15 Financial Accounts

SYLLABUS

FINANCIAL ACCOUNTNG

- Fundamentals of double entry book keeping up to the preparation of Trial Balance.

- Bills of Exchange including accommodation bills - Preparation of Final accounts - Final Accounts of non trading concerns- Single Entry- Consignment- Joint Venture

Text and reference books :

1. Dr. M.A. Arulanandam & K.G. Raman Advanced Accountancy

2. M.C. Shukla & T.S. Grewal Advanced Accountancy

3. Jain & Narang Advanced Accountancy

4. R.L. Gupta Advanced Accountancy

Fundamental of double entry book keeping up to the preparation of Trial Balance

Preparation of final Accounts

Double Entry system of Accounting Books – Preparation of Journal – Ledger – Errors and Rectification – Preparation of Trail Balance and final accounts.

Double Entry system of Accounting:

In the Western world the double entry system was developed in the 15 th century in Italy by Lucas Pacioli. Every transaction has two aspects and according to this system, both the aspects are recorded. For example, if the business acquires something then either it must have been given by someone or it must have been acquired by giving up something. On purchase of furniture either the cash balance will be reduced or a liability to the supplier will arise. The Double Entry System as: The double entry system is that system which recognizes and records both the aspects of transaction”. This system has been proved to be systematic and has been found of great use for recording the transaction in the business enterprise.

Advantage of double entry system:

This system affords the under mentioned advantages:

(i) By the use of this system the accuracy of the accounting work can be established, through the device of the trail balance.

(ii) The profit earned or loss suffered during a period can be ascertained together with details.

(iii) The financial position of the firm or the institution concerned can be ascertained at the end of each period, through preparation of the balance sheet.

(iv) This system permits accounts to be kept in as much detail a necessary and therefore, affords significant information for preparation of the balance sheet.

(v) Results of one year may be compared with those of previous years and reasons for the change may be ascertained.

(vi) The management may be able to obtain the required information for the timely decision making.

(vii) The firm is saved from frauds and misappropriations since full information about all assets and liabilities will be available.

Book Keeping

A system of recording daily transactions of business leading to presentation of a complete financial picture is known a Book Keeping. The main purpose of book keeping financial accounts are summarized below.

1. To ascertain the operating results during a period, i.e. to find out the quantum of profit/loss during a particular period.

2. To ascertain the financial position at the end of the period. i.e. assets and liabilities of the concern.

3. To determine the relation between the outsiders.

There are two systems of recording transactions. Single entry system and Double entry system. Single entry system is economical but it is not fool proof whereas double entry system recognizes the fundamental fact that every transaction is a double sided affair. If one gives something then a corresponding benefit must have been received.

Rules for Journalizing.

Accounting are classified into three categories. They are Personal account, real account and nominal account. Rules for journalizing these three accounts are given below:

1. Debit the receiver and credit the giver - Personal Account2. Debit what comes in and credit what goes out - Real Account3. Debit all expenses (and losses) and credit all

incomes (and gains) - Nominal Account

Books of Accounts:

Cash book is meant out record dash and bank transactions. Left hand side of the cash book is called debit side which records for receipt of cast and right side if called credit side which records the transactions for payments. As business is translated through cash as well as bank, so double column cash book has been introduced by showing transaction both for cash and bank in debit and credit side. Cash discount arises for payment before specified date as per terms and conditions for purchase of good with the supplier. Cash discount when allowed to a customer is a loss and when received is a gain. In a triple column cash book the discount allowed and received is also recorded by maintaining a separate column on both sides.

Ledger

All the transactions of primary entry are posted in the Account Books called Books of Final entry. This is also called a ledger. It contains summaries of all transactions and final accounts are drafted from this ledger.

Ledger may be divided in two portions:

1. Personal Ledger – Sundry debtors and sundry creditors ledger,2. Impersonal Ledger – Cash book and General Ledger

Entries in the ledger follow the ‘Double Entry Principle’. This means for every debit entry there must be a corresponding credit entry and vice versa. All debit entries are proceeded by the word “By” in the right hand side of the relative ledger account.

Preparation of Journal:

Steps in Journalizing

Before one can journalize transactions, one must think, on the basis of the rules given above, about the effect of the transactions and assets, liabilities, expenses, gains etc., of the firm. On the basis the accounts to be debited or credited will be determined. Then the entry will be made in the journal, as indicated above.

It should be noted that the papers or documents supporting the transaction and establishing its validity are known as vouchers. These should be filed in proper order, together with necessary references, so that in times of need these can be referred to.

Usually the transactions in a firm are so numerous that to record the transactions for a month will require many pages in the journal. At the bottom of one page the totals of the two columns are written together with the words “Carriage forward” in the particulars columns with the words “Brought Forward” in particular column.

Illustration:

Transactions of Ramesh for April are given below. Journalize them. 7

April 1. Ramesh started business with cash 10,000

2. Paid into bank 7,000

3. Bought goods for cash 500

4. Drew cash from bank for office 100

13. Sold to Krishna goods on credit 150

20. Bought of Shyam goods on credit 225

24. Received from Krishna 150

28. Paid Shyam cash 215

Discount allowed 10

30 Cash sales for the month 800

Paid rent 50

Paid Salary 100

SOLUTION Journal

Date Particular L.F. Dr. Amount Cr. Amount

1992April 1 Cash Amount Dr. 10,000.00

To Capital(Being the amount invested by Ramesh in to business as capital)

10,000.00

2 Bank Account Dr. 7,000.00To Cash A/C(Being goods purchased for cash)

7,000.00

3 Purchase Account Dr. 500.00To Cash A/C(Being good purchased for cash)

500.00

4 Cash A/C Dr. 100.00To Bank A/C(Being cash withdrawn form bank)

100,00

5 Krishna A/C Dr. 150.00To Sales A/C(Being goods sold to Krishna on credit)

150,00

20 Purchase A/C Dr. 225.00To Shyam(Being goods bought from Shyam on credit)

225.00

24 Cash A/C Dr. 150.00To Krishna(Being Cash received from Krishna)

150.00

28 Shyam A/C Dr. 225.00To Cash A/CTo Discount(Being cash paid to Shyam and discount allowed)

215.0010.00

30 Cash A/CTo Sales A/CBeing gods sold for cashRent A/CSalaries A/CTo Cash A/C(Being amount paid for rent & salary)

Dr. 800.00800.00

50.00100.00150.00 19,290.00

Total 19,290.00 19,290.00

Advantages of Journal:

The chief advantages of the use of the journal are the following:

(i) The possibility of errors id reduced. Since the amounts to be debited and credited are written side by side, the two can be compared to see that they are equal. If the accounts are written up directly it is possible that a wrong amount may be written or the amount written on the debit side may be more or less than on the credit side.

(ii) Along with the entry in the journal a complete explanations is written so that later it would be possible to understand the entry property.

(iii) Transactions are entered in to journal in the chronological order hence the order in which they occur inters the records permanently.

Limits to the use of the journal

It is possible to record every transaction in the journal. This however may make it unwieldy. Therefore the usual practice is to have separate journals or books for different classes of transactions. The reasons for this are the following.

(i) The journal will be too long if all transactions are recorded there.(ii) Firms like to ascertain the cash balance everyday; hence they usually record

cash transactions directly in a separate book. This obviated the necessity of journalizing cash transactions.

(iii) By recording different classes of transactions in different books, book-keeping and accounting becomes easier, since, then, entries can often be made in totals.

The accounting equation tells us that in broad categories the accounts will be as follows:

(i) Assets, indicating the resources which the firm is enjoying. These may be in the form of cash, stock of goods, amounts owing from customers, land,. Building, machinery, etc.

(ii) Liabilities indicating the amounts which the firm owes an outsider.(iii) Capital indicating the amount which the proprietor has invested in the firm,

the accretion to it or a reduction in it, Since capital is affected by expenses and gains, there will be two more categories as part of capital.

(a) Expenses: the accounts which show the amount which has been spent or even lost in carrying on operations.

(b) Incomes: the accounts which show the amounts earned by the firm.

Alternatively, accounts may be classified in another manner, as shown below:

(i) Personal Accounts – accounts which relate to persons, debtors or creditors. Examples would be: the account of Ram&Co., a credit customer or the account of Jahveri&Co., a supplier of goods. The capital account is the account of the proprietor and, therefore, it is also personal but a adjustments on account f profit and loss will be made in it.

(ii) Impersonal Accounts – accounts which are not personal such as machinery account, cash account, rent account, etc. These can be further sub-divided as follows:

(a) Real Accounts: accounts which will relate to the assets of the firm but not debtors. For example, accounts regarding land, buildings, investments, fixed deposits will be real accounts. Cash in hand and the bank account are also real.

(b) Nominal Accounts- accounts which relate to expenses, looses, gains, revenue, etc. like salary account, interest paid account, commission received account. The net result of all the nominal accounts is profit and loss which is transferred to the capital account. Nominal accounts are, therefore, temporary.

The classification may be illustrated as follows:

Accounts

Personal Impersonal

Real Nominal

Ledger:

Posting the entries:

The journal tells us the accounts to be debited and credited and also the amounts involved. The amount is written on the left-hand side of the account to be debited. In the particulars column the name of the account which will be written, preceded by the word “To”. The amount will be written on the right-side of the account to be credited; in the particulars column, the name of the other account concerned will be written preceded by the word “By”. Consider the following entry:

March 6 Furniture Account Dr. 1,200.00To Modern Furniture 1,200.00

The amount of Rs. 1,200.00 will be debited to the Furniture Account and credited to Modern Furnitures. In the Furniture Account in the particulars column we shall write To Modern Furnitures. In the account of Modern Furnitures will be written: “By Furniture Account”. The two accounts will appear as under.:

FURNITURE ACCOUNT

Dr. Cr.Date Particulars L.F. Amount

Rs.Date Particulars L.F. Amount

Rs.

March 6

To Modern Furnitures 57 1,200.00

MODERN FURNITURES ACCOUNT



Rs.

March 6

By FurnitureAccount 57 1,200.00

“57” is the assumed number of the page on which the entry was presumably made in the journal.

Sometimes in the journal there may be two or more accounts to be debited and only one to be credited or vice versa. The entry given below shows that the debt of Rs. 500.00 due from Satish has been discharges by receipt of only Rs. 485.00 cash and by Rs. 15.00 allowed as discount.

Cash Account Dr. 485.00Discount Account Dr. 15.00To Satish 500.00

In the Cash Account we shall state “To Satish Rs. 485.00”, in the Discount Account we shall write To Satish Rs. 15.00 In the account of Satish we may write as follows (on the credit side):

By Cash Account 485.00By Discount A/C 15.00

But we may also write “By Sundries Rs. 500”.

The transactions which have been journalized in the previous illustration are posted below:

LEDGER

CASH ACCOUNT



Rs.

1992 1992Apr’1 To Capital A/C 10,000 Apr’2 By Bank A/C 7,000

4 To Bank A/C 10024 To Krishnan A/C 15030 To Sales A/C 800

11,050 11,050

May’1 To Balance b/d 3,185

CAPITAL ACCOUNT

1992Apr’1 By Cash A/C 10,000

BANK ACCOUNT

1992Apr’2 To Cash a/c 7,000 Apr’4 By Cash a/c 100

30 By Balance 6,900

7,000 7,000

May’1 To Balance b/d 6,900SALES ACCOUNT

1992Apr’3 To Cash a/c 500 Apr’13 By Krishna A/c 100

20 To Shyam a/c 225 30 By Cash a/c 800

KRISHNA



Rs.

1993 To Cash A/C 215Apr’28 To Discount 10 By Goods A/C 225

225 225

SHYAM



Rs.

1993 To Cash A/C 215Apr’28 To Discount 10 By Goods A/C 225

225 225

DISCOUNT ACCOUNT



Rs.

1993Apr’28 By Shyam 10

Rent AccountDr. Cr.Date Particulars L.F. Amount


Rs.

1993Apr’30 To Rent A/C 50

SALARIES ACCOUNT



Rs.

1993Apr’30 To Cash A/C 100

BALANCING ACCOUNT :-

At the end of each month or year on any particular day, it may be necessary to ascertain the balance in an account. This is not a too difficult thing to do; suppose a person has bought goods worth Rs. 1,000 and has paid only Rs. 850; he owes Rs. 150 and that is the balance in his account. To ascertain the balance in any account what is done is to add the two sides and ascertain the difference; the difference is the balance. If the credit side is bigger than the debit side, it will be a credit balance. In the other case, it will be a debit balance. The credit balance is written on the debit side as “To Balance carried down”. After this, the two sides will be equal. The totals are written on the two sides opposite to one another with one line above and two lines below, like this ……… Then the credit balance is written on the credit side as “By Balance brought down”. This is the opening balance for the new period. The debit balance similarly is written on the credit side as “By Balance carried down”, the totals then are written on the two sides as shown above and the debit balance written on the debit side as, “To Balance brought down”, as the opening balance for the new period. It should be noted that nominal accounts are not balanced; the balances in them are transferred to the profit and loss account. Only personal and real accounts ultimately show balances. In the illustrations, given above, one will have noticed, the capital account, the Purchases account, the discount account, the rent account and the salary account, have not been balanced. The capital account will have to be adjusted for profit and loss and that is why is has not been balanced yet.

Subsidiary Books:

Purchase Day Book: The purchase day book is used to record goods bought on credit. The sales invoice sent by the selling firm to its customer becomes a purchase invoice to

that customer. Since purchase invoices received from different suppliers carry different numbers, they are again numbered serially by the purchaser and to be filled for future reference.

The entry of credit purchases in the books of accounts follow a similar pattern to that of credit sales. The net amount of invoice is recorded in the purchases day book and the items are then posted separately to the credit of the personal account of the suppliers opened in the purchases ledger. At the end of the period (month/week) the total of the purchases day book is posted collectively to the debit of the purchase a/c in the General Ledger.

Sales Day Book

This book is used to record dales on credit. For each credit sale, the seller sends documents to the buyer showing full details of the goods dispatched, price and the terms of payment. This document is known Invoice and to the seller it is known as Sales Invoice. The seller retains one or more copies of each sales invoice for his own use. Examples of some items included in such invoices are given below:

(a) Cash Discount;(b) Trade Discount – This is a deduction from the catalogue price allowed

by the manufacture or wholeseller to the retailer. No entry is required for recording trade discounts.

(c) E & O.E. – This stands for Errors and Omissions Expected. This indicated that if any error if found, it is liable for adjustment.

PURCHASE RETURNS BOOK

Sometimes goods purchased are returned to the supplier. For recording this return it is necessary to use Purchase Returns Book. This is also used for recording empties returned, outward overcharges and allowances received.

A debit note is issued advising the dispatcher of the goods returned or the overcharge as the Case may be. Debit note is the document through which the returned entries are made. The items in the purchases returns book are posted to the debit of the suppliers accounts the purchased ledger. To complete the double entry the total of the purchases return book for the period is transferred to the credit of purchases Return Account in the General Ledger.

SALES RETURN BOOK:

Sometime goods sold and delivered are returned in full or n part by the customer because of problems of quality etc. For recording this sales return book is used. This book is also used for recording empties returned such as packing cases, drums, etc.

A document known as Credit not is used which is sent to the customer advising him that his account has been duly credited. Credit notes are generally printed n red colour. Items of sales return books are posted to the credit of the customers & accounts in the sales ledgers and double entry is completed by posting the total of the items for the period of the debit of sale Return Account (Return Inward) in General Ledger.

BILLS RECEIVABLE AND BILL PAYABLE BOOK:

Bill accepted by the customers in favour of the concern are entered in Bills Receivable Book whereas the bills accepted by the concern in favour of suppliers are entered in Bills Payable Book.

PREPARATION OF TRIAL BALANCE

After posting the accounts in the ledger, a statement is prepared to show separetly the debit and credit balances. Such a statement is known as the trial balance. It may also be prepared by listing each and every account and entering in separate columns the totals of the debit and credit sides. Whichever way it is prepared, the totals of the two columns should agree. The agreement indicates reasonable accuracy of the accounting work; if the two sides do not agree there is definitely some errors.

OBJECTIVES OF PREPARING TRIAL BALANCE

The preparation of trial balance has the following objectives:

1. The trial balance enables on to establish whether the posting and other accounting processes have been carried out without committing arithmetical accuracy of the books.

2. Financial statements are normally prepared on the basis of the trial balance; otherwise the work may be cumbersome. Preparation of financial statement therefore, is the second objective.

3. The trial balance serves as a summary of what is contained in the ledger may have to be referred to only when much detail is required of an account.

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

TRIAL BALANCE

Ledger accounts Dr. Cr.Amount Amount

The under-mentioned points may be noted:

i) A trial balance is prepared as on a particular date which should be mentioned at the top.

ii) In the first column the name of the account is written.iii) In the next column the total of the debit side of the account concerned or the

debit balance, is entered.iv) In the third column the total of the credit side or the credit balance is written.v) The two columns are totaled at the end.

METHODS OF PREPARING THE TRIAL BALANCE:

The various methods are as follows:

i) The Total Method: In this method the total of each side of the account is entered respectively in the debit and credit columns of the trial balance. Such a trial balance is known as the gross trial balance.

ii) The Balance Method: In this methods, only the debit or credit balances are entered separately in two columns. This is known as the net trial balance.

SIGNIFICANCE OF VARIOUS BALANCES:

The credit balance in the goods account indicates sale but this account is incomplete since we must also take in to consideration the stock of goods on hand. The credit balance in the discount account shows that the firm has earned a discount Rs. 5 on the whole. The rent account and the salary account show expenses incurred.

We can say briefly that:

(a) A debit balance is either an asset (Cash, bank, etc) or expenses (salary, rent, etc); and

(b) A credit balance shows the income earned (discount) or liability or the amount invested by the proprietor.

Limitations of trail balance:

One should note that the agreement of the trial balance is not a conclusive proof of accuracy. In other words, in spite of the agreement of the trial balance some errors may remain. These may be of the following types:

i) A transaction has not been entered at all in the journal.ii) A wrong amount has been written in both columns of the journal.iii) A wrong account has been mentioned in the journal.iv) An entry has not all been posted in the ledger.v) An entry is posted twice in the ledger.

Errors and Rectification:

Types of Errors:

a) Errors of Principles: when a transaction is recorded in contravention of accounting principle like treating the purchase of an asset as an expenses, it is an error of principle. In this case, there if no effect on the trial balance since the amounts are places on the correct side, though in a wrong account.

b) Clerical Errors: These errors arise because of mistakes committed in the ordinary course of the accounting work. These are of three types;

i) Errors of omission: If a transaction is completely or partially omitted from the books of account, if will be a case of error of omission. Examples would be not recording a credit purchase of furniture or not posting an entry into the ledger.

ii) Errors of commission: If while making an entry the wrong amount is written either in the subsidiary book or in the ledger, or the entry is made on the wring side of the account, the error will be an error of commission.

iii) Compensating Errors: If the effect of the errors committed cancels out, the errors will be called compensating errors. The trial balance will agree. Form another point of view, errors may be divided into two categories.

a) Those that affect the trial balance-because of the errors, the trial balances does not agree; and

b) Those that do not affect the trial balance-it will agree inspite of the errors.c) The errors that affect the trial balance are the following.

i) Wrong casting of the subsidiary booksii) Wrong balancing of an accountiii) Posting an amount on the wrong side.iv) Wrong posing i.e. writing the wrong amount.v) Omitting to write the case book balances in the trial balance.vi) Omitting to write the case book balances in the trial balance.vii) Omitting to post the totals of subsidiary books into the ledger.viii) Omitting to write the balance of an account in the trial balances.ix) Writing a balance in the wring column of the trial balance.x) Totalling the trial balance wrongly.

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

i) Omitting an entry altogether from the subsidiary books.ii) Making a entry in the wrong subsidiary books

iii) Posting an amount in a wrong account but on the correct side, Suppose an amount to be debited to A is debited to B, the trial balance will still agree.

iv) Errors of Principle. Suppose on the purchase of a typewriter, the office expenses account is debited, the trial balance will still agree.

v) Compensating errors: If the effect on one error is cancelled by the effect of some other errors, the trial balance will naturally agree. Suppose an amount of Rs. 10 received from A is not credited to his account and the total of the sales book is Rs 10 in excess, the omission of credit to A’s account will be made up by the increased credit to the Sales Account: there will not be any effect on the trial balance.

STEPS TO LOCATE ERRORS

Even if there is only a vary small difference in the trial balance, the errors leading to it must be located and rectified. A small difference may be the result of a number of errors. The following steps will be useful in locating errors.

i) the two columns of the trial balance should be totaled again. If in the place of a number of accounts, only one amount has been written in the trial balance, the list of such accounts should be checked and totaled again, for example, the list of sundry debtors.

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

iii) The exact difference in the trial balance should be established. The ledger should be gone through; it is possible that a balance equal to the difference has been omitted from the trial balance. It is possible a balance equal to half the difference has been written in the wrong column.

iv) The ledger accounts should be balances again.v) The casting of Subsidiary books should be checked again, especially is

the difference if Rs. 1, Rs. 10, Rs. 100, etc.vi) If the difference is very big the balance in the various accounts should

be compared with the corresponding accounts in the previous period. If the figures differ materially, the causes should be seen; it is possible that an error has been committed. Suppose the sale : account for the current year shows a balance of Rs 32,53,000 where as it was Rs. 36,45,000 last year: it is possible that there is an error in the Sales Account.

vii) Posting of the amounts equal to the difference or half the difference should be checked. It is possible that an amount has been omitted to be posted or has been posted on the wrong side.

viii) If there is till a difference in the trial balance, a complete checking will be necessary. The posting of all the entries including the opening entry

should be checked. If may be better to begin with the nominal accounts.

RECTIFICATION OF ERRORS

Errors should never be corrected by overwriting: if, immediately after making an entry, it is clear that an error has been committed, it may be corrected by neatly crossing out the wrong entry and making the correct entry.

If however, the error is located after some time, the errors may be as such affect only in account-one sided errors-or they may affect both the accounts involved.

ONE SIDED ERRORS

The trial balance is affected by one-side errors but not by the other type. One sided errors do not require journal entries. We shall take up the correction or errors through illustration.

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

ii) While posting the discount column on the debit side of the cash book, the discount of Rs. 10 allowed to Ramesh has not been posted. There is no error in the cash book: the total of the discount column presumably has been posted to the discount account on the debit side; the error is one-sided, not crediting Ramesh by Rs. 10. This should now be done by the entry “By omission of posting of discount on ………Rs. 10”.

iii) Rs. 200 received from Ram have been entered by mistake on the debit side of his account. The error is only in the account of Ram-he should have been credited and not debited by Rs. 200. Not only is to be wrond debit to be removed but also a credit of Rs. 200 is to be given. This can be done by entering Rs. 400 on the credit side of his account.

iv) Rs. 50 were received from Mahesh and were entered on the debit side of the cash book but were not posted to his account. This error affects only the account or Mahesh, Rs. 50 have been omitted from the entry “By Omission of posting on …… Rs. 50”.

v) Rs. 51 paid to Mohan has been posted as Rs. 15 to the debit of his account. This also is a one-sided error. Mohan has been debited short by Rs. 36.

Illustration:

How would you rectify the following errors in the books of Ram & Co.?

1. The total of the Purchases Book has been undercast by Rs. 100.2. The Return Inward Book has been undercast by Rs. 503. A sum of Rs. 250 Written off as depreciation on Machinery has not been

debited to Depreciation Account.4. A payment of Rs. 75 for salaries (to Mohan) has been posted twice to Salaries

Account.5. The total of Bills Receivable Book Rs. 1,500 has been posted to the credit of

Bills Receivable Accounts.6. An amount of Rs. 151 for a credit sale of Hari, although correctly entered in

the Sales book, has been posted as Rs. 115.7. Discount allowed to Satish Rs. 25 has not been entered into Discount Column

of the Cash Book but it has been posted to his personal Account.

Solution:

1. The purchase Account should receive another debit of Rs. 100 since it was debited short previously.“To Undercastng of Purchase Book for the month of………”

2. Due to this error the Returns Inward Account has been posted short by Rs. 50; the correct entry will be:“To Undercastng of Returns Inward Book for the months of ………Rs 50”

3. The Omission of the debit to the Depreciation Account will be rectified by the entry:“To Omission of posting on …………….Rs. 250”

4. The excess debit will be removed by a credit in the Salaries account by the entry. “By Double posting on …………..Rs. 75”

5. Rs. 1,500 should have been debited to the Bills Receivable Account and not credited. To correct the mistake, the Bills Receivable Account should be debited by Rs. 3,000 by the entry; “To Wrong posting of B/R received on…………….. Rs. 3,000:.

6. Due to this error Hari has been debited short by Rs. 36. The correcting entry is: “To Difference in amount posted on …………..Rs. 36.

7. Due to this error, the Discount Account has been debited short by Rs. The required entry is. “To Omission of discount allowed to Satish on …………… Rs. 25”.

Two – sided errors:

So far we have discussed the correction of the errors which affect any one account. It wll have been notices that the rectifying entries were not complete journal entries: in fact the rectifying entry is made directly in the account concerned. We shall now take up the correction of errors involving both the accounts through illustrations.

i) The purchase of machinery for Rs. 2,000 has been entered in the purchases book. The effect of the entry is that the account of the supplier has been credited by Rs. 2,000 which is quite correct. But the debit to the purchases Account is wrong the debit should have been to the Machinery Account. To rectify the error the debit in the Purchases Account has to be transferred to the Machinery Account. The correcting entry will be to credit the Purchases Account and debit the Machinery Account, Please see the three entries made below, the last entry rectifies the error.

Rs. Rs.Wrong Entry Purchase Account Dr. 2000

To Creditor 2000Correct Entry Machinery Account Dr. 2000

To Creditor 2000Rectifying Entry Machinery Account Dr. 2000

To Purchase Account 2000

ii) Rs. 100 received form Kamal Kishore have been credited in the account of Krishnan Kishore. The error is that there is a wrong credit in the account of Krishnan should be debited to remove the wrong credit and Kamal Kishore should be credited. The following three entries make this clear.

Rs. Rs.Wrong Entry Cash Account Dr. 100

To Krishnan Kishore 100Correct Entry Cash Account Dr. 100

To Kamal Kishore 100Rectifying Entry Krishnan Kishore Dr. 100

To Kamal Kishore 100

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

Rs. Rs.Wrong Entry Customer’s Account Dr. 1,000

To Sales Account 1,000Correct Entry Customer Account Dr. 1,000

To Machinery Account 1,000Rectifying Entry Sales Account Dr. 1,000

To Machinery Account 1,000

Illustration:

The following errors were found in the books of Ram Prasad & Sons. Give the Necessary entries to correct them.

1. Rs. 500 paid for furniture purchased has been charged to ordinary purchases A/c.

2. Repair made were debited to Building A/c for Rs. 50

3. An account of Rs. 100 withdrawn by the proprietor for his personal use has been debited to Trade Expenses A/c.

4. Rs. 100 paid for rent debited to Landlord’s A/c

5. Salary Rs 125 paid to a clerk due to his has been debited to his personal account.

6. Rs. 100 received from Shan & Co. has been wrongly entered as from Shaw & Co.

7. Rs. 700 paid in cash for a typewriter was charges to Office Expenses Account.

SOLUTION

RECTIFYING JOURNAL ENTRIES

Errors

Particular L.F. Dr. Cr.

Rs. Rs.

1. Furniture A/cTo Purchase A/c(Correction of worn debit to purchases A/C for furniture purchased)

Dr. 500500

2. Repairs A/cTo Building A/c (Correction of Wrong debit to Building A/C for repairs made)

Dr. 5050

3. Drawing A/cTo Trade Expenses A/c(Correction of wrong debit to Trade Expenses A/c for cash withdrawn 100 by the proprietor for his personal use.)

Dr. 100100

4. Rent A/cTo Landlord’s Personal A/c(Correction of wrong debit to Landlord’s for rent paid)

Dr. 100100

5. Salaries A/cTo Landlord’s personal A/cCorrection of wrong debit to clerk’s personal A/c for salaries paid)

Dr. 100100

6. Shan & Co.To Shaw & Co.(Correction of wrong credit to Shaw & Co. instead of Shan & Co.)

Dr. 100100

7. Typewriter A/cTo Office Expenses A/c(Correction of wrong debit to Office Expenses A/c for purchases of typewriter)

Dr. 700700

Correcting the Errors Through Suspense Account:

The method of the correction errors indicated so far is appropriate when the errors have been located before the according period is closed.

After the correction, the trial balance will agree. Sometimes, trial balance is artificially made to agree by opening a suspense account. The suspense Account will be debited if

the total of the credit column of the trial balance exceeds the total of the debit column, it will be credited in the other case.

Illustration Correct the following errors (1) without opening a suspense Account, and (2) opening a Suspense Account:

a) The Sales book has been shorted Rs 100 shortb) Goods worth Rs. 150 returned by Green & Co., have not been recorded any

where.c) Goods purchased, Rs. 250 have been posted to the debit of the suppler, Gupta

& Co.d) Furniture purchased from Gulab & Bros. Rs. 1000 has been entered in

purchases Day book.e) Discount received from Red & Black, Rs. 15 has been entered n the Discount

Column of the Cash Book.f) Discount allowed to G. Mohan & Co., Rs 18 has not been entered in the

Discount Column of the Cash Book. The Account of G. Mohan & Co. has however, been correctly is not posted.

Solution: (1) If a suspense account is not opened:

a) Since sales book has been cast Rs. 100 short, the sales Account has been similarly credited Rs. 100 short. The correcting entry is to credit the Sales Account by Rs. 100 as “By Wrong totaling of the sales Book Rs. 100”.

b) To rectify the omission the Returns Inward Account has to be debited and the account of Green & Co. credited. The Entry

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

Dr. 150150

c) Gupta & Co. have been debited Rs. 250 instead of being credited. This account should now by Rs. 500 to remove the wrong debit and to give the correct credit, the entry will be on the credit side “By Error in posing Rs. 500”.

d) By this error purchases Account has been debited by Rs. 1000 whereas the debit should be given to the furniture Account. The correcting entry will be:

Furniture AccountTo purchase Account(Correction of the mistake by which purchases Account was debited instead of the Furniture Account)

Dr. 10001000

e) The Discount Rs. 15 received from Red & Black should have been entered on the credit side of the cash book. Had this been done, discount Account would have been credited (through the total of the discount column) and Red & Black would have been debited. This entry should now be made.

Red & Black To discount Account(Rectification of the error by which the discount allowed by the firm was not entered in the Cash book)

Dr. 1515

f) In this case the Account of the customer has been correctly posted: the Discount Account has been debited Rs. 18 short since it has been omitted from the discount column on the debit of the cash book. The discount account should be now debited by the entry. “To Omission of entry in the Cash Book Rs. 182) If a suspense account is opened.

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

Dr. 100100

b) Returns Inward AccountTo Green & Co.(Being the recording of unrecorded returns)

Dr. 150150

c) Suspense Account A/cTo Gupta A/c(Being the correction of the error by which Gupta & Co. were debited instead of being credited by Rs. 250)

Dr. 500500

d) Furniture A/cTo Purchase A/c(Being the correction of recording purchasing of furniture as ordinary purchases)

Dr. 10001000

e) Red & Black To Discount Account(Being the recording of discount omitted to

Dr. 1515

be recorded)

f) Discount Account To Suspense Account (Being the correction of omission of the discount allowed from Cash Book-Customer’s account already posted correctly)

Dr. 1818

Suspense Account

Date Particular Folio Amount Date Particular Folio AmountRs. P. Rs. P.

To Sales A/C 100.00 By Difference in Trail balance (Balancing Figure)

582.00

To Gupta & Co. 500.00 By Discount A/C 18.00600.00 600.00

Final Accounts:

Manufacturing Account:

Manufacturing Account is prepared for performing manufacturing operations. The aim of manufacturing account is to find out of the cost of goods manufactured. The following items are required to be debited to the manufacturing account.

a) Cost of raw materials consumed i.e. opening stock of raw materials plus purchase less closing stock of raw material.

b) Amount of direct wages.c) Chargeable expenses: i.e expenses which are considered to have been directly

incurred in connection with the manufacture.d) Indirect manufacturing expenses i.e depreciation of factory assets, factory rent

etc.e) Opening work in progress is credited.

Only item closing work in progress is credited. Any excess of opening WIP over closing WIP may be debited to manufacturing account. After balancing between debit and credit side, the balance represents Trading, Profit and Loss Account.

Trading Account:

Gross profit or loss is calculated through Trading Account. The items of debit and credit of trading account are given below.

Debit Side Credit Sidea) Opening stock of finished goods Sales less returnsb) Cost of goods manufactured Closing stock of finished goodsc) Purchases of finished goods less returns

Besides expenses incurred for putting the product into salable condition it should also be included in the debit side of Trading Account. Balancing of debit and credit side, represent balancing figure transferred to Profit and Loss Account.Profit and Loss Account :

Net Profit is calculated by drawing up the profit and loss account. All administrative, selling, distribution expenses, provisions are debited to profit and loss account.

Incomes of various nature, i.e. sales, commission, rent received, interest on investments are credited to profit while in case of gross loss it is debited. The net loss or net profit in case of proprietary concerns and partnership firms is transferred to the capital account of the proprietor or partners in the Balance Sheet.

Profit and Loss Appropriation Accounts:

Net profit or loss is brought down to credit or debit side of profit and loss appropriation account. Items which appropriations of profits such as salary to partners, interest on capital commission to partners, transfer to reserve etc., should be shown in profit and loss appropriation account.

Balance Sheet :

It is the classified summary of balances remaining in the General Ledger after all the income and expenditure accounts have been taken care of by transfer to Manufacturing Trading and Profit and Loss account. It shows readily the financial position of the business at a given date by disclosing the amount of capital contributed and how the same has been invested and the values of assets and liabilities and their nature.

The capital and liabilities of the business are shown on the left hand side. The order of performance so far as assets are concerned requires that these be arranged in the following order: i) Fixed Assets, ii) Floating or current assets iii) Fictitious assets. Liabilities concerned the order usually adopted as 1) Proprietary Interest, consisting of

capital, Reserves and undistributed, 2) Long term loans, a distinction being made between those secured and those unsecured 3) Current liabilities and provisions.

Form

Balance Sheet as at ……………………..XYZ Co. Ltd.

LIABILITIES RS. ASSETSShare Capital Fixed AssetsReserve & Surplus Investments, CurrentSecured Loans Loans & AdvancesUnsecured Loans Miscellaneous Current Liabilities & Provisions Expenses (not written off)

Illustration :

The following is the Trail Balance of B. Govil on 30th June, 1975:-Dr. Cr.

Rs. Rs.Cash in hand 540 540Cash at Bank 2,630Purchases Accounts 40,675Sales Account 98,780Returns Inwards Account 680Returns Outwards Account 500Wages Account 10,480Fuel and Power Account 4,730Carriage on Sales Account 3,200Carriage on Purchase Account 2,040Stock Account 1st, July, 1974 5,760Buildings Account 30,000Freehold Land Account 10,000Machinery Account 20,000Patents Account 7,500Salaries Account 15,000General Expenses Account 3,000Insurance Account 600Drawing Account 5,245Capital Account 71,000Sundry Debtors 14,500Sundry Creditors 6,300

1,76,580 1,76,580

Taking into account the following adjustments, prepare Trading and Profit and Loss Account and the Balance Sheet :-

a) Stock on hand 30th June 1975 is Rs. 6,800.b) Machinery is to depreciated at the rate of 10% and patents at the rate of 10%.c) Salaries for the month of June, 1975 amounting to Rs. 1,500 were unpaid.d) Insurance includes a premium of Rs. 170 on a policy, expiring on 31st

December 1975.e) Wages include a sum of Rs 2,000 spent on the erection of a cycle shed for

employee and customers.f) A provision for Bad and doubtful Debits is to be created to the extent of 5 per

cent on sundry debtors.

Trading and Profit and Loss Account for the year ended 30th June 1975.

Dr. Cr.

Rs. Rs. Rs. Rs.

To Stock Account 5,760 By Sales A/c 98,780To Purchases Account 40,675 Less Returns Less Returns Inwards 680 98,100

Outwards 500 40,175 By Stock Account 6,800

To Wages Account 8,480To Fuel & Power A/c 4,730To Carriage on Purchase A/c 2,440To Gross Profit trans Ferred to Profit & Loss A/c 43,715

1,04,900 1,04,900

To Salaries A/c 15,000 By Gross Profit- transfer Trading A/c 43,715

Add Outstanding 1,500 16,500

To Carriage on Sales A/c 3,200To General Expenses A/c 3,000To insurance A/c 600

Less Prepaid 85 515

To Provision for Bad and Doubtful Debtors A/c 725To Depreciation A/c Machinery Patents

2,0001,500 3,500

To Net Profit-transferto capital Account 16,275

43,715 43,715

Balance Sheet on B. Govil as on 30th June, 1975Liabilities Rs. Rs. Assets Rs. Rs.

Current Assets:Sundry Creditors 6,300 Cash in Hand 540Salaries Outstanding 1,500 Cash at Bank 2,630Capital: Sundry Debtors 14,500Balance in the beginning 71,000

Less Provision for Bad and Doubtful Debts 725 13,775

Add Profit during the year 16,275

87,275 Insurance Prepaid 85Less Drawings 5,245 82,030 Stock on hand 6,800

Fixed Assets:Freehold Lad 10,000Building 32,000

Machinery 20,000Less Depreciation 2,000 18,000

Patents 7,500Less Depreciation 1500 6,000

89,830 89,830

Illustration :

From the following Trail Balance of A. Atmaram as at 31st December, 1973. You are required to prepare a Trading and Profit and Loss Account for the year ended 31 st Dec., 1973 and a Balance Set as at that date, after making the necessary adjustments.

Trail Balance

Dr. Cr.Rs. Rs.

A Atmaram’s Capital Account 80,000A.Atmaram’s Drawing 6,000Plant and Machinery (balance 1st Jan 1973) 20,000Plant and Machinery (balance on 1st July, 1973) 5,000Stock on 1st January, 1973 15,000Purchases 82,000Returns Inwards 2,000Sundry Debtors 20,000Furniture and Fixtures 5,000Freight and Duty 2,000Carriage Outwards 500Rent, Rates and Taxes 4,600Printing and Stationery 800Trade expenses 400Sundry Creditors 10,000Sales 1,20,000Returns Outwards 1,000Postage and Telegrams 800Provisions for Doubtful Debts 400Discounts 800Rent of premises sub-let for year up to 30th June, 1974 1,200Insurance charges 700Salaries and Wages 21,300Cash in hand 6,200Cash at Bank 20,500

2,13,400 2,13,400

Adjustments:

1. Stock on 31st December, 1973, was valued at Rs. 14,600.2. Write off Rs. 600 as Bad Debts.3. The Provisions for Doubtful Debts is to be maintained at 5 percent on

Sundry Debtors.4. Create a Provision for Discounts on Debtors and Reserve for

Discounts on Creditors at 2 per cent.5. Provide for depreciation on Furniture and Fixture at 5 per cent per

annum, and on Plant and Machinery at 20 per cent per annum.6. Insurance Prepaid was Rs. 100.

7. A fire occurred on 25th December, 1973 in the godown and stock of the value of Rs. 5,000 was destroyed. It was fully insured and the Insurance Company admitted the claim in full.

A. Atmaram

Trading and Profit and Loss Account for the year ended December 31, 1973

Dr. Cr.

Rs. Rs.To Stock 15,000 By Sales 1,20,000To Purchase 82,000 Less Returns 2,000 1,18,000 Less Returns 1,000 81,000To Freight and Duty 2,000 By Stock 14,000To Gross Profit transferred to Profit & Loss Account 39,600

By Insurance Co. (Goods destroyed) 5,000

1,37,600 1,37,600

To Salaries and Wages 21,000 By Gross Profit-transfer from Trading A/c 39,600

To Rent, Rates & Taxes 4,600 By Discounts 800To Printing & Stationery 800 By Reserve for

Discount on Creditors 200

To Trade Expenses 400 By Rent Receive 1,200To Postage & Telegrams 800 Less Receive in

Advance 600 600To Insurance Charges 700 Less prepaid 100 600To Depreciation: Plant & Machinery 4,500 Furniture & Fixture 250 4,750To Provision for Doubtful Debts Required

1,000

Add Bad Debts 6001,600

Less Existing Provision 400 1,200To Provision for Discount on Debtors

380

To Carriage Outwards 500To Net Profit-transfer to capital Account

5,870

41,200 41,200

Balance Sheet of A Atmaram as at December 31st, 1973

Liabilities Rs Rs. Assets Rs. Rs.

Sundry Creditors 10,000 Current AssetsLess Reserve for Discounts 200 9,800 Cash in Hand 6,200

Cash at Bank 20,500Rent Received in Advance 600 Sundry Debtors 20,000

Less Provision for Doubtful Debts 1,000

Capital:Balance of 1st Jan 1973

80,000 19,000

Net Profit 5,870 Less Provisions for Discounts 380

18,620

Stock 14,620Less Drawings 6,000 79,870 Insurance prepaid 100

Insurance Company 5,000

Fixed AssetsPlant and Machinery: 1st Jan, 1973

20,000

Additions 5,00025,000

Less Depreciation 4,500 20,500Furniture and Fixtures 5,000Less Depreciation 250 4,750

Total 90,270 Total 90,270

Bills of Exchange

Credit is an important aspect in trade. Goods are sold or bought on credit. In such situations the value of goods will be received or paid only at a future date. A written document is prepared for acknowledge the amount receivable or payable. This document is known as bill of exchange. Example: If Kaman sells goods on credit to Vijayan, the buyer becomes the debtor. In this case, Kaman draws a bill of exchange on Vijayan for the amount due directing to pay the amount at a certain future date. Vijyan accepts the order by signing it with or without the word ‘Accepted’

Section 5 of the Negotiable Instruments Act defines a Bill of Exchange as ‘an instrument in writing containing an unconditional order signed by the market, directing a certain person to pay a certain sum of money only to or to the order of a certain person r the bearer of the Instrument.

Essentials of Bills of Exchange

1) A bill of Exchanger is always in writing.

2) It is an unconditional order made by the drawer (creditor) on the drawer (debtor) to pay a certain sum of money. The person drawing the bill is called ‘drawer’ and the person to whom the order is made is called ‘drawee’. The drawer becomes the ‘Acceptor’ when the bill is accepted by him. For the drawer the bill is known as ‘Bill Receivable’ and for the acceptor it to ‘Bill Payable’.

3) The instruments may be drawn either payable to a particular person or his order or to the bearer.

4) The bill of exchange may be drawn payable either on demand or after the expiry of a certain period. In the former case it is called ‘Demand Bill’ and in the latter case it is called ‘Time Bill’. For ‘Time Bill’ a period of 3 days known as ‘grace days’ will have to be added to find out the due date.

Section 4 of the Negotiable Instruments Act defines a promissory note as ‘an instrument if writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to, or the order of a certain person, or to the bearer of the instrument’

Noting Charges

When a bill is dishonored, the holder of the bill should present the bill through the Notary Public and the facts of the dishonor are noted by the Notary Public on the reverse of the bill. The Notary Public will present the bill for payment and if payment is not forthcoming, not ehte fact on the bill. The Noting must be recorded within the reasonable time after the dishonour and must contain the fact of dishonour, the date of dishonour, the reasons if any, given for such dishonour and the noting charges. The service rendered by the Notary public is called noting charge. This charge is paid by the holder of the bill in the beginning and the same will be collects from the acceptor ultimately.

Accounting treatment for the bill of exchange is explained in the following illustration.

Illustration 1

A sold goods to B for Rs. 10,000. A drew a bill of exchange for Rs. 10,000 on B and the bill was duly accepted by B and returned to A. Pass necessary entries in the book of A and B in the following cases.

Case 1 : On the due date the bill was honoured.

Case 2: On the due date the bill was dishonoured.

Case 3: A discount the bill with his banker for Rs. 9,800 and on the due date the bill was (a) honoured (b) dishnoured and the banker has paid a noting charges Rs. 100

Solution:

Journal Entries

In the books of A In the books of BOn sale of goods B a/c Dr. 10,000 Purchase a/c Dr. 10,000To Sales a/c 10,000 To A a/c 10,000

On receipt of the billBills Receivable a/c Dr. 10,000 A a/c Dr. 10,000To B a/c 10,000 To Bills Payable a/c 10,000

First two entries are common in all the three cases.

Case 1 On honouring the bill

Cash a/c Dr. 10,000 Bill Payable a/c Dr. 10,000To Bills Receivable a/c 10,000 To Cash a/c 10,000

Case 2 On dishnouring the billB a/c Dr. 10,000 Bills pyable a/c Dr. 10,000To Bills Receivable a/c 10,000 To A a/c 10,000

Case 3 (a) On discounting the billCash a/c Dr. 9,800 No Entry

Discount a/c Dr. 200To Bills Receivable a/c 10,000

On houring the billNo Entry Bills Payable a/c Dr. 10,000

To Cash a/c 10,000

Case 3(b) On discounting the billCash A/c Dr. 9,800 No EntryDiscount a/c Dr. 200To Bills Receivable a/c 10,000

On dishonouring the billB a/c Dr. 10,000 Bills Payable a/c Dr. 10,000To Bank 10,000 Noting Charges 100

To A a/c 19,100

Illustration

X sold goods to Y for Rs. 10,000. X purchased goods from Z for Rs. 10,000. X drew a bill of exchange for Rs. 10,000 on Y and the bill was duly accepted by Y and returned to X. This bill was endorsed by X infavour of Z.

Pass necessary journal in the books of X, Y and Z in the following cases:

Case 1:On the due date the bill was honoured.Case 2:Z discounted the bill with his banker for Rs. 9,800 and on the due date the bill was dishnoured and the banker has paid a noting charge of Rs. 100.

Solution

Journal entries in the books of X

Y a/c Dr. 10,000To Sales 10,000(Being goods sold)

Purchases a/c Dr. 10,000To Z a/c 10,000(Being gods purchased)

Bills Receivable /ac Dr. 10,000To Y a/c 10,000(Being the bill received)

Z a/c Dr. 10,000To Bills Receivable a/c 10,000(Being the bill endorsed to Z)

In addition to above entries

Case 1 No entry

Z the holder of the bill, presented the bill for payment and the payment has been made by the acceptor, Mr. Y.

Case 2

Y a/c Dr. 10,100To C a/c 10,100(Being bill dishonored by B and banker paid noting charges)

Journal Entries In the books of Y

Purchase a/c Dr. 10,000To X a/c 10,000(Being the goods purchased

X a/c Dr. 10,000To Bills Payable a/c 10,000(Being the bill accepted)

In addition to above entries

Case 1 On honouring the bill

Bills Payable a/c Dr. 10,000To Cash a/c 10,000

Case 2 On dishonouring the bill

Bills Payable a/c Dr. 10,000Noting Charges a/c Dr. 100To X a/c 10,100(Being bill dishonoured and noting charges paid)

Journal Entries in the books of Z

X a/c Dr. 10,000To Sales a/c 10,000

(Being the goods sold)

Bills Receivable a/c Dr. 10,000To X a/c 10,000(Being the bill received)

Bank a/c Dr. 9,800Discount a/c 200To Bills Receivable a/c 10,000In addition to the above entries,

Case 1 No EntryAs the bill is honoured, need not pass any entry in his books.

Case 2 X a/c Dr. 10,100To Bank a/c 10,100(Being the bill dishonoured and noting charges paid by banker to be borne)

Renewal of a bill

The acceptor should pay the bill on the maturity date. In case if the acceptor is not in a position to apy the bill on the maturity date, he can request the drawer of the bill to renew the bill for a further period acceptable to the drawer. In this case, the old bill will be cancelled and a new bill wil be drawn and accepted. Cancellation of the old bill is treated as bill dishonoured and required journal entry is palled for the dishonour. While drawing a new bill, the drawer normally used to charge a sum of s interest and the interest may be collected from the acceptor in cash or it will be added with the new bill. Interest charges by the drawer is an income and it is an expense to the acceptor. The entry for the interest is :

Acceptor A/c Dr /To Interest A/c / In the books of drawer

Interest A/c Dr /To Drawer A/c / In the books of drawee

Illustration

Akbar sold goods to Bharathan for Rs. 10,000. Bharathan accepted a bill for Rs. 10,000 drawn by Akbar. On the due date, Bharathan approached Akbar and requested him to cancel the original bill and ot draw a new bill for Rs. 10,250 (including interest) which is agreed by Akbar. On the due date the second bill was honoured. Show the journal entries in the books of Akbar and Bharathan.

SolutionJournal Entries in the books of Akbar

Bharathan a/c Dr. 10,000To Sales a/c 10,000(Being the goods sold)

Bills Receivable a/c Dr. 10,000To Bharathan a/c 10,000(Being the bill received)

Bharathan a/c Dr. 10,000To Bills Receivable a/c 10,000(Being the bill cancelled)

Bharathan a/c Dr. 250To Interest a/c 250(Being interest renewal of bills)

Bills Receivable a/c Dr. 10,250To Bharathan a/c 10,250(Being new bill received)

Cash a/c Dr. 10,250To Bills Receivable a/c 10,250(Being new bill honoured)

Journal entries in the books of Bharathan

Purchase a/c Dr. 10,000To Akbar a/c 10,000(Being goods purchased)

Akbar a/c Dr. 10,000To bills Payable a/c 10,000(Being bill accepted)

Bills Payable a/c Dr. 10,000To Akbar a/c 10,000(Being bill cancelled)

Interest a/c Dr. 250To Akbar a/c 250(Being interest for renewing old bill)

Akbar a/c Dr. 10,250To Bills Payable a/c 10,250(Being new bill accepted)

Bills Payable a/c Dr. 10,250To Cash a/c 10,250(Being the bill honoured)

Retiring the Bill

Sometimes the acceptor may approach the holder of the bill to make payment for discharging the bil before the maturity period. Discharging the bill before the maturity period is known as retiring the bill. As the acceptor pays the bill before the maturity period, the holder allows discount to the acceptor. The discount is called rebate on bill. The amount of discount allowed is based on the unexpired portion of the bill period, amount of the bill and rate of discount agreed by the holder and the acceptor. The accounting entries for retiring the bill are:

Cash a/c Dr. /Rebate or Discount a/c / In the books of the holderTo Bills Receivable a/c

Bills Payable a/c Dr/ /To Cash a/c /To Rebate or Discount a/c / In the books of the acceptor.

InsolvencyIf the accepted becomes insolvent, the holder of the bill cannot get the full amount of the ill. In this case the bill will be deemed to have been dishonoured and the entry for dishnour will be passed. The holder of the bill will get partial payment from the estate of the insolvent and the balance is treated as bad debts or written off. The accpetor credits the unpaid portion of the amount due to the holder of the bill either to the profit and loss Account or to the ‘Deficiency Account’.

Illustration

Arvind owes Babu Rs. 42,000. On 1st January 1995 he accepts a bill for 3 months for Rs. 40,000 in full settlement. On the same date Babu discounts the bill from his banker at 6% p.a. Before the due date, Arving becomes bankrupt and Babu receives first and final dividend of 20 paise in the rupee. Show journal entries in the Books of Babu and Arvind.

Solution

Journal entries in the books of Babu

1995 Bills Receivable a/c Dr. 40,000Jan 1 Discount a/c Dr. 2000

To A a/c 42,000(Being bill received from A)

1995 Bank a/c Dr. 38,400Jan 1 Discount a/c Dr. 600

To Bills Receivable a/c 40,000(Being bill discounted)

1995 Arvind a/c Dr. 42,000April To Bank a/c 40,000 14 To Discount a/c 20,00

(Being bill dishonoured)

1995 Bank a/c Dr. 8,400April Bad debts a/c Dr. 33,600 14 To Arvind a/c 42,000

(Being 20% of the amount due from Arvind received)

Journal entries in the books of Arvind

1995 Babu a/c Dr. 42,000Jan 1 To Bills Payable a/c 40,000

To Discount a/c 2,000(Being bill dishonoured)

1995 Bills Payable a/c Dr. 40,000April Discount a/c Dr. 2,000 4 To Babu a/c 42,000

(Being bill dishonoured)

1995 Babu a/c Dr. 42,000April To Babu a/c 8,400 4 To Deficiency a/c 33,600

(Being 20 paise in a rupee paid to Babu)

Accommodation bill

Bill of exchange drawn and accepted for trading activity is known as trade bill. Apart from the trade bill, an individual may accept a bill drawn by another person by mutual consent for helping

the other person n creating the funds by discounting the bill and the amount may be utilized either by one person or by both. These types of bills are drawn and accepted for the purpose of accommodating another person and the bills are known as accommodation bill. The discount loss in discounting bills with the banker will be shared by the parties to the bill in the same proportion in which they have shared the proceeds of the bill. The accounting treatment for accommodation bills is similar to trade bills.

Illustration

Ratnam for the mutual accommodation himself and Sanjay, draws upon the latter a bill of exchange at 3 months date for Rs. 50,000. The bill is discounted by Ratnam at 12% and half the proceeds are remitted to Sanjay.

Sanjay, at the same time, draws a bill of exchange at 3 months on Ratnam for Rs. 25,000. After securing Ratnam’s acceptance the bill is discounted at 12% by Sanjay who remits half the proceeds to Ratnam.

Sanjay becomes bankrupt before the due date of his acceptance and Ratnam receives a first and final dividend of 40% in the rupees in full satisfaction. Show the journal entries and prepare ledger accounts in the books of both the parties.

Solution

Journal entries in the books of Ratnam.

Bills Receivable a/c Dr 50,000To Sanjay a/c 50,000(Being bill received from Sanjay)

Bank a/c Dr. 48,500Discount a/c Dr. 1,500To Bills Receivable a/c 50,000(Being the bill discounted)

Sanjay a/c Dr. 25,000To Bank a/c 24,250To Discount a/c 750(Being half of the proceeds remitted to Sanjay and discount charges proportionately)

Sanjay a/c Dr. 25,000To Bills Payable a/c 25,000(Being bill accepted drawn by Sanjay)

Bank a/c Dr. 12,125Discount a/c Dr. 375To Sanjay a/c 12,500

(Being amount received from Sanjay and proportiate Charged by him)

Bills Payable a/c Dr. 25,000To Ban a/c 25,000(Being the bill honoured)

Sanjay a/c Dr. 50,000To Bank a/c 50,000(Being Sanjay dishonoured his acceptance)

Bank a/c Dr. 15,000Bad debts a/c Dr. 22,500To Sanjay a/c 37,500(Being 40% of the amount due from Sanjay received)

Sanjay Account

Dr. Cr.Rs. Rs.

To Bank 24,250 By Bills Receivable 50,000To Discount 750 By Bank 12,125To Bills Payable 25,000 By Discount 375To Bank 50,000 By Balance c/d 37,500

1,00,000 1,00,000

To Balance b/d 37,500 By Bank 15,000By Bad Debts 22,500

37,500 37,500

Journal entries in the books of Sanjay

Ratnam a/c Dr. 50,000To Bills Payable 50,000(Being the bill accepted)

Bank A/c Dr. 24,250Discount a/c Dr. 750To Ratnam a/c 25,000(Being amount received from Ratnam and discount charged)

Bills Receivablle a/c Dr. 25,000To Ratnam 25,000(Being acceptance received from Ratnam)

Bank a/c Dr. 24,250Discount Dr. 750To Bills Receivable a/c 25,000(Being the bill discounted)

Ratnam a/c Dr. 12,500To Bank a/c 12,125To Discount a/c 375(Being amount remitted to Ratnam and discount adjusted)

Bills Payable a/c Dr. 50,000To Ratnam a/c 50,000(Being the bill dishonoured)

Ratnam a/c Dr. 37,500To Bank a/c 15,000To Deficiency a/c 12,500(Being amount due to Ram discharged by payment of 40% of his dues)

Final Accounts of Non – Trading Concerns

Introduction

Maintaining proper accounting records is essential not only to the trading concerns but also to the non-trading concerns. The educational institutions, sports and recreatin clubs and charitable institutions and societies/associations interested in the production of art, culture, education and recreation and which are not profit seeking are known as non Trading concerns. Systematic accounting records essential for avoiding or minimizing the possibilities of misappropriation and embezzlements and to reveal to cash and income position of the institution. The non trading concerns usually maintain the following books.

a. Register of members.b. Minutes bookc. Receipts bookd. Payment book

Like any trading concerns of final accounts prepared at the end of the year consists of a (i) receipts and payments account (ii) Income and expenditure account and (iii) a balance sheet.

Revenue/capital receipts and payments:

Any sum received by a non-trading organization which is recurring by nature such as subscription, fees, interest rent etc. is known as revenue receipt. The revenue receipt is the income out of which the day to day expenses of the organization are met. The recurring expenses to meet day to day obligations in the organization are known as revenue payments.

Any receipts is a lump sum, received once in a way or receive for a specific purpose is a capital receipt. The amount so received is credited to the specific fund (i.e. Tournament Fund) or to the General Fund, known as capital fund. Any expenditure incurred in the acquisition of assets, repayment of a long term liability etc. is known as capital payments.

Receipts and payments Account

Receipts and payments account is a summary of cash transactions made during the year. It shows the cash/bank balance at the end of the year. Income and Expenditure account is summary of income and expenditure during the year. It consists of revenue items only. At the end of the year it shows surplus of income over expenditure or vice versa.

Difference between receipts and payments account and Income and Expenditure Account.

Receipts and payments Account Income and Expenditure Account

1. It is a real account.2. It is like a cash boo

3. Receipts are recorded in the debit side of this account.

4. Payments are recorded in the credit side of this account

5. This account starts with the opening balance. Balance in the beginning represents cash in hand in the beginning.

6. Balance at the end shows cash inhand at the end or cash over-spent.

7. Both capital and revenue items are recorded in this account.

1. It is a nominal account.2. It is like a trading and profit and

loss account.3. Expenses are recorded in the debit

side of this account.4. Incomes are recorded in the credit

side of this account.5. No balance in the beginning in this

account.

6. Balance at the end shows excess of income over expenditure of vice versa.

7. Revenue items are only recorded in this account.

Accounting treatment of some important items :

1. Legacy:

This is the amount donated to the non-trading concern by means of a will. It is recorded in Receipts and payments account and is not considered as income because it is non-recurring in nature. However, legacy of small amount may be considered as income.

2. Subscription:

It is a major part of the income of the non-trading concern. It is recurring in nature. In non-trading concerns recurring receipts are treated as income.

3. Donations:

It is the amount received from some person, firm, company or any other body by sway of a gift. It is shown in receipts and payments accounts of the year. If a donation is received for a specific purpose (donation for building, donation for conducting specific events – sports, annual day celebration etc.) It is in the nature of a capital receipt credited to a separate Fund account and shown in the balance sheet. The non trading concern has to sulfill the purpose for which the donation is received. Hence expenditure incurred out of this fund s deducted and the balance is shown in the Balance sheet. Sometimes, the donation is invested in securities, and the income interest earned is added with the investment. The investment appears in the assets side of the balance sheet.

If the donation is not for a specific purpose, it is known as a general donation. General donation of a big amount is capitalized and not shown as income as it is non recurring in nature. Donations of a small amount may be expected every year. So this may be considered as income during the year.

4. Entrance fee/Life Members fees:

It is receipt and recorded in the receipts and payments account. This is paid only once by the members. It is non recurring in nature. The recurring receipts are only treated as income. Hence the entrance fee is capitalized, Similarly, life members fee are also paid only once by members, and hence not a revenue receipt.

5. Sale of old assets:

The amount realized by the sale of old asset is shown in the receipt and payments account of the year in which the assets are sold. But the profit or loss on sale of such assets is surplus and is shown in the income and expenditure account.

6. Sale of old newspapers, journals, magazines etc:

This appears in the receipts and payments account and is considered as income and recorded in the credit side of the Income and Expenditure account. Selling old newspapers is a routine one and is justified to consider it as income.

7. Sale of sports materials:

The proceeds by sale of sports materials are shown in the receipts and payments accounts. Since sale of sports materials is the regular one for any sports club, the sales proceeds is treated as income and shown in the credit side of the income and expenditure account.

8. Payment of honorarium:

It is the revenue expense and is shown in the expenditure side of the income and expenditure account. It is the amount paid t the person who is not the employed of the organization paying the amount.

Special Funds in non trading concerns:

In non trading concerns, specific funds are created for specific purpose (prize fund for giving prizes, tournament fund for conducting tournaments, charity fund for clarity etc.) and they are invested in specific securities. The income derived from the investment is added to that fund and is not treated as income.

Example Rs.

Prize Fund 20,000Prize fund investment 15,000Interest on Prize Fund 2,000investment for the yearPrize given 8,000

Now the total Prize fund is Rs. 22,000 (20,000 + 2,000) The interest of Rs. 2000 is added with the Prize fund.

The expenses incurred out of fund is deducted form the fund itself. In the previous example the accumulated Prize fund is Rs. 22,000. The Prize given for of Rs. 8,000 is deducted from the Prize fund and the balance fund of Rs. 14,000 will be shown in the Balance sheet.

Exercises in non-trading concern:

There are four types of exercises in non trading concern.

a. Preparing income and expenditure account from the receipts and payments account accompanied with notes.

b. Preparing receipts and payments account from the income and expenditure account accompanied with notes.

c. Preparing balance sheet both in the beginning and at the end from the receipts and payments account and income and expenditure account.

d. Preparing final accounts when wrong statements are given.

Income and Expenditure Account for professional people.

Professional people like Doctors, Lawyers etc. also prepare Income and Expenditure Account to ascertain their net income for a particular period. They prepare receipts and payments account also for recording cash transactions. Their accounts are purely based on cash basis. All outstanding expenses are considered but outstanding incomes are ignored. Professional people cannot file a suit for collecting the outstanding fees. The account prepared by them is called receipts and expenditure account instead of Income and Expenditure account. The outstanding income is aided with the income already received and reserve is created equivalent to the outstanding income and it is debited in the receipts and expenditure accounts. Hence outstanding in the receipts and expenditure account. Hence outstanding income is not considered as the income of the current year.

IllustrationsI. Prepare Income and Expenditure Account from the Receipts and Payments

Accounts.

The following is the receipts and payment Account of the Gymkana Sports club for the year ending March 31 1981.

Receipts Rs. Payments Rs.To Balance b/d 1.4.80

2050 By March 31, 1981

To Subscription By Salaries 41601979-80 80 By Rates & taxes 12001980-81 4220 By Stationary 8001981-82 160 By Telephone 200

4460 By Investment in govt. securities

2500

To profit on Sports meets

2850 By Sundry expenses 1850

To Interest on investment

2000 By Balance c/d 900

To Sundry receipts 250

11610 11610

The following additional facts are ascertained

1. Stock of stationary on April 1, 1980 was Rs. 100 and on March 31, 1981 Rs, 1802. Rates and taxes were prepaid to the extent of Rs. 4003. Telephone charges outstanding amounts to Rs. 75.4. In 1979-80 subscription received in advance amounting to Rs. 200 for current year and Rs. 180 were due on March 31, 1981 for 1980-81.5. On March 31, 1980 the Building stood in the books at Rs. 20,000 and it is required to write off depreciation at 5%. Investments at March 31, 1980 were Rs. 40,000.

You are required to prepare Income and Expenditure Account for the year ended march 31, 1981 and a Balance sheet as at that date.

Solution:

Income and expenditure Account for the year ended March 31, 1981.

Dr. Rs. Cr. Rs.

To Salaries 4160 By Subscription 4220To Rates & Taxes 1200 Add:

Less prepaid 400 800Received in 1979-80 for 1980-81

200

Outstanding 1980-81 180 4600To Stationary

Add : opening stock 100 800900 By Interest on Investments 2000

Less: Closing stock 180 720 By Profit on sports meet 2850To Telephone

Add: outstanding 75200275

To Sundry expenses 1850 1850 By Sundry receipts 250To Depreciation Building 1000

To Surplus 895

9700 9700

Balance Sheet as on March 31, 1980

Liabilities Rs. Assets Rs.Subscription received in advance

200 Cash 2050

Stock of Stationery 100Capital fund (Balancing figure) 62030

Outstanding subscription 80Investments 40000Buildings 20000

62230 62230

Balance Sheet as on March 31, 1980

Liabilities Rs. Assets Rs.Outstanding Telephone charges 75Subscription received in advance

160 Cash 900

Capital fund Add : Surplus

62030895

62925 Stock of Stationary 180

Rates & taxes- prepaid 400Less:Depreciation 1000 19000

Outstanding subscription 180

Investments 42500Building 20000

63160 63160

II. Preparing Receipts and Payments Account from the Income and Expenditure Account.

The Income and Expenditure Account of the Nonesuch club for the year ended 31st

March, 1990 is as follows:

Income and Expenditure Account for the year ended March 31, 1990.

Rs. Rs.To Salaries 24750 By Subscriptions 37500To General expenses 500 By Entrance fees 250To Audit fees 1250 By contribution for annual dinner 11000To Secretary’s honorarium 1000 By profit on annual sports meet 750To Stationary & Printing 450To Annual Dinner expenses 11500To Interest and ban charges 150To Depreciation 9300

Rs. 49500 Rs. 49500

This account had been prepared after the following adjustments.

Subscriptions outstanding on 31st March 1989 Rs. 600Subscriptions received in advance on 31st March 1989 Rs. 450Subscriptions received in advance on 31st March 1990 Rs. 270Subscriptions outstanding on 31st March 1990 Rs. 750

Salaries outstanding on 31st March 1989 and 31st March 1990 were respectively Rs. 2000 and Rs. 2250. General expenses include insurance prepaid to the extent of Rs. 60. Audit fees for 1989-90 are as yet unpaid, during 1989-90. Audit fess for 1988-89 were paid amounting to Rs. 1000.

The club owned a freehold lease of ground valued at Rs. 10000. The club had sports equipment on 1st April 1989 valued at Rs. 12600. At the end of the year, after deprecation, this equipment amounted to Rs. 13700. In 1988-89 the club had raised a bank loan of Rs. 2000. This was outstanding throughout 1989-90. On 31st March, 1990 in hand amounted to RS. 1600.

Prepare Receipt and Payments account for the year ended 31st March 1990 and the Balance sheet and end of the year.

Receipts and payments Account of the Monesuch club for the year ended 31 st March 1990.

Receipts Rs. Payments Rs.

To Balance b/d (balancing figure) 1990 By Salaries 24750To subscriptions 37500 Add Paid for 1988-89 2000 Add: outstanding 31.03.89 600 26450 Add: Received in 31.03.89 270 Less: Payable for 1989-90 2250 24500

38370By General Expenses 500

Less: Received in advance on 31.03.89

450 Add: prepaid 1990-91 60 560

37290 By Audit fee (1989-90) 1000 Less Outstanding on 31.03.90 750 37170

By Secretary’s honorarium 1000

By Stationery and Printing 450To Entrance fee 250 By Annual Dinner expenses 11500To contribution for annual dinner 11000 By Interest ad bank charges 150To Profit on annual sports meet 750 By Sports equipments (Rs.

13700-(12600-9300) 10400

By Balance c/d 160051160 51160

To balance b/d 16000

Balance Sheet of the Nonesuch club as on 31st March, 1990

Liabilities Rs. Assets Rs.Freehold grounds 10000

Subscription received in advance 270 Sports equipments 12600Audit fee outstanding 1250 Additions during the year 10400Salaries outstanding 2250 23000Bank Loan 2000 Less Depreciation 93000 13700Capital fund 19740Add Surplus 600 20340 Subscription out-standing 750

Insurance prepaid 60Cash in hand 1600

26110 26110

Note: Capital fund is not given in this problem. To find out the capital found, the balance sheet for the year 1989 is to be prepared.

Balance sheet of the Nonesuch club as on 31st March 1989.

Liabilities Rs. Assets Rs.

Subscription received in advance 450 Freehold ground 10000Salaries outstanding 2000 Sports equipment 12600Audit fee unpaid 1000

Subscriptions out-standing 600Bank Loan 2000Capital fund (balancing figure) 19740 Cash in hand 1990

25190 25190

III. Preparing Balance sheet at the beginning and at the end of the year from the receipts and payments account and income and expenditure account.

Given below are receipts and payments accounts and income and expenditure account of a club for the year ending 31st Dec. 1995.

Receipts and payments account for the year ending 31st December 1965

Receipts Rs. Payments Rs.To Balance b/d 4000 By Salaries 6000To endowment 2000 By Advertisement 1200To subscription 10200 By Provision 6800To Entrance fee 800 By Printing and stationery 700To Donation for books 1300 By Bank 1000To Entertainment 4000 By Sports material 2800To sale of furniture (book value Rs. 800)

By Creditors (1964) 1300

By investments 4% at 96 purchased on 1.7.1964

1920

By balance c/d 128023000 23000

Income and Expenditure Account for the year ending 31st December 1965.

Expenditure Rs. Income Rs.To loss on sale of furniture 100 By Subscription 10000To Salaries 6700 By Entrance fee 400To Advertisement 1000 By Interest on investment at 4%

on Rs. 2000)80

By Entertainment 4000To Audit fee 300 By excess of expenditure over

income2370

To provision and stationery 6000To Printing and stationery 750To sports material 2000

16850 16850

Prepare balance sheet both in the beginning and at the end

Solution

Balance sheet as on 1st Jan 1965.

Liabilities Rs. Assets Rs.Creditors for investments 1920 Cash in hand 4000Creditors 1300 Investments 1920Capital fund 3500 Furniture 800

6720 6720

Note :The investments were purchased on 1st July 1964. So, investments were the assets on 1st Jan. 1965. The payments for the investments appears in receipts and payents account of the year 1965 and it is inferred that the payment was not made in the year 1964. Hence creditors for investments.

Balance sheet as on 31st December 1965.


Salary outstanding 700 Cash 1280Audit fee outstanding 300 Bank 1000Printing and stationary 50 Advertisement prepaid 200Endowment fee 2000 Stock of provision 800Subscription received in advance 200 Stock of sports material 800Entrance fee 400 Interest accrued 80Donation for books Investments 1920Capital fund 3500Less: Deficit 2370 1130

6080 6080

IV. Preparing final accounts when the wrong statements are given.

Following is the so-called receipts and payments account.

Receipts and payments account.

Receipts Rs. Payments Rs.

To balance b/d 50 By expenses (including payments 700

for sports material Rs. 300)To annual income from subscription

510 By Loss on sale of furniture (cost price Rs. 50)

20

Add : Outstanding of last year received this year

20

530Less : prepaid of last year 10 520 By balance c/d 10050To other fees 200To Donation for building 10000

10770 10770

Additional information:

Club had on 1.1.65; furniture Rs. 200; investments at 5% Rs. 3000; sports material Rs. 740; On 31.12.65; Subscription outstanding Rs. 30; subscription prepaid Rs. 10; stock of sports material Rs. 200.

If you do not approve of it, prepare correct receipts and payments accounts, income an expenditure account and balance sheet.

Solution

Receipts and Payments account for the year ending31st Dec. 1965

Receipts Rs. Income Rs.

To Balance b/d 50 By expenses sundries 400To subscription: Annual income 510

By sports materials 300

Less : Outstanding at the end 30

By Balance b/d

480 (balancing figure) 10080Add : prepaid at the end 10

490Add: outstanding in the beginning 20

510Less: Prepaid in the beginning

10 500

To other fee 200To Donation 10000To sale of furniture 30

10780 10780

Income and Expenditure account for year ending 31st December 1965

Expenditure Rs. Income Rs.To Sundries 400 By subscriptions-annual income 510To sports material 740 By other fee 200 Add: Additions 300 By deficit 400

1040

Less: Sock in hand 200 840To loss on sale of furniture 20

1260 1260

Balance Sheet as on 31st Dec. 1965

Liabilities Rs. Assets Rs.Capital fund 4000 Furniture 250Less Deficit 400 3600 Less sold : 50 150Donation 10000 Investments (5%) 3000Subscription paid in advance 10 Interest accrued 150

Stock of sports material 200Subscription outstanding 30Bank 10080

13610 13610

Capital fund I the beginning has been calculated as follows:

Balance Sheet as on 1st January, 1965

Liabilities Rs. Assets Rs.Subscription prepaid 10 Furniture 200Capital fund (balancing figure) 4000 Investments 3000

Sports material 740Subscription outstanding 20Bank 50

4010 4010

Dr. Getwell commenced practice in January, 1982. He has prepared the following Receipts and payments Account for the yaer 1982.

Receipts and Payments A.c

Receipts Rs. Income Rs.

To Cash Introduced: By Furniture 2000To Capital Fund 6000 By Equipments 3000To Income from Visits 8000 By Purchase of Drugs 2000To Receipts from Dispensing 6000 By compounder’s salary 1200To Miscellaneous receipts 100 By Rent 600

By Conveyance 1000By Stationery 200By Lighting 150By Journals & news-papers 150By Investments 6800By Balance – Cash 3000

20100 20100

Rs. 1500 were will still to be received on account of visits, Compounder’s salary of Rs. 300 and a bill of stationery for Rs. 100 are outstanding. Stock of drugs on hand was estimated at Rs. 500. Furniture and equipments are subject to depreciation at 5%.

Prepare Doctor’s Receipts and Expenditure Account and Balance sheet for the year ended Dec. 31, 1982

Receipts and Expenditure AccountOf Dr. Getwell & for the year ended December 31, 1982.

Expenditure Rs. Receipts Rs.

To Purchase of drugs 2000 Less : Closing stock 500 1500 By Income from visits 8000To Compounder’s salary 1200 Add: Outstanding 1500 9500 Add: Outstanding 300 1500

By Receipts from dispensing 6000To Rent 600To conveyance 1000 By Miscellaneous Receipts 100To Stationery 200 Add: outstanding 100 300

To Lighting 150To Journals and newspapers 150To Depreciation Furniture (5%) 100 Equipment (5%) 150

To Provision for income From visits outstanding

1500

To surplus 8650

15600 15600

Balance sheet as on 31st December 1982


Capital fund 6000 Cash 3000 Add: surplus 8650 14650 Investments 6800Compounder’s salary outstanding

300

Stationery outstanding 100 Furniture 2000

Less: Depreciation 100 1900Equipments 3000 Less: Depreciation 150 2850Stock of drugs 500Income from visits 1500 Less: provision 1500 ---

15050 15050

Single Entry

Accounting from incomplete records

All business concerns have to maintain their accounting records under double entry systems. If not concerns are said to be following a single entry system (Singe Entry System) It is a defective double entry system. In this system only personal account, bank account and cash account are maintained and other requirements of double entry system are not followed. So it may be called as incomplete double entry system. The impersonal account relating to assets, expenses, gains etc., are not maintained. Kohler’s dictionary for a accountants defines single entry as “A system of book keeping in which as a rule only records of cash and of personal accounts are maintained; it is always incompletes double entry, varying with circumstances”.

Characteristics of Single Entry System

a. Accounting records under single entry system can be maintained only by sole traders and other petty shops. Limited companies, by legal provisions cannot adopt this system.

b. It is defined as a system where only personal and cash accounts are maintained; other nominal and real accounts are not maintained.

c. In this system not only business transactions but also personal transactions are maintained in cash book.

d. Maintaining day-to-day transactions under this system is very simple. So it is adopted by small business units.

Defects

1. Preparing trial balance is not possible because both the aspects of transactions are not recorded. Hence arithmetic accuracy of books cannot be checked. It may encourage misappropriation and fraud.

2. Since the trial balance and the real accounts are not available, preparation of profit and loss account and balance sheet is impossible and hence the profitability and true and fair view of the business cannot be revealed. The progress made by the business over the years is unknown.

Profit Calculation

Under single entry system, in the absence of trading and profit and loss account profit is ascertained by comparing the capital (Net Assets) at the end and at the beginning of the trading period. An increase in capital, is taken at profit and any decrease is considered as loss. The increase and decrease in capital may be due to additional capital introduced and withdrawal made respectively. So the additional capital is to be deducted from the closing capital and drawings is to be added to it. The difference between the adjusted closing capital and opening capital is ascertained. This is the profit or loss. Alternatively, the

additional capital introduced and drawings can be adjusted, with the difference between opening and closing capital, by adding the drawings and deducting the capital introduced.

Steps in Profit Calculation

Step 1: Preparing statements of affairs at the beginning for ascertaining capital in the beginning.

Step 2: Preparing statement of affairs at the end for ascertaining capital at the end.

Step3: Adjusting the capital at the end by adding additional capital introduced and deducting drawings made during the year.

Step4: Ascertaing the difference between the adjusted capital and capital at the beginning. The difference is either profit or loss.

Formula for Profit Calculation

Profit = (Capital and end + Drawing – Additional Capital introduced) – Capital in the beginning.

For profit ascertainment the opening and closing capital are needed. Capital refers to the difference between the assets and liabilities. The statement of affairs shows the assets and liabilities of a given period. It differs from balance sheet. Because the items available in the statement of affairs are not drawn from proper ledger accounts.

Conversion Method

In single entry system, personal and cash accounts are only maintained. So the trail balance is not prepared. Once the trail balance is prepared, preparing trading and profit and loss account and balance sheet becomes easy. The following steps are necessary to prepare trading and profit and loss account and balance sheet from the incomplete information available under single entry system.

Step 1 : Preparing statement of affairs in the beginning to calculate capital in the beginning.

Step 2 : Preparing cash book. It will be useful to find out cash or bank balances in the beginning or end as the case may be. If both these balances

(Figures) are given, the difference in cash book nay be treated either drawings, or cash purchases (if debit side exceeds credit side) or cash sales or capital introduced or sundry income (if credit side exceeds debt side) as the case may be.

Step 3 : Preparing (i) total debtors account, (ii) total creditors account, (iii) Bills receivable account, and (iv) Bills payable account. This helps to

find out credit sales, credit purchases, creditors or debtors balance either in the beginning or at the end, returns and discount.

Step 4 : Ascertaining total sales by adding credit and cash sales and total purchases by adding cash and credit purchases.

Step 5 : Preparing trading account, profit and loss account and balance sheet.

Finding out the Missing Figure

Books of accounts maintained under single entry system are converted into double entry so as to prepare treading account, profit and loss account and balance sheet. For preparing these accounts the following information are needed.

(i) For Trading Account (a) Opening Stock(b) Purchases (Cash and Credit)(c) Direct expenses(d) Sales (Cash and Credit) and (e) Closing Stock

(ii) For Profit and Loss Account (a) Indirect expenses and Losses(b) Incomes and gains

(iii) For Balance Sheet (a) All assets and liabilities(b) Opening capital(c) Profit made during the years.

Opening Stock

In general the closing stock of the previous year is taken as opening stock of the current year. However, if the opening stock is not given, it can be found out by preparing. Memorandum Trading Account making use of the rate of gross profit.

Illustration

Purchase made for the period Rs. 1,00,000, sales mad during the period Rs. 1,80,000 closing stock Rs. 14,000 Manufacturing expenses Rs. 10,000. Rate of Gross Profit was 50% on cost calculated opening stock.

Memorandum Trading Account

Rs. Rs.

To Opening Stock (Balancing figure)

24,000 By Sales 1,80,000

To Purchases 1,00,000 By closing stock 14,000To Manufacturing expenses 10,000To Gross profit 1/3 X 1,80,000 60,000

1,94,000 1,94,000

Purchases

Total purchases are the sum of cash and credit purchases. Cash purchases can be ascertained from the cash book. Credit purchases are calculated by preparing total creditors account.

Illustration

From the following information, calculate the credit purchases.

Rs.Creditors as on 1.1.1990 8,000Cash purchases 17,000Cash paid to creditors 31,000Bills payable accepted during the year 5,000Purchases returns 1,000Creditors as on 31.2.1990 13,000

Total Creditors Account

Rs. Rs.

1990 Dec. 31 1990 Jan.1 1,80,000

To Cash paid to Creditors 31,000 By Balance b/d Dec. 31 25,000To bills payable 5,000 By Purchases (Balancing figure) 25,000To Purchase returns 1,000

To Balance c/d 13,000

50,000 50,000

Total Purchases :

Cash purchases 17,000Credit purchases 25,000

---------42,000---------

Sometimes, in order to calculate purchases, bill payable account and total creditors account are prepared. This is done when some payment to creditors is made by accepting bills. Bills payable account shows the bills accepted in favour of creditors. This information is recorded in creditors account and then the balancing figure is assumed as credit purchases.

Illustration

From the following particulars find out the credit purchases and total purchases:

Rs.Cash purchases 58,000Opening balance of bills payable s 15,000Opening balance of creditors 40,000Opening balance of bills payable 5,000Closing balance of creditors 36,000Cash paid to creditors 50,000Bills payable paid during the year 21,000Purchase returns 3,000 Allowances from creditors 1,600 Bills payable dishonoured 600

Solution

Bills payable Account To Cash A/c 21,000 By Balance b/d 15,000To Creditors (B/P dishnoured) 600 By Sundry Creditors (B/P

accepted)11,600


26,000 26,000

Total Creditors Account

Rs. Rs.

To Cash paid 50,000 By Balance b/d 40,000To B/P accepted 11,600 By B/P dishonoured 600To Allowances 1,600To Purchase returns 3000 By Credit Purchases

(Balancing Figure)61,600


1,02,200 1,02,200

Sale

Bills Receivable account and Bills Payable are to be prepared to calculate the bills receivable received during the year and credit sales.

Illustration

From the following particulars, you are required to calculate total sales.Rs.

Bills receivable January 1, 1990 7,000Debtors January 1, 1990 25,000Bills receivable encashed during 1990 15,000Cash received from debtors 18,000Bad debts written off 400Returns inwards 500Bills receivable dishonoured 1,500Bills receivable December 31, 1990 6,000Debtors December 31, 1990 18000

Cash sales (as per pass book) 40,000

Solution

Bills Receivable Account

1990 Jan. 1 Rs. 1990 Dec. 31 Rs.

To Balance b/d 7,000 By Cash 15,000Dec. 31 To Sundry debtors (Bill received)

15,500 By Sundry debtors (Bill dishonoured)

1,500

By balance c/d 6,000

22,500 22,500

Total Debtors Account1990 Jan. 1 Rs. 1990 Dec. 31 Rs.

To Balance 25,000 By Cash received 18,000Dec 31 to B/R dishonoured 1,500 By B/R Received 15,500To Credit Sales (Balancing Figure)

25,900 By Bad debts 400

By Returns inwards 500By Balance c/d 18,000

52,400 52,400

Total Sales Rs.

Cash Sales 40,000Credit Sales 25,900

Total Sales 65,900


Sometimes the total purchases or sales can be calculated by preparing a Memorandum Trading Account. The essential information required is the rate of gross profit earned.

Find out the purchases:

Opening Stock 8,000Closing Stock 17,500Sales 64,000Rate of Gross Profit on sales 25%


Rs. Rs.To opening Stock 8,000 By Sales 64,000To Purchases (Balancing figure) 57,500 By Closing Stock 17,500

To Gross profit 16,000

81,500 81,500

Illustration

Find out the sales:Rs.

Opening Stock 12,000Closing Stock 18,000Purchases 80,000Direct expenses 6,000Rate of gross profit 20% on sale


Rs. Rs.To opening Stock 12,000 By Sales (Balancing Figure) 1,00,000To Purchases 80,000 By Closing Stock 18,000To Direct expenses 6,000To Gross Profit 20,000

1,18,000 1,18,000

Cost goods sold is computed to work out the rate of gross profit on cost.

Cost of goods sold = Opening stock + Purchases + Direct Expense – Closing Stock= 12,000 + 80,000 + 6,000 – 18,000= Rs. 80,000

Gross Profit 20% on Sale = ¼ on cost= 80,000 x ¼ = Rs. 20,000

Balance Sheet items

Most of the figure relating to assets and liabilities are given in the problem. If some assets and liabilities are not given, e.g. debtors, creditors, bills receivable or payable, then they are ascertained by preparing total debtors account, total creditors account, bills receivable account and bills payable account respectively.

The closing cash balance is available in cash book, If the cash book is not given in a proper form, a cash book is to be prepared and missing information is to be found out. The missing information may be either the opening balance or closing balance of cash or cash sales or cash purchases or certain expenses or income.

The values of fixed assets can be ascertained from the balance sheet of the previous year. These values are reduced by the depreciation to ascertain the values of fixed assets at the end of the year. The capital in the beginning is available in the opening balance sheet. If the opening balance sheet is not given, it is to be prepared and the difference between the assets and liabilities is the opening capital. In the way all the information needed for the preparation of balance sheet are collected and the balance sheet is constructed.

Illustration

Vikash started his business on January 1, 1990 with a capital of Rs. 1,00,000. His capital as on December 31, 1990 was Rs, 1,20,000. During the yare the introduced a further capital of Rs, 10,000 and withdraw from the business for his private use Rs. 16,000. Find out his profit for the year 1990.

Solution

Statement of Profit for the year 1990

Rs.Capital as on December 31, 1990 1,20,000Add: Drawing during the year 16,000

1,36,000Less: Additional capital introduced 10,000

1,26,000

Less: Capital as on January 1, 1990 Profit for 1990

1,90,000

26,000

Alternative Method

Rs.Capital at the end 1,20,000Less: Capital at the beginning 1,00,000

20,000Add: Drawings 16,000

36,000Less: Additional capital 10,000

Profit for 1990 26,000

Illustration

Rama keeps his books under singly entry system. From the following information given below prepare a Trading and Profit and Loss Account for the year ending December 31, 1978 and a Balance sheet on that date.

1.1.1978 31.12.1978Capital 7,500Sundry Debtors 3,440 4,500Stock 1,750 2,000Sundry creditors 1,125 850Machinery 1,560 1,560Analysis of the cash book for the year ended 31st December 1978

Rs. Rs.To Balance b/d 1,875 By Sundry Creditors 1,500To Sundry Debtors 6,000 By Wages 300To Cash sales 1,350 By General Expenses 200To Commission 90 By Salaries 2,800

By Drawings 1,600By Balance c/d 2,915

9,315 9,315

Depreciate machinery by 10%. Allow interest on opening capital at 5% p.a. Provide for reserve for doubtful debts at 5% on debtors.

Balance Sheet as on 1.1.1978Liabilities Rs. Assets Rs.Sundry Creditors 1,125 Cash in hand 1,875Capital 7,500 Sundry debtors 3,440Stock 1,750Machinery 1,560

8,625 8,625

Total Debtors AccountTo Balance b/d 3,440 By Cash 6,000To Credit sales 7,060 By Balance c/d 4,500

10,500 10,500

Total Creditors AccountTo Cash 1,500 By Balance b/d 1,125To Balance c/d 850 By Credit purchases 1,225

2,350 2,350

Trading and Profit and Loss Account for the year ending December 31, 1978

Rs. Rs.To opening Stock 1,750 By Sales Cash 1,350To Purchase 1,225 Credit 7,060To Wages 300To Gross Profit 7,135 By Closing Stock 2,000

10,410 10,410

Rs. Rs.To Salaries 2,800 By Gross Profit 7,315To Genera expenses 200 By Commission 90To Depreciation on Machinery 156To Reserve for doubtful debts 225To Interest on Capital 375To Net Profit 3,469

7,225 7,225

Liabilities Rs. Rs. Assets Rs. Rs.Sundry creditors 850 Cash 2,915Capital 7,500 Debtors 4,500Add: LessInterest on Capital 375 Reserve for bad debts 225 4,275Net Profit 3,469 Stock 2,000

11,344 Machinery 1,560Less: LessDrawings 1,600 9,744 Depreciation 156 1,404

10,594 10,594

Illustration

Johnson does not maintain books in the Double Entry System and Bank Accounts. From the following information, prepare Profit and Loss Account and Balance Sheet s at June 30th, 1977.

(a) Assets and Liabilities

30.06.76 30.06.77Rs. Rs.

Stock 19,800 1,13,200Creditors 31,000 14,500Debtors 1,18,000 1,25,000Premises 90,000 90,000Furniture 11,000 11,500Air Conditioner 15,000 15,000

(c) Creditors as at 30.06.76 include Rs. 15,000 for purchase of Air-Conditioners.(d) Cash Transactions

Rs.Cash at July. 1976 15,000Collections from customers 1,60,000Payment to Creditors (Trade) 1,44,000Rent, Rates and Taxes 11,500Salaries 1,12,000Sundry expenses 18,000Sundry Income 16,500Drawings by Johnson 30,000Loan from Mrs. Fernandes 23,000Capital introduced 12,000Cash Sale 11,500Cash purchases 15,000Paid to credit for Air-Conditioner 15,000

(d) Bad debts written off 1,200

Trading and Profit and Loss Account for the year ended June 30, 1977.

Rs. Rs.To Opening Stock 19,800 By SalesTo Purchase Cash 11,500Cash 15,000 Credit 1,69,000 1,80,500Credit 1,42,500 1,57,500 By Closing Stock 1,13,200

2,93,700 2,93,700

Rs. Rs.To Salaries 1,12,000 By Gross Profit b/d 1,16,400To Rent, Rate & Taxes 11,500 By Sundry income 16,500To Sundry expenses 18,000 By Net Loss 9,800To Bad debts 1,200

1,42,700 1,42,700

Balance Sheet as on June 30 1977

Liabilities Rs. Assets Rs.Johnson Capital A/c as at 1.7.76

2,37,800 Premiseses 90,000

Add Furniture 11,500Capital introduced 12,000 Air- Conditioner 15,000

2,49,800 Stock 1,13,000Less: Debtors 1,25,000Drawings 30,000

2,19,800Less:Loss for the year 9,800 2,10,000Loan from Mrs. Fernandes 23,000Bank Balance Overdraft 1,07,000Sundry Creditors 14,500

3,54,700 3,54,700

Calculation of Capital as at 1.7.76

Opening Balance Sheet s at 1.7.76

Liabilities Rs. Assets Rs.Creditors (Trade 31,000 – 15,000)

16,000 Premises 90,000

Furniture 11,000Air-conditioner 15,000

For Air Conditioner 15,000 31,000 Stock 19,800Debtors 1,18,000

Capital (Balancing figure) 2,37,800 Cash 15,000

2,68,800 2,68,800

Workings

Calculation of credit sales

Total Debtors Account

Rs. Rs.To Balance b/d 1,18,000 By Bank 1,60,800To Credit Sales 1,69,000 By Bad Debts 1,200

By Balance c/d 1,25,000

2,87,000 2,87,000

Calculation on Creditors Account

Total Trade Creditors Account

Rs. Rs.To Bank 1,44,000 By Balance b/d (Rs. 31,000 –

15,000 due for air-conditioner)16,000

By Credit Purchases (Balancing figure)

1,42,500


1,58,500 1,58,500

Calculation of bank balanceBank Account

Rs. Rs.To Balance b/d 15,000 By payment to creditors 1,44,000To Collection from customer 1,60,800 By Rent, rates and taxes 11,500To Sundry income 16,500 By Salaries 1,12,000To Loan from Mrs. Fernandes 23,000 By Sundry expenses 18,000To Capital introduced 12,000 By Drawings 30,000To Cash sales 11,500 By Cash purchases 15,000To balance c/d (balancing figure)

1,07,200 By Payment to creditors for Air-Conditioner

15,000

(Bank Overdraft) By Purchase of furniture 500

3,46,000 3,46,000

Consignment

Manufacturers or wholesalers usually dispatch their goods periodically to a trader on consignment basis. It means the trader will sell the goods at the risk of the manufacturer or wholesaler. Goods sent by the manufacturer on consignment basis to the trader is not treated as sales. Manufacturer sends goods is called consignor. Trader receives goods is called consignee. The transaction agreed between consignor and consignee is known as consignment. The relationship between the consignor and consignee is that of principal and agent. Sometimes the consignor will as advance money from the consignee before dispatch of goods. Consignee should sent statement to the consignor periodically, stating the details of goods received, sales (both ash and credit), expenses incurred, commission charged remittances made and the balance due. This statement is known as “Account Sales”.

The consignee is entitled to charge his commission from sales. The percentage of commission will be mentioned in the consignment agreement. Consignee can get “del credere commission” in addition to usual commission, if he bears the responsibility of collecting bad debts. The “del credere commission” is paid to consignee on total sales. Consignee can deduct the “del credere commission” in addition to usual commission from the sales.

The consignor and consignee should prepare the books of accounts stating the details of consignment transaction for every financial year. Consignor prepares consignment account. It reveals goods sent, expenses incurred, commission, sales closing stock and profit/loss. Consignee prepares consignor account revealing the sales, expenses incurred, commission and the amount to be remitted to consignor.

ACCOUNTING TREATMENT IN CONSIGNMENT

In the books of Consignor In the books of the Consignee

1. When goods are consigned:Debit Consignment A/cCredit Goods sent on Consignment A/c

No Entry

2. Expenses incurred by the ConsignorDebit Consignment A/cCredit Bank/Cash A/c

No Entry

3. Expenses incurred by the Consignee:Debit Consignment A/cCredit Consignee’s A/c

Debit Consignor’s A/cCredit Bank/Cash A/c

4. When a bill is received:Debit Bills Receivable A/cCredit Consignee’s A/c

Debit Consignor’s A/cCredit Bills Payable A/c

5. When the bill is discounted:Debit Bank/Cash A/cDebit Discount A/cCredit Bills Receivable A/c

No Entry

6. When the Goods are sold by the Consignee:Debit Consignee’s A/cConsignors DebtorsCredit Consignment A/c

Debit Cash/Bank/

Credit Consignors A/c

7. For the commission due to the Consignee:Debit Consignment A/cCredit Consignee’s A/c

Debit Consignor’s A/cCredit Commission A/c

8. For the Cash received from the Consignee:Debit Consignment A/cCredit Consignee’s A/c

Debit Consignor’s A/cCredit Cash/Bank A/c

9. For the Bad Debts Suffered by the Consignee:(a) When the Del_Credere Commission is allowed No Entry

Debit Bad Debts A/cCredit Consignor’s Debtors A/c AndDebit Commission Credit Bad Debts A/c

(b) When the Del_Credere Commission is not allowedDebit Consignment A/cCredit Consignee’s A/c

Debit Consignor’s A/cCredit Consignor’s Debtor’s A/c

10. For the stock lying with the consignee at the end:Debit Consignment Stock A/cCredit Consignment A/c

No Entry

The above entry will be reversed in the next year, by treating the stock as opening for that year

11. For closing the goods sent onConsignment A/c:

No Entry

Debit goods sent on Consignment A/cCredit Trading A/c – if the Consignor has the manufacturing activityCredit Purchase A/c – if the Consignor has Trading activity

12. For transferring the profit or loss made on the consignment:

For Profit

For Loss

-

-

Debit Consignment A/cCredit Profit and Loss A/cDebit Profit and Loss A/cCredit Consignment A/c

Valuation of closing stock with the consignee

A part of the goods, sent by the consignor may remain unsold with the consignee at the end of the financial year. The unsold goods are known as Closing Stock. A proper valuation is to be done for the closing stock. While valuing the closing stock, the cost of the goods, the proportionate expenses incurred by the consignor will have to be added to compute the value of closing stock lying with the consignee.

The computed value of Closing Stock (cost price) is to be compared with the market price and valuation of closing stock must be least of the cost price or market price.

Expenses incurred by the consignee till the goods teach the consignee’s premises are considered as non-recurring expenses. Example, unloading charges, customs duty, carriage, freight, insurance in transit etc. Expenses like advertisement, salesman’s salary and godown rent are considered as recurring expenditure and not taken into account for the purpose of the computation of closing stock.

Normal Loss

In consignment goods are dispatched by consignor to consignee. While transferring or dispatching goods from one place to another, some loss is in-hearten and unavoidable. Such loss is known as normal loss. It causes for loss in quantity of goods dispatched. Example: evaporation of petrol due to atmosphere, leakage of oil, loss in weight due to loading and unloading of goods etc. The quantity and value of normal loss are small and can be easily recovered from the good units. While computing the value of closing stock at the end of the year, normal loss (in units) is deducted from the total quantity of goods dispatched but the value is not deducted for the purpose of calculating the value of remaining good units at an escalated cost so as to recover the loss due to normal loss.

Example Goods dispatched 1000 units

Value Rs. 1,00,000

Value per unit Rs. 100Normal Loss 1% (10 units)Good Units = 1000-10 = 990

ABNORMAL LOSS

Certain losses are accidental or may occur due to carelessness-for example theft of goods or destruction of goods by fire or flood. Such losses are known as abnormal losses. They will not occur often. Abnormal loss may occur during goods in transit or at the consignee’s premises. Abnormal loss is separated while preparing the consignment account for ascertaining the correct profit from the particular consignment.

Example : Vikash consigned 1000 kg of groundnut oil to Basker of Nagpur at Rs. 15 per kg. Expenses incurred by Vikash being Rs. 750 for freight and Rs. 250 for insurance. During transit 50 kg of oil was destroyed due to accident and the insurance company accepted the loss to the extent of Rs. 700. Basker received the balance of consignment and sold 700 kg of oil at Rs. 20 per kg. 10 kg of oil was lost due to leakage. Calculate the abnormal loss and the value of the closing stock lying with the consignee.

Groundnut oil dispatched

In Qty ValueKg. Rs.

1,000 15,000

ExpensesFreight 750Insurance 250

1,0001000 16000

Abnormal loss 50 800

Normal Loss95010

15,200-------

940 15200

Closing Stock (940 – 700) = 240 kg

Valuation of Closing Stock =

Accounting TreatmentAbnormal loss a/c Dr. 800

To Consignment a/c 800

Insurance Company A/c Dr. 700To Abnormal loss A/c 700

Profit and loss A/c Dr. 100To Abnormal loss A/c 100

INVOICING GOODS HIGHER THAN COST

Sometimes, consigner may not like to disclose the cost of the goods consigned and the real profit. So he invoices the goods in such a way to earn the expected profit on sales. The invoice sent by the consignor will not be at a cost price, but at selling price. It is known as invoice price. The consignee is at the option either to sell the goods at the invoice price or above the invoice price. While preparing the consignment account, the journal entries are passed at invoice price. In order to ascertain the true profit, the loading is eliminated on the goods sent ant a stock reserve is created for the closing stock lying with the consignee. The journal entries are as follows:

ENTRIES IN THE BOOKS OF CONSIGNOR

When the goods are consigned:Debit Consignment A/cCredit Goods sent on Consignment A/c

At invoice price

For unsold stock lying with the consignee:Debit Stock on Consignment A/cCredit Consignment A/c

At invoice price plus proportionate non recurring expenses.

To remove the load on goods sent on consignment:Debit Goods sent on Consignment A/cCredit Consignment A/c

Difference between the invoice price and cost

To remove the load on unsold stock:Debit Consignment A/cCredit Stock Reserve A/c

Difference between the invoice price and cost (excluding expenses) for the number of units unsold.

The closing stock and stock reserve will be carried forward to the next year and will be closed by transfer to the Consignment Account as opening stock and opening stock reserve.

Illustration: 3

Johar of Jaipur sends goods on consignment to Pawan to Patna. The terms are that Pawan will resume 10% commission (including del crederre) on the invoice price (which is cost plus 25%) and 20% of any price realized above invoice price.

Johar sent goods for Rs. 90,000 at invoice price and spent Rs 6,740 on freight, forwarding charges etc. Pawan accepted a bill for 2 months for Rs. 72,000 immediately on receiving consignment.

His expenses were Rs. 1,200 as rent and Rs. 150 as insurance. Pawan sold 3/4 of goods for Rs. 87,750. One customer failed to pay Rs. 1,800. This amount could not be realized. Pawan met his acceptance and remitted the amount due to Johar.

Give the important ledger accounts in the books of Johar and Pawan.

Solution

IN THE BOOKS OF JOHAR

CONSIGNMENT TO PATNA ACCOUNT

Dr. Cr.Rs. Rs.

To Goods sent on Consignment 90,000 By Pawan – Sale Proceeds 87,750To Bank – Expenses 6,740 By Stock on Consignment 24,185To Pawan – Expenses 1,350 By Goods sent on Consignment 18,000To Pawan- commission 10,800To Stock Reserve 4,500To Profit and Loss A/c – profit 16,545

1,29,935 1,29,935

GOODS SENT ON CONSIGNMENT ACCOUNT

Rs. Rs.To Consignment to Patna A/c –difference between cost and invoice

18,000 By Consignment to Patna A/c 90,000

To Purchase 72,000

90,000 90,000

Pawan account

Rs. RsTo Consignment A/c 87,750 By Bills Receivable 72,000

By Consignment Exp. 1,350By Consignment – commission 10,800By Bank Balance received 3,600

87,750 87,750

1. Calculation of Commission:

CommissionRs. Rs.

Sales made by Pawan ¾ ths of the invoiced value 90,000 X ¾ Excess over invoice value

87,75067,500 – 10%

20,250 – 20%

6,750

4050

10,800

2. Calculation of Unsold Stock:

1/4th of invoice value Rs. 90,000 22,5001/4th of Consignor’s Expenses Rs. 6,740 1,685

---------24,185---------

IN THE BOOK OF PAWANJOHAR ACCOUNT

Rs. Rs.To Bills Payable A/c 72,000 By Bank & Consignment Debtors

A/c87,750

To Cash Expenses 1,350To Commission 10,800To Bank 3,600

87,750 87,750

Messers East India Company of Madras, consigned 100 steel chairs to United Company of Hyderabad. The cost of each steel chair was Rs. 500. The consignor paid insurance Rs. 500. Freight Rs. 800. Account sales was received from United Company showing gross sale proceeds of 80 units at Rs. 600 each. The expenses paid and deducted by them were:

Carriage Rs. 20 : Establishment expenses Rs. 130 commission @ Rs. 2400 Show journal entries and important ledger accounts in the books of both the parties.

BOOKS OF EAST INDIA COMPANY

Journal Dr. Cr.Consignment to Hyderabad A/c Dr. 50,000To Goods sent on consignment(100 Steel chairs consigned to United Company, Hyderabad)

50,000

Consignment to Hyderabad A/c Dr. 1,300To Cash(Freight and Insurance paid for the consignment)

1,300

Consignment to Hyderabad A/c Dr. 150To United Company(Expenses paid by United Company)

150

United Company A/c Dr. 48,000To Consignment to Hyderabad(Sale proceeds received by United Company)

48,000

Consignment to Hyderabad A/c Dr. 2,400To United Company(Commission due to United Company)

2,400

Stock on consignment A/c Dr. 10,264To Consignment to Hyderabad a/c(Closing Stock in United Company)

10,264

Bank A/c Dr. 45,450To United Company (Amount received from United Company)

45,450

Consignment to Hyderabad Account

To Goods sent on consignment A/c

50,000 By United Company – sales 48,000

To Cash By Stock on consignment a/c 10,264-Insurance 500-Freight 800

To United Company-Carriage 20-Establishment Expenses 130

To United Company-Commission 2,400

To Profit / Loss A/c 4,414

58,264 58,264

Goods sent on Consignment Account

Rs. RsTo Purchase a/c 50,000 By Consignment to Hyderabad a/c 50,000

50,000 50,000

United Company Account

To Consignment to Hyderabad A/c – Sales

48,000 By Consignment to Hyderabad a/c 20

-carriage 130-Establishment expenses 2,400-commission 45,450-Bank (amount received)

48,000 48,000

Rs.Valuation of unsold stock 20 steel chairs @ Rs. 500 10,000

Proportionate expenses incurred by cosignor 260

Proportionate non recurring expenses (carriage) incurred by consignee

4

10,264Books of United Company

Journal Dr. Cr.East India Company a/c Dr. 150To Cash(Expenses incurred for consignment)

150

Bank A/c Dr. 48,000To East India Company(Sale of 80 steel chairs)

48,000

East India Company A/c Dr. 2,400To Commission(Commission due for sale)

2,400

East India Company a/c Dr. 45,450To Bank(Balance money paid)

45,450

East India Company Account

Rs. Rs.To Cash 150 By Bank – sales 48,000To Commission 2,450To Bank 45,450

48,000 48,000

1000 gift articles were consigned by ABC & Co., of Calcutta to XYZ & Co., of Chennai at an invoice cost of Rs. 150 each. ABC & Co., paid freight Rs. 10,000 and insurance Rs. 1500. During the voyage 100 articles were totally damaged by fire and had to be trrown overboard. No recovery has been made from the insurance company. XYZ & Co. took delivery of the remaining gift articles and paid Rs. 14,400 as customs duty.

XYZ & Co., had sent a bank draft to ABC & Co., for Rs. 50,000 as advance payment and later sent an account sales shoeing that 800 gift articles were sold at Rs. 220 each.

Expenses incurred by XYZ & Co., on godown rent and advertisement etc. amounted to Rs. 2000. XYZ & Co., is entitled to commission of 5% One of the credit customers could not pay the cost of 5% of gift articles.

Prepare the consignment account and XYZ & Co., account.

Consignment to XYZ & Co. to Chennai AccountRs. Rs.

To Goods sent on consignment 1,50,000 By Sales 1,76,000To Cash

Freight 10,000 By Profit/Loss 16,150Insurance 1500 11,500

By Stock on consignment 17,750To XYZ Co.

Customs duty 14,400Expenses 2,000Commission 8,800Bad debt

1,100

To Profit/Loss a/c 22,100

2,09,900 2,09,900

X Y AND Z & CO. ACCOUNT

Rs. Rs.To consignment to Chennai a/c 1,76,000 By Bank 50,000To Balance c/d (advance for 100 gift articles)

5,000 By Consignment a/c

-customs duty 14,400-expenses 2,000-bad debts 1,100

By Consignment a/c -commission 8,800

By Bank 1,04,700

1,81,000 1,81,000

By Balance b/d 5,000

Value of the loss (100 gift articles damaged by fire)

Rs.Cost of 100 gift articles 15,000

Freight and insurance for 100 articles 1,150

Value of closing stockCost of 100 gift articles unsold 15,000Proportionate Expenses incurred by consignor (freight and insurance) 1,150

Proportionate non-recurring expenses incurred

by consignee (customs duty) 1,600

JOINT VENTURE

Joint venture is a temporary partnership between two or more parties who undertake jointly a small commercial venture. Joint venture is established for the purpose of consigning the goods from one place to another, undertaking contracts for construction works, underwriting of chares or debentures of joint stock companies etc. The persons entering into joint venture agreement are called co-venturers. They share profit or loss of joint venture in agreed proportions. The joint venture agreement will come to an end once the business mentioned in the agreement is completed. Once the business of the joint venture is completed, the co-venturer’s account is closed and settled either by receipt of cash or payment of cash.

The accounts of joint venture can be maintained in any one of the following methods:

Method 1:Each co-venturer is maintaining a joint venture account and other co-venturer’s account in his own books of accounts. Every co-venturer records all the transactions in his books relating to the joint ventre.

Accounting entries:

In the books of A In the books of B

Goods supplied by A and expenses paid Joint Venture a/c Dr.To Purchase a/cTo Cash a/c

Goods supplied by B and expenses paid Joint Ventre a/c DrTo B a/c

Joint Venture a/c DrTo A a/c

Joint Venture a/c DrTo Purchase a/cTo Cash a/c

When goods are directly purchased for joint venture by the co-venturer, cash/bank is credited instead of purchases account

Bill drawn by A and accepted by BBill Receivable a/c DrTo B a/c

A’s a/c DrTo Bills payable a/c

When the bill is discounted Cash/Bank a/c DrJoint Venture a/c Dr (discountTo Bills Receivable a/c

Joint Venture a/c DrTo A a/c

Goods sold ACash a/c DrTo Joint Venture a/c

A a/c DrTo Joint Venture

Goods Sold BB a/c DrTo Joint Venture a/c

Cash a/c DrTo Joint Venture a/c

Commission allowed to BJoint Venture a/c DrTo B a/c

Joint Venture a/c DrTo Commission a/c

Unsold goods taken by BB a/c DrTo Joint Venture a/c

Purchase a/c DrTo Joint Venture a/c

Transferring ProfitJoint Venture a/c DrTo Profit and Loss a/c-for A share-for B shareTo B a/c

Joint Venture a/cTo Profit and Loss a/c

To A a/c

Illustration:

A and B entered into a joint venture in textile goods. B is to be allowed a commission on sales at 10% and profits are to be shared in the ratio of A 2/3 and B 1/3 provide textile goods from stock for Rs. 1,00,000 and incurs expenses amounting to Rs. 10,000. B pays Rs. 10,000 for unloading and other non recurring expenses. A drew upon B for Rs. 60,000. The draft was accepted and A got it discounted for Rs. 57,000. B sold 90% of the textile goods for Rs. 1,50,000 and took over the remaining textile goods at cost plus 20 per cent. B settle his account by bank draft. Show the journal entries and the relevant ledger accounts in the book of both the parties.

Solution:

Journal entries in the books of A

Joint Venture Dr 1,10,000To Purchase ac 1,00,000To Bank a/c 10,000(Goods sent to B and expenses incurred for joint venture)

Joint Venture a/c Dr 10,000

To B a/c 10,000(Expenses incurred by B)

Bills Receivable a/c Dr 60,000To B a/c 60,000(Bill drawn accepted by B)

Bank a/c Dr 57,600Joint Venture a/c (discount) Dr 2,400To Bills Receivable a/c(Bill discounted)

60,000

B a/c Dr 1,50,000To Joint Venture a/c 1,50,000(Sale proceeds of joint venture received by B)

Joint Venture a/c Dr 15,000To B a/c 15,000(for commission)

B a/c Dr 14,400To Joint Venture a/c 14,400(Unsold goods taken by B at cost plus 20%)

Joint Venture a/c Dr 27,000To Profit and loss a/c 18,000To B a/c 9,000(profit transferred)

Bank a/c Dr 70,400To B a/c 70,400(Balance received from B)

Joint Venture Account

Dr Rs. RsTo Sundries-goods-expenses

1,00,00010,000

By B a/c – sales 1,50,000

To B a/c (expenses) 10,000 By B a/c – goods taken 14,400To B a/c (commission) 15,000To Discount 2,400To Profit/Loss a/c

18,000To B a/c 9,000 27,000

1,64,000 1,64,000

B Account

Dr Rs. RsTo Joint Venture a/c

– sales1,50,000 Bills Receivable 60,000

To Joint Venture a/c – goods taken

14,000 By Joint Venture a/c-expenses

10,000

By Joint Venture a/c-commission

15,000

By Joint Venture a/c-profit

9,000

By Bank a/c 70,400

1,64,400 1,64,000

Calculation of Textile goods taken by B

1/10 of cost 10,0001/10 of A’s expenses 1,0001/10 of B’s expense 1,000

12,000

Add : 20% of Rs. 12,000 2,40014,400

Journal Entries in the books of B

Joint Venture a/c Dr 1,10,000TO A a/c(Goods supplied by A and expenses incurred)

1,10,000

Joint Venture a/c Dr 10,000To Cash a/cExpenses for joint venture)

10,000

A a/c Dr 60,000To Bill Payable a/c(Bill accepted drawn by A)

60,000

Joint Venture a/c Dr 2,400To A a/c(Discounted on bills discounted)

2,400

Cash a/c Dr 1,50,000To Joint Venture a/c(Goods sold and proceeds received)

1,50,000

Joint Venture a/c Dr 15,000To Commission a/c(10% of commission on Rs. 1,50,000)

15,000

Purchase a/c Dr 14,400To Joint Venture a/c(Unsold goods taken by B)

14,400

Joint Venture a/c Dr 27,700To Profit/loss a/cTo A a/c(profit transferred)

27,700

A a/c Dr 70,400To Bank a/c(Balance due to A settled by bank draft

70,400

Joint Venture Account

Rs. Rs.To A – goods 1,00,000 By Cash sale proceeds 1,50,000To Expenses 10,000 By Purchase goods taken 14,400To Sundries expenses 10,000To Commission 15,000To A – discount 2,400To Profit/Loss a/c 9,000To A a/c 18,000 27,000

1,64,400 1,64,400

A Account

Rs. Rs.To Bills payable a/c 60,000 By Joint Venture a/c – goods 1,00,000To Bank a/c 70,400 By Joint Venture a/c – expenses 10,000

By Joint Venture a/c – discount 2,400By Joint Venture a/c – profit 18,000

1,30,000 1,30,000

Method 2 : Memorandum Joint Venture Method

Memorandum Joint Venture Account is prepared under this method. This account reveals the profit or loss on joint venture. After ascertaining the profit on joint venture each venturer will prepare in his books only on account in the name of the other venturer, which is styled as “……in Joint Venture Account”. The goods supplied for joint venture and expenses incurred are debited to Memorandum Joint by other venturer. This account is also debited with one’s share of profit made on joint venture, and the corresponding credit is given to his profit and loss account. The sale proceeds received is credited to the Memorandum Account. The balance in the account reveals the amount due to or due from the other venturer.

Illustration : 2

Illustration 1 is done under the second method.Memorandum Joint Venture Account

Rs. Rs.To A – goods 1,00,000 By B – sales 1,50,000- expenses 10,000 By B – goods taken 14,400-discount 2,400To B – expenses 10,000-commission 15,000To A – profit 18,000To B – profit 9,000

1,64,400 1,64,400

In the book of AB in Joint Venture with A

Rs. Rs.To Purchase 1,00,000 By Bills Receivable a/c 60,000To Cash – expenses 10,000 By Bank a/c 70,400To Discount 2,400To Profit/loss a/c 18,000

1,30,400 1,30,400

In the book of BA in Joint Venture with B

Rs. Rs.To Bills Payable 60,000 By Cash – sales 1,50,000To Cash Expenses 10,000 By Purchase – goods taken 14,400To Commission 15,000To Profit/loss a/c 9,000To Bank a/c 70,400

1,64,400 1,64,400

Method 3 : Separate Books

In this method separate accounts are prepared for all the transactions relating to joint venture as it is done in the case of partnership firm. Joint venture account, joint bank account, co-venture’s accounts and any other account that is needed in connection with the joint venture are maintained under this method.

Accounting Entries:

When cash contributed by co-ventures

Joint Bank a/c DrTo Co-venturer’s a/c

When expenses are paid/met by co-venturersJoint Venture a/c DrTo Joint Bank/Co-ventrer’s a/c

When sale proceeds/contract price receivedJoint Bank a/c DrTo Joint venturer a/c

When untutilised materials disposed of at the endJoint Bank a/c DrCo-vertnurer’s a/c DrTo Joint Venture a/c

When profit or loss on joint venture is transferred for profit

For ProfitJoint Venture a/c DrTo Co-vneturer’s a/c

For LossCo- venturers a/c DrTo Joint Venture a/c

Illustration 3 :X and Y, both builders, undertook a Joint Venture involving the construction of a building. A Joint Bank Account was opened in which X deposited Rs. 75,000 and Y deposited Rs. 37,000. The contract price was Rs. 3,75,000. X and Y shared profit or loss in the proportion of 2/3 and 1/3. the details of the transactions were as follows

RsWages paid 89,000Material supplies by X 13,500Material supplied by Y 12,000Materials purchased 1,65,000

Salaries 12,000Cartage 18,500Architect fee paid by X 10,000Concrete Mixer plant purchased 38,500

The stock of materials on the completion of the contract valued at Rs. 16,500 was taken over by X. Concrete Mixer plant taken over by Y for Rs. 30,000. X was to be3 paid Rs. 18,000 per annum against establishment expenses, to be charges to the Joint venture account. The contract lasted for 8 months. Prepared Joint Venture Account, Joint Bank Account and Accounts of A & B.

Solution:

Journal Entries

Joint Venture a/c Dr 1,12,000To X a./c 75,000To Y a/cAmount contributed by X and Y)

37,500

Joint Venture a/c Dr 89,000To Joint Bank a/c 89,000(Wages paid)

Joint Venture a/c Dr 25,500To X a/c 13,500To Y a/c 12,000

Joint Venture a/c Dr 1,65,000To Joint Bank a/c 1,65,000(Materials purchased)

Joint Venture a/c Dr 12,000To Joint Bank a/c 12,000(Salaries Paid)

Joint Venture a/c Dr 18,500To Joint Bank a/c 18,500(Cartage paid)

Joint Venture a/c Dr 10,000To X a/c 10,000(Architect for paid by X)

Joint Venture a/c Dr 38,500Joint Bank 38,500(Concrete mixer plant purchased)

Joint Bank a/c Dr 3,75,000To Joint Venture a/c 3,75,000(Contract price received)

X a/c Dr 16,500To Joint Venture a/c 16,500(Un utilized materials taken over by X)

Y a/c Dr 30,000To Joint Venture a/c 30,000(Concrete mixer plant taken over by Y)

Joint Venture a/c Dr 12,000To X a/c 12,000[Establishment expenses provided to X for

8 months ( )]

Joint Venture a/cDr. Cr.

Rs. Rs.To Joint Bank – wages 89,000 By Joint Bank – contract price

received3,75,000

To X a/c – material 13,500 By X a/c – un utilized material taken

16,500

To Y a/c – material 12,000 By Y a/c – concrete mixer plant taken

30,000

To Joint Bank – material 1,65,000To Joint Bank – salaries 12,000To Joint Bank – cartage 18,500To X a/c – architect fee 10,000To Joint Bank – concrete mixer 38,500To Profit – X 2/3 34,000To Profit – Y 1/3 17,000

4,21,500 4,21,500

A A/cDr. Cr.

Rs. Rs.To Joint Venture

– material taken 16,500By Joint Bank a/c 75,000

To Joint Bank 1,28,000 By Joint Venture a/c-material 13,500-architect fee 10,000-establishment 12,000-profit 34,000

1,44,500 1,44,500

B A/cDr. Cr.

Rs. Rs.To Joint Venture a/c By Joint Bank a/c 37,500-concrete mixer plant taken 30,000 By Joint Venture a/c 12,000To Joint Bank a/c 36,500 By Joint Venture – profit 17,000

66,500 66,500

Joint Bank A/cDr. Cr.

Rs. Rs.To X a/c 75,000 By Joint VentureTo Y a/c 37,500 -wages 89,000To Joint Venture

– concrete price3,75,000 -material

-salaries1,65,000

12,000-cartage 18,500-concrete mixer 38,500

By X a/c 1,28,000By Y a/c 36,500

4,87,500 4,87,500

Illustration : 4

X, Y and Z enter into a joint venture sharing profits and losses in the ratio of 5:3:3. No separate set of books are maintained. Amounts contributed and received by different venturers are as follows:

Particular X Y ZRs. Rs. Rs,

Cost of materials 4,00,000 2,00,000 1,00,000Expenses 60,000 40,000 20,000Sale proceeds received 1,70,000 3,40,000 6,80,000Stock taken over 30,000 60,000 90,000

Prepare i) Memorandum Joint Venture Account and ii) Joint Venture with account in the books of all the three parties.

SolutionMemorandum Joint Venture Account

Dr. Cr.Rs. Rs.

To X -materials 4,00,000 By X -Sales 1,70,000-expenses 60,000 -stock taken over 30,000

To Y -materials 2,00,000 By Y -Sales 3,40,000-expenses 40,000 -stock taken over 60,000

To Z -materials 1,00,000 By Z -Sales 6,80,000-expenses 20,000 -stock taken over 90,000

To profitsX 5/11 2,50,000Y 3/11 1,50,000Z 3/11 1,50,000 5,50,000

13,70,000 13,70,000

Books of XJoint Venture with Y and Z Account

Dr. Cr.Rs. Rs.

To Purchases -materials 4,00,000 By Bank – sale proceeds 1,70,000To Bank -expenses 60,000To Profit/loss -profit a/c 2,50,000 By Purchases

– stock taken over30,000

By Bank -settlement (cheque received)

5,10,000

7,10,000 7,10,000

Books of YJoint Venture with X and Z Account

Dr. Cr.Rs. Rs.



To Bank –settlement (cheque issued)

10,000

4,00,000 4,00,000

Books of ZJoint Venture with X and Y Account

Dr. Cr.Rs. Rs.



To Bank –settlement (cheque issued)

5,00,000

7,70,000 7,70,000

IMPORTANT THEORY BOOK KEEPING

The main aim of every business is to earn profit. Profit is nothing but the excess of Income over expenditure. So to calculate profit the businessman must record the incomes and expenditure related to his business, this recording of business transactions is called book-keeping. Thus book keeping means recording, classifying and summarizing business transaction systematically so that the businessman may be able to know his profit or loss during a specified period.

Single-Entry Bookkeeping

In a single-entry system, every transaction is recorded just once either as an income or expense, an asset or a liability. The system does not record assets, inventory and revenues, except in memorandum form. The advantage of the single-entry method of bookkeeping is that it is simple, easy to understand and requires little training. The disadvantage is that since all the assets and liabilities of the municipal corporation do not get recorded in the single-entrysystem, the government will never have the right figures to make the decisions. There is no way to check if the entries made are correct or not which may lead to errors or theft.

What Are The Disadvantages Of Single Entry System?

The single entry thus failing to record the two-fold aspects of every business transaction is most incomplete and unreliable in its results and fails to give the necessary information to the trader as to how far his business is profitable or otherwise. The system ignores the two-fold aspects of each and every transaction and as such the records in the ledger are incomplete and partial. Under this system as the two-fold aspects of each and every transaction are not recorded a Trial Balance cannot be prepared to test the arithmetical accuracy of the records. Owing to the absence of Nominal Accounts, Profit and Loss Account cannot be prepared.

In the absence of real and property Account cannot be prepared. In the absence of nominal accounts, profit and loss account cannot be prepared, and the true financial position of the business cannot be ascertained. Any information obtained under the system will not be free from doubt. Should the proprietor want to sell his businesses, it will be a difficult task to fix proper value of various assets, especially of goodwill. In the absence of various checks, which exist in Double Entry System, fraud is more easily committed and is very difficult to detect. In the absence of any reliable information no comparison can be made between one trading periods with that of another.

REFORMING ACCOUNTING SYSTEMSTo mitigate the disadvantages of the cash-based, single-entry system we need to move to an accrual-based, double-entry system.

Accrual-based Accounting Systems An accrual-based accounting system records credit transactions also. Revenue is recognized for the period that it was realized and expenses incurred are recorded in the same period irrespective of actual cash flow.

DOUBLE ENTRY SYSTEMThe system of accounting is based on Dual Aspect concept. According to this concept, every financial transaction involves a two – fold aspect – (a) receiving of a benefit (b) giving of that benefit, for example if a business has acquired an asset, it must have given up some other asset such as cash. Thus a giver necessarily implies a receiver and a receiver necessarily implies a

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giver. There must be a double entry to have a complete record of each business transaction, an entry being made in the giving account and an entry of the same amount in the receiving account. The receiving account is termed as debtor and the given account is called creditor. Thus every debit must have a corresponding credit and vice – versa and upon this dual aspect has been raised the whole superstructure of double entry system of accounting. Thus we may define the Double Entry System as that system which recognizes and records both the aspects of transaction”. This system has been proved to be systemic and has been found of great use for recording the financial affairs of all institutions requiring use of money.

ADVANTAGES OF DOUBLE ENTRY SYSTEM

1. Scientific system – This system is the only scientific system of recording business transactions as compared to other systems of book keeping. It helps to attain the objectives of accounting.2. This system maintains a complete record of all business transactions.3. By the use of this system the accuracy of the accounting work can be established through device of Trial Balance.4. This system helps in assessment of profit earned or loss suffered by the business though preparation of Profit and Loss A/C.5. The financial position of the firm can be ascertained at the end of each period, through preparation of Balance Sheet.6. This system permits accounts to be kept in as much detail as necessary and therefore affords significant information for purposes of control etc.7. Comparative study is possible – results of one year may be compared with those of previous year and reasons for the change may be ascertained.8. Helps management for decision-making. The management may be able to obtain good information for its work, especially for decision making.9. No scope for fraud – The firm is saved from frauds and misappropriations since full information about all assets and liabilities will be available. It is because of these advantages that the system has been used extensively in all countries.

Average due date:

The mean date of payment of several sums becoming payable at different dates (applies particularly to a bill of exchange).

What is ACCOUNTING

DefinitionAmerican Accounting Association defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decision by users of the information”.

ObjectivesThe main objectives of accounting arei. to maintain accounting records.ii. to calculate the result of operations.iii. to ascertain the financial position.iv. to communicate the information to users.

PROCESS

In order to accomplish its main objective of communicating information to the users, accounting embraces the following functions.

i. Identifying: Identifying the business transactions from the source documents.ii. Recording: The next function of accounting is to keep a systematic record of all business transactions, which are identified in an orderly manner, soon after their occurrence in the journal or subsidiary books.iii. Classifying: This is concerned with the classification of the recorded business transactions so as to group the transactions of similar type at one place. i.e., in ledger accounts. In order to verify the arithmetical accuracy of the accounts, trial balance is prepared.iv. Summarizing : The classified information available from the trial balance are used to prepare profit and loss account and balance sheet in a manner useful to the users of accounting information.v. Analyzing: It establishes the relationship between the items of the profit and loss account and the balance sheet. The purpose of analyzing is to identify the financial strength and weakness of the business. It provides the basis for interpretation.vi. Interpreting: It is concerned with explaining the meaning and significance of the relationship so established by the analysis. Interpretation should be useful to the users, so as to enable them to take correct decisions.vii. Communicating: The results obtained from the summarized, analyzed and interpreted information are communicated to the interested parties.

What is TRIAL BALANCE ? How it is prepared ?

Trial balance is a statement which shows debit balances and credit balances of all accounts in the ledger. Since, every debit should have a corresponding credit as per the rules of double entry system, the total of the debit balances and credit balances should tally (agree). In case, there is a difference, one has to check the correctness of the balances brought forward from the respective accounts. Trial balance can be prepared in any date provided accounts are balanced.

Definition“Trial balance is a statement, prepared with the debit and credit balances of ledger accounts to test the arithmetical accuracy of the books” – J.R. Batliboi.

ObjectivesThe objectives of preparing a trial balance are:i. To check the arithmetical accuracy of the ledger accounts.ii. To locate the errors.iii. To facilitate the preparation of final accounts.

Advantages

The advantages of the trial balance arei. It helps to ascertain the arithmetical accuracy of the book-keeping work done during the period.ii. It supplies in one place ready reference of all the balances of the ledger accounts.iii. If any error is found out by preparing a trial balance, the same can be rectified before preparing final accounts.iv. It is the basis on which final accounts are prepared.

Methods

A trial balance can be prepared in the following methods.i. The Total Method : According to this method, the total amount of the debit side of the ledger accounts and the total amount of the credit side of the ledger accounts are recorded.ii. The Balance Method : In this method, only the balances of an account either debit or credit, as the case may be, are recorded against their respective accounts. The balance method is more widely used, as it supplies ready figures for preparing the final accounts.

Format

Points to be noted :

i. Date on which trial balance is prepared should be mentioned at the top.ii. Name of Account column contains the list of all ledger accounts.iii. Ledger folio of the respective account is entered in the next column.iv. In the debit column, debit balance of the respective account is entered.v. Credit balance of the respective account is written in the credit column.vi. The last two columns are totalled at the end.

WHY FINAL ACCOUNTS

Trial balance proves the arithmetical accuracy of the business transactions, but it is not the end. The businessman is interested in knowing whether the business has resulted in profit or loss and what the financial position of the business is at a given period. In short, he wants to know the profitability and the financial soundness of the business. The trader can ascertain these by preparing the final accounts. The final accounts are prepared at the end of the year from the trial balance. Hence the trial balance is said to be the connecting link between the ledger accounts and the final accounts.

HOW TO PREPARE FINAL ACCOUNTS

In a broad sense Final Accounts means P & L a/c and Balance Sheet. First of all prepare Trial Balance. Trial Balance consists of Net Balances of all ledgers. If the Trial Balance is tallying we can assume the posting of entries are correct. P & L includes Revenue & Expenses post the same to P&L. Then either Net profit / Loss will arrive. Then calculation of depreciation and taxes the net balance will transfer to balance sheet. Balance sheet consists of Source of Fund & Application of funds (Assets & Liabilities)

Distinguish between Receipts and Payment Account AND Income and Expenditure Accounts

Receipts & Payments Account Income & Expenditure Account

Receipts are shown on debit side and payment shown on credit side

Expenses are shown on debit side and Incomes are shown on credit side

Starts with the opening balance of cash in hand and at bank

It has no opening balance

Only cash transactions takes place

Other transactions also take place

Capital as well as revenue items appear

Only revenue items appear

The difference of two sides is the cash in hand and at bank at the end of the periods

The difference between is either surplus or deficit for the period

All receipts and payments are shown irrespective of the year to which they relate

Only those expenses and incomes are shown which related to the period for which the account is prepared

Distinguish between Cash Discount and Trade Discount

Cash Discount Trade Discount

Is a reduction granted by supplier from the invoice price in consideration of immediate or prompt payment

Is a reduction granted by supplier from the list price of goods or services on business consideration re: buying in bulk for goods and longer period when in terms of services

As an incentive in credit management to encourage prompt payment

Allowed to promote the sales

Not shown in the supplier bill or invoice

Shown by way of deduction in the invoice itself

Cash discount account is opened in the ledger

Trade discount account is not opened in the ledger

Allowed on payment of money Allowed on purchase of goods

It may vary with the time period within which payment is received

It may vary with the quantity of goods purchased or amount of purchases made

Distinguish between Profit and Loss Account AND Income and Expenditure Account

Profit And Loss Account Income And Expenditure Account

Prepare by business undertakings

Prepared by non-trading organizations

Credit balance of this account is known as “Net profit” and added to opening capital

Credit balance is known as “excess of income over expenditure or surplus” and added to opening capital fund

Debit balance of this account is known as “ Net loss” and deducted from opening capital

Debit balance is known as “excess of expenditure over income or deficit” and deducted

from opening capital fund

To check correctness of accounts, trial balance is prepared before preparing this Profit & Loss Account

To check correctness of accounts, receipts and payment account is prepared before preparing this account.

Distinguish between Capital Receipts and Revenue Receipts

Capital Receipts Revenue Receipts

(a) Receipts derived from activities which are not part of the normal trading activities of the business

(a) Receipts related to NORMAL ACTIVITIES of the business

(b) Appears as capital or liabilities in the Balance Sheet

(b) Credited as revenue to Trading and Profit & Loss Account

Examples: receipts of cash brought in by partners, shareholders, debenture holders and bank loans

Examples: receipts from sales of goods and services, rent, commission and interest on bank deposits received by the business.

Valuation of Stocks

The valuation of stock can be classified depending on the various instances when we will be required to value stocks

based on when we do it are

1. Valuation of Closing Stock at the end of the accounting period. 2. Valuation of Stock lost on account of abnormal reasons. 3. Valuation of Stock in transit. 4. Valuation of Stock transferred to other businesses. 5. Valuation of Stock Returned to stores

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Specimen with Example - Statement for Valuation of Stocks

ParticularsQuantity(in units)

Rate(in Rs/unit)

Amount(in Rs)

Goods Consigned 1,100 50 55,000

Add: Consignor Direct Expenses — 10 11,000

1. Freight 8,0002. Loading Charges 3,000

Total 11,000

1,100 60 66,000

Less: Stock - in - Transit 100 60 6,000

Goods Collected by the Consignee 1,000 60 60,000

Add: Consignee Direct Expenses — 5 5,000

1. Octroi 4,0002. Unloading Charges 1,000

Total 5,000

Value of Stock received by the Consignee 1,000 65.00 65,000

Add: Opening Stock with the Consignee 100 62 6,200

Average Value of total stock 1,100 64.73 71,200

Value of Unsold Stock 150 65 9,750.00

Cost of Goods Sold 950 (?) 64.68

Self-balancing ledgers: A system which makes use of control accounts so that each ledger will balance on its own. A control account in a subsidiary ledger will be mirrored with a control account in the nominal ledger.

RULES OF DEBIT AND CREDIT

1. IN CASE OF PERSONAL ACCOUNT(these are the accounts in the names of persons eg K SONS & COMPANY) DR THE RECEIVER CR THE GIVER2. IN CASE OF REAL ACCOUNT(these account are based on amount which we get by selling or purchase of fixed asset) DR WHAT COMES IN CR WHAT GOES OUT3. IN CASE OF NOMINAL ACCOUNT(these account based on expenses eg. telephone expenses etc) DR ALL EXPENSES AND LOSSES

BANK RECONCILIATION STATEMENT

The cash Book and Pass Book are prepared separately. The Businessman prepares the Cash Book and the Pass Book is prepared by the Bank (here by cash book we mean three column cash Book). But as both the books are related to one person and same transactions are recorded in both the books so the balance of both the books should match i.e. the balance as per Pass Book should match to balance at bank as per cash book. But many a times these two balances do not agree then, it becomes necessary to reconcile them bypreparing a statement which is called Bank Reconciliation Statement. A BANK RECONCILIATION STATEMENT may be defined as a statement showing the items of differences between the cash Brook balance and the pass book balance, prepared on any day for reconciling the two balances.

A transaction relating to bank has to be recorded in both the books i.e. Cash Book and Pass Book but sometimes it happens that a bank transaction is recorded only in one book and not recorded simultaneously in other book this causes difference in the two balances.

The need and importance of the bank reconciliation statement may be given as follows:

1. The reconciliation process helps in bringing out the errors committed either in cash Book or Pass Book.2. Bank reconciliation statement may also show any undue delay in the clearance of cheques.3. Sometimes the cashier may have the tendency of cheating like he may made entries in the Cash Book only but never deposit the cash into bank. These types of frauds by the entrepreneur’s staff or bank staff may be detected only through bank reconciliation statement. So this way bank reconciliation statement acts as a control technique too.

CLASSIFICATION OF ACCOUNTING ERRORSVarious accounting errors can be classified as follows :

A. On the basis of their nature(a) Errors of omission(b) Errors of commission(c) Errors of principle

B. On the basis of their impact on ledger accounts(a) One sided errors(b) Two sided errors.

A. On the basis of their nature

(a) Errors of omission

As a rule, a transaction is first recorded in books of accounts. However, accountant may not record it at all or record it partially. It is called an error of omission. For example, goods purchased on credit are not recorded in Purchases Book or discount allowed to a customer was not posted to Discount A/c in the ledger. In the first case it is a complete omission. Therefore, both debit and credit are affected by the same amount. Therefore, it does not affect the Trial Balance. The second example is the example of partial omission. It affects only one account i.e. Discount A/c. Therefore it affects Trial Balance.

(b) Errors of commission

When the transaction has been recorded but an error is committed in the process of recording, it is called an error of commission. Error of commission can be of the following types:(i) Errors committed while recording a transaction in the Special Purpose books. It may be :l Recording in the wrong book for example purchase of goods from Rakesh on credit is recorded in the Sales Book and not in the Purchases Book. l Recording in the book correctly but wrong amount is written. For example, goods sold to Shalini of Rs.4200 was recorded in the Sales Book as Rs.2400 In the above two cases two accounts are affected by the same amount, debit of one and the credit of the other. Therefore, trial balance will not be affected.(ii) Wrong totalling : There may be a mistake in totalling Special Purpose Book or accounts. The totalled amounts may be less than the actual amount or more than the actual amount. First is a case of undercasting and the other of overcasting. For example, the total of Purchases Book is written as Rs.44800 while actual total is Rs. 44300, the total of SalesDay Book is written as Rs.52500 while it is Rs.52900. It is a case of an error affecting one account hence it affects trial balance.(iii) Wrong balancing : While closing the books of accounts at the end of the accounting period, the ledger accounts are balanced. Balance is calculated of the totals of the two sides of the account. It may be wrongly calculated. For example, the total of the debit column of Mohan’s A/c is Rs.8600 and that of credit column is Rs.6800. The balance calculated is as Rs.1600 while the actual balance is Rs.1800. It has affected one account only, therefore, the Trial Balance gets affected.(iv) Wrong carry forward of balances or totals : Totals or balances are carried forward to the next page. These may be carried forward incorrectly. For example, the total of one page of the Purchases Book. of Rs.35,600 is carried to next page as Rs.36500. Again the error affects one account only. Therefore, Trial Balance gets affected.(v) Wrong Posting : Transactions from the journal or special purpose books are posted to the respective accounts in the ledger. Error may be committed while carrying out posting. It may take various forms such as, posting to wrong account, to the wrong side of the account or posted twice to the same account. For example goods purchased of Rs.5400 from Rajesh Mohanti was posted to the debit of Rajesh Mohanti or posted twice to his account or posted to the credit of Rakesh Mohanti. In the above examples, only one account is affected because of the error therefore, Trial Balance is also affected.

Compensating ErrorsTwo or more errors when committed in such a way that there is increase or decrease in the debit side due to an error, also there is corresponding decrease or increase in the credit side due to another error by the same amount. Thus, the effect on the account is cancelled out. Such errors are called compensating errors. For example, Sohan’s A/c is debited by Rs 2500 while it was to be debited by Rs 3500 and Mohan’s A/c is debited by Rs 3500 while the same was to be debited by Rs 2500. Thus excess debit of Mohan’s A/c by Rs.1000 is compensated by short credit of

Sohan’s A/c by Rs.1000. As the debit amount and the credit amount are equalised, such errors do not affect the agreement of Trial Balance, but the fact remains that there is still an error.

(c) Error of Principle

Items of income and expenditure are divided into capital and revenue categories. This is the basic principle of accounting that the capital income and capital expenditure should be recorded as capital item and revenue income and revenue expenditure should be recorded as revenue item. If transactions are recorded in violation of this principle, it is called error of principle i.e. the capital item has been recorded as revenue item and revenue item is recorded as capital item. For example, Rs. 5000 spent on the repairs of building is debited to Building A/c while it should have been debited to Repair to Building A/c. It is a case of error of principle because expenditure on repairs of building is a revenue expenditure, while it hasbeen debited to Building A/c taking it as an item of capital expenditure. As both the sides i.e. credit as well as debit remain affected, the trial Balance also is not affected by such errors.

B. On the basis of impact on ledger accounts

Errors may affect one side i.e. either debit or credit side of an account or its two sides i.e. both debit and credit thus errors may be divided as:(a) One sided errors(b) Two sided errors

(a) One sided errors

Accounting errors that affect only one side of an account which may be either its debit side or credit side, is called one sided error. The reason of such error is that while posting a recorded transaction one account is correctly posted while the corresponding account is not correctly posted. For example, Sales Book is overcast by Rs.1000. In this case only Sales A/c is wrongly credited by excess amount of Rs.1000 while the corresponding account of the various debtors have been correctly debited. Another example of one sided error is Rs 2500 received from Ishita is wrongly debited to her account. In this case, only Ishita’s account is affected, amount in the cash-book is correctly written. This type of mistake does affect thetrial balance.

(b) Two sided errors

The error that affects two separate accounts, debit side of the one and credit side of the other is called two sided error. Example of such error is purchase of machinery for Rs.1000 has been entered in the Purchases Book. In this case, Purchases A/c is wrongly debited while Machinery A/c has been omitted to be debited. So two accounts i.e. Purchases A/c and the Machinery A/c are affected.

15 Financial Accounts

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