounts: Transaction Accounts
involved Type of
Accounts Deposit Rs.10,000 in Bank Bank Account
Cash Account Real Account
Real Account Purchase goods worth Rs.50,000
from Apple Ltd. Purchase
Account
Apple Ltd.
Account Nominal
Account
Personal
Account Sale of goods worth Rs. 35,000 to
Melon Ltd. Sales Account
Melon Ltd.
Account Nominal
Account
Personal
Account Pays Rs.12,000 as rent Rent Account
Bank Account Nominal
Account
Real Account Earn Rs.3,000 as interest on Bank
account Interest
received
Bank Account Nominal
Account
Real Account Now applying the golden rules of Financial Accounting to each of the transactions we will get the following journal entries : Deposit Rs.10,000 in Bank Both Bank and Cash are real accounts and so the Golden rule is: Debit what comes into the business munotes.in

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23 Accounting Transactions Credit what goes out from the business So the entry will be: Bank A/C Dr. 10,000 To Cash A/ C 10,000 Purchase goods worth Rs.50,000 from Apple Ltd. The Purchase Account is a Nominal account and the Creditors Account is a Personal account. Applying Golden Rule for Nominal account and Personal account: Debit the expense or loss Credit the giver The entry will be: Purchase A/C Dr 50,000 To Apple Ltd. A/C 50,000 Sale of goods worth Rs.35,000 to Melon Ltd. The sale account is a Nominal account and the Debtors Account is a Personal account. Hence the Golden Rule to be applied is: Debit the receiver Credit the income or gain Thus the entry will be: Melon Ltd. A/C Dr 35,000 To Sales A/C 35,000 Pays Rs.12,000 as rent Rent is a Nominal account and Bank is a real account. The Golden Rule to be applied is: Debit the expense or loss Credit what goes out of business The entry thus will be: Rent A/C Dr. 12000 To Bank A/C 12000 munotes.in

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24 Introduction to Financial Accounts
24 Earn Rs.3,000 as interest on Bank Account Interest and Bank are Nominal account and Real Account. The Golden rule to be applied is: Debit what comes into the business Credit the income or gain Hence the entry will be: Pass Journal entries for the following Transactions during the Year 2021: 1. Bought goods of Rs.4000 in cash 2. Bought goods of Rs.4000 from Mr. Ashok. 3. Bought goods of Rs.4000 from Mr. Ashok in cash 4. Bought goods of Rs.4000 on credit basis. 5. Bought goods of Rs.4000. 6. Purchased goods from Mr. Amit Rs.3000 7. Sold Goods of Rs. 4000 to Ms. Suman 8. Sold Goods of Rs.4000 9. Salary paid Rs. 3000 to Mr.Ajit 10. Received Interest Rs.2000 11. Purchased Computer of Rs.40, 000 12. Purchased Typewriter of Rs.5000 from M/S.AKS Com. In the Books of _______ Journal Entries Sr.
No Date Particulars L.F. Dr.Rs. Cr.Rs 1. 1 Purchases A/C Dr.
TO CASH A/C
(Being goods are purchased for
cash) 4000
4000 2. 2 Purchases A/C Dr.
TO Mr.Ashok A/c
(Being goods purchased from
Mr.Ashok on credit basis) 4000

4000 Bank A/C Dr 3,000 To Interest Received A/C 3,000 munotes.in

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25 Accounting Transactions Sr.
No Date Particulars L.F. Dr.Rs. Cr.Rs 3. 3 Purchaes (Goods )A/c Dr.
To Cash A/c
(Being goods purchased on cash
basis from Mr.Ashok) 4000

4000 4. 4 Purchases A/c Dr.
To Party A/c
Or
To Creditor A/c
(Being goods purchased on
Credit basis) 4000

4000 5. 5 Purchases A/c Dr.
To Cash A/c/Bank a/c
(Being goods are purchased for
cash) 4000

4000
6. 6 Purchases A/c Dr.
To Mr.Amit a/c
(Being goods purchased from
Mr.Amit on credit) 3000

3000 7. 7 Suman A/c Dr.
To Sales a/c
(Being goods sold to Ms.Suman
on Credit basis) 4000
4000 8 8 Cash A/c Dr.
To Sales A/c
(Being Goods sold on Cash basis) 4000

4000 9 9 Salary a/c Dr.
To Cash a/c
(Being salary paid to Ajit) 3000

3000 10 10 Cash A/c Dr.
To Interest Received A/c
(Being Interest Received) 2000
2000
11 11 Purchases A/c Dr.
To Party A/c or Creditor
(Being Goods purchased on
Credit basis) 5000

5000 12 12 Purchases A/c Dr.
To Cash A/c
(Being goods purchased on cash
basis from Mr.AMIT) 3000

3000 munotes.in

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26 Introduction to Financial Accounts
26 Sr.
No Date Particulars L.F. Dr.Rs. Cr.Rs 13 13 Purchases
To Cash A/c
(Being Goods purchased on Cash
Basis) 3000

3000
14
14 Computer A/c Dr.
To Cash A/c
(Computer Purchased on cash
basis) 40,000
40,000
15 15 Type writer A/c Dr.
To Aks A/c
(Being Typewriter Bought on
Credit basis) 5000

5000 2.3 LEDGER A ledger is a principal book of accounts, it contain an account for each assets, liability, capital, revenue, and expenses. The ledger contain the same information as the journal. The entries effect of a transaction is completely recorded in one place in the journal. Periodically the same information is posted to the ledger where it is accumulated according to individual items. A trader obtain all information about the business translation from the journal eg. Total amount recoverable from debtors, total amount payable to creditors, total payment on any head of expenditure etc. Dr. Name of A/c Cr. Date Particulars J.F Amount
Rs. Date Particulars J.F Amount
Rs. Year
month To Name of
Account
Credited Amount
of its
own Year
month To Name of
Account
Debited Amount
of its
own Explanation : (1) Date: This column is used to show the date of the transaction (2) Particulars: This column is used to write the name of the accounts debited or credited. (3) J.F.: This column is used to show the page number of journal on which the transaction is recorded. (4) Amount : The debit side amount column shows the amounts of the account debited, and credit side amount column shows the amount of the account credited. munotes.in

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27 Accounting Transactions LEDGER: 1. Record the following transactions in the personal account of Vipul: 1.4.2021 Sold goods to Vipul – 6,000 5.4.2021 Cash received from Vipul – 5,800 and allowed him discount – 200 18.4.2021 Vipul purchased goods – 8,000 30.4.2021 Received cash from Vipul on account Rs.4,500 1.5.2021 Balance from last month b/d – 3,500 12.5.2021 Sold goods to Vipul 12,000 22.5.2021 Received cash from Vipul – 4,850 and allowed him discount – 150 31.5.2021 Received cash in full settlement of Vipul’s A/c – 10,250 Solution: Vipul’s A/c Date Particulars Rs. Date Particulars Rs. 1.4.2021 To Sales 6,000 5.4.2021 By cash 5,800 18.4.2021 To Sales By Discount allowed 200 8,000 30.4.2021 By Cash 4,500 30.4.2021 By Balance C/d 3,500 14,000 14,000 1.5.2021 To Balance b/d 3,500 22.5.2021 By Cash 4,850 12.5.2021 To Sales 12,000 By Discount allowed 150 31.5.2021 By Cash 10,250 By Discount allowed (Bal.fig) 250 15,500 15,500 2.4 SUBSIDIARY BOOKS Meaning:- In a small business all transactions of purchase, sales, cash etc. are recorded in a single Journal. No attempt is made to classify the transactions. But in a large business, transactions are first classified into the following main groups: (1) Receipt and payment of cash (2) Purchase of goods on credit (3) Sale of goods on credit munotes.in

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28 Introduction to Financial Accounts
28 (4) Goods returned by our customers (5) Gods returned by us to our suppliers and (6) Other transactions. When the transactions are numerous, it is better to record each such group of transactions in a separate book. Each separate book is called a subsidiary book. 2. Record the following transactions for the month of January 2021 in the purchase book of M/s. Vijay Mart: Jan 4 Purchased from M/s Digital Mart: 20 Black & White T.Vs @ Rs.5,200 per piece. 10 Colour T.Vs @ Rs.12,000 per piece. Trade discount on all items @ 12% Jan 10 Purchased from M/s Ashok Mart; 12 Video tapes @ Rs. 600 per piece. 8 Philips tape recorders @ Rs.2,500 per piece. Jan 19 Purchased from M/s Reliance Mart: 10 LG Steros @ Rs. 3,500 per piece 8 LG Colour T.Vs @ Rs.25,000 per piece. Trade discount @ 15% Jan 24 Purchased from M/s. Yadav Mart: 200 Audio Cassettes @ Rs.25 per piece 30 Equity toasters @ Rs.500 per piece Also show posting of the above transactions into ledger accounts from purchase book. Solution: Books of M/s. Vijay Mart PURCHASES BOOK Date Name of the supplier L.F. Inward
Invoice
No. Details
Rs. Amount
Rs. 4.1.21 M/s. Digital Mart : 20 B/W T.Vs @ Rs.5,200 per piece. 1,04,000 10 Colour T.Vs at Rs.12,000 per
piece. 1,20,000 2,24,000 Less: Trade discount @ 12% 26,880 1,97,120 10.1.21 M/S. Ashok Mart: 12 Video tapes @ Rs.600 per piece. 7,200 8 Philips tape Recorders at Rs.2,500
per piece munotes.in

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29 Accounting Transactions Date Name of the supplier L.F. Inward
Invoice
No. Details
Rs. Amount
Rs. M/S. Reliance Mart : 20,000 27,200 19.1.21 10 LG Stereos @ Rs.3,500 per
piece. 8 LG Colour T.Vs @ 25,000 per
piece. 35,000 2,00,000 Less: Trade discount @ 15% 2,35,000 M/s. Yadav Mart: 35,250 1,99,750 24.1.21 200 Audio Cassettes at Rs.25 per
piece 30 Equity toasters @ Rs.500 per
piece 5,000 15,000 20,000 Total 4,44,070 LEDGER ACCOUTS Purchases A/c 31.1.21 To Sundries (as per purchase
book) 4,44,070 M/s. Digital Mart A/c 4.1.21 By Purchases A/c 1,97,120 M/s. Ashok Mart A/c 10.1.21 By Purchases A/c 27,200 M/s. Reliance Mart A/c 19.1.21 By Purchases A/c 1,99,750 M/s. Yadav Mart A/c 24.1.21 By Purchases A/c 20,000 munotes.in

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30 Introduction to Financial Accounts
30 3. Enter the following transactions in the Sales book of M/s. Saroj & Sons and post them into ledger: 2.5.21 Sold to M/s. R& Bros: 200 pieces long cloth at Rs.90 per piece 300 pieces shirting @ Rs.110 per piece 5.5.21 Sold to M/s. G& Verma: 20 pieces Coating at Rs.250 per piece 16.5.21 Sold to M/s. M& Jain: 250 blankets @ Rs.50 each 120 blankets @ Rs.75 each 20.5.21 Sold 20 shirts to cheap stores @ Rs.30 each for cash 25.5.21 Sold old furniture to M/s Santhosh & Co. on credit Rs.800 It is the practice followed by M/s. Saroj & Sons to allow 10% trade discount on all sales. Solution: Books of M/s. Saroj & Sons SALES BOOK Date Name of the customer L.F. Outward
Invoice No. Details Amount
Rs. 2.5.21 M/s. R&Bros: 200 Pieces long cloth @ Rs.90 18,000 300 Pieces shirting at Rs.110 33,000 51,000 Less: Trade discount @ 10% 5,100 45,900 5.5.21 M/s. G & Verma: 20 pieces coating at Rs.250 5,000 Less : Trade discount @ 10% 500 4,500 16.5.21 M/s.M & Jain: 250 blankets @ Rs.50 12,500 120 blankets at Rs.75 9,000 21,500 Less: Trade discount at 10% 2,150 19,350 Total 69,750 munotes.in

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31 Accounting Transactions LEDGER ACCOUNTS Sales A/c 31.5.21 By Sundries
(as per Sales Book) 69,750 M/s. R& Sons A/c 2.5.21 To Sales
A/c 45,900 M/s G & Verma A/c 5.5.21 To Sales
A/c 4,500 M/s. M & Jain A/c 16.5.21 To Sales
A/c 19,350 4. Prepare Purchase returns book and sales returns book from the following data: 1.8.21 Purchased goods returned to Aman – 205 3.8.21 Received goods returned by Akash – 300 5.8.21 Goods returned to Anuja – 500 7.8.21 Sales returns of Rs.1,260 by Suman 15.8.21 Returned defective goods to Suraj – 1,280 18.8.21 Damaged goods returned by Sahil – 1,120 23.8.21 Outward returns to Reshma - 275 29.8.21 Inward returns by Hemant – 750 30.8.21 Returned inferior goods to Riya -800 31.8.21 Reena returned goos to us – 1,330 Solution: Purchase Returns Book Date Name of the
Supplier Debit Note No. L.F. Amount
Rs. 1.8.21 Aman 205 5.8.21 Anuja 500 15.8.21 Suraj 1,280 23.8.21 Reshma 275 30.8.21 Riya 890 Total 3,150 munotes.in

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32 Introduction to Financial Accounts
32 Sales Returns Book Date Name of the
Customer Credit Note No. L.F. Amount
Rs. 3.8.21 Akash 300 7.8.21 Suman 1,260 18.8.21 Sahil 1,120 29.8.21 Hemant 750 31.8.21 Reena 1,330 Total 4,760 TYPES:- Each subsidiary book records a particular group of transactions. Following chart shows which subsidiary book record what group of transactions. No TYPE OF BOOK TYPE OF TRANSACTIONS 1. Cash book Receipts and Payments of cash 2. Purchase book Credit Purchases 3. Sales book Credit sales 4. Sales returns book Sales returns 5. Purchase return book Purchase returns 6. Journal proper Other transactions. ADVATAGE OR NEED:- 1. Divisional into Small Books:- Divisional o Journal leads to division of one big Journal Book into many smaller Subsidiary Books which are easier to handle. 2. Divisional of Recording Work:- Division of Journal leads to division of recording work. A single Journal can be written by a separate person at a time. Since each subsidiary book can be written by a separate person, the books are written faster and are always up-to-date. 3. Division of Posting Work:- Division of Journal leads to division of posting work. A single Journal can be used at a time either for recording or posting. When one subsidiary book is being written, another subsidiary book can be posted. Th7us, Ledger can be posted faster and is always up-to-date. 4. Classified Details:- Each subsidiary book shows detail regarding a particular group of transactions. Thus, Purchase Book shows details of total purchases, Sales Books shows details of total sales etc. Such munotes.in

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33 Accounting Transactions details are not available in the single Journal. The subsidiary books can also be designed to give more details such as Quantities purchased or sold, Product-wise details and so on. 5. Reduces Recording & Posting Work:- In subsidiary books the common account (purchase a/c, sales a/c, etc.) is not debited or credited for every transaction. Since it is understood that all entries say in the Purchase Book refer to credit purchases, there is no need to write narration in the subsidiary book. The posting into the common account is made only once every month and that too only for the total amount. Thus, when subsidiary books are used, the book-keeping work of recording and posting is reduced to a great extent. 2.5 CASH BOOK It has already explained that all credit transactions of business are recorded in a separate subsidiary book according to its nature. Cash book is maintained to record all cash transactions of the business. It is a very important subsidiary book because 1. The number of cash transaction is quite large in every business, 2. The chances of fraud being committed regarding cash are higher as compared to other assets. A strict control is required. A properly maintained cash book helps in achievement this object, 3. Cash is the backbone of a business. Timely payment to its creditor increases the reputation of the business. Similarly timely payment form debtors improves the financial position of business. 4. Cash book performs dual function of journal as well as ledger. All cash transactions are directly recorded in the cash book so it serves the purpose of journal. Every page of the cash book displays a cash account, and hence it is not necessary to open cash account in the ledger. The main purpose of maintaining cash book is to achieve the following four objects: 1. Recording all transaction pertaining to cash, either receipts or payments, 2. ascertainment of the balance of cash on hand and a bank balance, 3. Verification of correctness of cash and bank balance, and 4. To save time and labour by writing cash and bank transactions without passing journal entries. Meaning : Cash book is a book wherein all day – to – day cash transaction are recorded directly. It is a book of original entry. It is written on the basis of cash munotes.in

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34 Introduction to Financial Accounts
34 receipts and cash vouchers. It avoids the requirement of journal entries and ledger posting of cash transactions in journal and ledger. It has two sides namely – 1. Left-hand side or receipt side. 2. Right-hand side or payment side. Like ledger account, all cash receipts are entered o the debit side (receipts side) and all cash payments are entered on the credit side (payments side). The proforma of Cash Book is as follows: Dr. Cash Account Cr Date Particulars L.F. Rs. Date Particulars L.F. Rs.



Total


Total Cash Book is also known as Cash Journal. Features: The following are the main features of cash book – 1. It is a book of original entry. 2. It records only the transactions pertaining to cash. 3. It functions as cash journal as well as a ledger account for cash. 4. It is written on the basis of cash memo, receipts, vouchers form. 5. It shows receipts (debit)and payment (credit) side. 6. It results in saving of labour, time, stationary, and business cost. 7. It is considered as an asset of the business organization. Types of Cash Book: The following are the different types of Cash Book : Simple or Single Column Cash Book. Double or Two Columns Cash Book. o Cash Book with Cash and Discount columns. o Cash Book with Bank and Discount columns. o Cash Book with Cash and Bank Columns. Triple or Three Columns Cash Book or Cash Book with Cash, Discount and Bank Columns. Petty Cash Book or Multi Columns Cash Book. munotes.in

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35 Accounting Transactions Types of Cash Book : 2.5.1. Simple/Single column cash book : Such cash book appears like an ordinary account with one amount column on each side. Unlike an account it has an additional receipt and voucher column on debit side and credit side respectively. The debit side of the cash book is meant for recording all the receipts and so it is known as “Receipt Side”. The credit side of the cash book is meant for recording all payments so it is known as “Payment Side”. On receipt side the word “To” appears because cash comes in the business. Similarly on payment side the word “By” appears because cash goes out from the business. The cash book always shows debit balance. Performa of Simple/Single Column Cash Book : Dr Cash Book Cr Date Receipts R.N. L.F. Amt
(Rs.) Date Payment V.N L.F. Amt.
(Rs)
Total Total Source Documents for Accounting: 1. Source Documents: Source Document ( also known as voucher) is a record of each transaction. As soon as any transaction takes place, a voucher is prepared giving details of the transactions. For example, As soon as cash is paid, a Cash payment voucher is prepared. The vouchers is prepared on the printed from with the name of the concern printed on top. It contains details such as the Serial Number of Voucher, Date of Payment, name of payee, head of account to be debit, discription of transaction, amount etc. The cash payment voucher is sign by the receiver to acknowledge receipt of cash, by the authorized officer to indicate approval of payment and by the person preparing the voucher. 1. Debit Note: It is a statement including the value of goods returned by the buyer to supplier. It is sent by the buyer to the seller along returned. It states that the party to whom is prepared. It is printed usually on red colour paper. 2. Credit Note: Creditor/ Supplier prepares Credit note on receipt of goods returned by customer/debtor. It is sent by the seller to the buyer. This note states the value of the goods received on return and the party to whom it was sent is credited in the books. It is the source of document from which Sales Return Book is prepared. It is printed usually on the Yellow colour paper. Bank Documents: (1) Pay in Slip: Pay in Slip is a document prepared by the depositor of bank for depositing cash or Cheques. Pay in slip shows details regarding from whom cash or cheque is received. While depositing munotes.in

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36 Introduction to Financial Accounts
36 Cheques, they are attached to the pay in slip and deposited in the bank. Bank collects the amount of cheque. It is evidence of the cash or cheque depositing in to the bank account. The pay in slip has a detachable part called counter foil. The receiving cashier of the bank affixes the bank rubber stamp on the counter foil to acknowledge the receipt of cash or cheque. The cheque is sent to the concerned bank of the payer for collection. (2) Withdrawal Slip: It is a document used in bank for withdrawing amount from the account when account-holder does not possess the cheque-book. He uses this document to withdraw the money from his/her account. Only an account-holder can use this document. 2.5.2 Double \ Two column Cash book: Simple cash book does not have discount column. Hence, the exact nature of receipts and payments cannot be ascertained. However the cash discount received and allowed both recorded in the cash book along with cash receipt and payments respectively. This becomes necessary for a businessmen who receives discounts form his supplier \ creditors and allows discounts to his customers\ debtors. Trade discount does not appear in the books of accounts. So, the cash book contains two columns on both the sides of cash book such as – 1. Cash and discount column 2. Cash and bank column 3. Bank and discount column. 1. Cash Book with cash and discount columns: Double column Cash book is often used by a trader who allows discounts when payment is received from a customer or debtor and earns discount when payment is made to suppliers or creditor. Cash received will be entered on receipt side in cash column and discount allowed is entered in the discount column on receipts side only. Similarly actual cash paid will be entered in discount column on payment side itself. Cash book also performs the function of cash account. Therefore, a separate cash account need not be open in the ledger. But in cash of discount it is not so. Positing from the discount column will be made to ledger account. The discount column of the both side are not to be balance since they perform different function. The debit side discount column show total amount of discount allowed, whereas credit side discount column represents total amount of discount received and earned. At the end of specific period (i.e. day, week or month) the total of debit discount column is posted to discount allowed account, whereas the total of credit side discount column is posted to discount received earned account. Balance of discount column: It should be noted that the discount column are not balanced. They are merely totaled. Then the total of discount received column will be created in Discount Received A/C in the ledger and total of discount allowed column will be debited in Discount Allowed A/C in the ledger. Cash column are balanced in similar way as in simple cash book already shown. munotes.in

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37 Accounting Transactions Ruling of Double/Two Column Cash Book: Dr. Cash Book with Cash and Discount Column Cr. Date Receipt R.N. L.F Dis. Cash Date Payment V.N. L.F Disc. cash

2. Cash Book with Bank And Discount columns: Few traders, to maintain complete control on amount received and paid, deal exclusively through Bank. They deposit all cash received into the Bank and make all payment by cheques. On receipts of cash \ cheque, a recording is made on receipts side in cash Book as 1. Date of receipt in date column 2. Name of the account from whom the benefit of cash had been received in receipt column 3. The amount of cash \ cheque received in bank column. 4. If any discount to the party in discount column. If any payment is made to a creditor or supplier or for ant other purpose a recording is made on payment side of cash book as 1. Date of payment in fate column 2. Name of account to whom the benefit of cash has been given in payments column. 3. Amount of cheque issued \ paid in the column. 4. Discount received \ earned from the party in discount column. All account from which cash benefit is received are credited whereas all accounts to whom cash benefit is given are debited in the ledger. Discount columns are totaled and posted as (1) Total on receipts side to the debit on Discount Allowed Account, (2) Total of payment side to the credit of discount Received account. Bank A/c need not be opened in the ledger, as the Bank column in Cash book performs all the functions of Bank A/c. 3. Three Column Cash Book: In Day to Day business only hard cash is not used. Along with cash, bank money (i.e. cheque) is also used. Trader must record both the transaction as cash transaction only but actual cash must be recorded in cash column and bank money must be recorded in bank column. Therefore, he operates such a cash book which contains three column on both side such cash column, bank column and discount column. Such type of book is known as “Three column cash book.” In three column cash book, the cash column represents cash a/c and bank column represents bank a/c. Therefore, it is not necessary to open separate bank a/c or cash a/c in ledger. Specimen of three column cash book such as_ munotes.in

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38 Introduction to Financial Accounts
38 Date Recpt R.
No. L.F. Disc.
(Rs.) Cash
(Rs.) Bank
(Rs.) Date Payments V.
No. L.F. Disc.
(Rs.) Cash
(Rs.) Bank
(Rs.) Total Total Simple Cash Book Enter the following transactions in a simple Cash Book of M/S. Suryabhan 2021 1.4.21 Commenced business with Cash – 24,000 5.4.21 Bought goods for Cash -6,000 10.4.21 Goods Sold for Cash – 11,200 13.4.21 Paid into Bank – 2,500 14.4.21 Sold goods to Ganesan on Credit -9,000 15.4.21 Bought goods from Mohan on Credit -13,600 20.4.21 Purchased furniture -9,600 21.4.21 Purchased Stationery -160 23.4.21 Received Cheque from Ganesan – 9,000 25.4.21 Paid Mohan -13,600 26.4.21 Received Commission -740 27.4.21 Paid Telephone Chages -300 30.4.21 Drawn from Bank -3,800 Solution: Cash Book of M/s. Suryabhan (Single Columm) Date Particulars R.N. L.F. Amount Date Particulars V.N. L.F. Amount 1.4.21 To Capital 24,000 1.4.21 By Purchases 6,000 10.4.21 To Sales 11,200 13.4.21 By Bank 2,500 23.4.21 To Ganesan 9,000 20.4.21 By Furniture 9,600 26.4.21 To
Commission 740 21.4.21 By Stationery 160 30.4.21 To Bank 3,800 25.4.21 By Mohan 13,600 27.4.21 By
Telephone
Charges 300 30.4.21 By Balance
C/ d 16,580 48,740 48,740 1.5.21 To Balance
c/d 16,580 munotes.in

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39 Accounting Transactions 5. DOUBLE COLUMN CASH BOOK Enter the following transactions in Aman’s Cash book with discount and Cash Columns 1.1.21 Cash balance – 18,500 3.1.21 Cash Sales – 33,000 7.1.21 Paid Dravid -15,850 Discount allowed by him – 150 13.1.21 Sold goods to Manohar on credit – 19,200 15.1.21 Cash withdrawn for personal expenses – 2,400 16.1.21 Purchased goods from Charles on credit – 14,300 22.1.21 Paid into Bank -22,750 25.1.21 Cash received from Manohar – 19,000 Allowed him discount – 200 26.1.21 Drew a Cheque for office use – 17,500 27.1.21 Paid Cash to Saravanan – 2,950 Discount received from him – 50 28.1.21 Paid Cash to Charles less discount -14,200 29.1.21 Cash Purchases – 13,500 30.1.21 Paid for Advertising – 600 31.1.21 Paid Salaries -12,000 Solution: Cash Book of Mr. Aman (Double Column) Date Particulars R.N. L.F. D/A Cash Date Particulars R.N. L.F. D/R Cash 1.1.21 To Bal b/d 18,500 7.1.21 By Dravid 150 15,850 3.1.21 To Sales 33,000 15.1.21 By
Drawings 2,400 25.1.21 To
Manohar 200 19,000 22.1.21 By Bank 22,750 26.1.21 To Bank 17,500 27.1.21 By
Saravanan 50 2,950 28.1.21 By Charles 100 14,200 29.1.21 By
Purchases 13,500 30.1.21 By
Advertising 600 31.1.21 By Salaries 12,000 31.1.21 By Bal c/d 3,750 200 88,000 300 88,000 1.2.21 To Bal b/d 3,750 munotes.in

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40 Introduction to Financial Accounts
40 6. TRIPLE COLUMN CASH BOOK From the following transactions, prepare Three-Column Cash book of Sadanand for the month of Aug. 2021 1.8.21 Cash balance – 20,000 Bank balance -23,000 3.8.21 Paid rent by Cheque – 5,000 4.8.21 Cash received on account of Cash sales - 6,000 6.8.21 Payment for Cash purchases -2,000 8.8.21 Deposited into Bank – 8,000 9.8.21 Bought goods by Cheque -3,000 10.8.21 Sold goods to Nathan on Credit – 7,120 12.8.21 Received Cheque from Madan -2,900 Discount allowed to him – 100 13.8.21 Withdrew from Bank for office use -4,350 14.8.21 Purchased furniture by cheque -1,260 15.8.21 Received a cheque for Rs. 7,000 from Nathan in full settlement of his account, which is deposited into Bank. 17.8.21 Withdrew cash for personal use from the Bank – 1,200 18.8.21 Swamy, our customer has paid directly into our Bank A/c – 4,000 19.8.21 Parthi settled his account for Rs.1,250 by giving a Cheque for -1,230 20.8.21 Parthi's Cheque sent to Bank for Collection – 21.8.21 Received from Ravi a Currency note for Rs. 1,000 and gave him Change for it. 22.8.21 Received Cheque from Kamal for Rs. 6,000 in full settlement of his account of Rs.6,200 Deposited Kamal's Cheque into Bank. 25.8.21 Paid into Bank – 9,000 29.8.21 Parthi's Cheque returned dishonoured. 31.8.21 Paid Salaries – 10,000 Solution: Cash Book of Mr. Sadanand ( Three Column) Date Particulars R.N. L.F. D/A Cash Bank Date Particulars V.N. L.F D/R Cash Bank 1.8.21 To Bal b/d 20,000 23,000 3.8.21 By Rent 5,000 4.8.21 To Sales 6,000 6.8.21 By purchases 2,000 8.8.21 To Cash (c) 8,000 8.8.21 By Bank (c) 8,000 munotes.in

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41 Accounting Transactions 12.8.21 To Madan
A/c 100 2,900 9.8.21 By Purchases 3,000 13.8.21 To Bank (c) 4,350 13.8.21 By Cash (c) 4,350 15.8.21 To Nathan
A/c 120 7,000 14.8.21 By Furniture 1,260 18.8.21 To Swamy
A/c 4,000 17.8.21 By Drawings
A/c 1,200 19.8.21 To Parthi
A/c 20 1,230 20.8.21 By Bank (c) 1,230 20.8.21 To Cash (c) 1,230 25.8.21 By Bank (c) 9,000 22.8.21 To Kamal
A/c 200 6,000 29.8.21 By Parthi A/c 1,230 25.8.21 To Cash (c) 9,000 31.8.21 By salaries 10,000 31.8.21 By Bal c/d 4,250 42,190 440 34,480 58,230 34,480 58,230 1.9.21 To Bal b/d 4,250 42,190 7. PETTY CASH BOOK Petty Cashier received Rs. 600 on April 1, 2021 from the head cashier. Prepare a Petty cash book on the imprest system for the month of April 2021 from the following items: 3.4.21 Stamps – 50 5.4.21 Taxi fare – 100 6.4.21 Pencils & Pads -75 7.4.21 Registry -25 10.4.21 Speed Post -45 12.4.21 Telegram – 35 15.4.21 Refreshment – 55 16.4.21 Auto fare -20 19.4.21 Typing Paper -60 20.4.21 Bus fare -15 22.4.21 Trunk calls -43 25.4.21 Office cleaning – 18 30.4.21 Courier Services -17 Show the analysis of payments as Postage & Stamps. Telephone and Telegrams, Conveyance, Stationery and Sundry expenses. Assume imprest amount of Rs 600 Solution: PETTY CASH BOOK Amount
Received CBFN Date Particulars V.N. Total
Payments
Rs. Postage
&
stamps Telephone
&
Telegram Conveyance Stationery Sundries 600 1.4.21 To Cash - 3.4.21 By Stamps 50 50 5.4.21 By Taxi fare 100 100 munotes.in

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42 Introduction to Financial Accounts
42 6.4.21 By Pencils
&
Pads 75 75 7.4.21 By Registry 25 25 10.4.21 By Speed
post 45 45 12.4.21 By
Telegram 35 35 15.4.21 By
Refreshment 55 55 16.4.21 By Auto fare 20 20 19.4.21 By Typing
paper 60 60 20.4.21 By Bus fare 15 15 22.4.21 By Trunk
calls 43 43 25.4.21 By office
cleaning 18 18 30.4.21 By courier
services 17 17 558 137 78 135 135 73 30.4.21 By Bal c/d 42 600 600 42 1.5.21 To Bal b/d 558 To Cash Journal entry Date Particulars L.F. Debit Credit 30.4.21 Postage A/c Dr.
Telephone & Telegram A/c Dr.
Conveyance A/c Dr.
Stationery A/c Dr.
Sundry Expenses a/c Dr.
To Petty Cash A/c
(Being the analysis of Petty cash book for the month of April) 137
78
135
135
73






558 8. Bills Receivable Book and Bills Payable Book Record the following transactions in B/R and B/P Books of Mr. Gemi and Post them into ledger 1.3.21 Received a bill from Velu at 3 months for Rs. 1,000 3.3.21 Accepted a bill 2 m/d for Rs. 3,000 drawn by Saravana & Co. 8.3.21 A bill at 60 dd for Rs. 1,200 drawn by M/'s. Sarathy & Sons was accepted this day 15.3.21 Acceptance received from Mary & Sons for 2 months for Rs. 1,150 25.3.21 Gave acceptance to Mr. Balaji's bill for Rs. 1,300, payable 3 M/d. Solution munotes.in

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43 Accounting Transactions Bills Receivable book Serial
No. Date of
Receipt From
Whom
Received Name of
Acceptor Where
payable Date of
bill Term When
due L.F. Amount Remarks 1 1.3.21 Velu Velu - 1.3.21 3
months June 4 1,000 2 15.3.21 Mary &
Sons Mary &
Sons - 15.3.21 2
months May
18 1,150 Total 2,150 Bills Payable book Serial
No. Date
of Bill Name of
Drawers Name
of
Payee Term When
Due L.F. Amount Remarks 1 1.3.21 Saravan &
Co. - 2
months May 6 3,000 2 8.3.21 M/s. Sarathy
& Sons - 60 days May
10 1,200 3 25.3.21 Mr. Balaji - 3
months June
28 1,300 Total 5,500 LEDGER ACCOUNTS Bills Receivable A/c 31.3.21 To Sundries
(as per B/R book) 2,150 Velu A/c 1.3.21 By B/R A/c 1,000 Mary & Sons A/c 15.3.21 By B/R A/c 1,150 Bills payable A/c 31.3.21 By Sundries
(as per B/P book) 5,500 Saravanan & Co. A/c 3.3.21 To B/P A/c 3,000 M/s. Sarathy & Sons A/c 8.3.21 To B/P A/c 1,200 Balaji A/c 25.3.21 To B/P A/c 1,300 munotes.in

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44 Introduction to Financial Accounts
44 Bank Reconciliation Statement A bank reconciliation statement could be defined as the summary of the banking and business accounts that reconciles a company's bank account with its financial record. The statement contains a record of all the deposits, withdrawals and other financial activities with a bank over a certain period of time. Steps Involved in Preparation of Bank Reconciliation Statement : 1. Start with your closing balance for the prior month. That will be your starting number. 2. Add any deposits that may not have cleared or deduct any checks in transit. This is your adjusted cash balance. 3. Now that you have your adjusted cash balance, add in any earned interest or deduct any fees, non-sufficient funds (NSF) checks, or penalties that may not have been recorded in your company records. 4. Make sure that your deposits and cleared checks match the amounts that the bank recorded. The ending balance should then be the same. 5. If there are discrepancies, investigate to see what might have been missed in your recording or errors that may have been made at the bank. 2.6 EXPENDITURE AND RECEIPTS
2.6.1 MEANING AND PURPOSE OF CAPITAL EXPENDITURE Capital expenditure is that expenditure, the benefit of which is enjoyed, not only in the year in which such expenditure is incurred but over many years. Such expenditure usually results in purchase or acquisition of assets and properties which may be used for many years. The main purpose of such an expenditure is to increase the earning capacity of the business. For example Purchase of Plant and machinery, land and building etc is a capital expenditure. Capital expenditure is shown in the balance sheet. The features of capital expenditure are: 1. The benefit of such an expenditure is not exhausted in one year but the benefit of such an expenditure is enjoyed for a longer period.
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45 Accounting Transactions 2. Such an expenditure is of a non-recurring nature. It does not occur regularly. 3. The amount spent on such an expenditure is generally large but not always large. Expenditure incurred for the following purpose is capital expenditure. 1. Purchases of assets such as plant and machinery, Land and Building. 2. Expenditure incurred on an old asset bought to put it in a working condition. For example repairs expenditure incurred on an second hand machine bought. 3. Expenditure incurred for putting a new asset to use e.g. installation charges for Machine. 4. Expenditure incurred so it becomes economical to operate a asset, thereby reducing the cost of operation. For example converting a petrol engine taxi in to a diesel engine taxi. 5. Expenditure incurred on extension or improvement of an asset, so as improve the earning capacity of the business. e.g. expenditure incurred on converting a 35MM screen in to 70 MM screen. 6. Expenditure incurred for acquiring a benefit of a permanent nature or a valuable right e.g. expenditure incurred for acquiring patent rights. 7. Expenditure incurred on improving the existing fixed assets. However expenditure incurred on maintaining fixed asset is a revenue expenditure. 2.6.2. MEANING AND PURPOSE OF REVENUE EXPENDITURE Following are the features of revenue expenditure. 1. The benefit of such an expenditure is exhausted in a short period which is less than the accounting period. 2. Such an expenditure is incurred to carry on day to day business activities. 3. Such an expenditure is a recurring expenditure 4. Such an expenditure may be incurred to maintain the assets. 5. The amount of such expenditure is generally small, but not always small. 6. Such an expenditure is shown in profit and loss account. Revenue expenditure may be incurred for the following purposes. 1. Expenditure for purchasing the goods for resale or using them in manufacturing. munotes.in

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46 Introduction to Financial Accounts
46 2. Expenditure incurred on maintaining and operating the asset. 3. Expenditure incurred on protection of business. 2.6.3. MEANING OF DEFERRED REVENUE EXPENDITURE All expenditure incurred for carrying on the normal business activity is known as revenue expenditure. The benefit of such expenditure is enjoyed in the year in which it is incurred. However, sometime a heavy revenue expenditure may be incurred in one year such that its benefit of it may arise or enjoyed not in one year but also in the following two or more years. So much of revenue expenditure which is likely to benefit in future is called deferred revenue expenditure. Consider Advertisement expenditure. Normal Advertisement expenditure incurred is a revenue expenditure which is written off to profit and loss account. However, heavy expenditure incurred on advertisement for launching a new product may benefit for two or more years. In such a case, so much of the expenditure which benefits the current year can be treated as revenue expenditure, and debited to profit and loss account and the balance may be carried forward as Deferred revenue expenditure, i.e., the revenue expenditure which is postponed. 2.6.4. Write Short Notes on i) Capital Receipts. ii) Revenue Receipts. i) Capital Receipts are those receipts which are non-recurring in Nature. Such receipts usually result on account of Sale of Asset or Increase in Liability. Examples of Such Receipts are Amount of Loan raised, Receipts on account of sale of assets, or Amount received on account of issue of Shares. Such Receipts affect the items appearing in the Balance Sheet. Such Receipts are not considered as Income and hence are not included in Profit and loss Account. ii) Revenue Receipts: Such Receipts result from normal business Transaction. Such receipts do not result in reduction of Assets or increase of Liability. Such Receipts are treated as income are credited to Profit and Loss Account. Examples of such receipts are receipts on account of Interest, commission, sales, Royalties etc. 2.6.5. Distinguish between capital Expenditure and Revenue Expenditure? CAPITAL EXPENDITURE AND REVENUE EXPENDITURE The following are the points of distinction. 1. Benefit munotes.in

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47 Accounting Transactions The benefit of capital expenditure is not exhausted in year but is enjoyed for many years. The benefit of revenue expenditure is exhausted in a short period which is less than the accounting period. 2. Result Capital expenditure results in acquisition of an asset. Revenue expenditure is incurred in the normal course of business to carry on the routine business transactions. 3. Occurrence. A Capital expenditure is usually non recurring in nature. Revenue expenditure is of a recurring nature. 4. Object. The object of capital expenditure is to improve the earning capacity of the business. Revenue expenditure is incurred for normal business operations. 5. Improvement Capital expenditure is incurred to bring improvement in the assets. Revenue expenditure is incurred to maintain the asset. 6. Disclosure Capital expenditure is disclosed in the balance sheet. Revenue expenditure is shown in Profit and loss account 2.6.6. IMPORTANCE OF ALLOCATION Importance of Allocation :- Final accounts prepared at the end of the year consist of profit and loss Account or Income Statement and Balance sheet. These final accounts or Income Statement and Balance sheet are prepared from the Trial Balance. All the accounts appearing in the trial balance are to be taken to either Trading and Profit and loss Account or Balance sheet. It is therefore, necessary to know what is meant by revenue expenses and capital expenses, and revenue receipts and capital receipts and their importance in the preparation of final accounts. Any error on this account will falsify th final accounts. It is really difficult to lay down the clear cut rule for distinguishing between capital an revenue items. But y applying certain normal norms, they can be distinguished form each other. If capital expenditure is debited to P & L A/c the asset to which capital expenditure relates will be undervalued and secret reserve will be created to the extent of under valuation of assets. Creation of a secret reserve by a public company is not permitted by law. More ever, p & L A/c will be unnecessarily debited and the profit disclosed by profit and loss account will be less than actual profits. munotes.in

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48 Introduction to Financial Accounts
48 If revenue expenditure is not debited to P & l A/c the profit will be inflated. As a result dividend will be paid out of capital which is against the provisions of law. In such a case the auditor can be held responsible for such payment. He may be asked to refund the amount of dividend wrongly paid. The importance of the concept of capital and revenue can be summarized as follows:- 1. It helps to show correct value of assets and liabilities 2. It facilities to show true and fair view of the state of affairs. 3. It facilities to have better future planning of the resources. 4. It enable to have optimum use of the resources. 5. Unpleasant consequences of wrong allocation can be avoided. 2.6.7. PRINCIPLES OF ALLOCATING EXENDITURE The correct allocation of expenditure between capital, Deferred Revenue and Revenue is one of the fundamental problem of accountancy. The difficult of allocating an expenditure between capital and Revenue can be removed by observing the following principles. 1. Acquisition of Assets or goods. If the expenditure is incurred for acquiring the fixed assets then it will be treated as capital Expenditure, but if the expenditure is incurred for acquiring or producing goods, then it has to be treated as Revenue Expenditure. 2. Improvement or Maintenance. If the expenditure is incurred to extend or improve the fixed Assets it will be regarded as capital Expenditure. If it is incurred to maintain the fixed asset in a god working condition, the expenditure is to be treated as Revenue Expenditure. 3. Increase in earning capacity : If the expenditure increases the earning capacity of the business e.g. cost of improving sitting accommodation by a cinema house, then it is to be regarded as capital expenditure but if the expenditure does not result I the increase in the earning capacity of the business then it is to be regarded as Revenue Expenditure. 4. Benefit of the Expenditure If the benefit of the expenditure extends for a long period then it is to be regarded as capital Expenditure. If the benefit of the expenditure is exhausted within the accounting period, it has to be regarded as Revenue expenditure. 2.6.7. In some circumstances, expenditure which is primarily of a revenue nature is treated as capital Expenditure. Some of the examples about the same are given below : munotes.in

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49 Accounting Transactions 1. Legal costs, Brokerage and Stamp duty These expenses in the normal course are revenue expenses. However, legal charges and stamp duty paid in connection with the acquisition of any property are capital expenditure. Also brokerage paid in connection with purchase of shares or any other property is treated as capital Expenditure. 2. Productive Wages Wages paid for manufacturing finished gods for resale is a revenue expenditure. But if wages are paid to workers in connection with the extension to the factory building or for installing a machine has to be capitalized. 3. Freight & Carriage. In the normal course, if freight is paid on Raw Material it will be a Revenue Expenditure but if it is paid on a newly purchased machine then it will be capitalized. 4. Customs & clearing charges. Customs and clearing charges paid in connection with imported machine is to be treated as capital expenditure. 2.6.8. Classification of items into Capital and Revenue. Item Nature of
Expenditure
/ Receipt Reason (1) Cost of replacing
costly spare parts of
a machine Revenue For maintenance of an asset (2) Cost of acquisition
of copyrights Capital New asset acquired (3) Cost of designing a
new product which
did
not come up for
production Deferred
revenue Amount spent on
developing a product.
(Basically, it is a capital
loss/expenditure) (4) Heavy current
repairs
to roof of factory
building Revenue For maintenance of an asset (5) Cost of alteration of
cinema theatre in
accordance with
municipal law Revenue Normal day -to-day
business expenditure Review Questions: Q1. Journalise, Post in to ledger for the following transactions. munotes.in

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50 Introduction to Financial Accounts
50 1. Bought Motor Car worth Rs. 1,00,000 for cash. 2. Purchased Machinery worth Rs. 1,16,000 amount paid in cash. 3. Purchased Typewriter for cash worth Rs. 7,500 5. Purchased a horse for cash Rs 25,000 6. Purchased Machinery from Godrej Ltd. worth Rs. 50,750. 7. Bought goods from Pratik Ltd. Rs 9,000, paid by cheque. 8. Paid cheque of Rs. 17,000 to Tata Ltd for the goods bought earlier. 10. Sold goods worth Rs 1,700 to Gajanan. 11. Sold goods for cash for Rs. 1,400 to Sudhakar. 12. Sold old typewriter for Rs 2500. 13. Cash sales to Vinod Mills Rs. 16,000. 14. Cash sales Rs 2,540. 15. Invoiced goods worth Rs. 1700 to Robert. Robert presented a cheque for the same. 16. Credit sales to Sawant Rs. 5,920. 17. Sold buildings for Rs. 10,000 to Shankar. Q2. Difference between Capital Expenditure v/s Revenue Expenditure  munotes.in

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51 3 DEPRECIATION ACCOUNTING & TRIAL BALANCE Unit Structure : 3.1 Definition of Depreciation,,its Causes & its Need 3.2 Methods of Depreciation 3.3. Examples -Sums on Depreciation 3.4 Preparation of Trial Balance-Its meaning, Characteristics, Objectives, How to prepare Trial Balance, its Format, Practice sum OBJECTIVE After Studying the module student would be able to:-  Understand What is Depreciation, why it is charged  Understand different methods of Depreciation  Know the format of Trial Balance and its format 3.1 DEFINITION "Depreciation means decline in the price or value of an asset. It means gradual diminution in the value of an asset on account of its use. The following are the causes of Depreciation :- 1. Physical Wear & Tear The most important cause of depreciation of an asset is the physical wear and tear of the asset on account of its use. As the asset is used the physical qualities of the asset diminish as a result of which the value of the asset is reduced. 2. Passage of Time Apart from use, the physical qualities of an asset deteriorate due to passage of time. This causes reduction in value of asset. 3. Obsolescence Depreciation may be caused on account of obsolescence. Due to technological development new types of machineries may be invented due to which existing machine may be rendered outdated. 4. Exhaustion Certain assets like mines, quarries etc. get exhausted over a period of time which causes depreciation of these assets. munotes.in

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52 Introduction to Financial Accounts
52 3.1.1. Objects \Necessity of providing Depreciation 1. To find correct profit & loss Depreciation is a non cash expenditure. Depreciation should be provided in the books of accounts to find the correct profits. If depreciation is not provided in the accounts the profits would be overstated. 2 To provide Funds for Replacement of Assets The most important reason for providing depreciation is to keep the funds in the business which can be used for replacement of the asset at the end of the life of asset. When depreciation is provided, the profits are reduced and lesser amount is distributed among the owners of the business, so the amount of funds equivalent to the depreciation remains in the business which can be used to buy new assets. 3. To present "True Financial Position" If depreciation is not provided, the result will be that the asset will be shown at higher value in the Balance sheet i.e. it will be over valued in the balance sheet. If depreciation is not provided the balance sheet will not disclose true financial position. 4. Section 205 of the Companies Act. According to this section for all limited companies, it is provided that the company cannot distribute dividend without providing depreciation. Therefore for companies declaring dividends, it is compulsory to provide depreciation. 3.2 THE DIFFERENT METHODS OF DEPRECIATION ARE 1. Fixed Installment or Straight Line Method or Original Cost system. Under this method a fixed proportion of the original cost of the asset is written off each year, the asset being reduced to nil or break up value at the end of its life. This method is very simple and easy to understand. The calculation of depreciation is not very complicated. This method is suitable for those assets, the working life of which can be easily estimated, e.g. a Lease, a patent etc. This method is not suitable for those assets whose life cannot be estimated as it depends upon its use. If the machinery is used for 3 shifts the wear and tear will be more, than in the case where it is used for 1 shift only. Again, in the case of machinery, difficulty is felt as during the course of the year, additions to the plant &machinery is made and thus calculations will be difficult. munotes.in

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53 Depreciation Accounting &
Trial Balance The other defect of this system is that the charge to profit & loss A\c consisting of depreciation and repairs expenditure relating to the asset over the life of the asset will be inequitable considering the charge for repairs along with depreciation for the maintenance of the assets. 2. Reducing Balance Method or Diminishing Balance Method or Written down Value method. Under this method, depreciation is calculated as a certain percentage of Book value of the asset. This method is commonly adopted for the depreciation of assets which have some residual value, e.g. Plant & machinery Motor Cars, Furniture etc. This system has one important advantage that the charge to the profit & loss A\c. over the life of the asset remains equal, considering the charge for repairs and renewals. The amount of depreciation gradually diminishes whereas the charge for repairs gradually increases as the assets gets older and older. The defect of this system is that it takes a very long time to write down the asset to a reasonable break up value. If the value of an asset is to be bought to a certain value which is about its scrap value the rate of depreciation is to be fixed at a very high level. But if this is done the charge for depreciation in initial years becomes reasonably heavy with a high percentage and if it is lowered to a reasonable level, there is always the danger of inadequate provision. The other drawbacks are that the system does not consider the question of interest charge on the capital outlay involved nor does it make provision for a smooth replacement of the asset when it ceases to be useful. 3. Depreciation Fund method or Sinking Fund Method. Under this system a fixed amount is charged for depreciation to profit & loss A\c. each year, and credited to depreciation Fund A\c. An equal amount of money is invested in securities outside the business at the end of each year. Interest received on such investments is reinvested. At the end of the life of the asset, the investments are sold and the money realised from sale of investment is used to replace the asset. This method is employed where it is desired to make provision for the replacement of a costly asset. e.g. the acquisition of a New Lease. The advantage of this system is that when the asset has to be replaced funds are available by selling the securities. Another advantage is that one can know at any time the original value of the asset as it is always shown in the balance sheet at this price. The disadvantage of this method is that the investment when realised may not give the requisite amount for replacement of the assets because investment may be sold at discount. munotes.in

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54 Introduction to Financial Accounts
54 4. Annuity Method Under this method the total cost incurred in holding the asset is considered as depreciation. The total cost of holding the asset is decline in the value of asset plus the notional interest lost on funds blocked in the asset. The total depreciation to be provided during the life of the asset is equal to cost of the asset plus interest lost on the funds blocked in the asset. When the asset is purchased, asset account is debited with the cost of the asset and at the end of the year notional interest is calculated and debited to asset account and credited to interest amount. This increases the book value of the asset. Depreciation is provided on such an increased book value. This is done every year till the useful life of the asset comes to an end. 5. Insurance Policy Method According to this system, an Endowment Insurance policy is purchased from the Insurance company, so that at the end of a definite period the insurance company will pay the assured sum with the help of which the asset can be replaced. The advantage under the system is that the company is sure about the requisite amount for replacement of the asset. Under Depreciation Fund, investment may be sold at a discount, thus sufficient money may not be available from investment. In the case of Insurance policy system, however, the Insurance Co. will pay the stipulated amount to replace the asset. This method is not suitable for those assets to which many additions are made during the year and the life of which cannot be estimated with any precision. It is suitable for leases, where the life of the asset is definitely known. 6. Depletion or Output Method In the case of wasting Assets such as Mines & Quarries, which have to be replaced, Depreciation is provided on the basis of depletion of the asset caused due to generation of output. Under this method total cost of the asset is compared with the estimated total contents of the mine. and depreciation per unit of out put is calculated. Thus if a mine estimated to contain 1,00,000 tons of Coal is acquired for Rs. 50,0000 the amount of depreciation to be provided will be 50 paise per ton of coal raised. If the output in a particular year is 20,000 tonnes, depreciation will be 20,000 x .5 i.e Rs 10,000. 7. Revaluation Method Under this method, the asset, is revalued each year and the resulting depreciation is charged to profit & Loss A\c. It is suitable for assets which constantly change and whose life is uncertain, e.g. Live stock, Loose tools etc. munotes.in

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55 Depreciation Accounting &
Trial Balance 3.3 EXAMPLES- SUMS Question No.1 Calculate the Rate of Depreciation under Straight Line Method (SLM) from the following: Purchased a second-hand machine for ₹ 96,000, spent ₹ 24,000 on its cartage, repairs and installation, estimated useful life of machine 4 years. Estimated residual value ₹ 72,000. ANSWER: Amount of Depreciation=Cost of Machine−Scrap Value of Machine Life in Years =1,20,000−72,000/4=Rs 12,000 Rate of Depreciation=Amount of Depreciation/Cost of Machine×100 =12,000/1,20,000×100=10%p.a. Question No.2 On 1st April, 2015, X Ltd. purchased a machine costing ₹ 4,00,000 and spent ₹ 50,000 on its installation. The estimated life of the machinery is 10 years, after which its residual value will be ₹ 50,000 only. Find the amount of annual depreciation according to the Fixed Instalment Method and prepare Machinery Account for t he first three years. The books are closed on 31st March every year. ANSWER: Book of X Ltd.
Machinery Account Dr. Cr. Date Particulars J.F. Amount
(Rs) Date Particulars J.F. Amount
(Rs) 2015 2016 April
01 Bank 4,00,000 Mar.31 Depreciation 40,000 April
01 Bank
(Erection
Expense) 50,000 Balance c/d 4,10,000 4,50,000 4,50,000 2016 2017 April
01 Balance b/d 4,10,000 Mar.31 Depreciation 40,000 Balance c/d 3,70,000 4,10,000 4,10,000 2017 2018 April
01 Balance b/d 3,70,000 Mar.31 Depreciation 40,000 Balance c/d 3,30,000 3,70,000 3,70,000 munotes.in

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56 Introduction to Financial Accounts
56 Calculation of Depreciation: Depreciation p.a.=4,00,000+50,000−50,000(Scrap Value)10 years =Rs 40,000 p.a. Question 3: On 1st April, 2014, furniture costing ₹ 55,000 was purchased. It is estimated that its life is 10 years at the end of which it will be sold for ₹ 5,000. Additions are made on 1st April 2015 and 1st October, 2017 to the value of ₹ 9,500 and ₹ 8,400 (Residual values ₹ 500 and ₹ 400 respectively). Show the Furniture Account for the first four years, if Depreciation is written off according to the Straight Line Method. ANSWER: Furniture Account Dr. Cr. Date Particulars J.F. Amount
(Rs) Date Particulars J.F. Amount
(Rs) 2014 2015 April 01 Bank (F1) 55,000 March 31 Depreciation
(F1) 5,000 March 31 Balance c/d
(F1) 50,000 55,000 55,000 2015 2016 April 01 Balance b/d
(F1) 50,000 March 31 Depreciation April 01 Bank (F2) 9,500 F1 5,000 F2 900 5,900 March 31 Balance c/d F1 45,000 F2 8,600 53,600 59,500 59,500 2016 2017 April 01 Balance b/d March 31 Depreciation F1 45,000 F1 5,000 F2 8,600 53,600 F2 900 5,900 March 31 Balance c/d F1 40,000 F2 7,700 47,700 53,600 53,600 2017 2018 munotes.in

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57 Depreciation Accounting &
Trial Balance April 01 Balance b/d March 31 Depreciation F1 40,000 F1 5,000 F2 7,700 47,700 F2 900 Oct. 01 Bank (F3) 8,400 F3 400 6,300 March 31 Balance c/d F1 35,000 F2 6,800 F3 8,000 49,800 56,100 56,100 Working Notes:
Question 4: On 1st April, 2014, A Ltd. purchased a machine for ₹ 2,40,000 and spent ₹ 10,000 on its erection. On 1st October, 2014 an additional machinery costing ₹ 1,00,000 was purchased. On 1st October, 2016, the machine purchased on 1st April, 2014 was sold for ₹ 1,43,000 and on the same date, a new machine was purchased ata cost of ₹ 2,00,000. ANSWER: Machinery Account Dr. Cr. Date Particulars J.F. Amount
(Rs) Date Particulars J.F. Amount
(Rs) 2014 2015 April 01 Bank (M1) 2,50,000 March 31 Depreciation Oct. 01 Bank (M2) 1,00,000 M1 12,500 M2 (6 Months) 2,500 15,000 March 31 Balance c/d M1 2,37,500 M2 97,500 3,35,000
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58 3,50,000 3,50,000 2015 2016 April 01 Balance b/d March 31 Depreciation M1 2,37,500 M1 12,500 M2 97,500 3,35,000 M2 5,000 17,500 March 31 Balance c/d M1 2,25,000 M2 92,500 3,17,500 3,35,000 3,35,000 2016 2016 April 01 Balance b/d Oct. 01 Depreciation (for 6 months) 6,250 M1 2,25,000 Oct. 01 Bank (M1 sold) 1,43,000 M2 92,500 3,17,500 Oct. 01 Profit and Loss (loss on
sale) 75,750 2017 July 01 Bank (M3) 2,00,000 March 31 Depreciation M2 5,000 M3 (for 6
months) 5,000 10,000 March 31 Balance c/d M2 87,500 M3 1,95,000 2,82,500 5,17,500 5,17,500 2017 2018 April 01 Balance b/d March 31 Depreciation M2 87,500 M2 5,000 M3 1,95,000 2,82,500 M3 10,000 15,000 March 31 Balance c/d M2 82,500 M3 1,85,000 2,67,500 2,82,500 2,82,500 Working Notes: 1. Calculation of Deprecation 2. Calculation of profit or loss on sale of Machine 1 Particulars Amount (Rs) Book Value on April 01, 2016 2,25,000 Less: Deprecation for six month (6,250) Book Value on Oct. 01, 2016 2,18,750 Less: Sale Proceeds (1,43,000) Loss on Sale of Machine 75,750
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59 Depreciation Accounting &
Trial Balance Question 5: From the following transactions of a concern, prepare the Machinery Account for the year ended 31st March, 2018: 1st April, 2017 : Purchased a second -hand machinery for ₹ 40,000 1st April, 2017 : Spent ₹ 10,000 on repairs for making it
serviceable. 30th September, 2017 : Purchased additional new machinery for
₹ 20,000. 31st December, 2017 : Repairs and renewals of machinery ₹ 3,000. 31st March, 2018 : Depreciate the machinery at 10% p.a. ANSWER: Machinery Account Dr. Cr. Date Particulars J.F. Amount
(Rs) Date Particular J.F. Amount
(Rs) 2017 2018 Apr.01 Bank (M1) 50,000 Mar.31 Depreciation Sept 30 Bank (M2) 20,000 M1 5,000 M2 (6
months) 1,000 6,000 Mar.31 Balance c/d M1 45,000 M2 (6
months) 19,000 64,000 70,000 70,000 Note: Repair and renewal made on December 31, 2017 will not be recorded in Machinery Account because, this repair was made after putting the Machinery into use. Question 6: An asset was purchased for ₹ 10,500 on 1st April, 2011. The scrap value was estimated to to be ₹ 500 at the end of asset's 10 years' life. Straight Line Method of depreciation was used. The accounting year ends on 31st March every year. The asset was sold for ₹ 600 on 31st March, 2018. Calculate the following. (i) The Depreciation expense for the year ended 31st March, 2012. (ii) The net book value of the asset on 31st March, 2016. (iii) The grain or loss on sale of the asset on 31st March, 2018. munotes.in

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60 Introduction to Financial Accounts
60 ANSWER: Asset Account Dr. Cr. Date Particulars J.F. Amount
(Rs) Date Particulars J.F. Amount
(Rs) 2011 2012 April 01 Bank 10,500 Mar.31 Depreciation 1,000 Mar.31 Balance c/d 9,500 10,500 10,500 2012 2013 April 01 Balance b/d 9,500 Mar.31 Depreciation 1,000 Mar.31 Balance c/d 8,500 9,500 9,500 2013 2014 April 01 Balance b/d 8,500 Mar.31 Depreciation 1,000 Mar.31 Balance c/d 7,500 8,500 8,500 2014 2015 April 01 Balance b/d 7,500 Mar.31 Depreciation 1,000 Mar.31 Balance c/d 6,500 7,500 7,500 2015 2016 April 01 Balance b/d 6,500 Mar.31 Depreciation 1,000 Mar.31 Balance c/d 5,500 6,500 6,500 2016 2017 April 01 Balance b/d 5,500 Mar.31 Depreciation 1,000 Mar.31 Balance c/d 4,500 5,500 5,500 2017 2018 April 01 Balance b/d 4,500 Mar.31 Depreciation 1,000 Mar.31 Bank 600 Mar.31 Profit and Loss
(Loss) 2,900 4,500 4,500 (i) Depreciation Expense for the year ended March 31, 2012 is Rs 1000 (ii) The Net Book Value of the asset on March 31, 2016 is Rs 5,500 (iii) Loss on Sale of the asset on March 31, 2018 is Rs 2,900 munotes.in

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61 Depreciation Accounting &
Trial Balance Question 7: A Van was purchased on 1st April, 2015 for ₹ 60,000 and ₹ 5,000 was spent on its repair and registration. On 1st October, 2016 another van was purchased for ₹ 70,000. On 1st April, 2017, the first van purchased on 1st April, 2015 was sold for ₹ 45,000 and a new van costing ₹ 1,70,000 was purchased on the same date. Show the Van Account from 2015-16 to 2017-18 on the basis of Straight Line Method, if the rate of Depreciation charged is 10% p.a. Assume that books are closed on 31st March every year. ANSWER: Van Account Dr. Cr. Date Particulars J.F. Amount
(Rs) Date Particulars J.F. Amount
(Rs) 2015 2016 April 01 Bank (I) 65,000 March 31 Depreciation (I) 6,500 March 31 Balance c/d (I) 58,500 65,000 65,000 2016 2017 April 01 Balance b/d
(I) 58,500 March 31 Depreciation Oct. 01 Bank (II) 70,000 (I) 6,500 (II)
(for 6
month ) 3,500 10,000 March 31 Balance c/d (I) 52,000 (II) 66,500 1,18,500 1,28,500 1,28,500 2017 2017 April 01 Balance b/d April 01 Bank (I) 45,000 (I) 52,000 April 01 Profit and Loss
(Loss on Sale ) 7,000 2018 (II) 66,500 1,18,500 March 31 Depreciation April 01 Bank (III) 1,70,000 (II) 7,000 (III) 17,000 24,000 March 31 Balance c/d (II) 59,500 (III) 1,53,000 2,12,500 2,88,500 2,88,500 munotes.in

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62 Introduction to Financial Accounts
62 Working Notes 1. Calculation of Annual Depreciation Maruti Van (I)= 65,000*10%=Rs.6,500 Maruti Van (II)= 70,000*10%=Rs.7,000 Maruti Van (III)= 1,70,000*10%=Rs.17,000 2. Calculation of profit or loss on sale of Van (I) Particulars Amount (Rs) Book Value on Apr. 01, 2017 52,000 Less: Sale of Van (45,000) Loss on Sale of Van 7,000 Question 8: A company whose accounting year is a financial year, purchased on 1st July, 2014 machinery costing ₹ 30,000. It purchased further machinery on 1st January, 2015 costing ₹ 20,000 and on 1st October, 2015 costing ₹ 10,000. On 1st April, 2016, one-third of the machinery installed on 1st July, 2014 became obsolete and was sold for ₹ 3,000. Show how Machinery Account would appear in the books of the company. It being given that machinery was depreciated by Fixed Instalment Method at 10% p.a. What would be the value of Machinery Account on 1st April, 2017? ANSWER: Machinery Account Dr. Cr. Date Particulars J.F. Amount
(Rs) Date Particulars J.F. Amount
(Rs) 2014 2015 July 01 Bank (I) 30,000 March
31 Depreciation 2015 Jan. 01 Bank (II) 20,000 I (for 9 months ) 2,250 II 500 2,750 March
31 Balanced c/d I 27,750 II 19,500 47,250 50,000 50,000 2015 2016 munotes.in

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63 Depreciation Accounting &
Trial Balance April
01 Balance b/d March
31 Depreciation I 27,750 I 3,000 II 19,500 47,250 II 2,000 III 500 5,500 Oct. 01 Bank (III) 10,000 March
31 Balance c/d I 24,750 II 17,500 III 9,500 51,750 57,250 57,250 2016 2016 April
01 Balance b/d April
01 Bank I(1/3rd portion) 3,000 I 24,750 April
01 Profit and Loss (Loss on
Sale of I) 5,250 2017 II 17,500 March
31 Depreciation III 9,500 51,750 I (on
2/3rd portion) 2,000 II 2,000 III 1,000 5,000 March
31 Balance c/d I (on
2/3rd portion) 14,500 II 15,500 III 8,500 38,500 51,750 51,750 Working Notes 1. Calculation of Depreciation

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64 Introduction to Financial Accounts
64 Calculation of profit or loss on sale of 1/3rd Portion of Machine I Particulars Amount (Rs) Book Value of 1/3rd portion of Machine I on April 01,
2016 (24,750 × 1/3) 8,250 Less: Sale Value (3,000) Loss on sale 5,250 3.4 TRIAL BALANCE Meaning : A trial balance is a bookkeeping worksheet in which the balance of all ledgers are compiled into debit and credit account column totals that are equal. A company prepares a trial balance periodically, usually at the end of every reporting period. The famous writer R.N. Carter says; A trial balance is a schedule or a list of balances both debit and credit extracted from the accounts in the ledger and including the cash and bank balances from the cash book. According to J.R. Batliboi, A trial balance may be defined as a statement of debit and credit balances extracted from the ledger with a view to testing the arithmetical accuracy of the books. 3.4.1 Characteristics of Trial Balance It appears from the definitions of trial balance that the trial balance contains the following features; 1. The trial balance is neither an account nor a part of it. It is a statement containing all balances of ledger accounts. 2. It is not recorded in any book of account. The trial balance is prepared in a separate sheet or paper. 3. The trial balance is prepared with the balances of accounts at the end of a particular accounting period. A trial balance is prepared before the preparation of financial statements at the end of the accounting period. 4. The statement contains all kinds of accounts, irrespective of their classifications, such as assets liabilities, income-expenses etc. It helps to test the arithmetical accuracy of accounts. munotes.in

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65 Depreciation Accounting &
Trial Balance 3.4.2. Objects of Trial Balance Although trial balance is not an account, it is prepared to fulfill the following objects; • The main object of the trial balance is to proof the arithmetical accuracy of accounts. • It is prepared to check whether the debit and credit accounts of each transaction have been recorded properly. • For the convenient preparation of financial statements, the trial balance is prepared to bring debit and credit ledger balances together. • To proof accurate balancing of a ledger account. • To detect mistakes in the process of accounts, if any. • To provide information to the proper authority in time. • To compare the balances of various ledger accounts of the current year with those of previous year. 3.4.3. How to Prepare a Trial Balance Business transactions are first recorded in the journal and thereafter these are posted in the ledger under different heads of accounts. It may be mentioned that transactions may directly be posted in the ledger accounts without recording them in the journal. At the end of a particular accounting period, a trial balance is prepared in a separate sheet of prescribed form recording debit ledger balance, in debit column and credit ledger balances in credit money column. Besides ledger balances, cash balance and bank balance of cash book of that particular date are also included in the trial balance. Thereafter total of debit and credit money columns of a trial balance is calculated. Agreement of trial balance is the conclusive evidence of the accuracy of the ledger and trial balance. 3.4.5. The format for Preparing Trial Balance A short description of the format of the trial balance is given below: 1. Titles: In the middle of the format name of the company, the trial balance and date of preparation are written. 2. Accounts serial number: In this column, the serial numbers of ledger accounts are written. munotes.in

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66 Introduction to Financial Accounts
66 3. Account Titles: The serial number of that account of the ledger which has been written in the first column, the full title of that account is written in this column. For example, Capital account, Furniture account, Cash account etc. 4. Ledger Folio: The number of the ledger page from where ledger balances are brought is written in this column. 5. Debit balance: All debit balances of ledger accounts are written in this column. 6. Credit balance: All credit balances of ledger accounts are written in this column. 3.4.6. Important to remember: 1. Opening cash and bank balance is not shown in the trial balance as these are included in closing cash and bank balances. 2. Closing stock is not shown in the trial balance because this remains included with opening stock and purchase of the accounting year. But if opening stock and purchase remain absent in trial balance and adjusted purchase is shown in the trial balance, in that case, the closing stock is shown in the debit money column of the trial balance. Sum- Example Q1. From the following balances extracted by M/s Mohanlal & Co. You are required to prepare their trial balance. these balances are as on 31.3.2019 Rupees Rupees Capital a/c of Mohanlal 45,000 Sundry Creditors 27,000 Drawings a/c of Mohanlal 9,000 Bills payable 18,000 Sales 60,000 Bad debts 1,500 Purchases 24,000 Advertisements 1,500 Salaries 1,500 Building 30,000 Wages 4,500 Machinery 43,500 Sales returns 3,000 Interest Received 1,500 Purchase returns 1,500 Sundry receipts 3,000 Rates and taxes 3,000 Furniture and Fixtures 30,000 Sundry expenses 1,500 Cash on hand 3,000 Sundry debtors 15,000 Overdraft with Dena Bank 15,000 munotes.in

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67 Depreciation Accounting &
Trial Balance Soln: Trial Balance as on 31/3/2019 for M/S.Mohanlal & Co Particulars Dr. Rs. Cr. Rs. Capital a/c of Mohanlal 45000 Drawings a/c of Mohanlal 9000 Sales 60,000 Purchases 24000 Salaries 1500 Wages 4500 Sales returns 3000 Purchase returns 1500 Rates and taxes 3000 S.Exp 1500 S. Debtors 15,000 S. Credtiors 27000 Bills payable 18000 Bad debts 1500 Advertisements 1500 Building 30,000 Machinery 43,500 Interest received 1500 S. Receipts (various income) 3000 Furniture & Fix 30,000 Cash on Hand 3000 Overdraft with dena bank 15000 Total 171000 171000 Review Questions: 1. Difference between Ledger V/S Trial Balance 2. Difference between WDV Method and SLM.  munotes.in

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68 Introduction to Financial Accounts
68 4 INTRODUCTION TO FINAL ACCOUNTS OF A SOLE PROPRIETOR Unit Structure: 4.01 Introduction & Meaning 4.02 Manufacturing Account 4.03 Trading Account 4.04 Profit & Loss Account 4.05 Balance Sheet 4.06 Classification of Assets 4.07 Classification of Liabilities 4.08 Adjustment/Closing Entries 4.09 Treatment of some items of adjustment in Trial Balance 4.10 Treatment of some items in the absence of any specific information 4.11 Procedure for preparing Final Accounts 4.12 Solved Illustrations 4.13 Exercises LEARNING OBJECTIVES After studying this unit, you will be able to: • Make out various accounts, which are the parts of final accounts • Understand the various items of Manufacturing Account, Trading Account, Profit & Loss Account and Balance Sheet • Form and Layout of Final Accounts • Adjusting and Closing entries 4.01 INTRODUCTION Meaning of a Sole Trader A sole trader, also known as a sole proprietorship, is a simple business structure in which one individual runs and owns the entire business. A sole trader is entitled to keep all profits after taxes have been deducted but is also liable for all losses the business incurs. Sole-trading business is carried on by one person with his own funds and according to his managerial capabilities. The sole trader carries on business by himself and for himself. He is the proprietor, manager and controller of business munotes.in

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Trial Balance Meaning of Final Accounts Initially, the transactions are recorded in the Journal of the company, which is then reflected in the individual ledgers maintained for the relative transaction type & party. The closing balance of this ledger is maintained in the Trial Balance, which shows equal debit and credit side for the period. Then for providing the status & performance of the business organization for the specified period (i.e., a year, half-year, quarter, etc.), Final accounts are prepared which includes Trading Account for calculation of Gross profit (now generally inclusive with the statement of profit & loss), Statement of Profit & Loss for net profit earned during the period and Balance Sheet which provide the Assets & Liabilities of the entity at the period end. Features of Final Accounts 1. The final account is legally required for the entities. The financial accounting and preparation of Financial statements are obligatory for the entities and getting those accounts audited. 2. These accounts are prepared to present and provide the entity’s financial performance and status to the stakeholders, users, investors, promoters, etc. 3. The presentation of comparable figures for the current period from the previous period increases the utility of the statements of accounts. 4. It presents an accurate & fair view of the organization’s financial performance by providing accurate & full information regarding the business with proper notes and disclosures of the real facts. Objectives of Final Accounts 1. They are prepared to calculate Gross profit & net profit earned by the organization for the relevant period by presenting the Statement of Profit & Loss. 2. The Balance sheet is prepared to provide the company’s correct financial position as of the date. 3. These accounts use the bifurcation of direct expenses to obtain the gross profit & loss and bifurcation in indirect expenses to ascertain the organization’s net profit & loss. 4. Through the Balance sheet, these accounts bifurcate the assets & liabilities as per the holding & usage periods of the same. Overview of the Final Accounts of sole proprietor can be explained with the help of the following chart munotes.in

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70 Let us discuss the meaning and format of above accounts in detail. 4.02 MANUFACTURING ACCOUNT Manufacturing Account is prepared by manufacturing firms to ascertain the “Cost of Goods” manufactured during an accounting period. It is closed by transferring its balance to the debit side of Trading Account. The manufacturing account gives information on all the expenses and costs incurred in the preparation of the goods to be sold. This includes the expenses that are met in the path of preparing the goods but not the finished goods. Any type of expenses including the cost of raw materials, the cost of machines and their maintenance, the salaries and wages of both skilled and unskilled workers which are considered as the direct expenses of the manufacturing. Even the depreciation of the assets like costly machines and plants are also included under this account.
Sole ProprietorNon Manufacturing Business UnitsManufacturing Business UnitsFinal AccountsFinal Accounts - Trading A/c - Manufacturing A/c - Profit & Loss A/c - Trading A/c - Balance Sheet - Profit & Loss A/c - Balance Sheet
ParticularsAmtAmtParticularsAmtAmtTo Work in Progress (Opening)xxBy Work in Progress (Closing)xxTo Raw Materials ConsumedBy Sale of Scrapxx Opening StockxxAdd: PurchasesxxBy Cost of Production trf. To Trading AccountxxAdd: Purchase Expenses - Carriage Inwardxx - Octroi Dutyxx - Customs DutiesxxLess: Purchase Returns(xx)Less: Closing Stock(xx)xxTo Direct WagesxxTo Direct Mfg. Expenses - Hire of Machineryxx - Royalty related to Mfg.xx - Design ExpensesxxxxTo Direct Factory Expneses - Stores, Oil, Greasexx - Power & Fuelxx - Repairs to Factory Assetsxx - Rent, lighting of Factory bldgxxxxxxxxxxManufacturing A/c for the year ended …….munotes.in

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71 Depreciation Accounting &
Trial Balance The purpose of preparing the Manufacturing Account is to ascertain the cost of goods manufactured. Therefore, it should include all the expenses relating to manufacture of goods such as purchase of raw materials, carriage and freight on purchase of materials and other expenses incurred in the production process i.e. conversion of raw materials in to finished goods. Major Manufacturing expenses are as follows. 1. Direct Materials – These are the raw materials from which finished goods are manufactured. Raw Materials consumed is arrived as follows. Opening Stock of Raw Materials xx Add – Purchase of Raw Materials Xx Less – Purchase Returns Xx Less – Closing Stock of Raw Materials Xx xxx 2. Work in Progress / Semi Finished Goods – The value of opening WIP appears on Dr side and value of closing WIP appears on Cr side of manufacturing account. This represents materials put in to process. 3. Direct Labor – It is the amount of wages paid to the workers who are employed in the production process 4. Manufacturing Expenses/Factory or Production Overheads – These are expenses incurred in the factory like rent, rates, taxes, electricity, salaries, insurance, depreciation of factory building, plant and machinery, amortization of patents, water, heat, light and parts used in the factory, power & fuel, factory stores & spares, factory supervision etc. 5. Sale of Scrap – In a production process there may be certain scrap which may or may not have a sale value. Amount of scrap is credited in manufacturing account. 6. Cost of Production – It is the cost of manufacturing the goods. It is the excess of debit side total of manufacturing account over its credit side total. It is the balance in the manufacturing account which is transferred to Trading Account. 4.03 TRADING ACCOUNT It shows the result of buying & selling of goods and/or services during an accounting period. The main purpose is to ascertain the gross profit or gross loss. Gross Profit or Gross Loss is the difference between Sales Value and Cost of Goods Sold. Trading Account records trading transactions of a businessman. Trading and manufacturing business firms deal in sales and purchases of goods. Therefore, only manufacturing and trading entities prepare the trading account. Trading account gives details of total sales, total purchases and direct expenses munotes.in

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72 relating to purchase and sales. It shows gross profit of business activities during a specific period. In case of trading concern or where manufacturing account is not prepared, Trading account will also include other expenses for receipt or manufacture of goods.
Trading Account contains the following details • Opening stock details of Finished Goods and in case where manufacturing account is not prepared then it also includes opening stock details of Raw Material, Semi-Finished Goods (WIP) • Closing stock details of Finished Goods, raw material and semi-finished goods • Total purchases of goods less Purchase Returns. • Total sales of goods less Sales Returns. • All direct expenses related to purchases or sales or manufacturing of goods. Items of Income (Cr.) side • Total sales of goods fewer Sales returns • Closing stock of goods. • Drawings in the form of goods, goods issued as samples or goods lost by accidents Items of Expenditure (Dr.) Side • Opening stock of goods • Total purchases of goods Less purchase returns • All direct expenses like Carriage inward & Freight expenses, rent for go-down or factory, Electricity and Power expenses, wages of workers and supervisors, Packing expenses, etc. ParticularsAmtAmtParticularsAmtAmtTo Opening StockxxBy SalesxxTo Purchasesxx Less: Sales Returnsxx Less: Purchase ReturnsxxxxBy Goods lost / destroyedxxTo Direct Purchase Exp.xxBy Goods taken by ProprietorxxTo Manufacturing A/cxxBy Goods given as free samplesxx (Cost of Production trf.)By Closing StockxxTo Gross Profit B/fxxBy Gross Loss C/fxxxxxxxxTrading A/c for the year ended ………munotes.in

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73 Depreciation Accounting &
Trial Balance Balancing of Trading Account After recording all the expenses and incomes as mentioned above to trading account, it is closed by transferring the balance – Gross Profit or Gross Loss – to Profit & Loss Account. If Cr side > Dr Side = it’s Gross Profit and Dr side > Cr side = it’s Gross Loss. 4.04 PROFIT & LOSS ACCOUNT It is a part of financial statement, which shows the result of business operations conducted during the year. The purpose is to find out net profit earned or net loss incurred during the year. It contains all indirect expenses and losses (other than those shown on debit side of trading account) which are shown on its debit side and all indirect incomes and gains (other than those shown on credit side of trading account) which are shown on its credit side. All indirect expenses and losses (other than those shown on debit side of Trading A/c) are shown on debit side of P&L A/c, whereas all indirect resource incomes and gains (other than those shown on credit side of Trading A/c) are shown on credit side of Profit & Loss A/c Profit & Loss A/c may be prepared showing separately the expenses as under: 1. Administration Exp., 2. Selling Exp., 3. Distribution Exp., 4. Finance Charges Explanation of Indirect or Other Expenses and Gains • All indirect expenses are transferred to debit side of Profit & Loss A/c. Any loss occurred by fire or accident is also debited to Profit & Loss Account • Discount allowed to customers (Debtors) is a loss and should be debited to P&L A/c and Discount earned from suppliers (Creditors) is a gain and should be credited to P&L A/c • Commission on sales to agents and salesmen paid is expenditure and should be debited to P&L A/c and commission received being gain, to be credited to P&L A/c • Interest paid on capital or loans taken, being expense should be debited to P&L A/c and Interest received on loans given, being gain, to be credited to P&L A/c • Bad Debts are the debts or dues from customers, which are not recoverable. It is a loss to the business, therefore, debited to P&L A/c • Salaries and wages – sometimes only one account is kept for both salaries and wages. When the amount of wages is small such combined account is opened. In such case full amount to be debited to P&L A/c. But if the item is Wages and Salaries, it is transferred to munotes.in

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74 Introduction to Financial Accounts
74 Trading A/c on the assumption that wages is a major part of this expenditure • Trade Expenses also known as sundry expenses or miscellaneous expenses or petty expenses are charged to P&L A/c debit side • Income Tax is a tax in income. It should not be treated as expenses of the business. Therefore, it is not debited to P&L A/c. In case of sole trader, it is debited to Capital Account or added to Drawings Balancing of Profit & Loss A/c After transferring all expenses and losses of the business to Debit, and all incomes and gains of the business to Credit side of P&L A/c, it is balanced. If Credit Side > Debit Side then difference is Net Profit If Debit Side > Credit Side then difference is Net Loss in case of sole proprietor and partnership business, net profit is added to the Capital and net loss is deducted from the capital.
ParticularsAmtAmtParticularsAmtAmtTo Gross Loss B/dxxBy Gross Profit B/dxxTo Administrative ExpensesBy Other Income or Gains - Rent, Insurance, Repairsxx - Commission recdxx - Office Salariesxx - Discount recdxx - Postage, teleph & telexxx - Dividend recdxx - Printing & Stationeryxx - Interest recdxx - Fees (legal/audit)xx - Profit on sale of assetsxx - General ExpensesxxxxTo Selling & Distribution Exp. - Salesman's salaries, commission etc.xx - Travellingxx - Carriage, freight, dutiesxx - Warehousing chargesxx - Packing expensexx - Advtg & sales promotionxx - Goods given as free samplesxxxxTo Financial Expenses - Interest & bank chargesxx - Bad debts & prov for bad debtsxx - Discounts givenxxxxTo Depreciation - on Machinery, Computersxx - on Furniture & Fixturesxx - Building, Office EquipmentsxxxxTo Unusual Exp or losses - Goods lost/destroyedxx - Loss on sale of fixed assetsxxxxTo Appropriations - Income taxxx - ReservesxxxxTo Net Profit trf to Capital A/cxxxxxxxxProfit & Loss A/c for the year ended ………munotes.in

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75 Depreciation Accounting &
Trial Balance 4.05 BALANCE SHEET A Balance Sheet is a statement (not an account) of the total assets and liabilities of an organization at a particular date- usually the last date of an accounting period. Objective is to ascertain the financial position of a concern. It shows the nature and value of assets and the nature and value of liabilities and the position of capital. It is always prepared on a certain date and not for a particular period. It is divided in to two sides. The left hand side is “Liabilities” and right hand side is “Assets”. It is a summary of balances of those ledger accounts, which have not been closed by transfer to Trading and Profit & Loss A/c. It shows financial position of the business.
Form and Layout The Balance Sheet is generally prepared in T Form having two sides, one to show the assets and the other liabilities. The left-hand side is generally called as the Liabilities side and the right-hand side is called the Asset side. This is called the Traditional Form. Now a days the Balance Sheet is also prepared in the vertical of T form in a way a layman can understand. 4.06 CLASSIFICATION OF ASSETS Assets are classified in to (1) Fixed Assets, (2) Floating or Current Assets and (3) Fictitious Assets LIABILITIESAmtAmtASSETSAmtAmtCapital AccountFixed AssetsOpening BalancexxGoodwill /LandxxAdd: New Capital brought inxxPlant & MachineryxxAdd: Net profit during the yearxxLess - DepreciationxxxxLess: DrawingsxxPremises/Building / VehiclesxxLess: Net loss during the yearxxxxLess - DepreciationxxxxFurniture & FittingsxxLess - DepreciationxxxxReserves & SurplusInvestmentsGeneral ReservexxInvestments in shares & bondsxxLoans (Secured/Unsecured)Current Assets, Loans & AdvancesLoans from BankxxClosing StockxxBank OverdraftxxDebtorsxxLoans & Advances givenxxCurrent Liabilities & ProvisionsBills receivablexxCreditorsxxPrepaid ExpensexxBills PayablesxxCash at BankxxOutstanding expensesxxCash in HandxxIncome received in advancexxFictitious AssetsDeferred Expense not w/offxxCapital A/c Debit balancexxxxxxxxBalance Sheet As at …….munotes.in

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76 Introduction to Financial Accounts
76 Fixed Assets – are the assets of a permanent nature, which are used in business as long as they are held and useful. These assets are not meant for resale. Business is carried on with the help of these assets. Examples are Machinery, Building, Office Equipment, Plant, Patent Rights etc. Types of Fixed Assets 1. Tangible Fixed Assets – Have physical existence and can be seen by eyes. E.g. Land, Building, Machinery, Furniture etc. 2. Intangible Fixed Assets – Have no physical existence and which cannot be seen. E.g. Goodwill, Patents, Copyrights etc. Floating/Current Assets/Circulating Assets – Assets which are held temporarily and which are meant for resale or consumption in business. They change from time to time. E.g. Cash and Bank, Sundry Debtors, Bills Receivables, Stock etc. Fictitious Assets – These are those assets which are not represented by anything concrete. There is no tangible property or asset representing it. They cannot be converted into cash. E.g. preliminary expenses, discount on issue of shares and debentures etc. 4.07 CLASSIFICATION OF LIABILITIES Liabilities can be classified into (1) Fixed (2) Current and (3) Contingent Liabilities Fixed Liabilities – Liabilities which are redeemed or repaid after a long period of time. E.g. are Long term loans and capital. Current Liabilities – Liabilities which are to be paid or discharged in the near future, usually within a year. E.g. Creditors, Bank Overdraft, Outstanding Expenses, Bills Payable etc. Contingent Liabilities – These are not actual liabilities, but they may become actual liability on happening of certain events. If expected event does not occur, no liability or loss will arise. E.g. suit filed against the business for a claim, not admitted by the business. The liability will arise if Court decides against the concern and in favour of the claimant, otherwise there will be no liability. Other examples would be liability on partly paid shares and debentures held as investment, liability of bill discounted etc. Arrangements of Assets and Liabilities Balance sheet is generally prepared in “T” form having two sides, one to show the assets and the other liabilities. Left hand side is generally called as Liabilities side and the right-hand side is called the Assets side. For sole proprietorship and partnership organizations there is no prescribed form of Balance Sheet. A sole trader may arrange the assets and properties in the order of liquidity or in the order of permanency. munotes.in

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77 Depreciation Accounting &
Trial Balance 4.08 ADJUSTMENT / CLOSING ENTRIES

1Every Adjustment has two effects, one in B/S & other is in either Trading A/c or in P/L A/c2Normally adjustments are related to the following itemsaClosing stock (to be valued at cost price or market price which ever is less)Closing Stock A/c … Dr(shown on Asset Side) To Trading A/c …..Cr(Shown on Trading A/c Cr Side)bDepreciationEntry for Charging DepreciationDepreciation A/c……. Dr(Shown in profit & loss A/c Dr. Side) To Assets A/c……..Cr(shown as deduction from Asset)Entry for Transferring depreciation to profit & loss A/cP/L A/c……………….Dr To Deprn A/c ……..CrcOutstanding Expenses (Expenses Payable)Expenses A/c………….Dr(Shown in profit & loss A/c Dr. Side)or add in the concerned expenses) To O/s Expenses A/c…Cr(Shown as Liability in B/S)dPrepaid Expenses (expense paid in advance)Prepaid Expenses A/c……Dr(Shown as Asset in B/S) To Expenses A/c…….Cr(Shown in Profit & Loss A/c Cr. Side)or reduce from the concerned expenseeGoods distributed as free samples /Loss by fire/Loss by theft etc.Goods (Free Samples) A/c ….Dr(Show as expense in P/L A/c) To Trading A/c….Cr(show in Trading A.c Cr. Side)fBad debts written offBad Debts A/c …..Dr.(shown in P/L A/c Dr. side) To Debtors A/c…Cr(Deduct from Debtors in B/S)gProvision for doubtful debtsDoubtful Debts A/c …… Dr.(shown in P/L A/c Dr. side) To Prov. for Doubtful Debts a/c(Shown in liability side)hOutstanding IncomeOutstanding Income A/c….Dr(Show as Assets in B/S) To Income A/c …….. Cr(show in P/L A/c Cr.Side)iPrepaid IncomeIncome A/c ………..Dr(Deduct from the income in P/L A/c) To Prepaid Income A/c..Cr (Show as liability)jInterest on Capital Interest on Capital A/c…..Dr(Show as expense in P/L A/c) To Proprietor's Capital A/c(Add to Capital on liability side)kInterest on DrawingsProprietor's Capital A/c…..Dr(Deduct from capital A/c in B/S) To Interest on Drawings A/c(show as income in P/L A/c)lOther Rectificatory Entriesmunotes.in

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78 Introduction to Financial Accounts
78 4.09 TREATMENT OF SOME ITEMS OF ADJUSTMENT IN TRIAL BALANCE Sr.
No. Items Given in Trial
Balance Treatment in
Trading and Profit
& Loss A/c Treatment in
Balance Sheet 1 Closing Stock Show on Asset side as
a current asset 2 Outstanding Expenses Show on Liabilities
side as a current
liability 3 Prepaid Expenses Show on Asset side as
a current asset 4 Accrued
income/Income Due Show on Asset side as
a current asset 5 Income Received in
Advance Show on Liabilities
side as a current
liability 6 Depreciation Show on Dr side of
P&L A/c 7 Bad Debts (If no RDD
is given) Show on Dr side of
P&L A/c as a
separate item 8 Bad Debts (If RDD is
given) Show on Dr side of
RDD A/c 9 Discount Allowed (If no
provision for Discount
on debtors appears) Show on Dr side of
P&L A/c 10 Discount Allowed (If
provision for Discount
on Debtors appears) Show on Dr side of
provision for
discount in debtors 11 Discount Received (If
no reserve for discount
is given) Show on Cr side of
P&L A/c 12 Discount Received (if
reserve for discount is
given) Show on Cr side of
reserve for discount
A/c 13 Interest on Capital Show on Dr side of
P&L A/c 14 Interest on Drawings Show on Cr side of
P&L A/c munotes.in

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79 Depreciation Accounting &
Trial Balance 4.10 TREATMENT OF SOME ITEMS IN THE ABSENCE OF ANY SPECIFIC INFORMATION Item If the item appears
on Dr side of Trial
Balance If the item
appears on Cr
side of Trial
Balance If nothing is
given about
Debit or
Credit Returns It is a sales return
which should be
deducted from sales It is a purchase
return which
should be
deducted from
purchases Necessary
assumption
should be taken
about the return
(either sales
return or
purchase
return) Carriage /
Freight It is assumed as
carriage/Freight on
purchases which
should be debited to
Trading A/c It is assumed as
carriage/Freight
on purchases Wages &
Salaries Shown on Debit side
of Trading A/c Salaries &
wages Shown on Debit side
of Profit & Loss A/c Discount Shown on Debit side
of P&L A/c as
Discount Allowed Shown on
Credit side of
P&L A/c as
Discount
Received It is assumed as
Discount
Allowed Commission Shown on Debit side
of P&L A/c as
Commission Allowed Shown on
Credit side of
P&L A/c as
Commission
Received It may be
assumed as
commission
allowed Interest Shown on Debit side
of P&L A/c Shown on
Credit side of
P&L A/c It is assumed a s
interest on loan
taken and
shown on debit
side of P&L
A/c Rent Shown on Debit side
of P&L A/c Shown on
Credit side of
P&L A/c It is assumed as
rent paid Premium Shown on Debit side
of P&L A/c as
premium paid Shown on
Credit side of
P&L A/c as
premium
received It is assumed as
premium paid munotes.in

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80 Introduction to Financial Accounts
80 4.11 PROCEDURE FOR PREPARING FINAL ACCOUNTS 1. First open the various accounts like Manufacturing A/c, Trading A/c, Profit & Loss A/c and Balance Sheet leaving appropriate space/lines 2. Post the items given in the Trial Balance or in the sum in the abovementioned accounts and /or statements. 3. Identify and/or classify the particular item as Assets, Liabilities, Incomes, Expense and accordingly post them in to the respective accounts as follows 4. Assets = Debit Balance (Record in B/S on Asset Side) 5. Expenses = Debit Balance (Record either in Trading A/c or P&L A/c on Debit Side) 6. Liabilities = Credit Balance (Record in B/S on Liability Side) 7. Incomes = Credit Balance (Record either in Trading A/c or P&L A/c on Credit Side) 8. Personal Accounts having Debit Balance to be recorded on Asset Side and 9. Personal Accounts having credit balance to be recorded on Liability Side 10. Information outside the trial balance should be considered and two effects should be given 11. Personal expenses of the owner are to be treated as drawings and deducted from capital 12. First close the Manufacturing A/c and transfer the balance to Trading A/c. 13. Then close the Trading A/c and transfer the balance to P&L A/c 14. Then close the Profit & Loss A/c and transfer the balance to Balance Sheet 15. Finally balance sheet should match. 4.12 SOLVED ILLUSTRATIONS Illustration 1 From the following particulars of Lal Traders, you are required to prepare Trading A/c for the year ended 31st March XXXX Particulars Rs. Particulars Rs. Opening Stock 30000 Carriage inwards 11000 Purchases 305000 Carriage outwards 8500 Purchase Returns 5000 Power & Fuel 7500 Sales 380000 Bad Debts 1500 Sales Returns 12800 Closing Stock 75000 Wages 54000 munotes.in

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81 Depreciation Accounting &
Trial Balance Additional Information 1. Purchase of Rs.5000 from Mr. M and Sales of goods worth Rs.7000 of Mr. C were not recorded in the books 2. Goods worth Rs.1000 were distributed as free sample 3. Goods of the estimated value of Rs.500 were received as free samples and were included in the closing stock at that value 4. Goods costing Rs.1500 were taken by Mr. Lal for his personal use 5. Goods costing Rs.5000 were lost in fire Solution
Illustration 2 From the following balances of a Manufacturer prepare Manufacturing A/c for the year ended 31st December XXX Particulars Amt Particulars Amt Opening Stock of Wages 6400 Raw Materials 17000 Factory rent 3800 W.I.P. 8000 Factory Insurance 900 Finished Goods 12000 Coal 1600 Purchases Mfg. Packing Expenses 500 Raw Materials 50000 Repairs to Machinery 750 Finished Goods 25000 Royalty 1000 Carriage Consumables Raw Materials 700 Stores 200 Finished Goods 300 Sales 120000 Railway Freight Sales Return 1100 Raw Materials 1400 Closing Stock Finished Goods 600 Raw Materials 8000 Purchase Returns W.I.P. 5200 Raw Materials 700 Finished Goods 25000 Finished Goods 800 Dr.Cr.ParticularsAmtAmtParticualrsAmtAmtTo Opening Stock030000By Sales380000To Purchases305000Add - Unrecorded Sales7000Add - Unrecorded Purchases5000Less - Returns12800374200Less - Returns5000Less - Withdrawn for Personal use1500303500By Goods lost by fire5000By Free Samples1000To Wages54000By Closing Stock75000To Carriage Inward11000Less - Free Samples Received To Power & Fuel7500 wrongly included in stock50074500To G ross Profi t trf to P&L A/c48700454700454700M/s Lal Traders Trading Account for the year ended 31st March XXXmunotes.in

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82 Introduction to Financial Accounts
82 Solution

Illustration 3 Prepare Profit & Loss Account for the year ended 31st March XXX Particulars Amt Particulars Amt Gross Profit 15000 Sales Salaries 2600 Salaries 5000 Packing expenses 200 Advertising 400 Rates & Taxes 900 Postage 250 Insurance 750 Printing & Stationery 180 Commission Received 1800 Rent 2500 Dividend on Investment 1700 Interest on loan 400 Donation 350 Discount (Dr.) 600 Carriage Outward 480 Discount (Cr) 750 Apprentice Premium 160 Interest om Bank overdraft 250 Dr.Cr.ParticularsAmtAmtParticualrsAmtAmtTo Opening Stock By Closing Stock W.I.P.8000 WIP5200To Materials Consumed Opn stock of R/M17000By Cost of Production Add - Purchase of R/M50000 Trf to Trading A/c78350Less - Purchase Returns of R/M700Less - Closing Stock of R/M800058300To Carriage of R/M700To Railway Freight - R/M1400To Wages6400To Factory rent3800To Factory Insurance900To Coal1600To Mfg. Packing Expenses500To Repairs to Machinery750To Royalty1000To Consumable Stores2008355083550 Manufacturing A/c for the year ended 31st December XXX
Dr.Cr.ParticularsAmtAmtParticualrsAmtAmtTo Opn Stock - F/G12000By Sales120000To Purchases - F/G25000Less - Returns1100118900Less - Purchase Returns - F/G80024200By Closing Stock - F/G25000To Carriage of F/G300To Railway Freight - F/G600To Cost of Production78350To Gross Profit28450143900143900 Trading Account for the year ended 31st December XXXmunotes.in

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83 Depreciation Accounting &
Trial Balance Solution
Illustration No.4
Illustration No.5
Dr.Cr.ParticularsAmtParticualrsAmtTo Salaries5000By Gross Profit15000To Advertising400By Discount Received750To Postage250By Commission Received1800To Printing & Stationery180By Dividend on Investment1700To Rent2500To Interest on Loan400To Discount Allowed600To Interest on Bank Overdraft250To Sales Salaries2600To Packing Expenses200To Rates & Taxes900To Insurance750To Donation350To Carriage outward480To Apprentice Premium Paid160To Net Profi t42301925019250 Profit & Loss A/c for the year ended 31st March XXX
Following are the balances of Ms. Roselin, as on 31.03.2022. You are requested to prepare the Final Accounts, after giving effects to the adjustments.ParticularsAmtParticularsAmtParticularsAmtSundry Creditors94500Patents112500Fuel & Power70950Sundry Debtors217500Machinery300000Wages157200Capital Account1065000Freehold Land150000Returns Outwards7500Drawings78675Building450000Returns Inwards10200Insurance9000Stock 1.4.2186400Sales1481700General Expenses45000Carriage on Purchase30600Purchases610125Salaries225000Carriage on Sales48000Cash at Bank39450Cash in Hand81001. Stock as on 31.03.2022 was valued at Rs.102000/-2. Provision for Doubtful Debts is to be created @5% on Sundry Debtors3. Depreciate Machinery by 10%, Patents by 20%4. Wages include a sum of Rs.30000/- spent on erection of a Cycle shed for employees & customers5. Salaries for the month of March 2022 were unpaid at Rs.22500/-6. Insurance include a premium of Rs.2520 on a policy, expiring on 30.09.2022Following is the Trial Balance of Ms. Prachi as on 31.03.2022. Prepare Trading A/c & P&L A/cfor the year ended 31.03.2022 & Balance Sheet after making necessary adjustmentsParticularsAmtParticularsAmtParticularsAmtDebtors450000Motor Car216000Rates & Taxes22500Creditors180000Printing & Stationery13500Drawings18000O/s Liab. for Exp49500Furniture & Fittings99000Capital Account1298700Wages90000Advertisements76500Purchases1494000Carriage outwards99000Insurance40500Sales1788750Carriage inwards45000Salesmen's Commission78750Stock on 1.4.22225000General Expense63000Postage & Telegram51750Cash at Bank54000Discount allowed18000Salaries144000Cash in Hand9450Bad Debts90001. Closing stock was valued at Rs.652500/-2. Provision for Doubtful Debts is to be created @5% on Sundry Debtors3. Depreciate Furniture & Fittings by 10%, Motor Car by 20%4. Prachi had withdrawn goods worth Rs.22500/- during the year5. Sales include goods worth Rs.67500 sent out to Prabhat & Company on approval and remaining unsold on 31.03.2022. The cost of goods was Rs.45000/-6. Salesmen are entitled to a commission of 5% on total sales7. Debtors include Rs.22500/- bad debts8. Purchase include purchase of furniture worth Rs.45000/-munotes.in

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84 Introduction to Financial Accounts
84 Solution for Illustration No.4
DR.Tradi ng A/c for the year ended 31.03.2022CR.ParticularsAmtAmtParticularsAmtAmtTo Opening Stock86400By Sales1481700To Purchases610125Less - Returns Inward102001471500Add - Carriage on Purchases30600Less - Returns Outward7500633225By Closing Stock102000To Fuel & Power70950To Wages157200Less - Cycle Shed Charges30000127200To Gross Profit c/d65572515735001573500DR.Profit & Loss A/c for the year ended 31.03.2022CR.ParticularsAmtAmtParticularsAmtAmtTo Insurance9000By Gross Profit b/d655725Less - Prepaid Insurance (2520/12*6)12607740To General Expenses45000To Salaries225000Add - Unpaid Salaries22500247500To Carriage on Sales48000To Provision for Doubtful Debts10875To Depreciation on Patents22500To Depreciation on Machinery30000To Net Profit c/d244110655725655725DR.Balance Sheet as on 31.03.2022CR.LiabilitiesAmtAmtAssetsAmtAmtCapital Account1065000Patents112500Less - Drawings78675Less - Depreciation @20%2250090000Add - Net Profit 2441101230435Machinery300000Less - Depreciation @10%30000270000Freehold Land150000Sundry Creditors94500Building450000Unpaid Salaries22500Cycle Shed30000Sundry Debtors217500Less - Prov for Doubtful Debts @5%10875206625Cash at Bank39450Cash in Hand8100Closing Stock102000Prepaid Insurance126013474351347435munotes.in

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85 Depreciation Accounting &
Trial Balance Solution for Illustration 5
DR.Tradi ng A/c for the year ended 31.03.2022CR.ParticularsAmtAmtParticularsAmtAmtTo Opn Stock225000By Sales1788750To Purchases1494000Less - Goods sold on approval basisLess - Furniture450001449000 but remaining unsold as on 31.3.22675001721250To Carriage Inwards45000To Wages90000By Goods Withdrawn by Proprietor22500By Closing Stock652500Add : Cost of Goods sold on approval basis but remaining unsold45000697500To Gross Profit c/d63225024412502441250DR.Profit & Loss A/c for the year ended 31.03.2022CR.ParticularsAmtAmtParticularsAmtAmtBy Gross Profit B/d632250To Carriage Outwards99000To General Expenses63000To Discount Allowed18000To Bad Debts9000Add - Further Bad Debts22500Add - Provision for Doubtful Debts @5%1800049500To Printing & Stationery13500To Advertisements76500To Insurance40500To Salesmen's Commission78750Add- Outstanding Commission 731386063(5/100*(1788750-67500)=86063To Postage & Telegram51750To Salaries144000To Rates & Taxes22500To Depreciation on Motor Car43200To Depreciation on Furniture & Fittings14400By Net Loss89663721913721913DR.Balance Sheet as on 31.03.2022CR.LiabilitiesAmtAmtAssetsAmtAmtCapital Account1298700Motor Car216000Less - Drawings18000Less - Depreciation @20%43200172800Les s - Further Drawings (Goods W ithdrawn)22500Furniture & Fittings99000Less - Loss during the year896631168537Add - Furniture45000Less - Depreciation @10%14400129600Creditors180000Outstanding Liabilities for Expenses49500Debtors450000Outstanding Salesmen commission7313Less - Sales on Approval basis but but remaining unsold as on 31.3.2267500Less - Bad Debts22500Less - Provision for Doubtful Debts @5%18000342000 (5/100*(450000-67500-22500)Cash at Bank54000Cash in Hand9450Closing Stock652500Add : Cost of Goods sold on approval basis but remaining unsold4500069750014053501405350munotes.in

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86 Introduction to Financial Accounts
86 Illustration 6 Following is the Trial Balance of Ms. Manu, Proprietor of Chinu Enterprises for the year ended 31.3.20xx Particulars Dr Cr Particulars Dr Cr Opening Stock –
R/M 250000 Printing &
Stationary 5200 - WIP 80000 Bank Charges 2500 - F/G 220000 Travelling
Expenses 10000 Purchases 215000 Discount 3300 Buildings 150000 Sales Return 11000 Plant & Machinery 360000 Advertisement 5500 Furniture 40000 Sales 780000 Trade Mark 30000 Capital 850000 Wages 83000 Sundry Creditors 52000 Factory Taxes 4000 Sundry Debtors 82500 Motive Power 9000 Discount 2500 Factory Insurance 5000 Mis Expenses 5500 Salary to Office
Staff 11000 Bills Payable 34000 Office Rent 10500 Bills Receivable 16000 Carriage Inward 2500 Corporation Bank 98000 Cash on Hand 9000 1718500 1718500 Adjustments 1. Closing stock of R/M – Rs.85000/-, WIP – Rs.30000/- and F/G – Rs.205000/- 2. Factory taxes Prepaid Rs.2000/- 3. Depreciate Furniture @10%, P&M @15%, Trade Mark @20% and Building @5% 4. Prepare Manufacturing A/c, Trading A/c and Profit & Loss A/c for the year 31.3.xx munotes.in

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87 Depreciation Accounting &
Trial Balance Illustration 7 Amar Chemicals has the following Ledger Balances as on 31.03.xx Particulars Dr Cr Particulars Dr Cr Goodwill 50000 Net Sales 1100000 Factory Shed 20000 Misc. Income 4000 Machinery 130000 Bad Debts
Reserve 5000 Furniture 8000 Purchase of
Materials 860000 Investments 10000 Freight on
Materials 50000 Capital 195000 Factory Power 15000 Bank Loan 300000 Salaries & wages
– Factory 150000 Creditors 150000 Salaries & wages
– Office 65000 Debtors 135000 Repairs and
Renewals 2500 Stock on 1.4.xx Rent & Taxes 16500 Materials 130000 Insurance 3900 Work in
Progress 7500 General Expenses 18100 Finished Goods 82500 1754000 1754000 Adjustments 1. Closing stock: Materials Rs.210000/-, WIP Rs.12500 and Finished Goods Rs.207500/- 2. Depreciation to be charged @2.5% on factory shed, 10% on Machinery and 15% on Furniture 3. Repairs and Rent and Taxes to be apportioned between factory and office in 3:2 ratio 4. Reserve for bad and doubtful debts to be provided at 4% on debtors 5. Insurance premium covers a period of one month in advance. Prepare Manufacturing, Trading and Profit & Loss A/c for the year ended 31.3.xx munotes.in

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88 Introduction to Financial Accounts
88 Solution for Illustration 6

DR.Manufacturing A/c for the year ended 31.3.xxCR.ParticularsAmtAmtParticularsAmtAmtTo Opn Stock - Raw Materials250000By Closing Stock - Raw Materials85000 - Work in Progress80000 - Work in Progress30000To Purchases 215000To Wages83000To Factory Taxes4000Less - Prepaid Factory Taxes20002000To Motive Power9000To Factory Insurance5000By Cost of Production 531500To Carriage Inward2500646500646500DR.Tradi ng A/c for the year ended 31.3.xxCR.ParticularsAmtAmtParticularsAmtAmtTo Opn Stock - Finished Goods220000By Sales780000To Cost of Production 531500Less - Returns11000769000By Closing Stock - Finished Goods205000To Gross Profit222500974000974000DR.Profit & Loss A/c for the year ended 31.03.xxCR.ParticularsAmtAmtParticularsAmtAmtBy Gross Profit b/d222500To Salary to office Staff11000By Discount2500To Office Rent10500To Printing & Stationery5200To Bank charges2500To Travelling Expenses10000To Discount3300To Advertisement5500To Mis. Expenses5500To Depreciation on - Building7500 - P&M54000 - Furniture4000 - Trade Mark6000To Net Profit 100000225000225000DR.Balance Sheet as on 31.3.xxCR.LiabilitiesAmtAmtAssetsAmtAmtCapital 850000Buildings150000Add - Net Profit100000950000Less - Depreciation @5%7500142500Plant & Machinery360000Sundry Creditors52000Less - Depreciation @15%54000306000Bills Payable34000Furniture40000Less - Depreciation @10%400036000Trade Mark30000Less - Depreciation @20%600024000Sundry Debtors82500Bills Receivable16000Corporation Bank98000Cash on Hand9000Closing Stock - Raw Materials85000 - Work in Progress30000 - Finished Goods205000Prepaid Factory Taxes200010360001036000munotes.in

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89 Depreciation Accounting &
Trial Balance Solution for Illustration 7

DR.Manufacturing A/c for the year ended 31.3.xxCR.ParticularsAmtAmtParticularsAmtAmtTo Opn Stock - Raw Materials130000By Closing Stock - Raw Materials210000 - Work in Progress7500137500 - WIP12500222500To Purchase of Materials860000To Freight on Materials50000To Factory Power15000To Salaries & Wages - Factory150000To Repairs & Renewals - Factory (3:2)1500To Rent & Taxes - Factory (3:2)9900To Depreciation - Factory Shed500To Depreciation - Machinery13000By Cost of Production101490012374001237400DR.Tradi ng A/c for the year ended 31.3.xxCR.ParticularsAmtAmtParticularsAmtAmtTo Opn Stock - Finished Goods82500By Net Sales1100000To Cost of Production 1014900By Closing Stock - Finished Goods207500To Gross Profit21010013075001307500DR.Profit & Loss A/c for the year ended 31.03.xxCR.ParticularsAmtAmtParticularsAmtAmtTo Salaries & Wages - Office65000By Gross Profit b/d210100To Repairs & Renewals - Office (3:2)1000By Mis. Income4000To Rent & Taxes - Office (3:2)6600To Insurance3900Less-Advance for 1 month (3900/13*1)3003600To General Expenses18100To Reserve for Bad & Doubtful Debts5400To Depreciation - Furniture1200To Net Profit113200214100214100Balance Sheet as on 31.3.xxLiabilitiesAmtAmtAssetsAmtAmtCapital195000Goodwill50000Add - Net Profit113200308200Factory Shed20000Less - Depreciation @2.5%50019500Bank Loan300000Machinery130000Creditors150000Less - Depreciation @10%13000117000Furniture8000Less - Depreciation @15%12006800Investments10000Debtors135000Less - Bad Debts Reserve (Old)5000Less - RBD@4% (New)5400124600Closing Stock - Raw Materials210000 - WIP12500 - Finished Goods207500430000Prepaid Insurance300758200758200munotes.in

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90 Introduction to Financial Accounts
90 4.13 EXERCISES I. MULTIPLE CHOICE QUESTIONS 1. Return outwards in Trial Balance are deducted from a. Sales b. Purchase c. Stock d. C5 e. apital 2. Trade Mark is --- a. Current Asset b. Fictitious Asset c. Tangible Asset d. Intangible Asset 3. For a plastic company plastic is a. Raw Material b. WIP c. Finished Goods d. All of the above 4. Manufacturing account shows… a. Cost of Production b. Gross Profit c. Net Profit d. None of the above 5. Income Tax paid by a Sole Trader on his business income should be a. Debited to Trading A/c b. Debited to P&L A/c c. Deducted from Capital A/c in the Balance Sheet d. All of the above II. STATE WHETHER THE FOLLOWING STATEMENTS ARE TRUE OR FALSE 1. Sale of machinery for cash will increase the asset and decrease the asset – T 2. A capital account is a real account – F 3. Depreciation is a loss – T 4. Sales are equal to Cost of Goods sold + Profit – T 5. Productive wages are debited to Profit & Loss Account – F III. FILL IN THE BLANKS 1. A list of balances of all the accounts in the ledger is called --- 2. Net sales is the difference between gross sales and ….. 3. Liabilities + Capital at the end gives = …. 4. …. Is a statement of assets and liabilities of a business on a particular date. 5. Assets minus liabilities is ------ munotes.in

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91 Depreciation Accounting &
Trial Balance Ans: 1-Trial Balance, 2 – Sales Return, 3 – Total Assets, 4 – Balance Sheet, 5 – Capital IV. MATCH THE FOLLOWING Group X Group Y 1 Depreciation a Deducted from Assets 2 Drawings b Deducted from Capital 3 Unrecorded Sales c Add to sales 4 Unrecorded Purchases d Add to purchases 5 New Reserve e Deducted from Debtors 6 Unsold goods f Closing Stock 7 Work in Progress g Semi -Finished goods 8 Tax charged by Govt. h Excise Duty 9 Profit & Loss Account I Nominal Account (Ans: 1-a, 2-b, 3-c, 4-d, 5-e, 6-f, 7-g, 8-h, 9-I) Practical Exercises
Exercise 1From the following trial balance of Bhargav as on 31.3.xx you are required to prepare Trading and Profit & Loss A/c and Balance SheetDebitRs.CreditRs.Purchases80000Capital less drawings of Rs.400010250Sales return2100Outstanding wages1000Sundry Debtors20000Dividend on Investments400Opneing stock13000Sales135000Wages10250Purchase Return1500Salaries4450Provision for Doubtful Debts1000Furniture3500Sundry Creditors14000Postage2500Insurance650Rent, rates and taxes2750Bad Debts250Loan to Suresh @5% 2500 given on 1.10.xxInvestments6250Cash on Hand2950Bills Receivable12000163150163150Adjustments(a)Closing stock was valued at cost at Rs.10000 (Market price Rs.12000)(b)Goods worth Rs.1000 were destroyed by fire but insurance company admitteda claim of Rs.800 only(c)Depreciate furniture @10% p.a.(d)Goods costing Rs.100 supplied to Bhargav were included as debtors(e)Salaries include Rs.400 paid to an employee as advance(f)Write off Rs.400 as further bad debtsmunotes.in

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92 Introduction to Financial Accounts
92 Exercise 2Prepare Manufacturing, trading and Profit & Loss A/c and Balance Sheet from the following trial balance as on 31.03.2022ParticularsDebit RsCredit RsBaburao's Capital77000Baburao's Drawings73500Plant at Cost100000Plant depreciation up to 31.3.202127500Office equipment at cost4000Office equipment depreciation up to 31.3.20213000Delivery vans cost60000Delivery Vans depreciation up to 31.03.202128800Stock of Raw Material on 1.4.202134500Stock of finished goods on 1.4.202118000Wages - factory210420Salaries - office120700Purchases of raw material117350Power15800Insurance22500Sundry expenses33600Delivery van expenses5450Advertising54700Discount5750Sales700000Debtors and Creditors4753012000Cash at Bank1020Bills Payable76520924820924820Adjustments1. On 31.3.2022 stock of R/M was Rs.33550/0 and finished goods cost Rs.165002. Outstanding expenses were - Power Rs.5200, sundry Expenses Rs.900 and Delivery Van Expenses Rs.12503. Prepaid expenses were insurance Rs.2500, Delivery van expenses Rs.400, Advertising Rs.26004. Provision for depreciation to be made on reducing balance method 10% p.a. on plant and office equipment and 25% p.a. on vehicles5. Debtors of Rs.4280 to be written off6. Expenses are to be allocated as followsFactoryOfficePower98%2%Insurance95%5%Sundry expenses70%30%munotes.in

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93 Depreciation Accounting &
Trial Balance
 Exercise 3Prepare Trading and Profit & Loss A/c and Balance Sheet from the following trial balance as on 31.03.xxParticularsDebit RsCredit RsPurchases & Sales155000207500Stock25000Cash in Hand750bank of Maharashtra6300Drawings and Capital 2000144300Rates & Taxes2500Salaries16000Postage5750Salesmen's commission17500Insurance4500Advertisement8500Furniture11000Stationary & Printing1500Car24000Bad debts1000Cash discounts2000General expenses7000Cariage inward5000Carriage outward11000Wages10000Outstanding liability for expenses5500Sundry Debtors and creditors5000020000371800371800Adjustments1. Stock at the end Rs.72500 (at cost), Market Value Rs.750002. Goods withdrawn for personal use Rs.2500. No entry is passed for the same3. Stationary and Printing expenses for the earlier year ending 31.3.2021 and not provided for in that year amounting to Rs.5500 were paid during the year by debiting "Outstanding Liability for expenses account"4. Purchases include Furnitur worth Rs.3000 and Furniture for Residence Rs.20005. Debtors include Rs.2500 now considered bad and should be written off. Provision for doubtful debts is to be created @5% fo sundry debtors6. Salesmen are entitled to a commission of 10% on total sales7. Creditors include Rs.2000 to the credit of Mr.X. It was decided to pay Rs.1000 full and final settlement8. Sales include goods worth Rs.7500 sent to Mr. P on approval and remaining unsold till the end of the year. Cost of these goods was Rs.50009. Depreciate furniture @10% and car by 20% under RBM. Original cost of furniture is Rs.20000, Cars Rs.40000munotes.in

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94 Introduction to Financial Accounts
94 5 RECTIFICATION OF ERRORS Unit Structure: 4.1 Meaning 4.2 Types of Errors 4.3 Classification of Errors 4.4 Procedure 4.5 Solved Illustrations 4.6 Exercises LEARNING OBJECTIVES • Errors and their classification • Rectification of Errors 4.1 MEANING Errors are the mistakes committed in recording the transactions in the books of accounts. These errors affect the accuracy of books of accounts. 4.2 TYPES OF ERRORS Errors of Principles – These are the errors arising from not observing the accounting principles correctly, e.g. wrong capitalization of revenue items such as purchase of new tyres for car debited to Motor car account. This type of error does not disturb the trial balance, i.e. Trial balance will tally every after existence of such errors. Errors of Omission – This is an error of omission of recording a transaction in the books of accounts. An omission may either be complete or partial. There is said to be a complete omission when the transaction is not recorded at all in the books of accounts, e.g. A purchase transaction not recorded at all. Complete omission does not affect the agreement of trial balance and only with proper care and caution, can such errors be detected by the auditor. When the transactions are partly omitted i.e. one aspect is recorded and the other is omitted, it is a partial omission, which affects the Trial Balance. Such errors are comparatively easier to detect. Errors of Commission – This is an error of recording a transaction wrongly in the books. These are errors in posting casting, carry forward or taking out balances etc. Posting errors may be of wrong account, wrong amount or wrong side. E.g. Amount received from X credited to Y’s Account, Purchase of Rs.360 from A posted in his account as Rs.630 or sales returns from M posted as the debit or his account etc. The first type of error will munotes.in

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95 Rectification of Errors not affect the Trial balance, however, the other two will affect the agreement of trial balance. Casting errors are the errors committed while taking the totals. Such errors affect the trial balance. Errors in carrying forward and errors in taking out the balances also affect the trial balance. 4.3 CLASSIFICATION OF ERRORS I. ERRORS RELATING TO AGREEMENT OF TRIAL BALACNE Errors NOT affecting the Trial Balance 1. Complete omission of a Transaction 2. Recording of wrong amounts on both sides 3. Posting to wrong heads of accounts 4. Compensating errors 5. A wrong entry in the original record Errors affecting Trial Balance 1. Partial Omission of Transaction 2. Posting of the wrong amount 3. Posting on the wrong side of an account 4. Wrong totaling or balancing II. GENERAL CLASSIFICATION OF ERRORS A. Clerical or Technical Errors - Partial Omission - Errors of Duplication - Errors of Commission - Compensating errors B. Errors of Principle III. ON THE BASIS OF RECTIFICATION A. Errors affecting one account B. Errors affecting two or more accounts 4.4 PROCEDURE 1. Pass Correct Entry 2. Pass Wrong Entry 3. Pass Reverse Entry of Wrong Entry munotes.in

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96 Introduction to Financial Accounts
96 4. Pass Rectification Entry (Compare correct entry and reverse entry of wrong entry) 4.5 SOLVED ILLUSTRATIONS Illustration I Rectify the following errors 1. Purchases from Padma Rs.191 posted to her account as Rs.119 2. Purchases from Lata Rs.171 credit to her account as Rs.117 3. Salaries Rs.400 posted to Salaries Account as Rs.300 4. A cash sale of Rs.430 to Rita posted as Rs.43 Solution
Illustration 2 Following errors were found in the books of Ram Stores. Rectify them. 1. Rs.500/- paid for the purchase of office furniture charged to office expenses account 2. Rs.200/- received from Madanlal has been wrongly entered in Mohanlal’s account 3. Goods worth Rs.187/- purchased from Chandan Stores but whose account was actually debited by Rs.178 4. Repairs paid were debited to Building Account for Rs.150/- 5. The total of the discount column on the credit side of the cash book was undercast by Rs.15 6. An amount of Rs.300 withdrawn by the proprietor for his personal use was debited to the Trade Expenses Account 7. Total of the sales book is short by Rs.500 Correct EntryAmtWrong EntryAmtReverse of Wrong EntryAmtRectification EntryAmt1There is an error of posting a wrong amount. Padma's account is credited by Rs.119 instead of Rs.191. The rectification can be done by passing following journal entries.Purchase A/c…Dr191Purchase A/c..Dr191Padma A/c…Dr119Suspense A/c…Dr72 To Padma A/c 191 To Padma A/c119Suspense A/c..Dr72 To Padma A/c72 To Suspense A/c72 To Purchase A/c1912Lata's account is credit by Rs.117 instead of Rs.171. The error can be rectified by passing following journal entriesPurchase A/c…Dr171Purchase A/c…Dr171Lata A/c…Dr117Suspense A/c…Dr54 To Lata A/c 171 To Lata A/c117Suspense A/c..Dr54 To Lata A/c54 To Suspense A/c54 To Purchase A/c1713Salary account is posted as Rs.300 instead of Rs.400. Error can be rectified by passing following journal entriesSalaries A/c…. Dr400Salaries A/c….Dr300Cash A/c….Dr400Salaries A/c…Dr100 To Cash A/c400Suspense A/c…Dr100 To Salaries A/c300 To Suspense A/c100 To Cash A/c400 To Suspense A/c1004Cash sale is recorded correctly but the sales account is wrongly credited as Rs.43 instead of Rs.430/- This can be rectified by passing following entriesCash A/c..Dr430Cash A/c..Dr430Sales A/c….Dr43Suspense A/c…Dr387 To Sales A/c430 To Sales A/c43Suspense A/c…Dr387 To Sales A/c387 To Suspense A/c387 To Cash A/c430munotes.in

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97 Rectification of Errors 8. An amount of Rs.130 received on account of interest was credited to Commission Account Solution
Illustration 3 Rectify the following errors 1. Rs.3000 paid for purchase of typewriter charged to stationary account 2. Wages paid Rs.1800 for erection of new machinery were posted to Wages A/c 3. Paid Rs.150 for the purchase of a table fan posted to purchase A/c 4. 100 shares of Oswal Oil Limited purchased @Rs.50 each not recorded in the books 5. An amount of Rs.500 withdrawn by the proprietor for his personal use was debited to sundry expenses account 6. Sold old furniture on credit for Rs.250 passed through the Day (Sales) Book Solution Correct EntryAmtWrong EntryAmtReverse of Wrong EntryAmtRectification EntryAmt1Furniture A/c…Dr500Office Exp. A/c..Dr500Cash A/c…Dr500Furniture A/c…Dr500 To Cash A/c500 To Cash A/c500 To Office Exp A/c500 To Office Exp A/c5002Cash A/c….Dr200Cash A/c….Dr200Mohanlal A/c…Dr200Mohanlal A/c…Dr200 To Madanlal A/c200 To Mohanlal A/c200 To Cash A/c200 To Madanlal A/c2003Goods A/c…Dr187Chandan Stores A/c..Dr178Suspense A/c…Dr365Suspense A/c…Dr365 To Chandan Stores A/c187Goods A/c…Dr187 To Chandan Stores178 To Chandan Stores365 To Suspense A/c365 To Goods A/c 1874Repairs A/c…Dr150Building A/c…Dr150Cash A/c….Dr.150Repairs A/c…Dr150 To Cash A/c150 To Cash A/c150 To Building A/c150 To Building A/c1505No Entry. Total of the discount column on credit side of the cash book should be corrected. 6Drawings A/c…Dr300Trade Exp A/c….Dr300Cash A/c…Dr300Drawings A/c…Dr300 To Cash A/c300 To Cash A/c300 To Trade Exp A/c300 To Trade Exp A/c3007No Entry. Total of sale book is to be corrected. 8Cash A/c….Dr130Cash A/c….Dr130Commission A/c…Dr130Commission A/c..Dr130 To Interest A/c130 To Commission A/c130 To Cash A/c130 To Interest A/c130munotes.in

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98 Introduction to Financial Accounts
98 Illustration 1 Rectify the following errors 1. A sale of old furniture of Rs.4000 has been credited to sale account 2. Purchase of furniture for Rs.4000 has been debited to purchase account 3. Rs.3000 paid to Jeevan has been debited to Jeevan Ram 4. Rent of Rs.10000 paid to landlord has been debited to landlord account 5. An amount of Rs.8000 withdrawn by the proprietor has been debited to general expense account 6. Rs.15000 spent for repairs to machinery has been posted to machinery account 7. Salary of Rs.8000 paid to the Draftsman Sachin has been debited to his personal account 8. Goods worth Rs.4000 purchased from Ravi have been omitted to be recorded in the books 9. Paid for purchase of furniture Rs.6000 has been debited to computer account. 4.6 EXERCISES I. MULTIPLE CHOICE QUESTIONS 1. What is the type of error in which wrong casting is done? a. Error of Commission, b. Error of Omission c. Error of Principle d. Compensating Error 2. In which error the effect of one mistake is nullified by another opposite mistake for the similar account? a. Compensating Error b. Error of commission c. Error of principle d. Compensating error Correct EntryAmtWrong EntryAmtReverse of Wrong EntryAmtRectification EntryAmt1Typewriter A/c..Dr3000Stationary A/c….Dr3000Cash A/c…Dr3000Typewriter A/c..Dr3000 To Cash A/c3000 To Cash A/c3000 To Stationery A/c3000 To Stationery A/c30002Machinery A/c….Dr1800Wages A/c….Dr1800Cash A/c….Dr1800Machinery A/c…Dr1800 To Cash A/c1800 To Cash a/c1800 To Wages A/c1800 To Wages A/c18003Furniture A/c…Dr150Purchase A/c…Dr150Cash A/c…Dr150Furniture A/c…Dr150 To Cash A/c150 To Cash A/c150 To Purchase A/c150 To Purchase A/c1504Investment in Shares A/c5000NOT ApplicableNOT ApplicableInvestment in Shares A/c5000 To Bank A/c5000 To Bank A/c50005Drawings A/c….Dr500Sundry Expenses A/c..Dr500Cash A/c….Dr500Drawings A/c….Dr500 To Cash A/c500 To Cash A/c500 To Sundry Expenses A/c500 To Sundry Expenses A/c5006Customer A/c…Dr250Customer A/c…Dr250Sales A/c….Dr250Sales A/c…Dr250 To Furniture A/c250 To Sales A/c250 To Customer A/c250 To Furniture A/c250munotes.in

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99 Rectification of Errors 3. In which error wrong accounting principles are followed by an accountant in passing a journal entry? a. Error of principle b. Error of omission c. Compensating error d. Error of commission 4. The error disclosed by Trial Balance is a. Error of omission b. Error of commission c. Error of principle d. None of the above 5. Suspense Account in the Trial Balance is entered in a. Trading A/c b. Balance sheet c. Profit & Loss A/c d. Manufacturing A/c II. STATE WHETHER THE FOLLOWING STATEMENTS ARE TRUE OR FALSE 1. Single sided errors affect only one side of the Trial Balance – True 2. A Trial balance can agree in-spite of some errors – True 3. All errors are rectified by means of Journal entries - False 4. If the amount is wrongly debited instead of credit then errors would be equal to double amount – True 5. Wrong balancing will not affect the trial balance – False III. FILL IN THE BLANKS 1. Difference in trial balance may be transferred to ….. Account (Suspense) 2. Mistakes involving wrong posting are called as errors of ….. (Posting) 3. In an error of principle, the debit and credit are …. (Equal) 4. Rectification entries are passed in the ….. (Journal Proper) 5. Double side errors cannot be disclosed through ….. (Trial Balance) IV. MATCH THE FOLLOWING Group X Group Y 1 Compensating Errors A Recording the transaction
wrongly 2 Error of Omission B Error affecting one account munotes.in

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100 Introduction to Financial Accounts
100 3 Error of Duplication C One error removes the effect
of another error 4 Error of Commission D Failure to record transaction
in the Account book 5 One Sided Error E Errors affecting totaling the
account 6 Error of Casting F Recording same transaction
two times Answers: (1 – C, 2 – D, 3 – F, 4 – A, 5 – B, 6 – E) V. Illustration 1 Rectify the following errors 1. A sale of old furniture of Rs.4000 has been credited to sale account 2. Purchase of furniture for Rs.4000 has been debited to purchase account 3. Rs.3000 paid to Jeevan has been debited to Jeevan Ram 4. Rent of Rs.10000 paid to landlord has been debited to landlord account 5. An amount of Rs.8000 withdrawn by the proprietor has been debited to general expense account 6. Rs.15000 spent for repairs to machinery has been posted to machinery account 7. Salary of Rs.8000 paid to the Draftsman Sachin has been debited to his personal account 8. Goods worth Rs.4000 purchased from Ravi have been omitted to be recorded in the books 9. Paid for purchase of furniture Rs.6000 has been debited to computer account.  munotes.in

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101 6 MANUFACTURING A/C, TRADING A/C, PROFIT & LOSS A/C AND BALANCE SHEET Unit Structure: 4.1 Manufacturing Account 4.2 Trading Account 4.3 Profit & Loss Account 4.4 Balance Sheet 4.5 Classification of Assets 4.6 Classification of Liabilities LEARNING OBJECTIVES After studying this unit, you will be able to: • Make out various accounts, which are the part of final accounts • Understand the various items of Manufacturing Account, Trading Account, Profit & Loss Account and Balance Sheet • Form and Layout of Manufacturing, Trading and Profit & Loss A/c and Balance Sheet 4.1 MANUFACTURING ACCOUNT Manufacturing Account is prepared by manufacturing firms to ascertain the “Cost of Goods” manufactured during an accounting period. It is closed by transferring its balance to the debit side of Trading Account. The manufacturing account gives information on all the expenses and costs incurred in the preparation of the goods to be sold. This includes the expenses that are met in the path of preparing the goods but not the finished goods. Any type of expenses including the cost of raw materials, the cost of machines and their maintenance, the salaries and wages of both skilled and unskilled workers which are considered as the direct expenses of the manufacturing. Even the depreciation of the assets like costly machines and plants are also included under this account. munotes.in

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102 Introduction to Financial Accounts
102 The purpose of preparing the Manufacturing Account is to ascertain the cost of goods manufactured. Therefore, it should include all the expenses relating to manufacture of goods such as purchase of raw materials, carriage and freight on purchase of materials and other expenses incurred in the production process i.e. conversion of raw materials in to finished goods. Major Manufacturing expenses are as follows. 1. Direct Materials – These are the raw materials from which finished goods are manufactured. Raw Materials consumed is arrived as follows. Opening Stock of Raw Materials xx Add – Purchase of Raw Materials Xx Less – Purchase Returns Xx Less – Closing Stock of Raw Material s Xx xxx 2. Work in Progress / Semi Finished Goods – The value of opening WIP appears on Dr side and value of closing WIP appears on Cr side of manufacturing account. This represents materials put in to process. 3. Direct Labor – It is the amount of wages paid to the workers who are employed in the production process 4. Manufacturing Expenses/Factory or Production Overheads – These are expenses incurred in the factory like rent, rates, taxes, electricity, salaries, insurance, depreciation of factory building, plant and machinery, amortization of patents, water, heat, light and parts used in the factory, power & fuel, factory stores & spares, factory supervision etc. ParticularsAmtAmtParticularsAmtAmtTo Work in Progress (Opening)xxBy Work in Progress (Closing)xxTo Raw Materials ConsumedBy Sale of Scrapxx Opening StockxxAdd: PurchasesxxBy Cost of Production trf. To Trading AccountxxAdd: Purchase Expenses - Carriage Inwardxx - Octroi Dutyxx - Customs DutiesxxLess: Purchase Returns(xx)Less: Closing Stock(xx)xxTo Direct WagesxxTo Direct Mfg. Expenses - Hire of Machineryxx - Royalty related to Mfg.xx - Design ExpensesxxxxTo Direct Factory Expneses - Stores, Oil, Greasexx - Power & Fuelxx - Repairs to Factory Assetsxx - Rent, lighting of Factory bldgxxxxxxxxxxManufacturing A/c for the year ended …….munotes.in

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103 Manufacturing A/c, Trading
A/c, Profit & Loss A/c and
Balance Sheet 5. Sale of Scrap – In a production process there may be certain scrap which may or may not have a sale value. Amount of scrap is credited in manufacturing account. 6. Cost of Production – It is the cost of manufacturing the goods. It is the excess of debit side total of manufacturing account over its credit side total. It is the balance in the manufacturing account which is transferred to Trading Account. 4.2 TRADING ACCOUNT It shows the result of buying & selling of goods and/or services during an accounting period. The main purpose is to ascertain the gross profit or gross loss. Gross Profit or Gross Loss is the difference between Sales Value and Cost of Goods Sold. Trading Account records trading transactions of a businessman.
Trading and manufacturing business firms deal in sales and purchases of goods. Therefore, only manufacturing and trading entities prepare the trading account. Trading account gives details of total sales, total purchases and direct expenses relating to purchase and sales. It shows gross profit of business activities during a specific period. In case of trading concern or where manufacturing account is not prepared, Trading account will also include other expenses for receipt or manufacture of goods. Trading Account contains the following details • Opening stock details of Finished Goods and in case where manufacturing account is not prepared then it also includes opening stock details of Raw Material, Semi-Finished Goods (WIP) • Closing stock details of Finished Goods, raw material and semi-finished goods • Total purchases of goods less Purchase Returns. • Total sales of goods less Sales Returns. • All direct expenses related to purchases or sales or manufacturing of goods. ParticularsAmtAmtParticularsAmtAmtTo Opening StockxxBy SalesxxTo Purchasesxx Less: Sales Returnsxx Less: Purchase ReturnsxxxxBy Goods lost / destroyedxxTo Direct Purchase Exp.xxBy Goods taken by ProprietorxxTo Manufacturing A/cxxBy Goods given as free samplesxx (Cost of Production trf.)By Closing StockxxTo Gross Profit B/fxxBy Gross Loss C/fxxxxxxxxTrading A/c for the year ended ………munotes.in

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104 Introduction to Financial Accounts
104 Items of Income (Cr.) side • Total sales of goods fewer Sales returns • Closing stock of goods. • Drawings in the form of goods, goods issued as samples or goods lost by accidents Items of Expenditure (Dr.) Side • Opening stock of goods • Total purchases of goods Less purchase returns • All direct expenses like Carriage inward & Freight expenses, rent for go-down or factory, Electricity and Power expenses, wages of workers and supervisors, Packing expenses, etc. Balancing of Trading Account After recording all the expenses and incomes as mentioned above to trading account, it is closed by transferring the balance – Gross Profit or Gross Loss – to Profit & Loss Account. If Cr side > Dr Side = it’s Gross Profit and Dr side > Cr side = it’s Gross Loss. 4.3 PROFIT & LOSS ACCOUNT It is a part of financial statement, which shows the result of business operations conducted during the year. The purpose is to find out net profit earned or net loss incurred during the year. It contains all indirect expenses and losses (other than those shown on debit side of trading account) which are shown on its debit side and all indirect incomes and gains (other than those shown on credit side of trading account) which are shown on its credit side. All indirect expenses and losses (other than those shown on debit side of Trading A/c) are shown on debit side of P&L A/c, whereas all indirect resource incomes and gains (other than those shown on credit side of Trading A/c) are shown on credit side of Profit & Loss A/c Profit & Loss A/c may be prepared showing separately the expenses as under: 1. Administration Expenses 2. Selling Expenses 3. Distribution Expenses 4. Finance Charges and others munotes.in

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105 Manufacturing A/c, Trading
A/c, Profit & Loss A/c and
Balance Sheet
Explanation of Indirect or Other Expenses and Gains • All indirect expenses are transferred to debit side of Profit & Loss A/c. Any loss occurred by fire or accident is also debited to Profit & Loss Account • Discount allowed to customers (Debtors) is a loss and should be debited to P&L A/c and Discount earned from suppliers (Creditors) is a gain and should be credited to P&L A/c • Commission on sales to agents and salesmen paid is expenditure and should be debited to P&L A/c and commission received being gain, to be credited to P&L A/c • Interest paid on capital or loans taken, being expense should be debited to P&L A/c and Interest received on loans given, being gain, to be credited to P&L A/c • Bad Debts are the debts or dues from customers, which are not recoverable. It is a loss to the business, therefore, debited to P&L A/c ParticularsAmtAmtParticularsAmtAmtTo Gross Loss B/dxxBy Gross Profit B/dxxTo Administrative ExpensesBy Other Income or Gains - Rent, Insurance, Repairsxx - Commission recdxx - Office Salariesxx - Discount recdxx - Postage, teleph & telexxx - Dividend recdxx - Printing & Stationeryxx - Interest recdxx - Fees (legal/audit)xx - Profit on sale of assetsxx - General ExpensesxxxxTo Selling & Distribution Exp. - Salesman's salaries, commission etc.xx - Travellingxx - Carriage, freight, dutiesxx - Warehousing chargesxx - Packing expensexx - Advtg & sales promotionxx - Goods given as free samplesxxxxTo Financial Expenses - Interest & bank chargesxx - Bad debts & prov for bad debtsxx - Discounts givenxxxxTo Depreciation - on Machinery, Computersxx - on Furniture & Fixturesxx - Building, Office EquipmentsxxxxTo Unusual Exp or losses - Goods lost/destroyedxx - Loss on sale of fixed assetsxxxxTo Appropriations - Income taxxx - ReservesxxxxTo Net Profit trf to Capital A/cxxxxxxxxProfit & Loss A/c for the year ended ………munotes.in

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106 Introduction to Financial Accounts
106 • Salaries and wages – sometimes only one account is kept for both salaries and wages. When the amount of wages is small such combined account is opened. In such case full amount to be debited to P&L A/c. But if the item is Wages and Salaries, it is transferred to Trading A/c on the assumption that wages is a major part of this expenditure • Trade Expenses also known as sundry expenses or miscellaneous expenses or petty expenses are charged to P&L A/c debit side • Income Tax is a tax in income. It should not be treated as expenses of the business. Therefore, it is not debited to P&L A/c. In case of sole trader, it is debited to Capital Account or added to Drawings Balancing of Profit & Loss A/c After transferring all expenses and losses of the business to Debit, and all incomes and gains of the business to Credit side of P&L A/c, it is balanced. If Credit Side > Debit Side then difference is Net Profit If Debit Side > Credit Side then difference is Net Loss in case of sole proprietor and partnership business, net profit is added to the Capital and net loss is deducted from the capital. 4.4 BALANCE SHEET A Balance Sheet is a statement (not an account) of the total assets and liabilities of an organization at a particular date- usually the last date of an accounting period. Objective is to ascertain the financial position of a concern. It shows the nature and value of assets and the nature and value of liabilities and the position of capital. It is always prepared on a certain date and not for a particular period. It is divided in to two sides. The left-hand side is “Liabilities” and right-hand side is “Assets”. It is a summary of balances of those ledger accounts, which have not been closed by transfer to Trading and Profit & Loss A/c. It shows financial position of the business. munotes.in

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107 Manufacturing A/c, Trading
A/c, Profit & Loss A/c and
Balance Sheet
Form and Layout The Balance Sheet is generally prepared in T Form having two sides, one to show the assets and the other liabilities. The left-hand side is generally called as the Liabilities side and the right-hand side is called the Asset side. This is called the Traditional Form. Now a days the Balance Sheet is also prepared in the vertical of T form in a way a layman can understand. 4.5 CLASSIFICATION OF ASSETS Assets are classified in to (1) Fixed Assets, (2) Floating or Current Assets and (3) Fictitious Assets Fixed Assets – are the assets of a permanent nature, which are used in business as long as they are held and useful. These assets are not meant for resale. Business is carried on with the help of these assets. Examples are Machinery, Building, Office Equipment, Plant, Patent Rights etc. Types of Fixed Assets 1. Tangible Fixed Assets – Have physical existence and can be seen by eyes. E.g. Land, Building, Machinery, Furniture etc. 2. Intangible Fixed Assets – Have no physical existence and which cannot be seen. E.g. Goodwill, Patents, Copyrights etc. LIABILITIESAmtAmtASSETSAmtAmtCapital AccountFixed AssetsOpening BalancexxGoodwill /LandxxAdd: New Capital brought inxxPlant & MachineryxxAdd: Net profit during the yearxxLess - DepreciationxxxxLess: DrawingsxxPremises/Building / VehiclesxxLess: Net loss during the yearxxxxLess - DepreciationxxxxFurniture & FittingsxxLess - DepreciationxxxxReserves & SurplusInvestmentsGeneral ReservexxInvestments in shares & bondsxxLoans (Secured/Unsecured)Current Assets, Loans & AdvancesLoans from BankxxClosing StockxxBank OverdraftxxDebtorsxxLoans & Advances givenxxCurrent Liabilities & ProvisionsBills receivablexxCreditorsxxPrepaid ExpensexxBills PayablesxxCash at BankxxOutstanding expensesxxCash in HandxxIncome received in advancexxFictitious AssetsDeferred Expense not w/offxxCapital A/c Debit balancexxxxxxxxBalance Sheet As at …….munotes.in

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108 Introduction to Financial Accounts
108 Floating/Current Assets/Circulating Assets – Assets which are held temporarily and which are meant for resale or consumption in business. They change from time to time. E.g. Cash and Bank, Sundry Debtors, Bills Receivables, Stock etc. Fictitious Assets – These are those assets which are not represented by anything concrete. There is no tangible property or asset representing it. They cannot be converted into cash. E.g. preliminary expenses, discount on issue of shares and debentures etc. 4.6 CLASSIFICATION OF LIABILITIES Liabilities can be classified into (1) Fixed (2) Current and (3) Contingent Liabilities Fixed Liabilities – Liabilities which are redeemed or repaid after a long period of time. E.g. are Long term loans and capital. Current Liabilities – Liabilities which are to be paid or discharged in the near future, usually within a year. E.g. Creditors, Bank Overdraft, Outstanding Expenses, Bills Payable etc. Contingent Liabilities – These are not actual liabilities, but they may become actual liability on happening of certain events. If expected event does not occur, no liability or loss will arise. E.g. suit filed against the business for a claim, not admitted by the business. The liability will arise if Court decides against the concern and in favour of the claimant, otherwise there will be no liability. Other examples would be liability on partly paid shares and debentures held as investment, liability of bill discounted etc.  munotes.in

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109 7 PREPARATION OF FINAL ACCOUNTS IN HORIZONTAL & VERTICAL FORM Unit Structure: 4.1 Introduction 4.2 Forms of Balance Sheet 4.3 Forms of Profit & Loss A/c 4.4 Vertical Form of Balance Sheet 4.5 Horizontal Form of Balance Sheet 4.6 Vertical Form of Profit & Loss A/c 4.7 Horizontal Form of Profit & Loss A/c 4.8 Solved Illustrations LEARNING OBJECTIVES After studying this unit, you will be able to: • Understand Horizontal and Vertical Format of Profit & Loss A/c and Balance Sheet 4.1 INTRODUCTION At the end of the accounting year, a businessman prepares certain statements which present the results of the business operations for that period. These statements comprise of: 1. Balance Sheet and 2. Profit and Loss A/c These statements taken together are known as final accounts / financial statements 4.2 FORMS OF BALANCE SHEET 1. Conventional (Horizontal or T) form – It shows the assets and properties and their values on the right-hand side of the sheet and the liabilities and capital and their values on the left-hand side. 2. Columnar (Vertical) form – Also known as the report format. Assets are shown in order of liquidity (i.e. how quickly it can be converted into cash). The least liquid asset appears first and the most liquid asset appears last. The liabilities appear in the order of due dates for repayment. The permanent liabilities appear first, followed by semi-permanent liabilities. Short term liabilities appear last. munotes.in

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110 Introduction to Financial Accounts
110 4.3 FORMS OF PROFIT & LOSS A/C 1. Customary or Conventional Form – Also known as Horizontal Form or Account Form or T Form. It shows all income for the year on the credit side of the account and all expenditure on the debit side. Excess of income over expenditure denotes profit for the year whereas excess of expenditure over income denotes loss for the year. 2. Vertical or Columnar or Analytical Form – It is prepared in a statement format showing Gross Sales less Returns = Net Sales. From Net sales cost of goods sold is deducted and gross margin is arrived. And from Gross Margin, operating and non-operating expenses are deducted. It gives clarity and simplicity and facility of analysis of the various sections of profit & loss a/c. It is possible to compute the relationship between various items in the revenue statement when it is prepared in such vertical format. 4.4 VERTICAL FORMAT OF BALANCE SHEET
BALANCE SHEET AS ON…….SOURCES OF FUNDSAmtAmtIShareholder's FundsShare CapitalxxCapital ReservexxGeneral ReservexxSecurities PremiumxxForfeited SharesxxProfit & Loss A/cxxLess:Accumulated LossesPreliminary ExpensesxxDiscount on issue of shares/debenturesxxUnderwritting commissionxxxxIILoan FundsDebenturesxxOther Long Term LoansxxxxTOTAL SOURCESxxxAPPLICATION OF FUNDSAmtAmtIFixed AssetsGoodwillxxLand & BuildingxxPlant & MachineryxxPatents, CopyrightsxxFurniturexxxxIIInvestmentsxxIIIWorking CapitalCurrent AssetsCashxxBankxxDebtorsxxBills ReceivablesxxMarketable SecuritiesxxStock of goodsxxPrepaid expensesxxLessCurrent Liabilities and ProvisionsCreditorsxxBills PayablexxOutstanding expensesxxBank overdraftxxProvision for TaxationxxProvision for DividendxxOther provisionsxxWorking capitalxxxxTOTAL APPLICATIONSxxxmunotes.in

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111 Preparation of Final Accounts
in Horizontal & Vertical Form 4.5 HORIZONTAL FORMAT OF BALANCE SHEET

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112 Introduction to Financial Accounts
112 4.6 VERTICAL FORM OF P&L ACCOUNT
PROFIT & LOSS STATEMENT AS ON …AmtAmtGross SalesCash + Credit SalesxxLess:Sales ReturnsxxSales TaxxxNet SalesxxLess:Cost of SalesR/M ConsumedxxDirect wagesxxManufacturing expensesxxAdd:Opening Stock - F/G & WIPxxLess:Closing Stock - F/G & WIPxxGROSS PROFITxxxAdd:Operating IncomeCommission on purchase & saleXXDiscount receivedXXLess:Operating ExpensesAdministrative expensesXXSelling & Distribution expensesXXFinance ExpensesXXNET OPERATING PROFIT BEFORE INTEREST AND TAX (NOPBIT)XXXAdd:Non Operating IncomeDividend & Interest ReceivedXXProfit on sale of fixed assetsxxLess:Non operating expenses & lossesDiscount on issue of shares/debenturesxxLoss on sale of fixed assetsxxNET PROFIT BEFORE INTEREST & TAX (NPBIT)XXXLess:Interet on DebenturesXX NET PROFIT AFTER INTEREST BUT BEFORE TAX (NPAIBT)XXXLess:TaxXXNET PROFIT AFTER TAX (NPAT)XXXmunotes.in

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113 Preparation of Final Accounts
in Horizontal & Vertical Form 4.7 HORIZONTAL FORMAT OF PROFIT & LOSS A/C

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114 Introduction to Financial Accounts
114 4.8 SOLVED ILLUSTRATIONS Illustration:1 Convert the following Balance Sheet in vertical format.
Illustration 2: Convert the following Balance Sheet in Vertical Format
Balance Sheet of X & Co. as on 31st March, 2XXX (Proprietor Mr.X)LiabilitiesAmtAmtAssetsAmtAmtProprietor's FundsFixed AssetsCapital 700000Land100000Reserves3000001000000Buillding360000Plant & Machinery6600001120000Long Term LoansSecured300000Investment30000Unsecured200000500000Current AssetsCurrent LiabilitiesStock in TradeCreditors100000Raw Materials50000Provision for Taxation35000135000Stores & Spares5000Work in Process5000Finished Goods100000160000Debtors300000Prepaid Expense20000Cash & Bank Balance500032500016350001635000 Balance Sheet of Venus Manufacturers as on 31st March, 2XXX LiabilitiesAmtAmtAssetsAmtAmtOutstanding Expenses11700Cash on Hand1000Sundry Creditors90000Cash with Bank16000Bills Payable60000Sundry Debtors418019Bills Receivable20000Capital Balance440000Closing Stock20000Less - Drawings38000Prepaid Expenses (Insurance)1500Add - Net Profit94619496619Loose Tools10000Less - Depreciation10009000Furniture4000Less - Depreciation4003600Plant & Machinery100000Less - Depreciation1000090000Building50000Add - Extension12000Less - Depreciation280059200Land20000658319658319munotes.in

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115 Preparation of Final Accounts
in Horizontal & Vertical Form Solution for Illustration 1
Balance Sheet of X & Co as on …..SOURCES OF FUNDSAmtAmtProprietor's FundsCapital700000Reserves3000001000000Long Term LoansSecured300000Unsecured200000500000Total1500000APPLICATION OF FUNDSAmtAmtFixed AssetsLand100000Buillding360000Plant & Machinery6600001120000Working CapitalCurrent AssetsStock in TradeRaw Materials50000Stores & Spares5000Work in Process5000Finished Goods100000Debtors300000Prepaid Expense20000Cash & Bank Balance5000Marketable Investments30000515000Less - Current LiabilitiesCreditors100000Provision for Taxation35000135000Total1500000munotes.in

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116 Introduction to Financial Accounts
116 Solution for Illustration 2
Balance Sheet of Venus Manufacturers as on …..SOURCES OF FUNDSAmtAmtProprietor's FundsCapital Balance440,000 Less - Drawings38,000 Add - Net Profit94,619 496,619 Long Term Loans- Total496,619 APPLICATION OF FUNDSAmtAmtIFixed AssetsLoose Tools10,000 Less - Depreciation1,000 9,000 Furniture4,000 Less - Depreciation400 3,600 Plant & Machinery100,000 Less - Depreciation10,000 90,000 Building50,000 Add - Extension12,000 Less - Depreciation2,800 59,200 Land20,000 IIInvestments- IIIWorking CapitalCurrent AssetsCash on Hand1,000 Cash with Bank16,000 Sundry Debtors418,019 Bills Receivable20,000 Closing Stock20,000 Prepaid Expenses (Insurance)1,500 476,519 Less - Current LiabilitiesOutstanding Expenses11,700 Sundry Creditors90,000 Bills Payable60,000 161,700 Total496,619 munotes.in

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117 Preparation of Final Accounts
in Horizontal & Vertical Form Illustration 3 Present the following
Manufacturing, Trading and Profit & Loss Account for the year ended …31.03.XXParticularsAmtAmtParticularsAmtAmtTo Opn stock (R/M)40000By Closing Stock (R/M)80000To Purchases205000By Cost of Production C/d242000Less - Returns5000200000To Packing Materials15000To Wages55000To Carriage Inwards9000To Depreciation - Plant3000322000322000To Opn Stock (F/G)10000By Sales410000To Cost of Production b/d242000Less - Returns10000400000To Gross Profit c/d168000By Closing Stock of F/G20000420000420000To Salaries22000By Gross Profit b/d168000To Insurance2500By Miscellaneous Income5000To Rent7000To Printing & Stationary4000To Rates and Taxes3000To Office Expenes4000To Interest & Bank Charges8000To Salesmen's Travel Exp10000To General Exp1000To Audit Fees2000To Advertisements6000To Legal Charges36000To Interest on Loan25000To Prov for doubtful debts7000To Dep on furniture1200To Net Profit c/d34300173000173000munotes.in

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118 Introduction to Financial Accounts
118 Solution for Illustration 3
PROFIT & LOSS STATEMETN IN VERTICAL FORMParticularsAmtAmtAmtGross Sales410000Less - Returns10000Net Sales400000Less - Cost of SalesOpn Stock - R/M40000Opn Stock - F/G10000Add - Purchases205000Less - Returns5000200000Add - Packing Materials15000Add - Wages55000Add - Carriage Inwards9000Add - Depreciation - Plant3000Less - Closing Stock - R/M80000Less - Closing Stock - F/M20000232000Gross Profit168000Less - Operating ExpensesAdministrative ExpensesSalaries22000Insurance2500Rent7000Printing & Stationery4000Rent & Taxes3000Office Expenses4000General Expenses1000Audit Fees2000Legal Charges36000Depreciation on Furniture120082700 Finance ExpensesInterest & Bank charges8000Interest on Loan25000Provision for Doubtful Debts700040000 Selling & Distribution ExpensesTravel expenses of salesmen10000Advertisement600016000138700Operating Net Profit29300Add - Non Operating Income Miscellaneous Income5000Less - Non Operating Expenses0Net Profit34300munotes.in

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119 Preparation of Final Accounts
in Horizontal & Vertical Form Illustration 4
Profit & Loss Account for the year ended …31.03.XXParticularsAmtAmtParticularsAmtAmtTo Opn stock40200By Sales1940000To Purchases less Returns1650260Less - Returns48001935200To Electricity Power28100By Closing Stock 24100To Carriage Inward 5120To Wages32212To Gross Profit c/d20340819593001959300To Rates and Taxes2500By Gross Profit b/d203408To Salaries38240By Bad Debts Recovered2000To Lighting6210To Office Rent6000To Travel Exp of Salesmen2220To Insurance1000To Advertising39550To Bad Debts16050To Discount5705To General Expenses11265To Postage & Telegram3000To Dep on Plant3916To Dep on furniture1560To Audit Fees1200To Loss on Sale of Machinery33250To Net Profit c/d33742205408205408munotes.in

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120 Introduction to Financial Accounts
120 Solution for Illustration 4
 PROFIT & LOSS STATEMETN IN VERTICAL FORMParticularsAmtAmtAmtGross Sales1940000Less - Returns4800Net Sales1935200Less - Cost of SalesOpening Stock40200Add - Purchases1650260 Electricity Power28100 Carriage Inward 5120 Wages32212 Deprn on Plant39161759808Less - Closing Stock241001735708Gross Margin199492Less - Operating Expenses Administrative ExpensesRates & Taxes2500Salaries38240Lighting6210Office Rent6000Insurance1000General Expenses11265Postage & Telegram3000Deprn on Furniture1560Audit Fees120070975 Finance ExpensesBad Debts16050Discount570521755 Sellign & Distribution ExpensesSalesmen's Travel Expenses2220Advertising3955041770134500Operating Net Profit64992Add - Non Operating Income Bad Debts Recovery2000Less - Non Operating Expenses Loss on Sale of Machinery33250Net Profit Before Tax33742munotes.in

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121 8 INTRODUCTION TO SCHEDULE VI OF COMPANIES ACT, 1956 (Now Schedule III of Companies Act, 2013, Amended by MCA Notification dated 24th March, 2021) Unit Structure: 4.1 Introduction & Meaning of Income Statement and Balance Sheet 4.2 Format of Balance Sheet and Profit & Loss statement as per Schedule III of the Companies Act 2013 4.3 Items appearing under the head Equity & Liabilities 4.4 Items appearing under the head Assets 4.5 Brief Explanation for P&L Statement 4.6 Legal Requirements 4.7 Exercises LEARNING OBJECTIVES • After studying this unit, you will be able to understand: • Schedule III of the Companies Act 2013 • Financial Statements as per Revised Schedule III 4.1 INTRODUCTION & MEANING Financial Statements are historical documents which show summaries of detailed information about financial performance and financial position of an organization for the accounting period. There are two basic financial documents viz. Income Statement and Balance Sheet. Income Statement It is a statement of Revenue from operations, other incomes and expenses during a given accounting year. It indicates financial performance of an organization for an accounting year. It is also called as statement of profit & loss Balance Sheet It is a statement of assets and liabilities indicating financial position of an organization at a certain date. It is a statement of assets and equity. Assets include non-current assets and current assets and liabilities include shareholders fund, Non-current liabilities and current liabilities. munotes.in

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122 Introduction to Financial Accounts
122 4.2 FORMAT OF BALANCE SHEET AND PROFIT & LOSS STATEMENT AS GIVEN IN THE SCHEDULE III OF THE COMPANIES ACT 2013 ARE GIVEN BELOW FOR REFERENCE WITH BRIEF EXPLANATION
Part I - FORM OF BALANCE SHEETPARTICULARSNote No.Current Year Amt Rs.Previous Year Amt Rs.IEQUITY & LIABILITIES1EQUITYaShare CapitalbOther Equity - Reserves & SurpluscMoney Received against Share Warrants2Share Application Money Pending Allotment3NON CURRENT LIABILITIESaLong Term BorrowingbDeferred Tax Liabilities (Net)cOther Long Term LiabilitiesdLong Term Provisions4CURRENT LIABILIITESaShort Term BorrowingsbTrade Payables - Total outstanding dues of Micro Enterprises & Small Enterprises - Total outstanding dues of Creditors other than Micro Enterprises & Small EnterprisescOther Current LiabilitiesdShort Term Provisions TOTALIIASSETS1NON CURRENT ASSETSaProperty Pland & Equipment and Intangible Assetsi) Property, Plant and Equipmentii) Intangible Assetsiii) Capital Work in Progressiv) Intangible Assets under DevelopmentbNon Current InvestmentscDeferred Tax Assets (Net)dLong Term Loans & AdvanceseOther Non Current Assets2CURRENT ASSETSaCurrent InvestmentsbInventoriescTrade ReceivablesdCash & Cash EquivalentseShort Term Loans & AdvancesfOther Current AssetsTOTALName of the CompanyBALANCE SHEET munotes.in

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123 Introduction to Schedule VI of
Companies Act, 1956
4.3 ITEMS APPEARING UNDER THE HEAD EQUITY AND LIABILITIES IN THE BALANCE SHEET 1) Shareholders Funds (a) Share Capital: Note: Equity Share Capital and Preference Share Capital are to be shown separately. (b) Reserves and Surplus: The following items are shown under this head: (i) Capital Reserves (ii) Capital Redemption Reserve (iii) Securities Premium (iv) Debenture Redemption Reserve Part II - FORM OF STATEMENT OF PROFIT & LOSS PARTICULARSNote No.Current Year Amt Rs.Previous Year Amt Rs.IRevenue from OperationsIIOther IncomeIIITotal IncomeIVExpenseseaCost of Materials ConsumedbPurchases of Stock in TradecChange in Inventories (of F/G, WIP & Stock in Trade)dEmployee Benefit ExpenseseFinance CostfDepreciation & AmortizationgOther ExpensesTotal ExpensesVProfit Before Exceptional and Extraordinary Items and Tax (III-IV)VIExceptional ItemsVIIProfit Before Extraordinary Items and Tax (V-VI)VIIIExtraordinary ItemsIXProfit Before Tax (VII-VIII)XTax Expenses1. Current Tax2. Deferred TaxXIProfit or (Loss) for the period from continuing operations (VII-VIII)XIIProfit or (Loss) for the period from dis - continuing operations XIIITax expenses of discontinuing operationsXIVProfit / (Loss) from Discontinuing operations (after tax) (XII-XIII)XVProfit or (loss) for the period (XI+XIV)XVIEarnings per Equity Share1. Basic (NPAT-Preference Dividend)/No. of issued equity shares2. Diluted (NPAT-Preference Dividene)/ No. of issued Equity shares, Preference shares, Warrants, Debts, stock options etc.Name of the CompanyPROFIT & LOSS STATEMENT FOR THE YEAR ENDED munotes.in

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124 Introduction to Financial Accounts
124 (v) Revaluation Reserve (Accounting Treatment -Not to be evaluated) (vi) Share options Outstanding Account (Accounting Treatment -Not to be evaluated); (vii) Other reserves (restricted to General Reserve only); (viii) Surplus i.e. balance in the Statement of Profit & Loss [Add Cr. Bal or Less Dr. balance] The balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus, if any, shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure is in negative. (c) Money received against share warrants 2) Share application money pending allotment 3) Non-current liabilities (a) Long Term borrowing: (Debentures / Bonds, Bank Loans, Long Term Loans, Mortgage Loans, Public Deposits etc.) (b) Deferred Tax Liabilities: (Net) (c) Other Long -Term Liabilities: Intercompany Owings from associates, subsidiaries or other companies, long term trade payable. (d) Long Term provisions: (Provision for Employee Benevolent/Welfare Fund, Provident Fund, Gratuity Fund, Provision for Warranties, Provision for Pension Fund) 4) Current Liabilities (a) Short-term Borrowings: Loans repayable on demand from banks and other parties, Bank Overdrafts, Cash credits. (b) Trade Payables: Sundry Creditors, Bills Payable, Outstanding Expenses (c) Other Current Liabilities: Unpaid dividends, Interest accrued and due or not due on borrowings, Income received in advance, Calls in advance, o/s Interest on calls in advance. (d) Short-term Provisions: (Provision for tax and Proposed dividend) munotes.in

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125 Introduction to Schedule VI of
Companies Act, 1956 4.4 ITEMS APPEARING UNDER THE HEAD ASSETS IN THE BALANCE SHEET. 1. Non-Current Assets (a) Fixed Assets: (i) Tangible Assets: (Land, Building, Plant and Equipment, Furniture & Fixture, Vehicles, Office Equipment, Live Stock, Railway sidings etc.) (ii) Intangible Assets: (a) Goodwill (b) Brand / Trademarks (c) Computer Software & Mining rights (d) Masthead and Publishing titles. (e) Copyrights, and patents and other intellectual property rights, services and operating rights. (f) Recipes, formulae, models, designs and prototypes (g) Licenses and franchise (iii) Capital work in Progress: (iv) Intangible Assets under Development: like patents, intellectual property rights, etc. which are being developed by the company. (b) Non-Current Investments: Investments /Trade Investments and Non-trade investment (If it is a long term) (c) Deferred Tax Assets (Net): (d) Long-term Loans and Advances: – only Capital Advances and Security Deposits. (e) Other non-current assets: Preliminary Expenses, Discount on Issue of shares/ debentures Underwriting Commission, Deferred revenue expenses/ Discount on issue of shares/debenture/Share expenses 2. Current Assets (a) Current Investments: (Investments in Equity Instruments (Shares), Preference shares, Government Securities, Debentures, and Mutual Funds etc.) (For short duration, i.e. meant for resale) munotes.in

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126 Introduction to Financial Accounts
126 (b) Inventories: Inventories include the following: (i) Raw Material (ii) Work-in-progress (iii) Finished Goods (iv) Stock- in- trade (in respect of goods acquired for trading) (v) Stores and Spares (vi) Loose Tools (c) Trade Receivables: Debtors and Bills receivables. (d) Cash and cash equivalents: (a) Balance with banks (b) Cheques, drafts on hand. (c) Cash in hand (d) Deposit with Banks. (e) Short-term Loans and Advances: (short term loans /advances given to employees) (f) Other Current Assets: (Restricted to prepaid expenses, Accrued Incomes, Interest accrued on Investments, Advance Tax) 3. Contingent Liabilities and Capital Commitments (a) Contingent Liabilities – Those liabilities which may or may not arise because they are dependent on a happening in future. It is not recorded in the books of accounts but is disclosed in the Notes to Accounts for the information of the users. (Claims against the company not acknowledged as debts, Guarantees, Other money for which the company is contingently liable). (b) Capital commitments – A future liability for capital expenditure in respect of which contacts have been made. (Uncalled liability on shares and other investments partly paid etc.) 4.5 BRIEF EXPLANATION FOR PROFIT & LOSS STATEMENT I Revenue from operations (Cash sales + Credit sales Less Sales returns Less Excise Duty) II Other Income (All incomes other than sales) III Total Revenue (I + II) munotes.in

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127 Introduction to Schedule VI of
Companies Act, 1956 IV Expenses a) Cost of materials consumed (is given specifically; No need to calculate if not given) b) Purchases of stock-in-trade (purchases) c) Changes in inventories of finished goods, work-in-progress & stock-in-trade (Opening stock less closing stock) d) Employees Benefits Expenses (salaries, wages, canteen expenses, all their employee welfare expenses, PF contribution of the employer) e) Finance cost (Interest on borrowings) f) Depreciation & Amortization expenses (Dep. On fixed tangible assets & amortization of intangible asset) g) Other expenses All other revenue expenses & losses + loss by theft/fire etc. 4.6 LEGAL REQUIREMENTS 1. Books of Accounts – Section 128(1) provides that every company must keep at its registered office books of accounts, relevant papers and financial statements for every financial year and explain the transaction effected both at the registered office and its branches. 2. Basis – Books of accounts must be kept on accrual basis and according to Double Entry System of Accounting 3. A Place Other than Registered Office – The books of accounts may be kept at such other place in India as the Board of Directors may decide. When such a decision is taken, the company must file with the registrar, within 7 days a notice giving full address of that place. 4. Electronic Mode – The company may keep such books of accounts or other relevant papers in electronic mode in such a manner as may be prescribed 5. Branch Books of Accounts – Where a company has a branch in India or outside India, the Provisions of the Act must be complied with. The branch must send the summarized return at its registered office or at such other place where accounts are kept munotes.in

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128 Introduction to Financial Accounts
128 6. Inspection by Directors – The directors have the right to inspect the books of accounts at the registered office or at such a place where accounts are kept. 7. Preservation – The books of accounts of every company must be preserved for at least 8 financial years immediately preceding the financial year 8. Penalty – In case of contravention of section 128, MD, whole time director in charge of finance, chief financial officer shall be punishable with imprisonment for 1 year or with fine of Rs.50000 which may be extended to Rs.500000 or with both 9. Compliances with AS and Forms – The financial statements must comply with the accounting standard notifies under section 133 and must be in the form prescribed by schedule III (Section 129 (1)) 10. Consolidated Financial Statements – In case a company has one or more subsidiaries, it prepares consolidated financial statements in addition to financial statements 11. Board Responsibility – The board is responsible to lay before Annual General meeting of a company the financial statements for the year. 12. Deviation – If there is a deviation from A.S. such deviations and the reasons there of must be disclosed in the financial statements for the year. 13. Signature – Financial statements must be approved by the board of directors before they are signed on behalf of the board by chairman or 2 directors, the Chief Financial Officer, Secretary of the company. Thereafter the financial statements should be submitted for audit (Section 134 (1)) 14. Auditor’s Report – The auditors report is to be attached to every financial statement (Section 134(2)) 15. BOD Report – The report is to be attached to statements laid before the general meeting 16. Directors responsibility statement (Section 134(5) must state – compliance with accounting standards, Accounting policies, Accounting records, Internal Financial Control and Compliance with Law 17. Circulation – A signed copy of every financial statement including consolidated financial statement, must be issued, munotes.in

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129 Introduction to Schedule VI of
Companies Act, 1956 circulated or published along with a copy of notes, auditors report and boards report 18. Penalty- If a company contravenes the provisions of section 134, the company shall be punishable with a fine of Rs.50000 which may extend to Rs.2500000 and every officer in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall be at least Rs.50000 and which may extend to Rs.500000 or with both. 19. Members Right (Section 136) – Every member has a right to receive copies of audited financial statements at least 21 days before the date of the annual general meeting (Section 136 (1)) 20. File with the Registrar (Section 137)- A copy of financial statements including consolidated financial statements if any along with the documents to be attached to such financial statements, must be filed with the registrar of companies within 30 days of the date of annual general meeting 4.7 EXERCISES I. MULTIPLE CHOICE QUESTIONS 1. The requirements for final account of companies are specified in Schedule… a. I b. III c. XIII d. XIV 2. Any amount payable within 12 months from date of Balance Sheet is called…. a. Capital b. Loan c. Contingent d. Current Liabilities 3. Schedule III requires Profit & Loss Account to be prepared in ---- a. Horizontal format b. Vertical Format c. Convenient Format d. Columnar Format munotes.in

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130 Introduction to Financial Accounts
130 4. Which of the following is not an example of PPE? a. Plant & Machinery b. Buildings c. Royalty d. Patents 5. Following is not a secured loan a. Debentures b. Bank Loans c. Public Deposits d. None of the above II. STATE WHETHER THE FOLLOWING STATEMENTS ARE TRUE OR FALSE 1. The companies final accounts should be prepared in the form prescribed under Companies Act, 2013 – True 2. Companies must prepare their financial statements in vertical format only – True 3. Immovable property is included in PPE – True 4. Goodwill is amortized – True 5. Authorized capital is disclosed only for information – True 6. Accounting policies adopted by a company should be disclosed as per AS-9 – False (it is AS-1) III. FILL IN THE BLANKS 1. Accounting policies are prescribed by ….. (AS-1) 2. Machinery is shown under …. Assets. (PPE) 3. Profit & Loss Account of a company must be as per part … of schedule III of Companies Act, 2013 (II) 4. Fixed Deposits with bank should be shown as ----- (Bank Balance) 5. Immovable properties held for source of additional income is to be shown as --- (Investment) 6. The capital work in progress is added to …. In Balance Sheet (PPE) munotes.in

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131 Introduction to Schedule VI of
Companies Act, 1956 IV. MATCH THE FOLLOWING Group X Group Y 1 Proposed Dividend A Contingent Liability as a
note 2 Discount on Issue of Shares B Other current assets 3 Disputed Tax Demand C Contingent Liability 4 Debentures D Long Term Borrowing 5 Live Stocks E PPE 6 Trade Marks F Intangible Assets 7 Issue of Bonus Shares G Capitalization of Reserve Answers: (1-A), (2-B), (3-C), (4-D), (5-E), (6-F), (7-G)  munotes.in