Kerala Plus One Accountancy (CA) Focus Area 2021 Based Notes, Expected Questions With Answers

HSE-I Accountancy with CA Focus Area-2021
Chapter-1
Introduction to Accounting
Focus Area – Public Examination September-2021
1. Meaning of Accounting
2. Qualitative Characteristics of Accounting Information
3. Objectives of Accounting
4. Basic Terms in Accounting
Accounting is the systematic process of identifying, recording, classifying, summarising, interpreting

and communicating financial information to users. Accounting shows the profit earned or loss incurred
during the accounting period. It also displays the value and nature of assets, liabilities and capital. The
primary objective of accounting is to provide accounting information to interested parties to facilitate
right business decisions.
Definition
According to American Institute of Certified Public Accountants (AICPA) “Accounting is the art of
recording, classifying and summarising in a significant manner and in terms of money;
transactions and events which are, in part at least, of a financial character, and interpreting
the results thereof”
Business Transaction
In accounting, the business transaction (also known as financial transaction) is an event that must
be measurable in terms of money and that essentially impacts the financial position of the business.
For example, purchased goods from Mohan Traders worth Rs.5,000 for cash, here cash Rs.
5,000 transferred from business to Mohan Traders and at the same time business received
goods worth Rs.5000 from Mohan Traders.
Characteristics/ Nature/ Features of Accounting
The above said definition of accounting contains four essential characteristics of
accounting:
1. Identifying and Recording Business Transactions (Economic Events only)
Business transactions are economic events that affect a business's financial position.
Accounting records only those transactions that can be measurable in terms of money.
Business transactions are recorded by using monetary unit, viz. rupees and paise as a
measuring unit. If an event cannot be quantified in monetary terms, it is not considered for
recording in financial accounts. The recording is done in a book called Journal.
(There are also some events takes place in business which are also very important for the business too but which
cannot be measured in terms of money. For example appointment of an efficient manager, death of an efficient
employee etc. Effect of such events can’t be measured in terms of money, so it cannot be recorded.)
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Example for business transaction / Example for Non-Economic Events

Economic Events
Commenced business with cash Quarrel between Purchase manager and
Production manager
Goods purchased on credit Resignation of an able and experienced
manager
Salary paid Strike by employees
Withdraw cash for personal use Starting of a new business by the
competitor
Note: Non economic events can’t be recorded in the books of accounts.
2. Classifying
After recording the transactions in subsidiary book or journal proper, the next step is
its classifications. Classification is the systematic analysis of the recorded data with a
view to bringing together items of a similar nature at one place (Account). The
classification work is done in the book called Ledger, where various types of accounts
are maintained.
3. Summarising
This involves presenting the classified data in a manner which is understandable and
useful for internal as well as external users of accounting system.Summarising leads
to the preparation of the following statements:
➢ Trial Balance
➢ Trading and Profit and Loss Account
➢ Balance Sheet
4. Analysis and interpretation
The financial data recorded is analysed and interpreted in such a manner that the
end-users can make a meaningful judgment about the profitability and financial
condition of the business.
5. Communicating
Finally, accounting involves communicating financial data to its users. Users includes
owners, managers, employees, investors creditors etc. The accounting information
should be communicated to the right person at the right tine to take right decision.
Note:
The process of accounting starts with identifying transactions and ends with
communicating information.
Need for accounting

At the end of an accounting year every businessman wants to know how much profit the
business made last year. Further the owner wants to know the financial position of the
business. In order to ascertain such information, it is essential to keep a complete and
systematic record of each and every business transaction occurred during the year.
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Objectives of Accounting
Main objectives of accounting are:
1. Maintaining Accounting records
The main objective of accounting is to maintain systematic record of business
transactions and events. Business transactions are recorded in books of account in
monetary terms and in a chronological order.
2. Ascertainment of result
The second objective of accounting is to ascertain the net profit earned or loss suffered
on account of business transactions during a particular year. For this purpose a
statement called ‘Income statement’ or ‘Trading and profit and Loss Account’ is
prepared.
Trading and Profit and Loss Account provides the following information:
➢ How much goods have been purchased during a particular year?
➢ How much goods have been sold during a particular year?
➢ How much goods have remained unsold and what is it value?
➢ How much amount has been spent on various heads of expenditure?
➢ How much amount has been earned by various heads of revenue?
3. Determining the Financial Position
The business man wants to know the financial position of the business. For this
purpose, a statement called ‘Balance Sheet’ is prepared, it displays the values of
assets and liabilities of the business.
4. Provide Information to Various Parties
Accounting is the ‘language of business’. It communicates the relevant accounting
information to various interested parties
5. Meeting Legal Requirements
Accounting records are accepted as evidence by the court, if they are maintained
systematically. Besides, the law such as Companies Act, Income Tax Act, GST Act
etc. requires timely submission of returns.
6. Assistance to Management
Management often requires financial information for decision making and ensures
efficient management. By providing timely information, accounting assists the
management in the task of planning, controlling and decision making.
Users of Accounting Information

The accounting information generated by the accounting process is communicated in the form of
repots, statements etc. to the users who need it in different decision situations.
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Qualitative Characteristics of Accounting Information

Accounting information should be prepared and presented in such a way that it should be
useful to the end users and should possess the following qualitative characteristics.
1. Reliability
Accounting information must be reliable. Reliability means the users must be able to depend
on accounting information. Reliable information should be free from error and bias and
verifiable. Verifiability means it can be verified from the source documents such as cash
memos, purchase invoices, sales invoices, agreements, property deed etc. Verifiability
ensures the truthfulness of the recorded transactions.
2. Relevance
To be relevant, information is to be available on time and must help in prediction.
3. Understandability
Understandability of accounting information means users of accounting information must

interpret it in the same sense as it is prepared and conveyed to them.
4. Comparability
Comparability means that the users should be able to compare the accounting information
of an enterprise of the period either with that of other periods (Intra-firm comparison) or
with the accounting information of other enterprises (Inter-firm comparison).Use of
common unit of measurement and common format of reporting promotes comparability.
Accounting information should be prepared and presented in such a way that it should be
useful to the end users and should possess the following qualitative characteristics.
Basic Terms in Accounting

Entity
Entity means a reality that has a definite individual existence. Entity may be a person or
business organization like sole trading concern, partnership, company etc.
Business entity means a specifically identifiable business enterprise like Wipro, Reliance
Industries Ltd, ITC Limited, Kalyan Silks etc. An accounting system is always devised for a
specific business entity (also called accounting entity)
Business Transaction
In accounting, the business transaction (also known as financial transaction) is an event that
must be measurable in terms of money and that essentially impacts the financial position of
the business..
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It can be transactions like purchase of goods, receipt of money, payment to a creditor,

incurring expenses; etc. It is a financial event expressed in terms of money which brings a
change in the financial position of an enterprise. Business transaction may be a cash
transaction or a credit transaction.
Examples:
➢ Purchased goods worth Rs 2000 from Rajan.
➢ Sold goods for cash Rs.5000
➢ Salary paid Rs.10,000
➢ Furniture purchased from A Ltd Rs.8000
➢ Anil started business with cash Rs.60,000
Features of business transactions

➢ It is concerned with money or money’s worth
➢ It brings about a change in the financial position (i.e in Assets, liabilities or capital)
➢ Every transaction has dual aspects-Receiving (Debit) aspect and Giving (Credit)
aspect
➢ After each transaction, the total assets of a business must be equal to its total
liabilities and capital (Always ,ASSET= CAPITAL + LIABILITIES).Therefore ,the
equality of the Balance Sheet cannot be disturbed by any transaction.
Assets
Assets are material things or possessions or properties of the business including the
amounts due to it from others. Assets help to generate income.
➢ Physical properties include assets like land and building, furniture, motor car, cash,
stock etc. owned by a business.
➢ Rights in certain things called intangible assets such as goodwill, patents, trademarks
etc possessed by the business.
➢ Amount due to the business from others like debtors, bills receivables, accrued income
etc
Example: Land and building, Plant and machinery, cash and bank balance, stock, bills
receivable, money owing by debtors etc.
Assets can be classified into the following categories
1. Non-current Assets
2. Current Assets
3. Fictitious Assets
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1. Non –Current Assets (Fixed Assets)

Non-current asset refers to those assets which are held for continued use in the business
for the purpose of producing goods or services and are not meant for sale. Non-current
assets are held by the business from a long-term point of view. They are long term
investments or fixed assets and its value can’t be realised within a year.
Example-Fixed assets like Land and building, plant and machinery, furniture, computer,
motor vehicles and long-term investment
Non-current assets are further classified into:
(a) Tangible assets
Tangible assets are those assets which have physical existence, i.e., they can be seen and
touched.
Example: Land, building, machinery, furniture etc.
(b) Intangible assets
Intangible assets are those assets which do not have physical existence i.e., they cannot
be seen and touched.
Example: Patents, good will, trademarks, computer software, prepaid expenses etc.
Like tangible assets, intangible assets also help to generate income to the firm. For example,
with the help of Patents businessman is able to produce goods and his goodwill helps in
attracting customers easily.
2. Current Assets
Current assets are those assets which are meant for sale or which can be converted into
cash within a year. For example, goods are purchased with a purpose to resell and earn
profit, debtors can be converted into cash within a short period.
Example-Debtors, stock, bills receivable, cash in hand and cash at bank
3. Fictitious Assets
Fictitious assets are neither tangible assets nor intangible assets. They are losses not written
off in the year in which they are incurred but in more than one accounting period.
Example- Discount on issue of debentures/debentures, preliminary expense, underwriting
commission
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Note:
Wasting Asset:
A wasting asset is a type of asset whose useful life is limited, and its value decreases over time. As
the asset is used, it depreciates, eventually having little or no residual value. For example, patents,
mines, assets taken on lease, natural resources, such as crude oil, timber etc. are wasting assets
that eventually are used and then have no remaining value.

Liabilities
It refers to the amount which the firm owes to outsiders. They represent creditors’ claims
on the firm’s assets.
Liabilities =Assets – Capital
Example-Creditors, Bills Payable, Salary outstanding, Loan from bank
Both small and big businesses find it necessary to borrow money from bank at one time or
the other, and to purchase goods on credit from suppliers.
Liabilities can be classified into two:
1. Current Liabilities
2. Non-Current Liabilities
1. Current Liabilities (Short term liabilities)
Current liabilities refer to those liabilities which are to be paid within 12 months from the
end of the accounting period.
Example-Creditors, bank overdraft, bills payable, outstanding expenses, short term loans
etc.
2. Non-Current Liabilities (Long term liabilities)
Non –Current liabilities are those liabilities which are to be paid after a period of more than
a year from the end of the accounting period.
Example-Long-term loans, debentures
Note: Contingent Liability (Doubtful liability)
These are not real liabilities. Future events can only decide whether it is really a liability or
not. Due to their uncertainty they are termed as contingent (doubtful) liabilities. The value of
contingent liabilities never shown in the amount column at the liability side of Balance sheet.
It is clearly state as a note inside/outside the Balance Sheet.
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Example:
➢ Value of bills discounted (There is a chance to dishonor it)
➢ Cases pending in the court (Court’s decision may be favorable or unfavorable)
➢ Guarantees undertaken by the business
Capital
Amount invested by the owner into the business is known as capital. Capital contribution
may be in the form of cash or assets. Capital is an obligation to the business and it is the
owner’s claim on the assets of the business. Capital is also known as owner’s equity.
Capital= Assets- Liabilities
Drawings
Cash or goods withdrawn by the owner for his personal use from the business or any private
payments made out of business funds are called drawings. Drawings will reduce the owner’s
capital.
Example:
➢ Amount withdrawn by the owner for his personal use
➢ Goods taken by the proprietor for his personal use
➢ Acquiring personal assets with business funds.
➢ Owner’s income tax paid by the business.
Sales
Sales means total revenue earned by a business earns through sale of goods or services.
Sales may be cash sales or credit sales. It is the major source of revenue of any business.
It is a direct income. The term ‘sales’ is used only for the sale of those goods which are
purchased for resale purposes. (The term ‘sales’ is never used for the sale of assets).
Example: Sold goods to Biju for Rs.8,000, Cash sales Rs.5,000
Sales Return( Return inwards)
Sales return or return inwards is that part of sales of goods which is actually returned to us
by customers. The return may be due to defective supply of goods, violation of terms of
agreement etc.It should be deducted from sales to calculate Net Sales.
Example: Goods returned by Biju Rs.400
Purchases
It is the major expense of any business.It is the expense incurred for procurement of goods
in a business. The term purchase is used only for the purchase of ‘Goods’.
In case of manufacturing concern goods means purchase of raw materials for the purpose
of conversion of finished products and then sale. In case of trading concern ‘goods’ are those
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things which are purchased for resale. In both the cases the purpose is to make a profit by
its resale. The term purchases include both cash and credit purchases of goods.
Example:
➢ Purchased goods from Anju traders Rs.5000
➢ Purchased goods for cash Rs.4000
➢ A furniture merchant purchased chairs for Rs.8000 is considered as purchase
because here chair is his goods and its purpose is to resale and to earn profit. But if a
furniture merchant purchase chairs for his office use, it is never considered as
purchase, its purpose is not resale but helps to generate imcome.Here chair is an
asset.
Purchase Return( Return outwards)

When purchased goods are returned to the suppliers, these are known as purchase
return or return outwards. It should be deducted from purchase to calculate Net
Purchase.
Example: Returned goods by Anju Traders Rs.300
Revenues
Revenue of a business constitutes sales revenue and other revenues. The amount earned
by business by selling its products or providing services to customers are called sales
revenue. Sales are the major revenue of a business. Other items of revenue common to
many businesses are: commission received, interest received, dividend received, royalties,
rent received etc.
Total Revenue = Sales Revenue + Other Revenue
Expenses
Expenses are costs incurred by a business in the process of earning revenue. It is the cost
of things or services used for the purpose of generating revenue.
Example:
Cost of things like Purchase cost of goods, stationery etc.
Cost of services like salary, advertisement, insurance, electricity, telephone, repairs etc.
Decline in the value of asset caused by the use of such assets for business like
depreciation.
Expenditure
An expenditure represents a payment with either cash or credit to purchase asset, goods or
services. Expenditure is a wider term than expense. The term expenditure includes
expenses also. Expenditure can be classified into capital expenditure and revenue
expenditure.
Capital Expenditure
Expenditure which has been incurred to derive long term advantage for the business is a
capital expenditure. Capital expenditures are non-recurring in nature and will increase fixed
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Profit and Loss account whereas capital receipts are shown in the Balance Sheet.
Receipts are classified as:
1 Capital Receipts
2. Revenue Receipts
1. Capital Receipts
Amount received from sale of fixed assets is capital receipts. If the receipts imply an
obligation to return money or amount received from sale of fixed assets is capital
receipts. Capital receipts are non-recurring in nature and the capital receipts are
shown in the Balance Sheet as increase in liabilities or as reduction in the value of the
asset. will increase liability or decrease asset.
Example for Capital Receipts:
1. Capital contributed by the owner
2. Amount received on sale of fixed assets or investments
3. loan taken from bank
2. Revenue Receipts
If a receipt does not incur an obligation to return the money or is not in the form of a
sale of fixed asset, it is termed as revenue receipts.
Example for Revenue Receipts:

1) Cash received from sale of goods
2) Commission, interest, dividend, rent etc. received.
Deferred Revenue Expenditure

Deferred Revenue Expenditure is the expenditure is a revenue expenditure in nature
but it is charged (written off) in more than one accounting period. The reason is that
benefit of such expenditure will accrue in more than one financial year. Example:
Large advertisement expenditure. It is estimated that it will give benefit for more
than one accounting period.
Profit
Profit is the excess of revenues over expenses in an accounting year. Profit increases the
investment/capital of the owner. Profit is calculated by deducting the cost from the sale.Profit
is earned by the business through regular business operations.
Gain
A gain is referred to as any economic benefit derived from outside of the usual business
operations. Gain is the profit that arises from events or transactions which are incidental to
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Example-Purchased goods worth Rs 50,000 from Rajan at a trade discount of 10%.Here

value of purchase is recorded as Rs.45,000 (50000-5000).Therefore trade discount Rs.5000
never recorded in the books of account.
Cash Discount- Cash Discounts are the discounts or incentives given by the seller(Creditor)
to the customer(Debtor) for making prompt (timely) payment. It is always recorded in the
books of account. It is a loss to the creditor (discount allowed) and a gain to the debtor
(discount received)
Example-Received cash from Mohan Rs.3850 allowed him discount Rs.150 and settled his
account Rs.4000.
Debtors/Account Receivables
A debtor is a person who owes money to the business. In general, a debtor is a customer
who has purchased a good or service and, therefore, owes the payment in return to the
supplier.
'Debtor' refers not only to a goods and services client but also to someone who borrowed
money from a bank or lender.
Example: Sold goods to Vijayan on credit Rs.40, 000.Here Vijayan owes Rs.40,000 to the
business, so he is a debtor.
Creditors/Accounts Payable
Creditor is a person/or other entities to whom the business owes money as he has given
some benefit to the business. The total amount standing to the favour of such persons and/or
entities on the closing date is shown in the Balance Sheet as sundry creditors on the liabilities
side.
➢ Purchased goods from Meera Traders on credit Rs. 3000.Here business owes
Rs.30000 to Meera traders, so Meera Traders is a creditor to the business.
Goods
Goods include all those things which are purchased for resale or raw materials which are
used for producing the finished products. Example: Kalyan Silks purchased 100 shirts for
Rs.12500 from Aravind Mills Ltd.Here,shirt is the goods for Kalyan Silks.
Note: For a furniture dealer purchase of chairs and tables is termed as goods, while for
others business firm it is furniture and is termed as an asset. For a stationery trader,
stationery is goods, whereas for others it is expense.
Stock
Stock means unsold goods. The value of goods remaining unsold at the end of an accounting
year is known as closing stock.
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Closing stock in case of manufacturing concern consists of raw-materials; work –in –

progress and finished goods. Last year’s closing stock will be the opening stock of next year.
Voucher
Voucher is a documentary evidence of a business transaction. For example, we get cash memo
when we purchased goods for cash, we get an invoice when we purchased goods on credit, we get
a receipt when we made a payment and so on.
Father of Accounting- Luca Pacioli

Luca Pacioli-Father of Accounting
He was an Italian Mathematician. In 1494, the first book
on double-entry accounting (Summa de arithmetica,
geometria, Proportioni et proportionalita) was
published by Luca Pacioli. He is considered as ‘Father of
Accounting and Bookkeeping’.
Important Questions:
1. A person who owes money to the business is a ----------
a) Debtor
b) Creditor
c) Supplier
d) None of these Ans: a
2. Amount spent for purchasing fixed asset is a -------
a) Revenue Expenditure
b) Deferred Revenue expenditure
c) Capital Expenditure
d) None of these Ans: c
3. Rajesh, owner, draw Rs.2,000 from the business for paying tuition fees to his son.
This amount is-------
a) Salary
b) Capital
c) Drawings
d) Direct Expense Ans: c
4. ----------is an example for internal users of accounting.
a) Creditors
b) Government
c) Manager
d) Debtor Ans: c
5. Sold goods to Mohan on credit Rs.4,000. Here Mohan is a -----to the business.
Ans: Debtor
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6. Find the odd one and state the reason

a) Debtors
b) Creditors
c) Cash at bank
d) Stock Ans: Creditors, all others are current assets.
7. Things or properties of value are called………
a) Assets
b) Liabilities
c) Capital
d) Revenue Ans: a
8. Complete the series based on the hint given:
a. Intangible Asset Goodwill
b. Fictitious Assets ?
c. Current Asset ?
Ans:
a. Intangible Asset Goodwill
b. Fictitious Assets Discount on issue of shares or
debenture, Preliminary Expenses
c. Current Assets Cash, stock, debtors, bills
receivables
9. Explain the main objectives of accounting? (5 Score)
Main objectives of accounting are:
1.Maintaining Accounting records
The main objective of accounting is to maintain systematic record of business
transactions and events.
2.Ascertainment of result
The second objective of accounting is to ascertain the net profit earned or loss suffered
on account of business transactions during a particular year.
3.Determining the Financial Position
The business man wants to know the financial position of the business. For this
purpose, a statement called ‘Balance Sheet’ is prepared, it displays the values of
assets and liabilities of the business.
4.Provide Information to Various Parties
Accounting is the ‘language of business’.It communicates the relevant accounting
information to various interested parties.
5.Meeting Legal Requirements
Accounting records are accepted as evidence by the court, if they are maintained
systematically. Besides, the law such as Companies Act, Income Tax Act, GST Act
etc. requires timely submission of returns.
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6. Assistance to Management
Management often requires financial information for decision making and ensures
efficient management. By providing timely information, accounting assists the
management in the task of planning, controlling and decision making.
10. Explain the qualitative characteristics of accounting information?( 5 Score)
1.Reliability: Accounting information must be reliable. Reliability means the users
must be able to depend on accounting information. Reliable information should be free
from error and bias and verifiable.
2.Relevance: To be relevant, information is to be available on time and must help in
prediction.
3.Understandability: Understandability of accounting information means users of
accounting information must interpret it in the same sense as it is prepared and
conveyed to them.
4.Comparability:Comparability means that the users should be able to compare the
accounting information of an enterprise of the period either with that of other periods
(Intra-firm comparison) or with the accounting information of other enterprises (Inter-
firm comparison).
11. Ramesh sold goods on credit to Satheesh Rs.50,000. What relation exist
between them? What are the accounting terms involved in it?
Satheesh - Debtor
Ramesh - Creditor
12. Distinguish between debtors and creditors.
Debtors are the persons who owe an amount to the enterprise for the goods sold or
service provided to them on credit.
Creditor is a person or institution to whom an amount owing by the enterprise because
they have provided a service or goods, or loaned money to the business.
Example: Ramesh sold goods on credit to Satheesh Rs.50,000. Here Sathesh is the
debtor and Ramesh is the creditor.
13. Give any two examples of revenue?
Examples: Sales, rent received, interest received,commission received, interest
received etc.
14. Distinguish between profit and gain.
Profit is the excess of revenues over expenses in an accounting year. Profit is
calculated by deducting the cost from the sale. Profit is earned by the business through
regular business operations.
A gain is referred to as any economic benefit derived from outside of the usual
business operations. Gain is the profit that arises from events or transactions which
are incidental to business such as profit sale of fixed assets, appreciation in the value
of an asset etc.
Income of the year = Profit + Gain
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15. Distinguish between expenses and expenditure?

Expense is the cost incurred in producing and selling the goods and services . Thus it
includes cost of goods sold (purchase and other direct expenses) and indirect
expenses.
On the other hand, expenditure is a wider term which includes expense also.
Expenditure is the amount spent for acquiring assets(capital expenditure), goods and
services (revenue expenses).
16. What do you mean by assets? What are the different types of assets?
(Refer-Page-7)
17. Give two characteristics of a business transaction?
1) It results in a change in the financial position of the firm, i.e., a change in the
value of some of the assets, liabilities and capital
2) The change may be capable of being expressed in terms of money.
Chapter-2
Theory Base of Accounting
Focus Area – Pubic Examination September-

2021
1. Basic Accounting Concept

1.1Business Entity Concept
1.2Money Measurement Concept
1.3 Going Concern Concept
1.4 Accounting Period Concept
1.5 Dual Aspect Concept
1.6 Matching Concept
1.7 Conservatism Concept
Accounting is the language of business. Language should be understandable to everyone. There

should be uniformity for this language. For making the accounting information meaningful to its
internal and external users, it is important that such information is reliable as well as comparable.
The comparability of information is required both to make inter-firm comparisons, i.e. to see how a
firm has performed as compared to the other firms, as well as to make inter-period comparison, i.e.
how it has performed as compared to the previous years. This becomes possible only if the
information provided by the financial statements is based on consistent accounting policies,
principles and practices. This calls for developing a proper theory base of accounting.
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The theory base of accounting consists of principles, concepts, rules and guidelines developed
over a period of time to bring uniformity and consistency to the process of accounting and
enhance its utility to different users of accounting information. These principles and concepts
provide foundation of recording transactions and preparing financial statements. It ensures
uniformity and consistency to the process of accounting.
Generally Accepted Accounting principles (GAAP)
In order to ensure uniformity in accounting procedures and methods, certain accounting principles,
concepts and conventions have been followed by accountants all over the world. These principles,
concepts and conventions are usually called Generally Accepted Accounting principles (GAAP).
GAAP can be classified into the following four categories:-
Concepts/Assumptions Conventions/Principles Modifying principles Accounting

Standards
1.Accounting Entity 1.Revenue realization 1.Materiality Issued by various
2.Going Concern 2.Verifiable Objective 2.Consistency Accounting
3.Money Measurement 3.Matching 3.Conservatism Standards Boards
4.Accounting period 4.Full disclosure 4.Timliness
5..Dual aspect
6. Historical cost
Various terms in GAAP (principles, concepts, conventions etc.) are inter-changeably used by
different authors. Instead of going into the semantics of these terms, it is important to concentrate
on the practicability of their usage. From the practicability view point, it is observed that the various
terms such as principles, concepts, assumptions etc.have been used interchangeably and are
referred to as Basic Accounting Concepts. All accounting procedures are developed on the basis of
Basic Accounting Concepts.
Basic Accounting Concepts
1. Business Entity Concepts
2. Money Measurement concept
3. Going concern Concept
4. Accounting Period Concept
5. Dual Aspect Concept
6. Matching Concept
7. Conservatism Concept
8.Revenue Recognitition (Realisation) Concept
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9. Cost Concept
10. Full Disclosure Concept
11. Consistency concept
12. Materiality Concept
13. Objectivity Concept
1 Business Entity Concepts
Business entity concept assumes that business has a distinct and separate entity from its owner. As
an accountant, we have to record business transactions from firm’s point of view and never from
the view point of proprietor’s. Owners are considered as creditors of the business to the extent of
their capital. This principle states that the affairs of business will not be mixed up with the private
affairs of the owner. A Because of this concept, financial position of the business can be easily found
out and earning capacity of the firm can be easily ascertained. In case this concept is not followed,
affairs of the business will be mixed up with the private affairs of the proprietor and the true picture
of the business will not be available.
Impact of business entity concept:
1. Proprietor is treated as creditor to the extent of his capital.
2. Personal assets and liabilities of the owner not considered while recording and reporting assets
and liabilities of the business.
3. Amount withdrawn by the owner from the business for his personal purpose is to be considered
as drawings.
Example: Owner’s personal car should not be included in the fixed asset of the company
2. Money Measurement concept
According to this concept, only those transactions are recorded which can be expressed in terms of
money or money’s worth. The qualitative aspects of the business like efficiency of management,
favourable location etc. are important for the business, but they cannot be recorded in the books of
accounts because they can’t be evaluated in terms of money.
Another important aspect of the concept of money measurement is that all transactions are to be
recorded in money value.
Impact of money measurement concept:
1. Events or transactions which can’t be expressed in terms of money will not be recorded in the
books of accounts even though they may be very important for the business. For example
efficiency/inefficiency of management/workers, favorable conditions in the economy,
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government decisions, quarrel between department heads etc. are very important for the
business but can’t be recorded as per this concept.
2. All items/transactions are to be recorded in money value. The business can’t record its
accounting records in meters, liters, kilograms, square feet etc.
Example: Market conditions, technological changes and the efficiency of management would not be
disclosed in the books of accounts.
3. Going concern Concept
This concept states that, a business firm will continue to carry on its activities for an indefinite period
of time. There is no intention to liquidate the business in the near future. It is on account of this
assumption that fixed assets are recorded at original cost and are depreciated in a systematic
manner. If this principle is not followed in accounting, the entire cost of asset will be charged to
profit and loss account of the current (asset purchased) year.
Impact of Going Concern Concept:
1. It is on this concept that we record fixed assets at their original cost and depreciation is charged
on these assets without reference to their market value.
2. On the basis of this concept that outside parties enter into long-term contracts with the firm,
give loans, purchase debentures etc.
3. On the basis of this concept, prepared expenses are eligible to record as an asset in the books
of the firm.
4. Assets are classified as current and noncurrent assets. Without this concept such classification
would be difficult to justify. It is same as in case of liabilities.
Example: Depreciation cost of a fixed asset is allocated over its useful life and it will not be
considered as the current year only.
4. Accounting Period Concept
According to this concept though the business is a continuous affair, its life is divided into small time
intervals for the measurement of the profit of the business. Twelve-month period is adopted for this
purpose.
Strictly speaking, the true results of the business operations can be ascertained only at the end of
its life. But ascertainment of result after a very long period will be of little use to various users and
it will be too late to take corrective steps at that time. Thus, the entire life of the firm is divided into
small time intervals for the measurement of the profits of the business.
Example: In India fiscal year starting April 1 would end on March 31 of the following year, in USA
fiscal year starting from 1st Oct to 30th Sep of the following year.
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5. Dual aspect Concept (Duality/Accounting Equation Concept)
Every business transaction has double effect. In other words, every transaction affects at least two
accounts. If one account is debited, any other account must be credited. The system of recording
transactions based on this principle is called as ‘Double Entry System’. Double Entry Book keeping
is based on this concept. It is because of this concept that the two sides of the Balance Sheet are
always equal and the following accounting equations will always hold good at any point of time:-
Assets = Liabilities + Capital
OR
Assets = Owners Equity (capital) +Creditors Equity (Liability)
Note: Everything of firm owns, it also owes out to somebody (Business Assets = Owners Equity
(capital) +Creditors Equity (Liability)
Example: If John started a business with capital of Rs.50,000,here on the one hand the business has
asset(Cash) of Rs.50,000,while on the other hand the business has to pay to the owner a sum of
Rs.50,000 (Capital).
Assets (Cash-50,000) = Capital (50,000) + Liabilities (0)
6. Matching Concept
According to this concept expense should be matched to the revenue of the appropriate accounting
period to determine correct profit/loss for the accounting period. As per this principal expense or
revenue are recognized on the basis of period to which they relate and not when these are paid/
received. It is because of this principle the adjustment is made for outstanding expense, accrued
income, prepaid expenses, unearned income (income received in advance) etc.
Impact of matching concept
1. Adjustment required for outstanding expenses, prepaid expenses, accrued incomes and income
received in advance.
Example: Wages paid in January 2020 relating to December 2019 should be treated as expenditure
for the year 2019 and not 2020.
7. Conservatism Concept or Principle of Prudence
According to this concept all anticipated losses should be recorded in the books of accounts, but all
anticipated or unrealized gains should be ignored. It is the policy of playing safe. This concept
requires that profit should not be recorded until realized but all losses, even those which may have
a remote possibility, are to be provided for in the books of accounts.
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Impact of Conservatism Concept or Principle of Prudence

1. Provision for doubtful debts is created in anticipation of actual bad debts
2. Closing stock is valued at cost price or market price whichever is Iess.
3. Joint life policy is shown only at surrender value as against the amount paid.
4. Provision for a pending law suit against the firm, which may either, be decided in its favour.
Example: 1
Mr. Anil is a debtor of 4, 00,000.There is possibility that he will be insolvent and only 40% of his dues
will be received. According to principle of prudence, the business will make provision for doubtful
debts for 60% of Rs.4,00,000 = Rs. 2,40,000.
Example: 2
A business owns a building that originally cost Rs.8,00,000.but due to the boom in the real estate
market the building is now valued at Rs. 9,00,000.Should the firm value the building at Rs. 9,00,000
and record a revenue of Rs.1,00,000 in the books of accounts?. Answer is no because conservatism
principle states that the gain should not be recorded until it is certain to occur, i.e, when the building
is sold.
Frequently asked questions:
No Questions/ situation Ans. Related Concept
1 Fixed assets are depreciated over their useful life Going concern concept
rather than over a short period
2 Proprietor is treated as creditor to the extent of his Accounting entity concept
capital
3 The sale achieved by a salesman and the commission Money measurement concept
payable to him is recorded in the books of accounts.
But efficiency and intelligence of salesman is not
recorded
4 Mr.Sarojkumar, a sole trader, purchased a TV for Yes, Business entity concept
Rs.20,000 for his personal use and asks his
accountant to record this as business expense. But
accountant, argue that it is the violation of
accounting principle. Is accountant right?
5 Accounting equation is based on.... Dual aspect concept
6 Closing stock is valued at cost or market Conservatism (Prudence)
prce,whichever is less Concept
7 According to......concept accountant are in favour of Conservatism (prudence)

understating assets and revenue and overstating Concept
liabilities and expenses
8 Anticipate no profit and provide for all possible Conservatism (Prudence)
losses Concept
24
9 Create Provision for doubtful debts Conservatism (Prudence)

Concept
10 Increase or decrease in the market value of an asset Cost concept
can’t be accounted
11 Wages outstanding is added to wages Matching concept
12 Prepaid insurance should be deducted from Matching concept
insurance
13 Stock is valued at cost price or market price Conservatism (Prudence)
whichever is less Concept
14 10 Kg rice purchased @ Rs.45 by a grocery shop Money measurement concept
,recorded it asRs.450(Not in quantity)
15 Profit and loss account and balance sheet is prepared Accounting period concept
at the end of the year
16 In case of a contract work, profit is calculated on the Revenue recognition concept
basis of work certified for each year
17 Profit=Revenue of the year – Expenses of that year Matching concept
18 Assets = Liabilities + capital Dual aspect concept
19 The owner of a business can’t wait till the closure Accounting period concept
of the business to know the result and financial
position
20 Vouchers should be the base for recording a Verifiable objective concept
transaction in the books of accounts
21 All business events may not be recorded in the books Money measurement concept
of accounts
22 Closing stock is credited to Trading account Matching concept
23 Efficiency of an employee cannot be recorded Money measurement concept
24.Match the following
A B
Closing stock is valued at cost or market Money measurement concept
price whichever is less
Proprietor is treated as creditor to the extent Dual aspect concept
of his capital
Every transaction will have two aspects Conservatism (Prudence) Concept
All business events not recorded in Accounting entity concept
accounting
Ans:
A B
Closing stock is valued at cost or market Conservatism (Prudence) Concept
price whichever is less
Proprietor is treated as creditor to the extent Accounting entity concept
of his capital
Every transaction will have two aspects Dual aspect concept
All business events not recorded in Money measurement concept
accounting
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25. A concept that a business enterprise will not be sold or liquidated in the near future is known as
………..
a. Going concern concept
b. Matching concept
c. Business entity concept
d. Dual aspect concept Ans: a
26. Recognition of expense in the same period as associated revenues is called ………concept.
Ans: Matching
27. Explain business entity concept?
According to business entity concept, proprietor of the business is a separate and distinct entity
from business. The transactions are recorded in the books of account from the point of view of
business, not from the point of view of the proprietor. Based on this principle, the amount
invested by the owner into the business is considered as capital and the amount or goods
withdrawn by the owner from the business is treated as drawings.
28. Explain money measurement concept?
According to money measurement concept, transactions and events that can be measured in
terms of money are recorded in the books of accounts. By following this principle, we will not be
able to record the value of efficiency of an employee, loss of business due to the death of an
efficient manager ,effect of Government decision etc.
29. Explain going concern concept?
According to the going concern concept, it is assumed that the business will continue for a long
period and there is no intention to close the operation in the near future. It is on account of this
assumption that fixed assets are recorded at original cost and are depreciated in a systematic
manner. If this principle is not followed in accounting, the entire cost of the fixed asset will be
charged to profit and loss account as current (asset purchased) year expense.
Prepared by BINOY GEORGE, HSST, MKNM HSS, Kumaramangalam, Thodupuzha, Idukki Dt.
26
Chapter-3
Recording of transaction-I
Focus Area-Public Examination-September-2021

1. Accounting Equation
2.Rules of Debit and Credit
3.Books of original entry
3.1. Journal
4. Ledger
5. Distinction between Journal and Ledger
6. Posting from Journal
Accounting is the process of identifying and analyzing the business transactions, recording them,
classifying and summarizing their effects and communicating it to the interested parties. Basic
accounting concept will act as a guide in this process. In this chapter we will discuss the details of
each step involved in the accounting process.
Accounting Equation
Accounting equation signifies that the assets of a business are always equal to the total of capital
(owners claim) and Liabilities (outsiders claim). Accounting equation is a statement of equality
between debits and credits.

The above equation can also be expressed as follows:
Assets – Liabilities = Capital Assets= Equites
Assets – Capital = Liabilities Assets = Owner’s equity + Outsiders’ equity
Assets= Owner’s Claim (Capital)+ Outsiders Claim (Liability)

Assets – Liabilities – Capital = 0
The accounting equation is often called as Balance Sheet equation as it shows the fundamental
relationship among the components of Balance Sheet.
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Assets, Liabilies and Capital are the three basic elements of every business transaction. This
equation set the foundation of double-entry accounting and highlights the structure of the balance
sheet.
No business transaction can break the relationship between these terms. A business transaction will
result in the changes in either of the assets, liabilities or capital of the firm and even after the change
the assets will be again equal to the total of capital and liabilities.
Process of preparing Accounting Equation

Step-1: Analyzing the transaction thoroughly, every transaction involves at least two aspects or
accounts, i.e., assets, liabilities, capital, revenues and expenses.
Step-2: Analyses the effect of transactions in two accounts (asset,liabilities,capital,revenue or

expenses) stated above. For example, purchased furniture for cash, in this transaction two accounts
are furniture and cash. Effect is furniture increased and cash decreased.
Step-3: Record the effect on the relevant side of the equation.
Effects of Transactions on accounting Equation

Business transactions like purchase of goods, payment of salary, cash received from customers etc
may affect either both sides of the equation, or one side of the equation only, by both increasing
and decreasing it by equal amounts.
On the basis of effects on accounting equation, transaction can be divided into two:
1. Transactions affecting two items.
2. Transactions affecting more than two items.
1. Transactions affecting two items: Some transactions will affect two items of the accounting
equation. We can again classify as:
1 (a) Transactions affecting opposite sides are:
Case-1 Increase in Asset, Increase in Capital: Introduction of capital by the proprietor increases
asset (cash) and also capital.
Case-2 Increase in Asset, Increase in Liability: Transactions such as credit purchase of goods
increases asset (stock) and also increases liability (creditor). Similarly loan taken from bank increases
asset (cash/bank) and also increases liability (bank loan)
Case-3 Decrease in Asset, Decrease in Capital: Transactions like Drawings by the proprietor will
decrease asset (cash/bank) and also decrease Capital.
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Case-4 Decrease in Asset, Decrease in Liability: Transaction of payment to a creditor decreases asset
(cash/bank) also decreases liability (creditor)
1 (b) Transactions affecting same side but in opposite direction
Case-5 Increase in one Asset and Decrease in another Asset: Transactions like cash purchases
increase the value of one asset (goods) and decrease another asset (cash/bank). Another
transaction, receipts from debtors, will increase the value of one asset (cash/bank respectively) and
decrease another asset (debtors).
Case-6 Decrease in one Liability and Increase in another Liability: settlement of creditors by issue
of Bills of Exchange (B/P) decreases a liability (creditor) and increases another liability (Bills payable)
2. Transactions affecting more than two items of the accounting equation /Balance Sheet: Some
transactions affect more than two items of the accounting equation. For example, when a sale of
goods is made in cash for Rs.10,000,it is made at cost (Rs.8,000) plus profit (Rs.2,000).Cost of goods
sold (Rs.2,000) reduces asset (Stock), another asset (cash) increased by Rs.10,000 and the capital
increased by the profit Rs.2,000. It should be noted that profit increases the capital and loss
decreases it.
Illustration: Suppose Mr. Thomas starts a new business and the following successive transactions
take place:-
Example for Case-1: Thomas started business with Rs.1, 00,000 as capital.
Effect: The business receives Rs.1, 00,000 in cash, which is an asset to the business and at the same
time according to business entity concept it owes Rs.1,00,000 to the owner Thomas, i.e., capital.

Cash Liabilities Capital
Capital Introduced 1,00,000 0 1,00,000
Example for Case-2: Purchased goods for Rs.3, 000 from Bharat Traders on credit.
Effect: As a result of this transaction, the stock of goods Rs.3,000 will increase and at the same time
a liability sundry creditors will also increase.

Cash Stock Creditors Capital
Old equation 1,00,000 0 1,00,000
Credit purchase for 0 +3,000 +3,000 0
Rs.3,000
New Equation 1,00,000 3,000 3,000 1,00,000
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Example for Case-3: Rs.1, 000 with drawn by the owner Thomas for his personal use.
Effect: As a result of this transaction an asset (cash) will reduce and at the same time owner’s claim
against firm (capital) will also reduce.

Old Equation 1,00,000 3,000 3,000 1,00,000
Drawings Rs.1,000 -1,000 0 0 -1,000
New Equation 99,000 3,000 3,000 99,000
Example for Case-4: Cash paid to Bhart Traders (creditor) Rs, 2,000
Effect: The effect of this transaction is that asset cash will reduce and at the same time a liability
creditor will also reduce.

Old Equation 99,000 3,000 3,000 99,000
Rs.2,000 paid to a -2,000 0 -2,000 0
creditor
New Equation 97,000 3,000 1,000 99,000
Example for Case-5: Purchased goods for cash Rs.5, 000
Effect: The effect of this transaction is that asset cash will reduce and at the same time another asset
(stock) will increase.

Old Equation 97,000 3,000 1,000 99,000
Cash purchase of -5000 +5000 0 0
goods Rs.5,000
New Equation 92,000 8,000 1,000 99,000
Example for Case-6: Bill of exchange of Rs.5,00 drawn by Bharat Trader’s (creditor) accepted (Bills
payable)
Effect: As a result of this transaction a liability creditor will reduce and at the same time another
liability Bills Payable will increase.

Cash Stock Creditors Bills Payable Capital
Old Equation 92,000 8,000 1,000 99,000
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Creditors Bills of 0 0 -500 +500 99,000

Exchange accepted
New Equation 92,000 8,000 500 500 99,000
Example for case-7 Sold goods costing Rs.1, 000 on credit for Rs, 1,250
Effect: Effect of this transaction is that a debtor has come into existence to the extent of Rs.1250.The
asset (stock) is reduced only by Rs.1, 000, being the cost of goods sold. The net increase in assets,
Rs.250 (1250-1000) is the amount of profit and it will be added to capital.

Cash Stock Debtors Creditors Bills Payable Capital
Old Equation 92,000 8,000 500 500 99,000
Sold goods costing 0 -1,000 +1,250 0 0 +250
Rs.1,000 on credit for
Rs, 1,250
New Equation 92,000 7,000 1,250 500 500 99,250
important note:
1. Treatment of profit/loss, expenses, revenue etc.
Capital is increased by amount of profit on sale of goods and revenue like commission received, interest received
etc.Capital is decreased by loss on sale of goods and amount of expenses like salary, rent etc.
Illustration (NCERT Text)
Analyse the effect of each transaction on assets and liabilities and show that the both sides of accounting
equation remains equal.
1. Introduced Rs.8,00,000 as cash and Rs.50,000 by stock

2. Purchased Plant for Rs.3, 00,000 by paying Rs.15, 000 in cash and balance at a later date.
3. Deposited Rs.6, 00,000 into the bank.
4. Purchased furniture for Rs.1, 00,000 and made payment by cheque.
5. Purchased goods worth Rs.80, 000 for cash and Rs.35, 000 in credit.
6. Goods amounting to Rs.45, 000 was sold for 60,000 on cash basis.
7. Goods costing Rs.80, 000 was sold for Rs.1, 25,000 on credit.
8. Cheque issued to the supplier of goods worth Rs.35,000
9. Cheque received from customer amounting to Rs.75,000
10. Withdrawn by the owner for personal use Rs.25,000
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Modern approach
Under this approach all accounts are classified into the following five categories
The rules for debit and credit depend upon the nature of an account. For example, to increase the
asset account balance, asset account should be debited, to decrease asset account balance, it should
be credited. On the other hand to increase liability account balance, it should be credited and to
decrease it, liability account should be debited.
Rules for Debit and Credit:
1. Asset Accounts (Land and Building, Plant and machinery,furniture,stock,debtors,cash,bank etc)

Debit the increases and Credit the decreases.
2. Liability Accounts (Creditors, bank loan, outstanding expenses, bills payable etc.)
Debit the decreases and credit the increases
3. Capital Account (Capital account and drawings account)
4. Income/ Revenue account (sales, discount received, interest received, commission received,
discount received, bad debts recovered etc.)

5. Expenses/ loss Accounts (purchases, wages, salary, depreciation, bad debts, rent, discount
allowed etc.)
Debit the increases and Credit the decreases
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Example:1 Started business with cash Rs. 1, 00,000.

Rule: According to double entry system there are two accounts /elements involved in every
business transaction. The elements may be asset, liability, capital, income or expenditure. One of
them is debited and the other is credited.
Application: In the above transaction, started business with cash, there are two accounts involved-
Cash A/c and capital a/c. Here Cash (Asset) increased and at the same time Capital is also increased.
To increase Cash account, it should be debited, to increase capital account , it should be credited.
Now, we can write the journal entry as:
Cash A/c Dr 1, 00,000
To Capital A/c 1, 00,000
Dr. Cash Account Cr.
1,00,000 (Debited)
Dr. Capital Account Cr.

1,00,000 (Credited)
Example 2 Furniture Purchased on credit from Ajay traders Rs.40,000

Application: In this transaction, there are two accounts involved-Furniture (Asset) A/c and Ajay
Traders Creditor, liability) a/c. Here Furniture (Asset) increased and at the same time Ajay Traders
(liability) is also increased. To increase Furniture account, it should be debited, to increase Ajay
Traders account, it should be credited. Now, we can write the journal entry as:
Furniture A/c Dr. 40,000
To Ajay trader’s 40,000
Dr. Furniture A/c Cr.

40,000(Debited)
Dr. Ajay Trader’s A/c Cr.

40,000(Credited)
Example; 3 Salary paid Rs.5, 000
Application: In this transaction, there are two accounts involved-Salary (Expenses) A/c and Cash
(Asset) a/c. Here Salary (Expenses) A/c increased and at the same time Cash (Asset) is decreased. To
36
increase, Salary account it should be debited, to decrease Cash account, it should be credited. Now,
we can write the journal entry as:
Salary A/c Dr. 5,000
To Cash A/c 5,000
Dr. Salary Account Cr.

5,000(Debited)

5,000(Credited)
Example: 4 Commission received Rs.2,000.
Application: In this transaction, there are two accounts involved- Cash (Asset) a/c and Commission
(Income). Here Cash (Asset) A/c is increased and at the same time Commission (Income) is also
increased. To increase Cash (Asset) account, it should be debited, to increase commission account,
it should be credited. Now, we can write the journal entry as:
Cash A/c Dr. 2,000
To Commission A/c 2,000

2,000(Debited)
Dr. Commission Account Cr.

2,000(Credited)
Example : 5 Deposited Rs.10,000 into Canara Bank
Application: In this transaction, there are two accounts involved- Canara Bank (Asset) A/c and Cash
(Asset) a/c. Here Canara Bank (Asset) A/c is increased and at the same time Cash (Asset) is
decreased. To increase, Canara Bank Account it should be debited, to decrease Cash account, it
should be credited. Now, we can write the journal entry as:
Canara Bank A/c Dr. 10,000
To Cash A/c 10,000
37
Dr. Canara Bank Account Cr.

10,000(Debited)

10,000(Credited)
Q. Analyse the following transactions, state the nature of accounts and state which account will be
debited and which account will be credited on the basis of Modern Classification of Accounts
1. Started business with cash Rs.3,00,000
2. Purchased furniture for cash Rs.1,00,000
3. Purchased goods from B Ltd Rs.50,000
4. Cash paid to B Ltd Rs. 50,000
5. Sold goods for cash to Kaimal Rs.30,000
6. Paid rent Rs.2,000
7. Commission received Rs.3,000
Analysis of Transaction
Transactions Accounts Nature of How Debit Credit

Involved Accounts Altered
Started business with cash Cash Asset Increased 3,00,000
Rs.3,00,000 Capital Capital Increased 3,00,000
Purchased furniture for cash Furniture Asset Increased 1,00,000
Rs.1,00,000 Cash Asset Decreased 1,00,000
Purchased goods from B Ltd Purchase Expense Increased 50,000
Rs.50,000 B Ltd Liability Increased 50,000
Cash paid to B Ltd Rs. 50,000 B Ltd Liability Decreased 50,000
Cash Asset Decreased 50,000
Sold goods for cash to Kaimal Cash Asset Increased 30,000
Rs.30,000 Sales Income Increased 30,000
Paid rent Rs.2,000 Rent Expense Increased 2,000
Cash Asset Decreased 2,000
Commission received Cash Asset Increased 3,000
Rs.3,000 Commission Income Increased 3,000
Books of Original Entry
This process of analysing transactions and recording their effects directly in the accounts is helpful
as a learning exercise. However, real accounting systems do not record transactions directly in the
accounts. The book in which the transactions are first recorded is called journal or book of original
entry.
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Journal
Journal is book of original entry in which transactions are first recorded. In journal transactions are
recorded in chronological order, as and when they take place. The process of recording transactions
in journal is called journalising. Journal entry is the basic record of a business transaction. The
format of journal is given below:
JOURNAL
Date Particulars L.F Debit (Rs.) Credit (Rs.)
Column Details
1. Date: In this column, transaction date is written.
2. Particulars: In double entry system, both the aspect of a transaction is to be recorded. The name
of the account to be debited is written first and the word ‘Dr.’ is also written towards the end of the
column. In the second line, the name of the account to be credited is written. The credit account
starts with the word ‘To’, a few spaces away from the margin to make it distinct from the debit
account.Narration: After each entry, a brief explanation of the transaction together with necessary
details is given. This explanation is called narration.
3. Ledger Folio or L.F: This column is used to the page number of the ledger account
4. Debit: The amount of account being debited.
5. Credit: The amount of account being credited
Journal Entry: The entry recorded in a journal is called Journal entry. It is the basic record of business
transactions. It may be simple or compound.
Simple Journal entry:
When only two accounts are involved to record a transaction, it is called simple journal entry.
For Example: On 07-04-2020, Purchased furniture for cash Rs.80,000.In this transaction there is two
accounts are involved, Furniture and cash. Furniture (asset) balance is increased, so furniture
account should be debited. Cash (asset) is decreased, so it should be credited. This transaction is in
the journal as follows.
Journal
07-04-2020 Furniture A/c Dr. 80,000
To Cash A/c 80,000
( Purchased furniture for cash)
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Compound Journal Entry:

A compound journal entry is an entry in which there is more than one debit, more than one credit,
or more than one of both debits and credits. It is a combination of several simple journal entries.
Example:
On 31-1-2017 Here, It is a
Salary paid Rs. 1,000 combination 3
simple journal
Rent paid Rs. 2,000
entries.
Interest paid Rs.5,000
Journal
31-01-2017 Salary A/c Dr 1,000
Rent A/c Dr 2,000
Interest A/c Dr 5,000
To Cash 8,000
(Being Salry,rent and interest paid)
Example: Purchased Machinery from Anand Traders on 1st April 2020 for Rs.50,000 and Rs. 20,000
is paid by cash immediately and balance of Rs.30,000 is still payable. This transaction increases
Machinery (assets) by 50,000, decreases Cash (Asset) by Rs.20, 000 and increases liability (Anand
Traders, creditor) by Rs.30, 000.
Journal
01-04-2020 Machinery A/c Dr. 50,000
To Cash A/c 20,000
To Anand Traders A/c 30,000
(Purchased furniture from Anand Traders
and paid Rs.20,000)
Illustration: Anna Traders furnishes the following information:

Journalise the following transactions:
1-1-2020 Started business with cash Rs. 2, 00,000
2-1-2020 Goods purchased from S Ltd Rs. 50,000
3-1-2020 Stationery purchased for cash Rs.10,000
4-1-2020 Sold goods to Biju Rs.10, 000
40
5-1-2020 Opened a bank account with SBI Rs. 25,000

5-1-2020 Sold goods to Sojan Rs.5,000 for cash
6-1-2020 Cheque issued to S Ltd Rs. 50,000
7-1-2020 Furniture purchased for cash Rs.10,000
8-1-2020 Interest received Rs.2,000
9-1-2020 Wages paid Rs.1,000
01-01-2020 Cash A/c Dr. 2,00,000
To Capital A/c 2,00,000
(Business started with cash)
02-01-2020 Purchase A/c Dr. 50,000
To S Ltd A/c 50,000
(Goods purchased on credit)
3-1-2020 Stationery A/c Dr. 10,000
To Cash A/c 10,000
(Purchased stationery for cash)
4-1-2020 Biju A/c Dr. 10,000
To Sales A/c 10,000
(Sold good to Biju on credit)
5-1-2020 Bank A/c Dr. 25,000
To Cash A/c 25,000
(Opened a bank account with SBI)
5-1-2020 Cash A/c Dr. 5,000
To Sales A/c 5,000
(Sold goods for cash)
6-1-2020 S Ltd A/c Dr. 50,000
To Bank A/c 50,000
(Cheque issued to S Ltd)
7-1-202 Furniture A/c Dr. 10,000
To Cash A/c 10,000
(Furniture purchased for cash)
8-1-2020 Cash A/c Dr. 2,000

To Interest A/c 2,000
(Interest received)
9-1-2020 Wages A/c Dr. 1,000
To Cash A/c 1,000
(Wages paid)
Note: Transactions can be classified into two, cash transaction and credit transactions. In cash
transaction one of the aspect- debit aspect or credit aspect is always cash/bank
41
Banking transactions:
Nowadays, most of the payments and receipts are going through the bank. So traders usually open
current accounts with banks. The following are the usual banking transactions and their journal
entries:
1. When cash deposited.
Bank A/c Dr.
To Cash A/c
2. When cash withdrawn for business purpose
Cash A/c Dr.
To Bank A/c
3. When cash withdrawn from bank for personal purpose
Drawings A/c Dr.
To Bank A/c
4. When cheque received from a customer
Cash A/c Dr.
To Customer
Note: The Cheque is treated like cash.
5. When cheque received from a customer paid into bank(next day)
Bank A/c Dr.
To Cash A/c
6. When cheque received from a customer and the same deposited into bank (on the same
day)
Bank A/c Dr.
To Customer a/c
7. When interest on deposit allowed by bank
Bank A/c Dr.
To Interest A/c
8. When bank charges charged by bank
Bank Charges A/c Dr.
To Bank A/c
9. When cheque issued to a supplier
Supplier (Creditor) A/c Dr.
To Bank A/c
10. When cheque received from a customer paid into bank for collection returned dishonored.
Customer A/c Dr.
To Bank A/c
42
Transactions related to purchase account

Purchases: The term purchase is used only for the purchase of ‘Goods’. In case of
manufacturing concern goods means purchase of raw materials for the purpose of
conversion of finished products and then sale. In case of trading concern ‘goods’ are those
things which are purchased for resale. The term purchases include both cash and credit
purchases of goods.
Example:
➢ Purchased goods from Anju traders Rs.5000 (eg.Credit purchase)
➢ Purchased goods for cash Rs.4000/ Purchased goods from Akhil Traders for cash
Rs.4, 000/ Cash purchase Rs.4000 (eg. Cash purchase)
➢ A furniture merchant purchased chairs for Rs.8000 is considered as purchase
because here chair is his goods and its purpose is to resale and to earn profit.
➢
Note: Purchase is an expense. Expense will always be a debit balance. So to increase

purchase (expense) account, it should be debited.
Transactions:
1. Purchased goods from Mahesh for Rs.50,000
Purchase A/c Dr.
To Mahesh A/c
2. Purchased goods Rs.10,000
Purchase A/c Dr.
To Cash A/c
3. Goods returned to Mahesh Rs. 200
Mahesh A/c Dr.
To Purchase return A/c
Note: If ‘Purchase’ is treated as an expense, purchase return will be treated as ‘
Revenue’. Here to increase purchase return (revenue) account balance, it should be
credited.
4. Purchased goods and paid by cheque Rs.5,000

Purchase A/c Dr.
To Bank A/c
5. Goods withdrawn by the proprietor for his personal use Rs.500
Drawings A/c Dr.
To Purchase A/c
43
Note: Purchase is treated as an expense of the business. When goods withdrawn for
personal purpose; here purchase A/c (goods purchased for sale, so purchase is a
business expense) balance needs to be reduced. You have to credit the purchase
account for that.
6. Goods costing Rs.1,200 given as charity
Charity A/c Dr.
To Purchase A/c
Note: 1. Charity is an expense, so it will be debited.
Note: 2 Purchase is the main expense of a business. Purchase means bought goods
for the purpose of sale. Here the goods worth Rs.1, 200 not used for sale, but
distributed for charity purpose. So the goods used for charity should be deducted from
the purchase. To reduce purchase (expense) A/c, it should be credited.
7. Distribution of goods as free sample Rs.200
Free sample / advertising A/c Dr.
To Purchase A/c
Note: 1. Free sample is an expense, so it will be debited.
Note: 2. Purchase means bought goods for the purpose of sale. Here the goods worth
Rs.200 not used for sale, but distributed for as free sample. So the goods used for
free sample should be deducted from the purchase. To reduce purchase (expense)
A/c, it should be credited.
8. Loss of goods by theft Rs.5,000
Loss by theft A/c Dr.
To Purchase A/c
9. Loss of goods by fire Rs.6,000
Loss of goods by fire A/c Dr.
To Purchase A/c
Fixed Asset Related Transactions

Example:
1. When furniture purchased for Cash Rs. 20,000
Furniture A/c Dr.
To Cash A/c
44
6.Purchase Return To Purchase return A/c Revenue Increased –

Credited
7. Sales Return Sales return A/c Dr. Expense Increased- Debited
To Debtor A/c Asset decreased- Credited
8.Collection from Debtors Cash A/c Dr. Asset Increased- Debited
To Debtors A/c Asset Decreased- Credited
9. Collection from Debtors Cash A/c Dr Asset Increased- Debited
and discount allowed Discount Allowed A/c Expense Increased-Debited
Dr To Debtors A/c Asset Decreased- Credited
10.Payment to Creditors Creditors A/c Dr. Liability decreased-Debited
To Cash A/c Asset Decreased-Credited
11. Payment to creditors Creditors A/c Dr. Liability decreased-Debited
and discount received To Cash A/c Asset Decreased-Credited
To Discount Received A/c Income Increased- Credited
12.Payment of Expenses Expenses A/c Dr. Expense Increased-Debited
To Cash A/c Asset decreased – Credited
13.Receipt of Income Cash A/c Dr. Asset Increased- Debited
To Income A/c Income Increased – Credited
14.Depreciation on Asset Depreciation A/c Dr. Expense Increased-Debited

To Asset A/c Asset decreased – Credited
15.Interest on capital Interest on capital A/c Dr. Expense Increased-Debited
allowed To capital A/c Capital Increased – Credited
16.Outstanding Expenses Expenses A/c Dr. Expense Increased-Debited
To Outstanding Expenses Liability Increased – Credited
17. Prepaid Expenses Prepaid Expenses A/c Dr. Asset Increased –Debited
To Expenses A/c Expense Decreased –
Credited
18.Withdrawal of goods for Drawings A/c Dr. Capital decreased-Debited
personal use To Purchase A/c Decrease in Expense-
Credited
46
19. Goods given as charity Charity A/c Dr. Expense Increased-Debited

To Purchase A/c Decrease in Expense-
Credited
20. Bad debts Written off Bad debts A/c Dr. Expense Increased-Debited
To Debtors A/c Asset Decreased- Credited
21.Bad debts recovered Cash A/c Dr. Asset Increased –Debited
To Bad debts Recovered Revenue increased –
Credited
22.Income tax paid Drawings A/c Dr. Capital decreased-Debited
To Cash A/c Asset Decreased- Credited
23.Sale of asset more than Cash A/c( Sales price) Dr. Asset Increased –Debited
book value To Asset (book value) Asset Decreased- Credited
To Profit on Sale of Asset Revenue increased –
Credited
24.Sale of asset lesser Cash A/c(Sales price) Dr. Asset Increased –Debited
than book value Loss on Sale of Asset Expense Increased-Debited
To Asset (book value) Asset Decreased- Credited
25. Sale of scrap Cash A/c Dr. Asset Increased –Debited

To Miscellaneous Revenue increased –
Receipts Credited
Discount
The discount may be1. Trade Discount 2. Cash Discount
1. Trade Discount: Trade discount is an allowance given by the seller of goods out of the
selling price (list price or catalogue price). It is usually allowed by the wholesaler to the
retailer, when goods are purchased in large quantity. Trade discount is allowed on both on
cash as well as credit transactions.Trade discount is related to the purchase and not to the
payment. No separate entry is passed for the trade discount, as it is deducted in the invoice
from the list price and the net amount only is recorded in the books of accounts.
Note: Trade discount is not separately recorded in the books of accounts.
47
Example: If Anil traders sells goods to Salman Traders of the list price of Rs.1,00,000 at
10% trade discount for cash.
Listed/catalogue price =1, 00,000. Trade discount= 10% of Rs.1, 00,000 i.e., Rs.10, 000
So selling price = 1, 00,000 – 10,000 = 90,000 (selling price is recorded in the invoice, so no
separate recording is needed for trade discount)
Journal entry:
Journal (Anil Traders)
Cash A/c Dr. 90,000
To Sales 90,000
(Sold goods for cash)
2. Cash Discount
Cash discount is usually allowed by the supplier(Creditor) to the customer(Debtor) to
encourage prompt or early payment. Cash discount is allowed only if the customer/debtor
makes the payment within a fixed period.When cash discount is allowed,it is an expense and
debited to ‘Discount allowed Account’ and when cash discount is received,it is a revenue
and credited to ‘Discount Received Account’. It is an expense for the business allowing
and gain for the business availing it.
Example: John owes an amount of Rs.2,000 to Sunil. John makes the payment promptly
and Sunil allows a discount of Rs.100.
The reduction of Rs.100 is the cash discount; it is revenue (Discount received) to John and
expense (Discount allowed) to Sunil.
Journal Entry: On receipt of amount (in the books of Sunil)
Journal
Cash A/c Dr. 1,900
Discount Allowed A/c Dr. 1,00
To John 2,000
(Cash received from John and discount
allowed Rs.100)
48
Classification of Ledger Accounts

All ledger accounts are put into five categories, namely, assets, liabilities. Capital, revenue
and expenses. All accounts may further be put into two groups, i.e. permanent accounts and
temporary accounts.
Permanent accounts: All assets, liabilities, and capital accounts are permanent accounts.
All permanent accounts are balanced and carried forward to the next accounting period. All
permanent accounts will appear in the Balance Sheet.
Temporary Accounts: All revenue and expenses accounts are temporary accounts.
Temporary accounts are not balanced, they are totaled at the end of the year and closed by
transferring them to the Trading and Profit and Loss account by passing closing entries.
Posting from Journal
Posting is the process of transferring entries from the Journal to the Ledger.
Steps involved in posting:
A journal entry consists of two aspects, debit aspects and credit aspect. Each aspect is an
account. Debit aspect is said to be debited in that particular account and the credit aspect is
said to be credited in that particular account. The following are the steps in posting:
Step-1: Focused on the debit aspect of the journal entry and turn to the particular account in
the ledger that is to be debited.
Step-2: Record the following items on the debit side of the account:
a) Date in the date column
b) Name of the other aspect (here, name of the credit aspect/account) of the journal entry
in the particular column with or without the word ‘To’.
c) Page number of the journal in the J.F column
d) Debit amount of the journal entry in the debit column of the account.
Step-3: Record the following items on the credit side of the account:
a) Name of the other aspect (here, name of the debit aspect/account) of the journal entry
in the particular column with or without the word ‘By’.
b) Page number of the journal in the J.F column
c) Credit amount of the journal entry in the credit column of the account.
50
Example:
1-1-2019 Started business with cash Rs.2,00,000
Journal Entry
1-1-19 Cash A/c Dr. 2,00,000
(Started business with cash)
Posting to the ledger account:

Date Particulars J.F Amount Date Particulars J.F Amount
1-1-19 To Capital A/c 2,00,000

1-1-19 By Cash A/c 2,00,000
Balancing of Accounts
Balancing of accounts is the process of ascertaining the difference between the totals of
debit side and the credit side of the account and inserting the difference on the side where
the amount is less in order to make the totals of the account equal. Permanent accounts in
the ledger are periodically balanced.
In case debit side exceeds credit side ,the difference is written on the credit of the account
as ‘By balance c/d’.In such a case the amount is said to have debit balance which
means that the debit side is more.
In case credit side exceeds debit side ,the difference is written on the debit of the account
as ‘To balance c/d’.In such a case the amount is said to have credit balance which
means that the credit side is more.
Journalising, Posting and balancing of account are illustrated below:
1-1-2019 Started business with cash Rs.20,000
2-1-2019 Machinery purchased Rs.5,000
3-1-2019 Purchased goods for cash Rs.3,000
4-1-2019 Received commission Rs.1,000
Prepare cash account and find out cash balance?
51

1-1-19 Cash A/c Dr. 20,000
To Capital A/c 20,000
2-1-19 Machinery A/c Dr. 5,000
To Cash A/c 5,000
(Machinery purchased for cash)
3-1-19 Purchase A/c Dr. 3,000
To Cash A/c 3,000
(Cash purchase of goods)
4-1-19 Cash A/c Dr. 1,000
(Commission received)

1-1-19 To Capital A/c 20,000 2-1- By Machinery A/c 5,000
4-1-19 To commission 1,000 19 By Purchase A/c 3,000
3-1- By Balance c/d 13,000
19
21,000 5-1- 21,000
8-1-19 To Balance b/d 13,000 19
Trial Balance
Trial balance is a statement prepared to test the books kept under double entry system. It is
prepared with the debit and credit balances of ledger accounts and also with the debit and
credit totals of ledger accounts. If the total of the debit balances is equal to the total of credit
balances ,it is presumed that there is no mistake in posting and balancing.
Journalise the following transactions, prepare ledger accounts and also prepare Trial
Balance.
1-1-2019 Started business with cash Rs.20, 000
2-1-2019 Machinery purchased Rs.5, 000
3-1-2019 Purchased goods for cash Rs.3, 000
4-1-2019 Received commission Rs.1, 000.
5-1-2019 Opened a bank account Rs.3, 000
6-1-2019 Purchased goods and paid by cheque Rs.5, 00
7-1-2019 Salary paid by cheque Rs.1, 000
8-1-2019 Sold goods for cash Rs.2, 000
52
9-1-2019 Sold goods to Biju Rs.5,00

Prepare cash account and find out cash balance?
1-1-19 Cash A/c Dr. 20,000
To Capital A/c 20,000
2-1-19 Machinery A/c Dr. 5,000
To Cash A/c 5,000
(Machinery purchased for cash)
To Cash A/c 3,000
(Cash purchase of goods)
4-1-19 Cash A/c Dr. 1,000
5-1-19 Bank A/c Dr. 3,000
To Cash A/c 3,000
(Cash deposited into bank)

To Bank A/c 5,00
(Purchased goods and paid by cheque)
7-1-19 Salary A/c Dr. 1,000
To Bank A/c 1,000
(Salary paid by cheque)
8-1-19 Cash A/c Dr. 2,000
To Sales A/c 2,000
(Sold for cash)
9-1-19 Biju A/c Dr. 5,00
To Sales A/c 5,00
(Credit sales of goods)
36,000 36,000
1-1-19 To Capital A/c 20,000 2-1-19 By Machinery A/c 5,000
4-1-19 To commission 1,000 3-1-19 By Purchase A/c 3,000
8-1-19 To Sales 2,000 5-1-19 By Bank 3,000
19
23,000 23,000
8-1-19 To Balance b/d 12,000
53

10-1- To balance c/d 20,000 1-1-19 By Cash A/c 20,000
19
20,000 20,000
11-1-19 By Balance b/d 20,000
Dr. Machinery Account Cr.
2-1-19 To Cash A/c 5,000 10-1- By Balance c/d 5,000
5,000 19 5,000
11-1- To Balance b/d 5,000
19
Dr. Purchase Account Cr.
2-1-19 To Cash A/c 3,000
6-1-19 To Bank A/c 5,00
3,500

4-1-19 By Cash 1,000
1,000
Dr. Bank Account Cr.

5-1-19 To Cash A/c 3,000 6-1-19 By Purchase 5,00
7-1-19 By salary 1,000
19
3,000 3,000
19
54

7-1-19 To Bank A/c 1,000
1,000
Dr. Sales Account Cr.

8-1-19 By Cash 2,000
9-1-19 By Biju 5,00
2,500
Dr. Biju Account Cr.

9-1-19 To sales A/c 5,00 10-1- By Balance c/d 5,00
5,00 19 5,00
19
Trial Balance As on 10-1-19

Particulars L.F Debit Credit
Cash A/c 12,000
Capital 20,000
Machinery 5,000
Purchase 3,500
Commission 1,000
Bank 1,500
Salary 1,000
Sales 2,500
Biju 5,00
23,500 23,500
Advantages of journal:
1. It reduces the possibility of error
2. This practice provides a complete record of each transaction in one place and links the debits and
credits for each transaction.
3. Narration: Journal entries bear narrations, which provide complete information about the
transaction. It enables us to understand the entry.
55
4. Location of errors: Errors can be easily located through journal.

The source document is required to record the transaction in the journal.
Difference between Journal and Ledger
No. Journal Ledger
1 All transactions are first recorded in journal All transactions recorded in journal are
later transferred to ledger.
2. In journal transactions are recorded in In ledger transactions are recorded in

chronological order. analytical order, i.e , all transactions
pertaining to a particular account are
contained at one place in the ledger.
3 Final accounts can’t be prepared with the Final accounts can be prepared with
help of journal the help of ledger.
4 Process of recording entries in journal is Process of recording entries in the

called journalising. ledger is called posting.
Questions:
1. The book in which all accounts are maintained is known as:
(a. Cash Book b. Journal c. Purchase Book d. Ledger) Ans: d
2. Recording of transaction in the journal is called…………. Ans: Journalising
3. Find the correct statement:
i. Credit a increase in assets
ii. Credit the increase in expense
iii. Debit the increase in revenue
iv. Credit the increase in capital Ans:iv
4. Cash withdrawn by the proprietor should be credited to:
(a. Drawings A/c b. Capital A/c c. Cash A/c d. None of these) Ans:c
5. Which of the following is correct:
i. Liabilities = Assets + Capital
ii. Assets = Liabilities – Capital
iii. Capital = Assets – Liabilities
iv. Capital = Assets + Liabilities Ans: iii
6. If a firm takes a loan from a bank, there will be ……….
i. Increase in capital
ii. Decrease in capital
56
iii. No effect on capital Ans: iii

7. Balancing of accounts meanse:
i. Total of debit side
ii. Total of credit side
iii. Difference in total of debit and credit sides
iv. None of these Ans: iii
8. Cash discount is allowed by :
(a. Customer b. Debtor c. Creditor) Ans: c
9. ……….discount is allowed on both on cash as well as credit transactions. Ans: Trade
10. Withdrawal of goods by an owner for his private use must be ………..in the drawings
account.
(a. Debited b. Credited) Ans: a.
11. The transaction ‘started with cash’ results in…….
i. Increase in Expense
ii. Increase in assets
iii. Decrease in assets
iv. Decrease in liability Ans: ii
12. Accounts that normally have debit balances are ……….

i. Asssets, expenses and revenue
ii. Assets, expenses and capital
iii. Assets , liabilities and drawings
iv. Assets , drawings and expenses Ans: iv
13. Journals prepared on …………..basis.
a) Daily b. weekly c. monthly d. yearly) Ans: a
14. Math the following
A B
Cash Book Ledger
Salary Account Allowed by creditor
Cash Discount To increase sales volume
Trade Discount Primary Book
Ans:
B
Cash Book Primary Book
57
Salary Account Ledger
Cash Discount Allowed by creditor
Trade Discount To increase sales volume
15. Purchased goods from Johnson for cash.In this case which account is credited?
( a. Purchase b. Cash c. Johnson d. None of these) Ans: Cash
16. Fillin the blanks:
---------- A/c Dr. 2,000
To General Traders 2,000
(Purchased furniture from General Traders) Ans: Furniture
17. Goods returned by customers are also known as …………….
(a. Purchase return b. return outwards c. return inwards d. none of these) Ans: c
17. …………….is the basic record of a business transacion
(a . Journal entry b. Ledger c. account d. posting) Ans: a
18. Complete the following as per hint given:
No. Transaction Effect on Business

1 Salary paid ▪ Decrease in Asset
▪ Decrease in capital
2 Purchased goods from Ramesh ▪ ?
▪ ?
3 Commission received ▪ ?
▪ ?
4 Purchased machinery for cash ▪ ?
▪ ?
5 Cash received fro Ramesh ▪ ?
▪ ?
Ans:
No. Transaction Effect on Business
1 Salary paid ▪ Decrease in Asset
▪ Decrease in capital
2 Purchased goods from Ramesh ▪ Increase in Asset
▪ Increase in Liability
3 Commission received ▪ Increase in Asset
▪ Increase in capital
4 Purchased machinery for cash ▪ Increase in asset
▪ Decrease in asset
5 Cash received fro Ramesh ▪ Increase in asset
▪ Decrease in asset
58
17. Given below are some journal entries.

i. Give suitable narrations to these entries
ii. Explain the types of discount mentioned in the second entry.
1. Drawings A/c Dr. 2,000

To Purchase A/c 2,000
(…………………………………….)
2. Cash A/c Dr. 2,500
Discount A/c Dr. 500
To Rajan 3,000
(……………………………………….)
Ans:i. 1. Goods withdrawn for personal purpose, 2. Cash received Rs. 2500 and allowed a
discount Rs.500)
Ans: ii Cash discount is usually allowed by the supplier(Creditor) to the

customer(Debtor) to encourage prompt or early payment. It is an expense for the
business allowing and gain for the business availing it.
19. a. Assets = ………………+ Capital
b. Show the accounting equation on the basis of the following transactions
c. Prepare cash account from the above transactions.
i. Started business with cash Rs. 1,00,000
ii. Purchased goods for cash Rs. 20,000
iii. Purchased goods from Sunny Rs.10,000
iv. Commission Received Rs.1,000
v. Salary paid Rs. 3,000
Ans: i Assets = Liabilities + Capital

Ans: ii
Transactions Assets = Liabilities + Capital
1 Started business with +1,00,000 0 0 1,00,000
cash Rs. 1,00,000
New Equation 1,00,000 0 0 1,00,000
2 Purchased goods for -20,000 +20,000 0 0
cash Rs. 20,000
New Equation 80,000 20,000 0 1,00,000
3 Purchased goods from 0 +10,000 +10,000 0
Sunny Rs.10,000
New Equation 80,000 30,000 10,000 1,00,000
4 Commission received +1,000 0 0 +1,000
Rs. 1,000
59
New Equation 81,000 30,000 10,000 1,01,000

5 Salary paid Rs.3,000 -3,000 0 0 -3,000
New Equation 78,000 30,000 10,000 98,000
Ans: iii
Cash A/c
1 To Capital A/c 1,00,000 2 By Purchase A/c 20,000
4 To commission 1,000 5 By Salary 3,000
By Balance c/d 78,000
1,01,000 1,01,000
To Balance b/d 78,000
20. Prepare Ajmal Traders A/c from the following information for the month of December
2019. Is Ajmal traders a debtor or creditor?
2019 Dec-1 Started business with cash Rs.2,00,000
Dec 1 purchased goods from Ajmal Traders Rs. 60,000.
2019 Dec 5 paid Rs. 40,000 to Ajmal Traders.
2019 Dec 10 sold goods to Ajmal Traders Rs. 70,000.
2019 Dec 15 purchased Furniture from Ajmal Traders Rs. 20,000
2019 Dec 20 purchased Machinery from Ajmal Traders Rs. 75,000.
2019 Dec 25 paid Rs. 30,000 to Ajmal Traders.
Ajmal Traders A/c

5-12-19 To Cash 40,000 1-12-19 By Purchase 60,000
10-12-21 To sales 70,000 15-12-19 By Furniture 20,000
15-12-21 To Cash 30,000 20-12-19 By Machinery 75,000
31-12-19 To Balance 15,000
c/d
1,55,000 1,55,000
➢ Ajmal Traders is a creditor to our business.

21. Givea specimen of an account.
60
Transactions Assets = Liabilities + Capital

Cash Stock Furniture Creditors Capital
a Started business with +90,000 0 0 0 90,000
cash Rs. 90,000
b Purchased goods on 0 +40,000 0 +40,000 0
credit from Sajan
Rs.40,000
New Equation 90,000 40,000 0 40,000 90,000
c Sold goods for +30,000 -30,000 0 0 0
cashRs.30,000
New Equation 1,20,000 10,000 0 40,000 90,000
d Paid Rent Rs.5,000 -5,000 0 0 0 -5,000
New Equation 1,15,000 10,000 0 40,000 85,000
e Purchased machinery -5,000 0 +5,000 0 0
for cash Rs.5,000
New Equation 1,10,000 10,000 5,000 40,000 85,000
Prepared by BINOY GEORGE, HSST, MKNM HSS, Kumaramangalam,Thodupuzha ,Idukki Dt.
Chapter-4
Recording of Transactions-II
Focus Area: Public Examination September-2021
1. Special Journals
2. Single Column Cash Book
3. Double Column Cash Book
4. Petty Cash Book
5. Purchases Book
6. Sales Book
In case of small business, Journal is large and sufficient to record all transactions. But in large
business, there are numerous transactions and it is impossible to record all transactions in one
journal and division of work is not possible. So, in big business firms Journal is subdivided into special
journals or Day Books. Separate journals are kept for recording transactions of a similar nature, so,
journalising and posting will be easier and convenient.
Special Journal or Subsidiary Books

The journal in which transactions of similar nature only are recorded is called special journals or
subsidiary book or Day Books.
62
Types of Subsidiary Books or Day Books

1. Cash Book- to record all cash and bank transactions
2. Purchase Book- to record all credit purchase of goods
3. Purchase Return (Return Outwards) Book- to record purchase returns of goods
4. Sales Book- to record all credit sales of goods.
5. Sales Return (Return Inwards) Book- to record sales returns of goods
6. Journal Proper
1. Cash Book
Cash Book is the special journal used to record all cash and bank transactions. It starts with cash or
bank balances at the beginning of the period. All cash/bank receipts are recorded on the debit side
and all cash/bank payments are recorded on the credit side. It serves the purpose both journal as
well as ledger. So, when a cash book is maintained, transactions of cash are not recorded in the
journal and no separate account for cash/bank is required in the ledger.
Cash Book is both Journal and a Ledger (Cash Book is both a subsidiary book and a principal book)
When cash book is maintained, cash transactions are recorded directly in the cash book and are not
recorded in in the journal. As all the cash transactions are recorded for the first time in the cash
book, it is therefore a book of orginal entry,i.e. journal.Cash book is prepared and balanced like a
ledger account.So when a cash book is maintained, no separate cash account is opened in the ledger.
As such cash book is a journal as well as a ledger
Features of Cash Book:
1) All cash and Bank transactions are recorded in the Cash Book.
2) Cash book itself is a cash account also.
3) It is a real account.
4) In cash book transactions are recorded in chronological order.
5) It performs the function of Journal and ledger in the same time.
6) Cash book may be balanced daily, weekly or monthly depending on the needs of the
business. If cash book is balanced daily, one can ensure that balance shown in the cash book
is the same as the balance in the cash box.
7) Cash book always shows a Debit Balance. It is because a businessman cannot pay more cash
than what he has got. If the money is paid by borrowing from bank, it will first be recorded
on the receipts side and only then it will be shown on the payment side.
63
Types of Cash Book

1. Single Column Cash Book
2. Double Column Cash Book
3. Petty Cash Book
1. Single Column Cash Book: Cash Book is the special journal used to record all cash and bank
transactions. It starts with cash or bank balances at the beginning of the period. All cash/bank
receipts are recorded on the debit side and all cash/bank payments are recorded on the credit side.
It serves the purpose both journal as well as ledger. So, when a cash book is maintained, transactions
of cash are not recorded in the journal and no separate account for cash/bank is required in the
ledger.
Dr. Cash Book Cr.

Date Receipts L.F Amount Date Payments L.F Amount
Illustration:
Enter the following transactions of Maria Traders in a single column cash book and post them to
Ledger.
1-1-2019 Cash in hand Rs.50,000
2-1-19 Purchased goods for cash Rs.20,000
3-1-19 Sold goods for cash Rs.10,000
4-1-19 Purchased furniture for cash Rs.15,000
5-1-19 Purchased goods from Sojan Rs.3,000
8-1-19 Cash paid to Sojan Rs.3,000
10-1-19 Paid Salary Rs.2,000
11-1-19 Withdrew for personal purpose Rs.5,00
28-1-19 Deposited into bank Rs.2,000
30-1-19 Cash purchase Rs.1000
31-1-19 Received commission Rs.4,00
64
Dr. Cash Book Cr.

Date Receipts L.F Amount Date Payments L.F Amount
1-1-19 Balance b/d 50,000 2-1-19 Purchase 20,000
3-1-19 Sales 10,000 4-1-19 Furniture 15,000
31-1-19 Commission 4,00 8-1-19 Sojan 3,000
10-1-19 Salary 2,000
11-1-19 Drawings 5,00
28-1-19 Bank 2,000
30-1-19 Purchase 1,000
31-1-19 Balance c/d 16,900
60,400 60,400
1-2-19 Balance b/d 16,900
Books of Maria Traders

3-1-19 Cash 10,000

31-1-19 Cash 4,00

2-1-19 Cash 20,000
30-1-19 Cash 1,000
Dr. Furniture account Cr.

4-1-19 Cash 15,000
65
Dr. Sojan Account Cr.

8-1-19 Sojan 3,000

10-1-19 Cash 2,000
Dr. Drawings Account Cr.

11-1-19 Cash 5,00
Dr. Bank Account Cr.

28-1-19 Cash 2,000
single column cash book and banking transactions

In a business where there is no double column cash book, the banking transaction is also recorded
in the single column cash book itself.
Payment by cheque: Payment by cheques will not affect cash balance of the business, but it should
be recorded in the single column cash book as cash book is the original entry for recording banking
transactions also. In such a case it will be assumed that the money was withdrawn first from the
bank and the expenses were paid with that money. Therefore, cash book is debited for such amounts
and then credited with the same. It does not affect the cash book balance anyway.
Example: Rent paid by cheque Rs.2000
First Assumption: Cash withdrawn from bank
Cash A/c Dr 2,000
To Bank 2,000
(Cash withdrawn from bank)
66
Second Assumption: Expense was paid with that cash

Rent A/c Dr. 2,000
To Cash 2.000
(Rent paid)
Direct deposit by customers:
Customers often deposit money directly in the bank. This also needs to be recorded in the single
column cash book. In such a case it will be assumed that the money was collected first from the
customer and the same were deposited in the bank. In such a case it will be assumed that the money
was collected first from the customer and the same were deposited in the bank. Hence, cash book
is first debited and then credited with the same amount. It does not affect the cash book balance
anyway.
Example: Mathew, a customer directly Rs.5,000 into bank.
First Assumption: Cash received from customer/Mathew
Cash A/c Dr 5,000
To Mathew A/c 5,000
(Cash received from Mathew)
Second Assumption: Cash deposited into bank
Bank A/c Dr. 5,000
To Cash A/c 5,000
(Cash Deposited into bank)
2.Double Column Cash Book

Double column cash book is the cash book having two amount columns in each side. One amount
column is to record cash transactions and another amount column is to record bank transactions.
When double column cash book is maintained, there is no need to maintain separate cash or bank
account.
The cash column will always show a debit balance, but the opening balance of bank may be Debit or
Credit. In case of overdraft, the bank balance will be the credit balance.
All cash receipts (example cash sales of goods and asset, commission received,cash recived from
Sunny etc.) are recorded in the cash column on the debit side. All cash payments (Example cash
purchase of goods and asset,salary paid, cash paid to Jos etc.) are recorded in the cash column on
the credit side.
67
The bank column on the debit side records those transactions (interest allowed/credited by bank,
direct deposit by customers etc) which increases our bank balance. The bank column on the credit
side records those transactions (Bank charges, interest charged by bank, payment made by bank on
behalf of customers etc) which decreases our bank balance.
Contra Entries:
There are certain transactions which will appear on both sides of the cash book. This is so because
one aspect of the transaction affects the cash balance and other aspect affects the bank balance.
The entries that affect both sides of the cash book are called contra entries. Against such entries,
the letter ‘C’ (C stands for contra) should be written in the LF column on both sides to signify that
these entries are not be posted to the ledger.
Example :(1) Deposit cash or cheque into the bank (2) Withdrawal of cash from bank for office use.
Cash Book (Double Column)
Date Receipts L.F Cash Bank Date Payments L.F Cash Bank
Cash column-Debit side: All cash receipts.
Cash column-Credit side: All cash payments.
Bank column-Debit side: Transactions (interest allowed/credited by bank, direct deposit by

customers etc.) which increases our bank balance.
Bank column- Credit side: Transactions (Bank charges, interest charged by bank, payment made by
bank on behalf of customers etc.) which decreases our bank balance.
There are certain transactions (contra entries) which come both on the debit side and credit side of
the cash book.
Business and bank
A business man generally opens a current account with a bank. In case of current account, there is
no restriction regarding the number and amount of deposit and withdrawals. Account holder can
remit amounts into bank account using the form called ‘pay-in-slip’ or through internet banking. The
bank issues cheques, to the account holder for withdrawing money.
68
10-1-18 Paid Sunny by cheque Rs.3,000

12-1-18 Cash purchase Rs.5,000
14-1-18 Cash deposited into bank Rs.3,000
16-1-18 Cash sales Rs.4,000
21-1-18 Purchased furniture and payment made by cash Rs.8,000
22-1-18 Withdrew from bank for office use Rs.3,000
25-1-18 Received a cheque from Rajan and immediately deposited into the bank Rs.7,000
27-1-18 Rajan’s cheque returned by bank dishnoured Rs,7,000
28-1-18 Paid charity Rs.2,000
31-1-18 Paid into bank Rs.10,000
Cash Book (Double Column)
Date Receipts L.F Cash Bank Date Payments L.F Cash Bank
1-1-18 Balance b/d 60000 22000 2-1-18 Petty Cashier 1000
2-1-18 Sales 14000 8-1-18 Salary 5000
4-1-18 Vijay 2000 10-1-18 Sunny 3000
14-1-18 Cash C 3000 12-1-18 Purchase 5000
16-1-18 Sales 4000 14-1-18 Bank C 3000
22-1-18 Bank C 3000 21-1-18 Furniture 8000
25-1-18 Rajan 7000 22-1-18 Cash C 3000
31-1-18 Cash C 10000 27-1-18 Rajan 7000
28-1-18 Charity 2000
31-1-18 Bank C 10000
31-1-18 Balance c/d 54000 24000
83000 42000 83000 42000
1-2-18 Balance b/d 54000 24000
Note:
1. Closing cash in hand is Rs.55, 000.
2. Closing cash at bank is Rs.24, 000.
3. There is no need to prepare separate Cash A/c and Bank A/c.
70

Date Receipts J.F Amount Date Payments J.F Amount
2-1-18 Cash 14000
16-1-18 Cash 4000
Dr. Vijay Account Cr.

4-1-18 Cash 2000
Dr. Rajan Account Cr.

27-1-8 Bank 7000 25-1-19 Bank 7000
Dr. Petty Cashier Account Cr.

2-1-18 Cash 1000

8-1-18 Bank 5000
Dr. Sunny Account Cr.

10-1-18 Bank 3000

12-1-18 Cash 5000
Dr. Furniture Account Cr.

21-1-18 Cash 8000
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Dr. Charity Account Cr.

28-1-18 Cash 2000
3. Petty Cash Book

In every organization, a large number of small payments such as cartage, postage, telephone,
stationery, bus fare etc. They are generally repetitive in nature. If all these payments are made by
the main cashier and are recorded in the main cash book, the cashier will be overburdened with
the work and the cash book will also become very bulky. To avoid this, it is usual to appoint an
employee as ‘petty cashier. He is entrusted with the task of making small payments, say, below 1,000
and records them in a separate book, called petty cash book.
In some organisations ,where all cash receipts are paid into bank and all payments are made by
cheques,it becomes necessary to keep a separate subsidiary book known as petty cash book.Petty
cash book is used for recording cash payments which are too small to be paid by cheque.
The petty cash book is maintained by a petty cashier who works under the supervision of the main
cashier. The main cashier issues cheques or pay cash to the main cashier in the beginning of the
specified period, say a week or month. This amount will be sufficient to meet petty expenses for
that period.
Imprest system
Imprest means advavance made to a certain person. Petty cash book is usually maintained under
imprest system.Under imprest system, the petty cashier is given a definite sum of money, say Rs.1,
000, at the beginning of a certain period. This amount is called ‘imprest amount’. The petty cashier
goes on making all small payments out of this imprest amount and when he has spent the
substatantial portion of the impreset amount, say Rs.800, he gets reimbursement of the amount
spent from the main cashier. Thus, he again has the full imprest amount in the beginning of the next
period. For instance,Rs.1,000 are advanced to the petty cashier on 1 st January. If petty cashier
spends Rs.850 by the end of January , he will be again given Rs.850 so that after including Rs 150,
the balance amount, he will again restart with the original amount of Rs.1,000 on the 1 st day of
February. This system of petty cash book is called the imprest system.The reimbursement may be
made on a weekly, fortnightly or monthly basis, depending on the frequency of small payments.
Accounting procedure
Petty cash book is prepared just like a simple cash book having the debit and credit sides. Amount
received from the main cashier is recorded on the debit side,whereas the payments are recorded
on the on the credit side. On the credit side, a separate column is provided for each class of most
common expenses. Number of columns depends upon the nature of the particular business. Those
expenses that are not entered in any separate column are entered in a column designated as
‘Miscellaneous’ Expenses.
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When the petty cashier meets expenses, it is first entered in the total column on the payment side
and then extended to the appropriate head of the expenditure column. At the end of the period,
these analytical columns are added up. The sum total of these analytical columns will be equal to
the total payment column. The difference between the receipt column and total payment column
will give the petty cash balance. The sum of expenditure paid will be reimbursed by the main cashier
to the petty cashier.
Posting the Petty Cash Book
Entries in the Petty Cash Book are posted into the ledger accounts at the end of the specified period.
Petty cash book is considered as a memorandum book ( A simple 'list of petty expenses' is used as a
record so that business knows how much expenses paid as petty expenses).Petty expenses are not
directly posted to the ledger accounts.A petty cash account is maintained in the ledger.
When Petty cash is advanced to the petty cashier, the main cashier records it on the credit side of
the cash book as “By Petty Cash A/c”.
Journal entry:
1. When (beginning day) cheque or cash issued issued/paid by the main cashier to the petty
cashier.
Petty Cash A/c Dr xxxx
To Bank/ Cash xxxx
(Cash paid to petty cashier)
At the end of the specified period (Say a week), for the total expenses paid a journal entry is passed
by debiting individual petty expenses and crediting to Petty Cash account.
2. When all petty expenses posted to petty cash account

Expenses (Individually) xxxx
To Petty Cash A/c xxxx
(Petty expenses posted to petty cash account)
All the accounts relating to individual petty expenses are maintained in the ledger individually.
Posting is made on the debit side of these accounts by writing “ To Petty Cash A/c” in the particular
column.
Thus, in Ledger, there is a Petty Cash A/c as well as separate Ledger Accounts for each expenses.
Illustration:
Mr.John , the petty cashier of Ajmal Traders received Rs.3,000 on 1-4-2019 from the main
cashier.For the month,details of petty expenses are listed here under. Prepare an Analytical Petty
Cash Book on the Imprest System.
73
Date Details Amount

2-4-19 Auto fare 20
3-4-19 Cartage 20
4-4-19 Courier charges 60
5-4-19 Telephone charges 100
5-4-19 Postage stamp 70
6-4-19 Speed post charges 28
7-4-19 Refreshments 42
7-4-19 Office stationery 20
9-4-19 Auto fare 25
10-4-19 Registered postal charges 40
11-4-19 Bus fare 10
12-4-19 Photo stating charges 18
13-4-19 Auto fare 30
19-4-19 Cartage 27
21-4-19 Telephone charges 30
23-4-19 Courier charges 20
29-4-19 Office stationery 50
30-4-19 Bus fare 18
74
Books of Ajmal Traders

Petty Cash Book
Analysis of payments
Particulars
Received
Voucher
Amount
Amount
Date
Paid
No.
Miscellaneo
Telephone
Stationery
Travelling
Expenses
April
Charges
Postage
Rs. Rs.
2019
us
1000 01 Cash Received
02 Auto fare 20 20
03 Cartage 20 20
04 Courier charges 60 60
05 Telephone charges 100 100
05 Postage Stamp 70 70
06 Speed post charges 28 28
07 Refreshment 42 42
07 Office stationery 20 20
09 Auto fare 25 25
10 Reg. postal charges 40 40
11 Bus fare 10 10
12 Photo stating charges 18 18
13 Auto fare 30 30
19 Cartage 27 27
21 Telephone charges 30 30
23 Courier charges 20 20
29 Office stationery 50 50
30 Bus fare 18 18
628 218 130 103 70 107

30 Balance c/d 372
1000 1000
May
372 01 Balance b/d
628 01 Cash received
75
Posting from the petty cash book

The petty cash book is balanced periodically. The difference between the total receipts and total
payments is the balance with the petty cashier. The balance is carried to the next period and the
petty cashier is paid the amount actually spent. A petty cash account is opened in the ledger. Petty
cash book is considered as a memorandum book. When Petty cash is advanced to the petty cashier,
the chief cashier records it on the creditside of the cash book as ‘ Petty Cash A/C”.
Journal Entry: When amount is advanced to the petty cashier by the main cashier
Petty Cash A/c Dr.
To Cash A/c
At the end of a specified period, for the total expenses paid a journal entry is passed by debiting
individual petty expenses and crediting to Petty Cash A/c. All the accounts relating to petty expenses
are maintained by in the ledger individually.Posting is made on the debit side of these accounts by
writing “ Petty Cash a/c”
Journal Entry: On Submission of Petty Cash A/c by the Petty Cashier.
Expenses A/c Dr.
To Petty Cash A/c
Note-1 Each expens is debited separately with the expenditure incurred during the period as shown
by the petty cash book
Note-2 In the ledger, there is Petty Cash A/c as well as separate Ledger Account for each expense.
Journal
1-4-19 Petty Cash A/c Dr. 1,000
To Cash A/c 1,000
30-4-19 Postage A/c Dr. 218
Telephone Charges A/c Dr. 130
Travelling Expenses A/c Dr. 103
Stationery A/c Dr. 70
Miscellaneous Expenses A/c Dr. 107
To Petty cash A/c 628
(Petty expenses posted to petty cash
account)
01-5-19 Petty Cash A/c Dr. 628

To Cash A/c 628
76

LEDGER
Dr. Petty Cash Account Cr.
1-4-19 Cash A/c 1000 30-4-19 Postage A/c 218
30-4-19
Telephone
Charges A/c 130
30-4-19 Travelling
Expenses A/c 103
30-4-19
30-4-19 Stationery A/c 70
Miscellaneous
Expenses A/c 107
30-4-19
Balance c/d 372
1000 1000
1-5-19
1-5-19
Balance b/d 372
Cash 628
Dr. Postage Account Cr.

30-4-19 Petty Cash A/c 218
Dr. Telephone Charges Account Cr.

Dr. Travelling Expense Account Cr.

77
Dr. Stationery Account Cr.

Dr. Miscellaneous Expenses Account Cr.

Advantages of maintaining petty cash book

1. Saving of time and efforts of chief cashier:The chief cashier is not required to deal with petty
disbursements.He can concentrate on cash transactions involving large amount of cash.
2. Effective control over cash disbursement: Cash control become easy because of division of work.
3. Easiness in posting: Only the total of each head of expense is posted into the ledger .As such, a lot
of space is saved and the posting becomes very convenient.
Purchase Book or Purchase Day Book or Purchase Journal

All credit purchases of goods are recorded in the purchase book. The source documents for
recording entries in the books are invoices or bills received by the firm from suppliers of
goods.Entries are made with the net amount of invoice. Trade discount and other details of invoice
need not be recorded in the book.
Following items are not recorded in the purchase day book:
1. Cash purchase of goods.
2. Purchase of assets. Cash purchases of assets are recorded in cash book. Credit purchases of assets
are recorded in Journal Proper.
Purchase Day Book
Date Invoice Name of Supplier L.F Amount
No. (Account to be credited)
78
Difference between Purchase Day Book and Purchase Account

Purchase Book Purchase Account
Purchase book is a part of Journal Purchase Account is the part of Ledger
Purchase book records only credit purchase Purchase account records cash as well as
of goods. credit purchase of goods.
Illustration : Consider the following details obtained from Anju Traders and prepare Purchase Day
Book.
2019 Purchased from Bijoy Electronics (Invoice No.5588) 10 Miixi @ Rs.2500 per
Jan.1 piece, 15 DVD players @ RS 1000 per piece. Trade discount on all items
@10%.
Jan.7 Purchased from A Star Electronics (Invoice No. 4250): 10 Heaters @ Rs.350
per piece, 20 CFL bulbs @ Rs. 150 per bulb. Trade discount @ 20% on
purchases.
Jan.10 Purchased furniture from Ale Furniture Mart as per invoice No.1216
2 Chairs @ 500 per Chair
3 Tables @ 2000 per Table
Jan.12 Bought from Bijoy Electronics (Invoice No 5599) 10 Colour TV @ Rs.12000
per TV, 10 Table Fans @ Rs.2000 per fan. Trade discount @ 10%.
Jan.17 Purchased from A Star Electronics (Invoice No. 4280): 20 Heaters @ Rs.350
per piece, 20 Tube lights @ Rs. 50 per tube light. Trade discount @ 20% on
purchases.
Books of Anju Traders

Purchase Day Book
2019
Jan.1 5588 Bijoy Electronics 36,000
Jan.7 4250 A Star Electronics 5,200
Jan.12 5599 Bijoy Electronics 1,26,000
Jan.17 4280 A Star Electronics 6,400
Jan.31 1,73,600
79
OR
Purchase Day Book (Traditional Method)
2019
Jan.1 5588 Bijoy Electronics:
10 Miixi @ Rs.2500 25000
15 DVD players @ RS 1000 15000
40000
Less: Trade discount @10%. 4000 36,000
Jan.7 4250 A Star Electronics:

10 Heaters @ Rs.350 3500
20 CFL bulbs @ Rs. 150 3000
6500 5,200
Trade discount @ 20% 1300
Jan.12 5599 Bijoy Electronics:
10 Colour TV @ Rs.12000 120000
10 Table Fans @ Rs.2000 20000
140000 1,26,000
Less:Trade discount @ 10%. 14000
Jan.17 4280 A Star Electronics:
20 Heaters @ Rs.350 7000
20 Tube lights @ Rs. 50 1000
8000 6,400
Less:Trade discount @ 20% 1600 1,73,600
Jan.31 Total
Posting from Purchase Day Book

1. Posting from purchase day book is done daily to their respective accounts with the relevant
amounts on the credit side.
2. The total of the purchase day book is periodically posted to the debit of the purchases account
normally on the monthly basis.
80

Purchase Ledger
Dr. Bijoy Electronics Cr.
2019
Jan1 Purchase 36,000
Jan 12 Purchase 1,26,000
Dr. A Star Electronics Cr.

2019
Jan7 Purchase 5,200
Jan 17 Purchase 6,400
General Ledger
2019 Sundries as per
Jan 31 Purchase Day
Book for January 1,73,600
Sales Day Book or Sales Journal

All credit sales of goods are recorded in the Sales Day book. The source documents for recording
entries in the books are invoices or bills issued by the firm to the customers.
Following items are not recorded in the Sales day book:
1. Cash sales of goods.
2. Sales of assets. Cash sales of assets are recorded in cash book. Credit sales of assets are recorded
in Journal Proper.
Purchase Day Book
Date Invoice Name of Customer L.F Amount
No. (Account to be debited)
81
Difference between Sales Day Book and Sales Account

Sales Book Sales Account
Sales book is a part of Journal Sales Account is the part of Ledger
Sales book records only credit sales of goods. Sales account records cash as well as credit
sales of goods.
Illustration : Record the following transactions of Anjana Traders un their sales book.
1-1-20 Sold goods on credit to M/s Raja traders (Invoice No.115):
40 shirts @ Rs.400
20 trousers @ Rs.100 each.
8-1-20 Sold goods on credit to M/s Sharan traders (Invoice No.116):
200 shirts @ Rs.400 each
800 trousers @ Rs.100 each
Less: Trade discount @ 10%
10-1-20 Sold goods on credit to M/s Raja traders (Invoice No.117):
13-1-20 Sold goods for cash to M/s Sundaram Traders (Invoice No.120)
Books of Anjana Traders
Sales day Book
1-1-20 115 Raja traders: 16200
8-1-20 116 Sharan traders: 144000

10-1-20 117 Raja Traders: 72000
232200
Total
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Books of Anjana Traders (Traditional Method)

Sales day Book
1-1-20 115 Raja traders:
40 shirts @ Rs.400 16000
20 trousers @ Rs.100 each. 2000
18000
Less Trade Discount 10% 1800 16200
8-1-20 116 Sharan traders:
200 shirts @ Rs.400 each 80000
800 trousers @ Rs.100 each 80000
160000
Less: Trade discount @ 10% 16000 144000
10-1-20 117 Raja Traders:
100 shirts @ Rs.400 each 40000
400 trousers @ Rs.100 each 40000
80000
Less: Trade discount @ 10% 8000 72000
Total 232200
Sales Ledger
Dr. Raja Traders Cr.
1-1-20 Sales 16200
10-1-20 Sales 72000
Dr. Sharan Traders Cr.

8-1-20 Sales 144000
83
General Ledger
31-1-20 Sundries as per 232200
sales book
1. The purchase Day Book contains--------- (March 2011)
a. All purchases b. Credit purchases of goods c. Cas purchases of goods Ans:b
2. Which of the following is not a book of original entry? (March-2011)
a. Cash Book b. Ledger c. Purchase Book Ans: Ledger
Note: Ledger is a book of final entry/secondary entry

3. Sales journal records all --------sales of goods. Ans: Credit (Marh-2010)
4. Fixed asset purchased on credit is recorded in-------journal Ans: Journal proper
5. Cash Book does not record------transactions. Ans: Credit
6. Credit balance shown by a bank column in cash book is……….. Ans: Overdraft
7. Cash purchase goods are recorded in-------book. Ans: Cash Book
8. Cash discount is recorded in --------subsidiary book. Ans: Journal proper
9. Double column cash book records transactions relating to…….and…… Ans: Cash, Bank
10. Total sales made during a particular period can be arrived at from…….
a. Sales Book
b. Sales Account
c. Cash Book
d. None of the above Ans: Sales Account
11. ‘Debit Note’ is associated with………
a. Purchase returns
b. Sales returns
c. Purchases
d. Sales Ans:a
12. When a firm maintains a cash book, it need not maintain:
a. Journal proper b. Purchase Book c. Bank and cash account in ledger Ans: c
13. Total of these transactions is posted in purchase account:
a. Purchase of furniture
b. Cash and credit purchase of goods
c. Purchases return
d. Only credit sales of goods Ans:b
84
14. When a firm maintains a cash book , it need not maintain………..account in the ledger.
Ans: Cash
15. Which is not a contra entry in the cash book
a. Cash deposited into bank
b. Cash withdrawn from bank
c. Cash withdrawn from bank for personal use
d. None of these Ans: c
16. Which of the following is not recorded in cash book.
17. ……..is the book used to record small cask payments. Ans: Petty cash book
a. Trade discount
b. Bad Debts
c. Depreciation
d. All the above Ans: d
18. A cheque received and depositedinto bank the same day will be recorded in cash bookin
a. Cash column on debit side
b. Cash column on credit side
c. Bank column on debit side
d. Bank column on credit side Ans:c
Match the followings:

1. Question Answer
A B A B
Purchase Day Book Debit Note Purchase Day Book Invoice
Sales Return Book Voucher Sales Return Book Credit Note
Cash Book Credit Note Cash Book Voucher
Purchase Return Book Invoice Purchase Return Book Debit Note
85
Match the followings:

2. Question Answer
A B A B
Debit Note Petty Cash Debit Note Source
Book Document
Cash Book Return Cash Book Journal and
inwards book ledger
Contra Entry Source Contra Entry Two sides in
Document cash book
Imprest system Journal and Imprest system Petty Cash
ledger Book
Sales Returns Book Two sides in Sales Returns Book Return
cash book inwards book
Short answers:
1. What are special purpose books?
2. What is a petty cash book?
3. What do you understand by imprest amount in petty cash book?
4. Briefly state how the cash book is both journal and a ledger?
5. What are the differences between Purchase Day Book and Purchase Account?
6. Define the purpose of maintaining subsidiary journal/Day Books?
Long Answers
1. What is cash Book? Explain the types of cash book.
2. What is contra entry? How can you deal this entry while preparing double column cash
book?
3. What is petty cash book? Write the advantages of petty cash book?
Prepared by BINOY GEORGE, HSST,MKNM HSS,Kumaramangalam,Thodupuzha,Idukki Dt.
86
Chapter-5
Bank Reconciliation Statement [BRS]

Focus Area- Public Examination September-2021
1. Concept of Bank Reconciliation Statement
2. Causes of differences between the cash book and the bank passbook.
In a business, there are numerous transactions takes place. Most of them are banking
transactions. Business man will be recorded these banking transactions in the bank column
of the cash book. Banks also records these transactions in their book called passbook. Due
to various reasons like timing, errors etc., bank balance as per cash book may not tally with
the balance reflected in passbook. Hence, we have to ascertain the causes of such
difference. The account holder usually prepares a statement to find out the reason for the
difference between cash book and passbook balance, which is called Bank Reconciliation
Statement.
Bank Reconciliation Statement (BRS)
It is a statement prepared by the account holder (customer) of a bank to reconcile the
bank balance as per cash book with the balance as per passbook. This statement will
show the reasons for the disagreement between the cash book and passbook. In order
to prepare a bank reconciliation statement, we need to have a bank balance as per cash
book and pass book on a particular date along with details of both the books. BRS is not a
part of Bookkeeping. It is a technique to reconcile/ resolve bank balance in Cash Book with
balance reflected in Passbook.
Cash Book:
Closing balance of double column cash column reflects cash in hand and bank column
reflects cash at bank /bank overdraft. Debit balance of Cash Book means deposit/favorable
balance and credit balance means Overdraft
At the time of preparation of Bank Reconciliation Statement, we consider only Bank column
of the double cash book.
Pass book:
Bank also records transactions and maintains accounts of every customers. Passbook is a
copy of customer’s account as it appears in the ledger of the bank It will be observed that a
bank statement/passbook shows all deposits in the credit column and withdrawals in the
debit column. Thus, if deposits exceed withdrawals it shows a credit balance and if
withdrawals exceed deposits it will show a debit balance (overdraft). Credit balance of
Passbook means deposit/favorable balance and debit balance in passbook means
Overdraft.
87
Bank Overdraft:
Bank overdraft is the overdraft facility provided by the banks under which customers can
withdraw money more than their account balance. Credit balance in cash book /Debit
balance in passbook means ‘Bank overdraft’.
Need and importance of preparing Bank Reconciliation Statement
BRS is prepared because of the following reasons:
1. BRS helps to ascertain the causes of difference between pass book and cash book.
2. It brings out errors if any, committed either in the Cash book or in the pass book.
3. Unnecessary delay in the clearance of cheques deposited is known from the reconciliation.
4. Reconciliation helps in verifying the accuracy of entries recorded in the cash book.
5. Regular reconciliation discourages embezzlements (fraudulent behavior).
6. It shows actual bank balance.
Causes of the difference between balance as per passbook and balance as per cash book
We can classify the reasons for the difference into two categories:
I. Difference Due to Timing: There is always a time gap between recording a transaction in the Cash
book and it being recorded by the bank. For example a cheque issued to a creditor is immediately
recorded in the cash book but bank may record it only on a later date when it actually presented for
payment. Thus ,there is always a time gap in recording entries in the two books, i e., cash book and
pass book. If BRS is prepared in between the two dates, differences will exist.
II. Difference due toErrors: Errors may be committed by the account holder or bank and these errors
result in difference in the balances of cash book and pass book. For example, wrong balance may be
carried forward, a transaction may not have been in the cash book or amount of a transaction may
have been wrongly recorded in an account.
Causes of differences between the cash book and the bank passbook
I. Difference Due to Timing (Timing difference)
1) Cheque issued but not yet presented for payment:

2) Cheque paid(deposited) into the bank but not yet collected.
3) Interest credited (interest on investment/allowed) by bank recorded only in passbook.
4) Interest and dividend collected by bank:
5) Payments made by bank on behalf of the account holder.
6) A customer directly deposited into our bank account.
7) Dishonor of a Bill Discounted with the Bank
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II.Difference due to Errors
1) Errors committed in recording transaction by the firm.

2) Errors committed in recording transaction by the bank.
I. Difference Due to Timing (Timing difference)

1) Cheque issued but not yet presented for payment:
When a trader issued cheques to his creditors, he immediately recorded it in the credit side of the
cash book, but the bank will record the same in pass book only when it is actually presented for
payment. If we compare the cash book with passbook between these two days there will be a
difference between the two.
2) Cheques deposited into bank but not yet collected:
Cheque deposited into bank for collection immediately recorded in the receipt/debit side of the
cash book. It will increase the deposit balance of cash book. But bank credit the account holders
account only after realization of the cheque. If we compare the cash book with passbook between
these two days there will be a difference between the two.
3) Interest credited (interest on investment/allowed) by bank recorded only in pass book.
Interest on deposit will be credited by bank on time. It will increase the deposit balance of
passbook. But the account holder will record the transaction in cash book only after receiving the
notification. Till that time, the balance as per pass book would be higher than the balance as per
Cash Book.
4) Interest charged (interest on loan) and bank charges recorded only in pass book
Bank debits the account holder’s account in its book with the amount of interest on overdraft or
Bank Charges. But account holder will record it in the credit side of the cash book only after receiving
the notification. If we compare the cash book with passbook between these two days , balance as
per passbook would be lower than the balance as per Cash Book.
5) Interest and dividend collected by bank:
Sometimes bank collects interest and dividend on behalf of the account holders and credit them to
the account holders account. But account holder will record it in the debit side of the cash book
only after receiving the notification. If we compare the cash book with passbook between these
two days, balance as per pass book would be higher than the balance as per Cash Book.
6) Payments made by bank on behalf of the account holder
The bank might have made some payments like insurance premium, telephone bill etc. on behalf of
the customer as per the standing Instruction of the account holder and debited the customer’s
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account. When the bank makes the payment, it will debits the customer’s account. But account
holder will record it in the credit side of the cash book only after receiving the notification. If we
compare the cash book with passbook between these two days, balance as per pass book would be
lower than the balance as per Cash Book.
7) A customer directly deposited into our bank account
If payment is received by the bank directly, it will record (credit) it in the account holder’s account.
But the account holder will record the transaction in cash book only after receiving the notification.
If we compare the cash book with passbook between these two days, the balance as per pass book
would be higher than the balance as per Cash Book.
8) Dishonor of a Bill Discounted with the Bank
To meet the working capital requirements, the businessman usually discounts the bills of exchange
with his bank. If on the date of maturity, such a bill is dishonored, the bank will debit the customer’s
account immediately. But the customer will make this entry in his book only after getting the
notification from his bank. If we compare the cash book with passbook between these two days,
balance as per pass book would be lower than the balance as per Cash Book.
II.Difference due to Errors
1) Errors committed in recording transaction by the firm.
Omission or wrong recording of transactions relating to cheques issued, cheques deposited and
wrong totaling etc., committed by the firm while recording entries in the cash book cause difference
between cash book and passbook balance.
2) Errors committed in recording transaction by the bank.
Omission or wrong recording of transactions relating to cheques deposited and wrong totaling
etc., committed by the bank while posting entries in the passbook cause difference between
passbook and cash book balance.
Important points
1. Date: Bank Reconciliation Statement is prepared on a particular date.
2. Bank reconciliation statement is prepared by the customer of a bank.
3. Debit balance of Cash Book means deposit/favorable balance and credit balance in cash
book means Overdraft.
4. Credit balance of Passbook means deposit/favorable balance and debit balance in passbook
means Overdraft.
QUESTIONS
Fill in the blanks :
(i) Passbook is a copy of.............as it appears in the ledger of the bank. [Customer’s Account]
(ii) When money is with drawn from the bank, the bank ............. the account of
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the customer. [Credit] Hint: Credit balance of Passbook means deposit

(iii) Normally, the cash book shows a debit balance, passbook shows
.............balance. [Credit]
(iv) Favourable balance as per the cash book means .............balance in the bank
column of the cash book. [Debit]
Select the Correct Answer:
1. A bank reconciliation statement is prepared by:
(a) Creditors (b) Bank
(c) Account holder in a bank (d) Debtors Ans: C
2. A bank reconciliation statement is prepared with the balance:
(a) Passbook (b) Cash book
(c) Both passbook and cash book (d) None of these Ans: C
3. Passbook is a copy of:
(a) Copy of customer Account (b) Bank column of cash book
(c) Cash column of cash book (d) Copy of receipts and payments Ans: A
4. Unfavorable bank balance means:
(a) Credit balance in passbook (b) Credit balance in cash book
(c) Debit balance in cash book (d) None of these Ans: B
5. Favourable bank balance means:
(a) Credit balance in the cash book (b) Credit balance in passbook Ans:B
(c) Debit balance in the cash book (d) Both (b) and (c)
6. A bank reconciliation statement is mainly prepared for:
(a) Reconcile the cash balance of the cash book.
(b) Reconcile the difference between the bank balance shown
by the cash book and bank passbook
(c) Both (a) and (b)
(d) None of these Ans: B
7.--------balance in cash book means bank overdraft.
a.Debit b. Credit c. Both debit and credit Ans: Credit
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8. Bank charge is an ------to the customer.

(a.Expense b.Income c.Asset) Ans: Expense
9. Credit balance in the passbook means a/an------to the account holder.
(a. Asset b. Liability c. Capital d. Expense e. Income) Ans: Asset
10. Bank reconciliation statement is prepared
a. to know the payment made through checques
b. to know the errors in the passbook
c. to compare the cash book with passbook and ascertain the differences
d. None of the above Ans: C
Q.Read the following transactions and identify the cause of difference on the basis of time
gap or errors made by business firm/bank. Put a sign(X) for the correct cause.
Si.No Transactions Time Gap Errors made by
business/bank
1. Cheque deposited but not cleared X
2. Cheque issued but omitted to record it in the cash X
book
3. Cheque issued but not presented for payment X
4. Interest and dividend credited in the passbook only X
5. Cheque amounting to Rs.15,000 issued to Sasidharan X
but recorded as Rs.5,000 in the cash book
6. Direct payment by a customer to the bank X
7. Bank charges seen only in passbook X
Short Answers Type Questions
1. State the causes of difference occurred due to time lag.
2. What is a bank overdraft?
3. Briefly explain the ‘favourable balance’ as per cash book.
4. State the need for the preparation of bank reconciliation statement (BRS)?
5. Explain any two reasons on account of which the balance as shown by the pass book
does not agree with the balance as shown by the bank column of the Cash Book?
Short Answers Type Questions
1. What is a bank reconciliation statement? Why is it prepared?
2. What are the various reasons for the difference between balance as per cash book and
passbook?
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Bank Reconciliation Statement(BRS) with Deposit Balance

Bank Reconciliation Statement As on--------
Particulars (+)Amount (-)Amount

Debit (Favourable) balance as per Cash Book XXXX
Cheque issued but not presented for payment XXXX
Interest credited by bank but not recorded in cash book XXXX
Direct deposit into bank account not recorded in the XXXX
cash book
Dividend collected by bank recorded only in pass book XXXX
Cheque deposited but not yet collected and credited by

bank XXXX
Bank charges, interest on overdraft debited in the pass
book not recorded in cash book XXXX
Discounted bill recorded only in pass book XXXX
Balance as per Pass Book ? ?
XXXX XXXX
prepared by- BINOY GEORGE, HSST,MKNM HSS, Kumaramangalam, Thodupuzha, Idukki Dt.
Chapter-6
Trial Balance and Rectification of Errors
Focus Area-Public Examination September 2021
1. Meaning of Trial Balance
2. Objectives of preparing Trial Balance
3. Preparation of Trial Balance- Balance Method
According to dual aspect concept every business transaction has two aspects, one
aspect/account is to be debited and another aspect/ account is to be credited. Dual aspect
concept assures that the sum of all debits equals the sum of all credits. The Trial Balance is a
tool for verifying the correctness of debit and credit amounts. It is an arithmetical check under
the double entry system which verifies that both aspects of every transaction have been
recorded accurately. This chapter explains the meaning and process of preparation of trial
balance and the types of errors and their rectification.
Trial Balance
Trial Balance is a statement showing balances or total of debit and credit of all the accounts
prepared under double entry system. Its main purpose is to test the arithmetical accuracy of the
ledger accounts. It also hep to locating errors and act as a base for the preparation of financial
93
statements. It is normally prepared at the end of an accounting year. However, an organisation

can prepare a trial balance at any time, which may be monthly, quarterly, half yearly or annually
depending upon its requirements. Trial balance is not a part of double entry system. Its
preparation is not compulsory, it is optional.
Format of a Trial Balance (Balance Method)
Trial Balance As on---------
Name of Accounts L.F. Debit Credit
Total
Objectives of Preparing Trial Balance
1) To ascertain the arithmetical accuracy of the ledger accounts: The trial
balance provides a useful check upon the ledger posting. If a trial balance tallies, it is
assumed that the posting to ledger account is correct.
2) To help in locating errors: If a Trial Balance does not tally, it indicates that some
errors have occurred.
3) To help in the preparation of final accounts: For preparing final account, ledger
account balances are essential. A trial balance provides all ledger account balances.
Methods of preparing Trial Balance
There are mainly two methods of preparing Trial Balance:
1. Balance Method
2. Total Method
3. Total-cum-balances Method
1. Balance Method: This is the most widely used method of preparing trial Balance. Under
this method trial balance is prepared by showing the balances of all ledger accounts. The
balance amount of accounts with debit balance will be recorded in the debit amount column of
the Trial Balance and the balance amount of accounts with credit balance will be recorded in
the credit amount column of the Trial Balance. The total of both the debit and credit columns
must be equal.
2. Total Method: Under this method the total of each side in the ledger (debit and credit) is
ascertained separately and shown in the trial balance in the respective (Debit/ credit)
columns. The total of the debit and credit columns must be equal. This method is not widely
used in practice as it does not help in assuming accuracy of balances of various accounts and
preparation of financial statements.
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Steps in Preparing Trial Balance

In order to prepare a trial balance following steps are taken:
1. Ascertain the balances of each account in the ledger.
2. The balance of each account should be placed in the debit or credit column of the Trial
Balance, as the case may be. (If an account has a zero balance, it may be included in the trial
balance with zero in the column for its normal balance).
3. Compute the total of debit and credit balances columns of the Trial Balance.
4. Verify that the sum of the debit balances equals the sum of credit balances. If they do
not tally, it indicates that there are some errors.
5. Creating suspense account. (if necessary) If there is any difference in trial Balance and it
can’t be rectified before the preparation of financial statement, the difference is placed in a
temporary account called suspense account.
Accounts can be classified into 5, i.e., assets, liabilities, capital, expenditure,
income.Nature of the above said assets:-
Asset and Expenses- DEBIT Balances
Liabilities, Capital and Income – CREDIT Balance
Illustration
John started business on 1-1-2020 with a capital of Rs.2,00,000. His transaction for the
month of January were as follows:
2020 Jan-1 Opened a current account with SBI Rs.30,000
Jan-3 Purchased Machinery from A Ltd and paid by cheque Rs.10,000
Jan-4 Purchased goods for cash Rs.15,000
Jan-7 Purchased goods from B Ltd Rs.8,000
Jan-8 Sold goods for cash Rs.1,000
Jan-9 Sold goods to Bimal Rs.500
Jan-10 Paid salary Rs.5,000
Jan-11 Received commission Rs.2,000
Jan-14 Purchased goods from Krishnan Rs. 6,000
Jan-15 Paid salary Rs.1,000
Jan-17 Purchased machinery from JK Furnitures Rs.10,000
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Pass journal entries, prepare ledger accounts and also prepare Trail Balance under-
Balance Method
Ans: Journal
1-1-20 Cash A/c Dr. 2,00,000
1-1-20 Bank A/c Dr 30,000
To Cash 30,000
(Deposited into bank)
3-1-20 Machinery A/c Dr 10,000
To Bank 10,000
(Machinery purchased and paid by
cheque)
4-1-20 Purchase A/c Dr 15,000
To Cash 15,000
(Purchase goods for cash)

To B Ltd 8,000
(Purchased goods from B Ltd)
8-1-20 Cash A/c Dr 1,000
To Sales 1,000
(sold goods for cash)
9-1-20 Bimal A/c Dr 5,00
To Sales 5,00
(Sold goods to Bimal)
10-1-20 Salary A/c Dr. 5,000
To Cash 5,000
(Salary paid)
11-1-20 Cash A/c Dr 2,000
To Commission 2,000
To Krishna 6,000
(Purchased goods from Krishna)
15-1-20 Salary A/c Dr 1,000
To Cash 1,000
(Salary paid)
17-1-20 Machinery A/c Dr 10,000
To Jk Furnitures 10,000
(Machinery purchased on credit)
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18-1-20 Purchased A/c Dr 5,000

To B Ltd 5,000
(Purchased goods from B Ltd)
Ledger
Dr. Cash A/c Cr.
1-1-20 To Capital 2,00,000 1-1-20 By Bank 30,000
8-1-20 To Sales 1,000 04-1-20 By Purchase 15,000
11-1-20 To commissiom 2,000 10-1-20 By Salary 5,000
15-1-20 By Salary 1,000
18-1-20 By Balance c/d 1,52,000
2,03,000 2,03,000
Dr. Bank A/c Cr.

1-1-20 To Cash 30,000 3-1-20 By Machinery 10,000
18-1-20 By balance c/d 20,000
30,000 30,000
Dr Capital A/c Cr.

18-1-20 To Balance c/d 2,00,000 1-1-20 By Cash 2,00,000
2,00,000 2,00,000
Dr. Machinery A/c Cr.
3-1-20 To Bank 10,000 18-1- By Balance c/d 20,000
17-1-20 To JK Furnitures 10,000 20
20,000 20,000
Purchase Account
4-1-20 To Cash 15,000
7-1-20 To B Ltd 8,000
14-1-20 To Krshna 6,000
18-1-20 To B ltd 5,000
34,000
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8-1-20 By Cash 1,000
9-1-20 By Bimal 5,00
1,500
Dr. Bimal A/c Cr.

9-1-20 To Sales 500 18-1-20 By balance c/d 5,00
5,00 5,00
10-1-20 To Cash 5000
15-1-20 To Cash 1,000
6,000
Dr. Commission A/c Cr.

11-1-20 By Cash 2000
2,000
Dr. Krishnan A/c Cr.

18-1-20 To Balance c/d 6,000 14-1- By Purchase 6,000
6,000 20 6,000
Dr. JK Ltd A/c Cr.

18-1-20 To Balance c/d 10,000 14-1-20 By Machinery 10,000
10,000 10,000
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can be errors, which affect the equality of debits and credits, and there can be errors, which do
not affect the equality of debits and credits.
1. Trial Balance is a………….
a) An account
b) A statement
c) Day book
d) Journal Ans: b
2. Which of the following statement is wrong regarding trial balance:
a) It is not an account
b) It is prepared to check the arithmetical accuracy
c) Trial balance is a part of double entry system
d) All of these Ans: c
3. Trial Balance is a list of the balances of ……….
a) Only personal and real accounts
b) Only real and nominal accounts
c) Only nominal accounts
d) All accounts Ans: d
4. Trial balance is prepared according………..method.
a. Total method
b. Balance method
c. Balance cum total method
d. All the above Ans: d
5. Asset account shows ………….balance.
a) Debit
b) Credit
c) Debit or credit
d) All the above Ans: a
6. Preparation of trial balance is………..
e. Optional
f. Compulsory
g. As per Government decision Ans: Optional
Short Answer Type:
1. Trial Balance is not an account. Is it correct? Give reason?
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Trial Balance is not an account. It is a statement which shows the names and balances of
all accounts in the ledger and cash book of an organization at any given date.
2. Trial balance facilitates the preparation of final accounts (Trading profit and loss A/c and
Balance Sheet). Is it correct? Give reason.
Yes. Trial Balance facilitates the preparation of Final Account of an enterprise by making
available the balances of all the accounts at one place.
3. Give two features of Trial Balance?
➢ It can be prepared at any time
➢ It is a list of balances of all Ledger accounts and Cash Book
4. Give three objectives of preparing Trial Balance?
➢ To help in locating errors
➢ To facilitate the preparation of final accounts
➢ To check the arithmetical accuracy of the ledger accounts
5. What is a Trial Balance? What are the different columns of a Trial Balance?
Trial Balance is a statement showing balances or total of debit and credit of all the
accounts prepared under double entry system. Its main purpose is to test the arithmetical
accuracy of the ledger accounts. It also hep to locating errors and act as a base for the
preparation of financial statements. Its preparation is not compulsory, it is optional.
The Trial Balance has 4 columns.
First column is ‘Name of Account’ column: This column contains the list of all ledger
accounts.
Second column is Ledger Folio column: This column contains the page number of
different ledger accounts in the ledger.
Debit Column: If the Trial Balance is prepared by Balance Method, then the debit balance
of account is written here.
Credit Column: If the Trial Balance is prepared by Balance Method, then the credit
balance of account is written here.
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6. Prepare a Trial Balance from the following information:

Name of the Account Balance Name of the Account Balance
Stock 70,000 Capital 2,00,000

Debtors 3,00,000 Cash 1,70,000
Bank Loan 1,50,000 Creditors 90,000
Purchases 2,00,000 Sales 3,00,000
Commission Received 10,000 Salaries 10,000
Ans:
Trial Balance As on………..
Name of the accounts L.F Debit (Rs.) Credit(Rs.)
Stock 70,000
Debtors 3,00,000
Bank Loan 1,50,000
Purchases 2,00,000
Commission Received 10,000
Capital 2,00,000
Cash 1,70,000
Creditors 90,000
Sales
3,00,000
Salaries 10,000
7,50,000 7,50,000
7. John started business on 1-1-2020 with a capital of Rs.2,00,000. His transaction for the
month of January were as follows:
2020 Jan-1 Opened a current account with SBI Rs.30,000
Jan-3 Purchased Machinery from A Ltd and paid by cheque Rs.10,000
Jan-4 Purchased goods for cash Rs.15,000
Jan-8 Sold goods for cash Rs.1,000
Jan-9 Sold goods to Bimal Rs.500
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Final Accounts of a Sole Trader

Final accounts of a sole trader include Trading A/c, Profit and Loss A/c and a statement called
Balance Sheet. The object of preparing a Trading and Profit and Loss A/c is to ascertain the true
and fair view of the financial performance (profit or loss) of a business during a particular period,
The object of preparing Balance Sheet is to present the true and fair view of the financial position
on a particular date. The above two accounts and the statement is collectively called Financial
Statements or Final Accounts of a business.
1.Trading Account
Trading account is a nominal account in nature. The object of preparing a trading account is to
ascertain the Gross Profit earned or Gross Loss incurred as a result of the trading activities (buying
and selling or production and selling) of a business. In trading account, two items are compared,
i.e., sales (direct income) and cost of goods sold. If sale is more than cost of goods sold, there is a
gross profit. Otherwise, a gross loss. Whatever it be the balance, which is transferred to profit and
loss account.Trading account is debited with Opening Stock, Net Purchase and Direct Expenses
other than purchase. It is credited with Salles (direct income) and Closing Stock.
Format of trading Account

Dr. Trading Account for the Year Ended………… Cr.
Particulars Amount Particulars Amount
To Opening Stock XXXX By Sales XXXX
To Purchase XXXX Less: S. Return XXXX XXXX
Less: Purchase Returns XXX XXXX
Direct Expenses: XXXX By Closing Stock XXXX
To Wages XXXX
To Carriage/Carriage inwards XXXX
To Cartage XXXX [By Profit and Loss A/c (xxxxx)
To Freight XXXX (Gross Loss c/d)]
To Factory rent,power XXXX
To Fuel,gas,water XXXX
To Octroi XXXX
To Import duty XXXX
To Excise duty XXXX
To Royalty (on production) XXXX
To Dock dues XXXX
To Customs duty XXXX
To Primary packing materials XXXX
To Manufacturing Expenses XXXX
To Factory Expenses XXXX
To Profit and Loss A/c XXXX
(Gross profit c/d)
XXXXX XXXXX
By Gross profit b/d XXXX

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Gross Profit
Trading account is prepared to determine the gross profit earned or gross loss incurred in the
accounting period. In trading account gross profit is calculating by comparing the revenue from
‘sale of goods’ with the ‘cost of goods sold’. Gross profit represents the profit remaining after the
production costs have been subtracted from revenue. Gross profit helps investors to determine
how much profit a business earns from the purchase/ production and sale of its goods and services.
Gross profit is sometimes referred to as gross income.
Gross Profit = Net Sales- Cost of Goods Sold
Gross Loss = Cost of goods sold – Net Sales
Cost of goods sold = Opening stock + Net Purchase + Direct expenses – Closing stock
Cost of goods sold (COGS): Cost of goods sold (COGS) is the cost of acquiring or manufacturing the
products that a company sells during a period. It refers to direct expenses incurred up to the sale.
Cost of goods sold is also referred to as "cost of sales."
For example, the COGS for a car manufacture would include the material costs for the parts that
go into making the car plus the labor costs used to put the car together. The cost of sending the
cars to dealerships and the cost of the labor used to sell the car would be excluded. It excludes
indirect expenses, such as distribution costs and sales force costs.
Gross Profit = Net Sales- Cost of Goods Sold [20=100-80]

Therefore:
Cost of goods Sold = Net Sales – Gross Profit [ 80= 100-20]
Net Sales = Cost of Goods sold +Gross Profit [100= 80+20]
OR
Gross Loss = cost of goods sold – Sales [30 = 230-200]
Therefore:
Cost of Goods sold = Sales + Gross Loss [230 = 200+30]
Sales =Cost of Goods Sold – Gross Loss [200 = 230-30]
Explanation of Debit side of the Trading Account

1. Opening stock.
Stock means unsold goods. Unsold goods in the beginning of the accounting year is called opening
stock. It may also be termed as ‘Stock at the beginning’. Previous year's closing stock is the opening
stock of current year and current year's closing stock is the opening stock of the next year and so
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on. In two circumstances there is no opening stock in the trial balance. One is the business is a
newly stared one and secondly when the purchase is adjusted.
Classification of opening stock
In case of trading concern opening stock does not have any classifications. In case of
manufacturing concern, opening stock may be stock of raw materials, stock of work in progress or
stock of finished goods.
2. Purchases.
Purchases includes all cash and credit purchases of goods. When there is purchase returns, it
should be deducted from gross purchases and the net purchase is taken in the trading account. If
the purchase includes purchases other than goods, it should be excluded from purchase.
➢ It also includes purchase of raw materials, semi-finished goods and finished goods.
➢ It does not include purchase of assets.
3. Direct Expenses.
All expenses incurred for purchasing/acquiring or manufacturing goods are called direct expenses.
It is the cost incurred up to the saleable condition of a product.
Examples of direct expenses are: wages, productive wages, wages and salaries, carriage in ward
(carriage on purchase/carriage), cartage, customs duty, clearing charges, octroi,import
duty,coal,gas and water,power,royalty on production, all factory expenses,freight,dock charges,
primary packing materials cosumed,consumable stores, manufacturing expenses etc.
Description of some direct expenses:
a. Wages: Remuneration for workers in the factory.
b. Carriage Inwards/ carriage/carriage on purchase: The amount of transportation cost
spent by the purchaser of the goods is termed as Carriage Inwards. It is also known as freight-
in or transportation-in.
c. Consumable stores: It includes cotton waste, lubricating oil, grease etc. are used in the
production process.
d. Royalty/Royalty based on production: Royalty is somewhat rent. It is the sum paid to a
patentee for the use of a patent or to an author or composer for each copy of a book sold or for
each public performance of a work. Royalty may be of two types based on production based
on sale. Based on production is a direct expense. Royalty based on sales is an indirect expense.
e. Primary packing materials: It is the primary package necessary to make the goods in saleable
condition. Example tube in case of toothpaste, container in case of coconut oil.
4. Closing stock.
Stock means unsold goods. Unsold goods at the end of the accounting year is called closing stock.
Previous year's closing stock is the opening stock of current year and current year's closing stock is
the opening stock of the next year and so on. According to conservatism concept closing stock is
valued at cost price or market value whichever is less. (If closing stock is Rs.50,000 but its market
value is Rs.45,000, closing stock will be taken at Rs.45,000)
107
5.Sales
Sales includes all cash and credit sales of goods. Sales mean sale of goods only. It includes cash
sales and credit sales. When there is sales return, it should be deducted from gross sales and the
net sales is taken in the trading account. If the sales include sales other than goods, it should be
excluded from sales.
Journal Entries for preparing Trading account [Closing entries]
While preparing a Trading account, it should be kept in mind that closing entries are passed in the
journal Proper. Closing entries are passed at the end of the accounting year to close and transfer
nominal account (temporary account) balances to Trading and Profit and Loss account. Generally
closing entries are compound journal entries.
Trading Account Debit Side:

1. Closing entry for opening stock:
Trading A/c Dr. xxxx
To Opening Stock xxxx
(Being transfer of opening stock to trading account)
2.Closing entry for purchase account
Trading A/c Dr. xxxxx
To Purchase A/c xxxxx
(Purchase account is closed by transfer it to trading account)
3.Closing entry for Sales return.
Sales A/c Dr. xxxx
To Sale Return A/c xxxx
(Sales return account is closed by transfer it to sales account)
Note: Usually sales return is deducted from the sales and net sales is shown in the trading account.
4. Closing entries for individual direct expenses like wages, carriage inwards, manufacturing exp etc.
To Individual Direct Expenses xxxx
(Example-Wages, carriage inwards, fuel etc.)
(Direct expenses account closed by transfer it to the debit side of the Trading account)
The above 4 entries can be summarized as (Compound journal entry) :
To Opening stock xxxx
To Purchase xxxx
To Wages xxxx
To Carriage inwards xxxx
To Manufacturing expense xxxx
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Trading Account Credit side:

5. Closing Entry for Sales Account
Sales A/c Dr. xxx
To Trading A/c xxxx
(Being sales account is closed by transfer it to trading account)
6. Closing entry for purchase return
Purchase Return A/c Dr. xxxx
To Purchase A/c xxxx
(Purchase return account is closed by transfer it to purchase A/c)
Note: Usually purchase return is deducted from the purchase and net purchase is shown in the trading
account.
7.Journal entry to bring closing stock into the books of accounts
Closing Stock A/c Dr. xxxx
To Trading A/c xxxx
(Being closing stock brought into the books)
The above credit side entries can be summarized (Compound journal entry) as :
Sales A/c Dr. xxxx
To Trading A/c xxxx
8. Journal entry to transfer gross profit/ gross loss

The trading account is prepared in ‘T’ shape. The difference of the two sides of this account is gross profit
or gross loss. If the total of the credit side of the trading account is more than the debit side, the
difference is gross profit. If the total of the debit side is more than the total of the credit side, the
difference is gross loss. The amount of gross profit or gross loss is transferred to the profit and loss
account.
9. For transfer of gross profit
Trading A/c Dr. xxxxx
To Profit and Loss A/c xxxxx
(Being transfer of gross profit to profit and loss account)
10. For transfer of gross loss (if any)
Profit and Loss A/c Dr. xxxxx
To Trading A/c xxxxx
(Being transfer of gross loss to profit and loss account)
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Profit and loss account

Profit and Loss Account is a nominal account prepared after preparing the trading account. It is
prepared to determine net profit earned or net loss incurred by the business concern during an
accounting period. Profit and Loss account starts with Gross Profit/Gross loss. All indirect expenses
are transferred to the debit side of the profit and loss account. All revenues/gains other than sales
are transferred to the credit side of the profit and loss account. The difference of the two sides of
this account is net profit or net loss. If the total of the credit side of the profit and loss account is
more than the debit side, the difference is net profit. If the total of the debit side is more than the
total of the credit side, the difference is net loss. The amount of net profit or net loss is transferred
to the capital account.Net profit increases the capital and net loss decrease it.
Indirect Expenses:
Indirect expenses are those expenses which are not directly associated with the manufacturing or
purchase of goods. They include administrative, selling and distribution expenses such as salaries,
taxes, postage, printing and stationery, advertising, insurance, bad debts etc.
Indirect Incomes:
Indirect incomes are those incomes which are not directly associated with sale of goods such as
interest received, dividend received, profit on sale of fixed assets etc.
Features of profit and loss account:
➢ It is a nominal account.
➢ It starts with gross profit or gross loss brought forward from trading account.
➢ It is debited with gross Loss (if any) and indirect expenses.
➢ It is credited with Gross Profit and indirect income (revenues/gains other than sale).
➢ Balance of this account is Net profit or net loss.
Purpose of preparing Profit and Loss account
➢ Main purpose of preparing profit and loss account is to ascertain net profit earned or net
loss incurred by the business during the accounting period.
➢ Profit determined by the profit and loss account for the accounting period can be
compared with that of the previous year’s profit.
➢ Indirect expenses are shown in the profit and loss account. These can be compared over
the period.
➢ A Balance Sheet can be prepared only after ascertaining net profit/loss through the
preparation of profit and loss account.
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Format of Profit and Loss account
Dr. Profit and Loss Account for the Year ended………. Cr.

[To Gross Loss b/d] XXX By Gross Profit b/d XXX
To Carriage Outwards XXX By Rent received XXX
To Salaries XXX By Discount Received XXX
To Rent XXX By Commission received XXX
To Printing and Stationery XXX By Interest received XXX
To Postage XXX By Bad debts recovered XXX
To Telephone charges XXX By Income from investment XXX
To Repairs and renewals XXX By Dividends received XXX
To Interest paid XXX By Miscellaneous income XXX
To Conveyance XXX By Profit on sale of assets XXX
To Bank charges XXX
To General Expenses XXX [By Net loss transferred to capital
To Electricity charges XXX A/c]
To Commission paid XXX
To Discount allowed XXX
To Travelling Expenses XXX
To Advertising XXX
To Insurance XXX
To Audit fee XXX
To trade Expenses XXX
To Sundry expenses XXX
To Free samples XXX
To Trade expenses XXX
To Legal charges XXX
To Bad debts XXX
To Loss on sale of assets XXX
To Loss by fire/theft/damages XXX
To depreciation XXX
To Net profit transferred to capital
A/c (B/F) XXX
XXXX XXXX
Explanation about Some indirect expenses

1. Salaries: Salaries are paid to employees of the firm working in the office.
2. Rent: Rent of the office, shop, show-room etc. is an example for indirect expense.
3. Commission: The firm has to avail of the services of the agents
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4. Trade Expenses: These expenses are also known as sundry expenses, miscellaneous and office
expenses.
5. Carriage and freight outwards: It is incurred to send goods outward after sale.It is a selling and
distribution expenses.
6.Printing and stationery: It included all expenses of printing bills, invoices, letter heads etc.
Stationery includes pen, pencil, paper, ink etc.
7. samples: Certain samples are to be distributed among prospective customers as part of
marketing.
8. Advertisement: Expenses incurred towards advertisement is an indirect expense.
9. Bad debts: Bad debts is the amount that has become irrecoverable from a debtor. It is an
indirect expense.
Closing Journal entries regarding Profit and loss account:
Following closing entries are to be passed in the journal proper for preparing the profit and loss
account:
1. Items of indirect expenses and losses are closed by transferring their balance to the debit side
of the profit and loss account.
Profit and Loss A/c Dr. xxxxx
To Individual Indirect Expenses account xxxxx
(Example: Salaries, rent, advertisement etc.)
(Being indirect expenses closed by transfer it to the debit side of P & L Account)
2. Items of indirect incomes and gains are closed by transferring their balance to the credit side
of the profit and loss account.
Individual indirect income A/c Dr. xxxxx
To Profit and Loss A/c. xxxxx
3. For transfer of net profit.
Profit and Loss A/c Dr. xxxx
To Capital A/c xxxx
(Being net profit transferred to capital A/c)
4. For Transfer of net loss (if any)
Capital A/c Dr. xxxx
To Profit and Loss A/c xxxx
(Being net loss transferred to capital A/c)
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Operating Profit and Net Profit

Profit may be divided into two:
I. Operating Profit
II. Net Profit
Operating Profit (EBIT): It is the profit earned through normal operating activities of the business. It
is calculated by deducting the Operating Expenses from the Gross Profit. Operating expenses include
office & administrative expenses and selling and distribution expenses.
Operating Profit = Gross Profit – Operating Expenses
OR
Operating profit = Net profit + non-operating expenses – non-operating income
Operating Expenses: Operating expenses include any cost associated with running a business.
Operating expenses include office & administrative expenses and selling and distribution expenses.
For example, administrative expenses like salaries, rent, insurance, stationery, general expenses etc.
and selling and distribution expenses like carriage outwards, advertising, bad debts etc. are
operating expenses of a concern. It never includes non-operating expenses like interest on loan, loss
on sale of furniture, loss by fire, donation etc. Operating expenses do not include cost of goods sold
(Purchase and other direct expenses) or capital expenditures.
Non-operating Expenses: non-operating expense is an expense incurred from activities unrelated

to core operations. Interest on capital, interest on loan, loss on sale of furniture, loss by fire,
donation etc.
Non -operating Income: Non-operating income is the portion of an organization's income that is
derived from activities not related to its core business operations. It can include profit on sale of
fixed assets, dividend income, profits or losses from investments and other unusual incomes.
Balance Sheet:
Balance sheet is the statement prepared after preparing the Trading and Profit and Loss account.
After ascertaining the net profit or loss of the business firm, the business man would like to know
the exact financial position of his business. For this purpose, a statement called Balance Sheet is
prepared which contains all the assets and liabilities of the business. Balance Sheet is so called
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because it is a sheet of balances of ledger accounts which are still open after the transfer of all
nominal accounts are grouped as assets and liabilities. Assets are shown on the right side of the
Balance Sheet and liabilities are shown on the left side.
Need for preparing Balance Sheet
1. The main purpose of preparing Balance Sheet is to ascertain the true financial position of the
business on a particular date.
2. It helps in finding out whether the firm is solvent or not. The firm is solvent when the assets
exceed the external liabilities.
3. It helps in preparing the opening entries at the beginning of the next year.
Features of Balance Sheet
1. Balance Sheet is a statement and not an account.

2. It has no debit or credit side. Its left side is known as liabilities and its right side is ‘Assets’.
3. Balance Sheet is a summary of the Personal and Real accounts, which are still open.
4. The total of the two sides of the Balance Sheet must be equal. If the totals are not equal, there will
be an error somewhere.
5. Balance Sheet is prepared on a particular date. It discloses the financial position of a business on a
particular date and not for a period.
6. Assts and liabilities displayed in the Balance Sheet is true only for the date on which it is prepared
because even a single transaction would cause a change in the assets and liabilities.
Grouping and Marshalling of Assets and Liabilities in Balance Sheet
The assets and liabilities shown in the Balance Sheet are properly grouped and presented in a particular
order.
Grouping means putting items of a similar nature under a common accounting head.For example the amount
owing from various customers will be shown under the heading ‘ Sundry Debtors’.
‘Marshalling’ is the arrangement of various assets and liabilities in a particular order in the Balance Sheet.
Marshalling can be done in any of the following two ways:
I. In the order of liquidity

II. In the order of permanence
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1. In the order of Liquidity:
In this method assets are arranged in the order of their liquidity. Liquidity means the ability of an asset to
convert into cash. According to this method cash is always presented first, followed by cash at bank, bills
receivables, short term investments, sundry debtors, inventory, and then fixed assets.
Format of Balance Sheet-In the order of Liquidity
Liabilities Amount Assets Amount

Bank Overdraft XXXX Cash in hand XXXX
Bills Payable XXXX Petty Cash XXXX
Sundry Creditors XXXX Cash at bank XXXX
Outstanding Expenses XXXX Bill’s receivable XXXX
Income received in advance XXXX Short term investment XXXX
Long -term Loans XXXX Sundry Debtors XXXX
Capital xxxx Closing Stock XXXX
Add: Net Profit xxxx Prepaid Expenses XXXX
xxxx Accrued Income XXXX
Less: Drawings xxxx XXXX Furniture XXXX
Loose Tools XXXX
Vehicles XXXX
Plant and Machinery XXXX
Land and Building XXXX
Patents XXXX
Goodwill XXXX
Trade Mark XXXX
XXXXX XXXXX
2.In the order of permanence

In this case assets and liabilities are arranged according to the order of permanence. Assets which
are most difficult to be converted into cash such as goodwill, patents etc. are written first and the
assets which are most liquid such as cash in hand are written last. Similarly, those liabilities which
are to be paid last, will be written first. So, capital, which is the most permanent of all obligations of
business is written first, followed by long-term loans and ending up with current liabilities.
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Format of Balance Sheet-In the order of Permanence

Capital xxxx Trade Mark XXXX
Add: Net Profit xxxx Goodwill XXXX
Less: Drawings xxxx XXXX Patents XXXX
Long -term Loans XXXX Land and Building XXXX
Outstanding Expenses XXXX Plant and Machinery XXXX
Income received in advance XXXX Vehicles XXXX
Sundry Creditors XXXX Loose Tools XXXX
Bills Payable XXXX Furniture XXXX
Bank Overdraft XXXX Accrued Income XXXX
Prepaid Expenses XXXX
Closing Stock XXXX
Sundry Debtors XXXX
Short term investment XXXX
Bill’s receivable XXXX
Cash at bank XXXX
Cash in hand XXXX
XXXXX XXXX
Relevant items in the Balance Sheet
Assets Side
I. Current Assets: Current assets are those which are either in the form of cash or can be converted
into cash within a year.
Example: Cash in hand/at bank, bills receivable, stock,debtors,short term investments, prepaid expenses,
accrued income etc.
II. Fixed Assets/Block Capital: Fixed assets are those assets, which are held on a long-term basis in the
business. They are not acquired for the purpose of resale.
Example: Land and building, plant and machinery, furniture, vehicles etc.
III. Intangible Assets: These are assets which can’t be seen or touched. Example :
Goodwill,patents,trademark,copy right etc.
IV. Investments: Investments represents the funds invested in government securities, shares of the
company etc.
Liabilities Side
I. Current Liabilities: Current liabilities are those liabilities which are expected to be paid within a year
and which are usually to be paid out of current assets. Example: Creditors, bank overdraft, bills
payable, short term loans, outstanding expenses.
II. Long term liabilities/Non-current liabilities: All liabilities other than current liabilities are known as
long term liabilities. Such liabilities are usually payable after one year of the date of the balance sheet.
Example: Long-term loans
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III. Capital: It is the excess of assets over external liabilities. It represents the amount originally
contributed by the owner as increased by net profits and interest on capital and decreased by losses,
drawings and interest on drawings.
IV. Drawings: Amount or goods withdrawn by the proprietor is termed as drawings. If owners’ personal
expense are paid from the business, for example, Income tax paid for the trader, owner’s son’s tuition
fees paid, these are example for drawings and it should be deducted from capital in the balance
sheet. Normally drawings account is closed by transferring its balance to his capital account.
Drawing’s account is shown in the balance sheet by way of deduction from capital.
Q.Arrange the following items in the order of both Answer: In the order of Liquidity
permanence and liquidity. Also group them under
Current Liabilities: Current Assets:
logical heads:
Bank overdraft Cash
Liabilities: Assets:
Bills payable Bills Receivable
Long-term loans Machinery
Sundry Creditors Sundry Debtors
Bank overdraft Cash
Short term loans Stock
Bills payable Bills Receivable
Non-current liabilities: Accrued Income
Owner’s Equity Sundry Debtors
Long-term loans Non-Current Assets:
Short term loans Land
Owner’s Fund: Machinery
Sundry Creditors Stock
Owner’s Equity Land
Accrued Income
Opening Entry
Opening entry is the entry made in the beginning of a financial year to open the books by debiting
assets and crediting liabilities and capital, appearing in the Balance Sheet of the previous year. The
balances of various accounts in balance sheet are carried forward from one accounting period to
another accounting period. For this an opening entry is made which opens all the accounts contained
in the Balance Sheet. Balance Sheet As on 31-12-2020

Sundry Creditors 40,000 Cash in hand 20,000
Bank over draft 60,000 Cash at bank 10,000
Outstanding Salary 1,000 Sundry Debtors 30,000
Loan 1,00,000 Closing Stock 90,000
Capital 2,00,000 Plant and machinery 1,00,000
Add: Net Profit 30,000 Land and Building 1,21,000
2,30,000 Goodwill 50,000
Less: Drawings 10,000 2,20,000
4,21,000 4,21,000
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Opening Entry on 1-1-2021

Journal
Date Particulars LF Debit Credit
1-1-21 Cash in hand A/c Dr 20,000
Cash at bank A/c Dr. 10,000
Sundry Debtors A/c Dr. 30,000
Closing Stock A/c Dr. 90,000
Plant and machinery A/c Dr. 1,00,000
Land and Building A/c Dr. 1,21,000
Goodwill A/c Dr. 50,000
To Sundry Creditors 40,000
To Bank over draft 60,000
To Outstanding Salary 1,000
To Loan 1,00,000
To Capital 2,20,000
(Being all assets and liabilities are carried
forward)
Some Valuable Points:

➢ Gross profit is the total revenue/ gross income.
➢ Balance Sheet is a statement, not an account.
➢ In Trading and Profit and Loss account, opening stock appears on the debit side because it forms the
part of the cost of goods sold for the current accounting period.
➢ Gross profit = Net Sales - Cost of goods Sold
➢ Operating Profit = Gross Profit – Operating Expenses
➢ Operating profit = Net profit + non-operating expenses – non-operating income
➢ ‘Marshalling’ is the arrangement of various assets and liabilities in a particular order in the Balance
Sheet.
➢ Closing entries are passed at the end of the accounting year to close and transfer nominal account
(temporary account) balances to Trading and Profit and Loss account.
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Q.Give the format of a Trading and Profit and Loss Account with Imaginary figures?
Trading and Profit and Loss Account
Dr. For the Year ended 31-12-21 Cr.
To Opening Stock 10,000 By Sales 4,00,000
To Purchase 3,00,000 Less: Return inwards 4,000 3,96,000
Less: Return outwards 10,000 2,90,000 Closing Stock 1,00,000
To Wages 20,000
To Carriage inwards 1,000
To Factory Lighting 4,000
To Gross Profit c/d 1,71,000
4,96,000 4,96,000
By Gross Profit b/d 1,71,000
To Salaries 20,000 By Interest received 1,000
To Rent 3,000 By Profit on sale of furniture 3,000
To Carriage outwards 4,000
To Repairs 7,000
To Trade Expenses 6,000
To Advertisement 12,000
To Bad debts 4,000
To Depreciation 3,000
To Interest on Loan 10,000
To Net Profit c/d 1,06,000
1,75,000 1,75,000
Q. (On the basis of the above question) Calculate ‘Operating profit’?

Operating Profit = Gross profit – Operating Expenses
In this problem Operating Expenses:
=Salaries+Rent+Repairs+Trade Exp+Advertisement+Bad debts+Depreciation
=20,000+3,000+4,000+7,000+6,000+12,000+4,000+3,000
Operating Expense=59,000
Operating profit = Gross profit – Operating Expenses
=1,71,000 – 59,000 =1,12,000
Operating profit can be calculated in another way:
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In this question Non-operating income =Interest received profit on sale of furniture
=1,000 +3,000 =4,000
In this question Non-operating expense= Interest on loan =10,000
= (1,06,000 +10,000) – 4000 =1,12,000
Some Valuable Points:
➢ Chronological order of profit ascertainment= Gross profit----Operating Profit------Net Profit

➢ Gross profit= Net Sales- Cost of goods sold
➢ Operating Profit=Gross profit – Operating Expense
➢ Net profit =Operating Profit +Non-operating Income – Non-operating Expenses
➢ Sales= cost of goods sold + profit
Q. Calculate the value of operating profit from the following? (March-2012)
Sales less return – 1,30,000
Cost of goods sold – 80,000
Administration Expense – 25,000
Loss on sale of furniture -20,000
Ans: Gross profit = Net sales- cost of goods sold
=1,30,000 – 80,000 = 50,000
Operating Profit =Gross Profit – administration expense
= 50,000-25,000 =25,000
Note: Loss on sale of furniture is a non-operating expense. So it was not considered to find
operating profit.
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Q.Prepare Trading and Profit and Loss Account and Balance Sheet from the Trial Balance of
Sri.Govind as on 31-03-2010
Trial Balance As on 31-03-2010
Particulars Debit Credit
Purchase 21,000
Opening Stock 20,000
Carriage Inwards 400
Wages 6,000
Carriage outwards 500
Power 1,500
Heating and lighting 600
Printing and Stationery 2,500
Investments 4,000
Debtors 30,000
Furniture 2,000
Building 60,000
Travelling expenses 500
Discount Allowed 300
Office Expenses 700
Bills Receivables 2,000
Repair Charges 300
Interest on loan 2000
Plant and Machinery 24,200
Capital 49,000
Sales 60,000
Loan 35,000
Discount Received 5,000
Creditors 19,500
Bills Payable 10,000
1,78,500 1,78,500
Closing stock is valued at Rs16,000
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Ans:
For the Year ended 31-03-2010
To Opening Stock 20,000 By Sales 60,000
To Purchase 21,000 Closing Stock 16,000
To Wages 6,000
To Power 1,500
To Carriage inwards 400
To Heating & Lighting 600
To Gross Profit c/d 26,500
76,000 76,000
By Gross Profit b/d 26,500
To Carriage outwards 500 By Discount received 5,000
To Printing and Stationery 2,500
To Travelling Expenses 500
To Discount allowed 300
To Office Expense 700
To Repair charges 300
To Interest on loan 2000
To Net Profit transferred to 24,700
capital account
31,500 31,500
Balance Sheet As on 31-03-2010

Bills Payable 10,000 Bills Receivables 2,000
Creditors 19,500 Investment 4,000
Loan 35,000 Debtors 30,000
Capital 49,000 Closing Stock 16,000
Add: Net Profit 24,700 73,700 Furniture 2,000
Building 60,000
Plant and Machinery 24,200
1,38,200 1,38,200
Points to be noted:
➢ Trading account is prepared to find out gross profit
➢ Gross profit can also be calculated through an equation: Gross Profit= Net Sales-
Cost of Goods Sold
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➢ Direct expenses and direct incomes are recorded in trading account. Indirect
expenses and indirect incomes are recorded in profit and loss account.
➢ Trading and profit and loss account is a nominal account.
➢ Profit and loss account is prepared to find out net profit or net loss.
➢ Balance sheet discloses the financial position of a business concern.
➢ We can see the reflection of the Accounting Equation (Assets= Liabilities + Capital)
in the Balance Sheet.
Read the study notes carefully and find the correct answer.
1. -------can be computed by deducting the cost of goods sold from sales. (March-2011)
2. The statement showing financial position of a business is known as -------- (SAY-2012)
3. Carriage inwards is debited to --------account. (Trading A/c, Profit and Loss A/c, Cash A/c)
4. Income tax paid for the sole trader from the business is treated as --------
5. Profit and Loss Account is transferred to ----- Account. (Trading A/c, Capital A/c, Asset A/c)
6. Financial statements consist of-------- (a. Trial Balance, b. Trading and profit and loss
account. c. Balance Sheet, d. Both b and c)
7. Loss on sale of old car is debited to --------account.
8. Return inwards appearing in the trial Balance is deducted from--------in the Trading Account.
9. Which of the following is not shown in the Balance Sheet?
(Opening Stock, closing stock, debtors, patents)
10. Purchased machinery for production is ………
(Capital expenditure, revenue expenditure, deferred revenue expenditure, none of these)
11. Give any two items that are credited to profit and loss account?
12. Give any 4 examples for current assets?
13. Distinguish between current assets and fixed assets?
14. Write a short note on drawings?
15. Balance of petty cash is a----- (Asset, expense, income)
16. Ascertain cost of goods sold and gross profit from the following.
(Opening Stock- 30,000, Purchase- 2,82,000, Direct Expenses – 30,000, Indirect Expenses-
40,000, Closing stock- 55,000, Sales- 4,05,000, Sales Return- 13,000)
17. Cost of goods sold + Gross Profit= ------------
18. Trading Account is a -------Account (Personal, Real, Nominal)
19. Gross Profit – Operating Expense = --------
20. Closing stock is valued at -------------- (Cost price, market price, cost price or market price
whichever is lower)
21. Trade expense is an example for-----------(Direct expenses, indirect expenses, asset)
22. Trading A/c Dr 5,000
To Wages 5,000
Is this a closing entry? What is meant by closing entry?
23. What do you mean by grouping and marshalling of assets and liabilities?
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24. Explain the term current liabilities with an example? (March-2016)

25. Explain the need for preparing Balance Sheet
26. Which is the closing journal entry to close interest received account?
Prepared By BINOY GEORGE, HSST, MKNM HSS, Kumaramangalam,Thodupuzha,Idukki Dt.
Chapter-10
Financial Statements-II
Focus Area-2021- September Public Examination
Chapter-10 Financial Statement-II
1.Treatment of the following adjustments in the preparation of Financial Statements
1.1 Closing Stock
1.2 Outstanding Expenses
1.3 Prepaid Expenses
1.4 Accrued Income
1.5 Income Received in Advance
1.6 Depreciation
2. Preparation of Trading and Profit and Loss Account and Balance Sheet with the
above adjustments
Final account is prepared on the basis of Trial Balance. But a trial balance contains only account
balances of those items for which accounts have already been prepared. Sometimes, on the closing
date of the accounting period, certain items may remain recorded in the books of accounts.
According to accrual concept of accounting, all revenues earned during the year (whether received
or not) and expenses incurred during the year (whether paid or not) are accounted. The expenses
of current year may be still payable or the expenses of the next year might have been paid the
current year. Sometimes, income of the current year remains still receivable as well as the income
of the next year might have been received in advance. Current year’s depreciation, provision for
doubtful debts etc.would not have been recorded in the books. So, we have to adjust these amounts
in the final accounts of the current year to ascertain the correct profit or loss of the business concern
as well as to display the correct financial position. For this, we have to pass some adjusting journal
entries. The items which usually need adjustments are:
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1. Closing stock
2. Outstanding Expenses
3. Prepaid/ unexpired expenses
4. Accrued income
5. Income received in advance
6. Depreciation
7. Bad debts
8. Provision for doubtful debts
9. Provision for discount on debtors
10. Manager’s commission
11. Interest on capital
Adjusting entry
While preparing final accounts at the end of the accounting period, there may be some expenses
due but not paid or some incomes due but not received or some expenses paid in advance or some
incomes received in advance. Depreciation on fixed asset, provision for doubtful debts etc. may not
be recorded in the books of accounts. These items do not appear in the Trial Balance. They are
generally given as additional information (Adjustments). We follow accrual basis of accounting.
According to accrual concept of accounting, all revenues earned during the year (whether received
or not) and expenses incurred during the year (whether paid or not) are accounted. Therefore, we
will have to pass adjusting journal entries for all above said items. An adjusting journal entry is an
entry that occurs at the end of an accounting period to record any unrecognized income or
expenses for the period. Adjustment journal entries are passed to get the adjustment effect to the
above said items.
Need of adjustment
I. To ascertain the true profit/ loss of the business concern
II. To ascertain the true financial position of the business
III. To make a record of business transactions omitted from the books.
IV. To make a record those expenses which are due but not paid.
V. To make a record those incomes which have accrued but have not been received
VI. To provide for current year’s depreciation and other provisions.
Effect of Adjustment items:
All adjustment items are reflected in the final accounts at two places to complete the double
entry. Double entry system states that every financial transaction has equal and opposite effects in
at least two different accounts. It is used to satisfy the accounting equation.
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1.(a) Closing Stock:

Closing stock represents the cost of unsold goods at the end of the accounting period. Closing stock
normally is not included in the ‘Trial Balance’. It is given outside the Trial Balance as an additional
information. Closing stock will come into Trial Balance only when ‘Purchase Adjusted’. Gross
profit/gross loss of a business concern can be determined by incorporating closing stock in the credit
side of the Trading Account.
Closing stock is valued at cost price or market(realizable) value, whichever lower and included in
the Final Accounts by passing the following adjusting entry:
To Trading A/c xxxx
(Being closing stock recorded)
1 (a) Treatment of closing stock in the final accounts- When closing stock is given as an adjustment
item.
I. Closing stock should be shown on the credit side of the Trading Account.
II. Closing stock should be shown on the asset side of the Balance Sheet.
Treatment in Trading Account
Dr. Trading Account Cr.
By Closing Stock xxxxx
Note: Opening stock and closing stock will not be shown separately in trading account, both of
them are adjusted with purchase.
Balance Sheet As on……
Closing Stock xxxx

Note:
a. The closing stock of Current year becomes the opening stock of the next year and is reflected in
the Trial Balance of the next year.
b. All adjustments are reflected in the final accounts at two places to complete the double entry.
1.(b)Adjusted Purchases and Closing Stock
Generally closing stock is given as an adjusting item but, sometimes, closing stock may be included
in the Trial Balance. Showing closing stock in the trial balance when opening stock and closing stock
are adjusted with purchase account (Adjusted purchase).
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Adjusted Purchase = Purchase + Opening Stock – Closing Stock

If opening stock is adjusted with purchases, opening stock will not appear in the Trial Balance.
Adjusted purchase will appear on the debit side of the trading Account. In this case closing stock
will not be shown on the credit side of the trading account, as closing stock has already been
adjusted through the purchase account. Moreover, opening stock will not be separately reflected
in the Trading Account. In case of adjusted purchase, closing stock will appear only in the asset side
of the balance Sheet. Closing stock here is a Trial Balance item and will reflect only in one place, but
the adjustments items will be reflected in two places.
Journal entry:
1. When closing stock created and adjusted with purchase account
To Purchase A/c xxxx
(Closing stock is created and adjusted with purchase account)
2. When opening stock is closed by adjusted it with the purchase account
Purchase A/c Dr. xxxx
To Opening Stock xxxx
(Opening stock account is closed by transfer it to purchase account)
1 (b) Treatment of closing stock in the final accounts- When closing stock is given in Trial Balance
(When purchase adjusted)
I. Closing stock will be shown on the asset side of the Balance Sheet.
II. Closing stock will not be shown in the Trading Account.
III. Opening stock will not be separately shown in the Trading .
IV. Adjusted purchase will be shown on the debit side of the Trading Account (Opening stock and
closing stock adjusted with purchase account)
Dr. Trading Account For the Year Ended………… Cr.
(Opening stock will not be
shown in Trading A/c)
(In this case Closing stock will not
To Adjusted Purchase xxxx be shown in Trading Account)
Note: Opening stock and closing stock will not be shown separately in trading account, both of
them adjusted with purchase.
127

Closing Stock xxxx
2.Outstanding Expenses
These are expenses which have become due during the accounting period for which the final
accounts have been prepared, but have not yet been paid. These expenses are related to the current
year but remain unpaid. As they are the expenses of the current year, so they must be debited in
the profit and loss account of the current year. Such expense remains unpaid so far during the
current year, so they are the liability of the firm. Such items usually are outstanding wages,
outstanding salaries, outstanding interest etc. The entry to bring such expenses into account is:
Concerned Expense A/c Dr xxxx
To Outstanding Expense A/c xxxx
Outstanding Expenses-Treatment in Final Account
1. Outstanding expense should be added to concerned expense on the debit side of the Trading
or Profit and Loss account.
2.The new account, outstanding expense account will be shown on the liability side of the Balance
Sheet.
Example: Wages paid during the year 2020 amounts to rs.5,000. Wages outstanding on 31-12-2020
amounts to Rs.1,000.Pass the adjusting entries for wages outstanding and also show how it would
appear in the trading account and balance sheet.
Adjusting entry:
Wages A/c Dr. 1,000
To Outstanding Wages 1,000
(Being wages outstanding Rs.1,000)
128

Dr. Trading Account Cr.
To Wages 5,000
Add: Outstanding 1,000 6,000
Treatment in Balance Sheet

Outstanding Wages 1,000
3. Prepaid Expenses
Prepaid or un expired expenses are future expenses that are paid in advance, whose benefit will be
available in the next accounting years. At the end of the accounting year, it is found that the benefit
of some portion of the expenses like insurance have not been fully received, a portion of its benefit
would be received in the next accounting year. That portion of expense is termed as prepaid
expenses and it should be carried forward to the next accounting period. The necessary adjustment
in respect of prepaid expenses is made by recording the following entry:
Prepaid Expense A/c Dr. xxxxx
To Concerned Expense A/c xxxx
Prepaid Expenses-Treatment in Final Account
1. Prepaid portion of the expense should be deducted from concerned expense on the debit side
of the Trading or Profit and Loss account.
2.The new account, prepaid expense account will be shown on the assets side of the Balance Sheet
as ‘Prepaid Expenses’.
Example: Insurance premium paid during the year 2019 is Rs.12,000, of which 3 months insurance
is prepaid. Pass necessary adjusting entry for the prepaid insurance and also show how it would
appear in the financial statements.
Insurance Paid for 1 year=12,000
Prepaid insurance = 3 months insurance =12,000 x 3/12 = 3,000
129
Adjusting entry:
Prepaid Insurance A/c Dr. 3,000
To Insurance 3,000
(Being prepaid insurance Rs.3,000 recorded)
Treatment in Profit and Loss Account
Dr. Profit and Loss Account Cr.
To Insurance 12,000
Less: Prepaid 3,000 9,000

Prepaid Insurance 3,000
4. Accrued Income [Income earned but not received / outstanding Income]

An income which has been earned but not received during the accounting is called accrued income.
Sometimes, items of income such as interest on investment, rent, commission etc. are earned during
the current year, but have not been actually received by the end of the same year. Since these
incomes actually relate to the current year, they are to be brought into account. The following
adjustment entry will be passed to record accrued income:
Adjusting entry:
Accrued Income A/c Dr. xxxx
To Concerned Income xxxx
Accrued Income-Treatment in Final Account
1. The amount of accrued income will be added to the concerned income in the credit side of the
Profit and Loss account.
130
2.The new account, ‘Accrued Income’ account will be shown on the assets side of the Balance
Sheet.
Example:
Interest on investment received (as per trial balance) during the year 2020amounts to Rs.4,000. On
closing date interest accrued on investment amounts to Rs.1,500. Pass the adjusting entries for
accrued interest and also show how it would appear in the Profit and Loss account and balance
sheet.
Adjusting Entry:
Accrued Interest A/c Dr. 1,500
To Interest on Investment 1,500
( Being accrued interest adjusted)
By Interest on Investment 4,000

Add: Accrued interest 1,500 5,500

Accrued Interest 1,500

5.Income Received in Advance (Unearned Income)
Sometimes a portion of income received during the current year relate to the next accounting
period. Such portion of the income which belongs to the next accounting period is called income
received in advance and it should not be included as income of the current year. The following
adjustment entry will be passed to adjust income received in advance:
Adjusting entry:
Concerned Income A/c Dr. xxxx
To Income Received in Advance A/c xxxx
Income Received in Advance-Treatment in Final Account
131
1. Unearned portion of income will be deducted from the concerned income in the credit side of
the Profit and Loss account.
2.The new account,’ Income received in advance’ account will be shown on the Liabilities side of
the Balance Sheet.
Example:
Commission received during the current year amounted to Rs.6,000. Half of the amount is in respect
of services to be rendered in the next year. Pass necessary adjusting entry for income received in
advance and also show how it would appear in the financial statements.
Commission Received in advance=6,000 x1/2 =3,000
Adjusting Entry:
Commission A/c Dr. 3,000
To Commission Received in Advance 3,000
( Being Commission received in advance adjusted)
By Commission 6,000
Less: Commission
received in advance 3,000 3,000

Commission Received in 3000

Advance
6. Depreciation (Given as an adjustment)

Depreciation is the decline in the value of assets due to wear and tear, passage of time etc.
Depreciation on assets will affect profit of the business. It will reduce profit, so it should be debited
to profit and loss account. Depreciation will also reduce the value of concerned asset, so
132
depreciation amount should be deducted from the concerned asset in the balance sheet. The
following adjustment entry will be passed to record depreciation into the books of accounts:
Adjusting entry:
Depreciation A/c Dr. xxxx
To Concerned Asset xxxx
Depreciation (When given as an adjustment item) -Treatment in Final Account
1. The amount of depreciation will be shown on the debit side of the Profit and Loss account.
2.Current year’s depreciation should be deducted from the particular asset in the asset side of the
Balance Sheet.
NOTE: If depreciation given in the Trial Balance, it is taken only on the debit side of the profit and
loss account.
Example
Machinery for Rs40,000 is purchased on 1-1-2020, 10% is the rate of depreciation. So, depreciation
for the year 2020 is Rs.4,000 and it will be brought into account by passing the following adjustment
entry:
Depreciation A/c Dr. 4,000
To Machinery A/c 4,000
(Being depreciation written off)
Depreciation- Machinery 4,000

Machinery 40,000
Less: Depreciation 4,000 36,000
133
Previous year’s Public Examination Question

Q. The following is the Trial Balance of Mr. Santhosh as on 31-12-2020.
Particulars Debit (Rs.) Credit (Rs.)
Cash in hand 2600
Cash at bank 8100
Purchases 60000
Sales 1,20,000
Returns 600 700
Insurance 300
Wages 12,000
Power and fuel 6,500
Carriage inwards 3,800
Carriage outwards 3,200
Opening stock 10,000
Commission 400
Interest 200
Building 42,000
Machinery 36,000
Patents 8,000
Salaries 11,000
Trade Expenses 3,000
Capital 80,000
Drawings 9,000
Sundry creditors 24,800
Sundry debtors 10,000
2,26,100 2,26,100
Santhosh furnishes the following additional information
a. Closing stock on 31-12-2020 is Rs.16,000

b. Wages outstanding Rs.2,000, salaries outstanding Rs.1,000
c. Insurance was prepaid to the extent of Rs.100
d. Interest accrued Rs.500
e. Commission received in advance Rs.100
f. Machinery and patents are to be depreciated @ 10% p.a and 20% p.a respectively. You are
required to prepare Trading and Profit and Loss Account and the Balance Sheet of Mr.
Santhosh as on 31-12-2020
134

Dr. for the Year ended 31-12-20 Cr.
To Opening Stock 10,000 By Sales 1,20,000
To Purchase 60,000 Less: Return inwards 600 1,19,400
Less: Return outwards 700 59,300 Closing Stock 16,000
To Wages 12,000
Add: Outstanding 2,000 14,000
To Carriage inwards 3,800
To Power and fuel 6,500
To Gross Profit c/d 41,800
1,35,400 1,35,400
By Gross Profit b/d 41,800
To Insurance 300 By Commission 400
Less Prepaid Insurance 100 200 Less Received in advance 100 300
To Salaries 11,000 By Interest 200
Add: Outstanding 1,000 12,000 Add: Accrued Interest 500 700
To Carriage outwards 3,200
To Trade Expense 3,000
To Depreciation:
Machinery 3,600
(36,000 x 10%)
Patents 1,600 5,200
(8,000 x 20%)
Net profit Transferred to Capital
Account (B/F) 19,200
42,800 42,800
Balance Sheet as on 31-12-2020

Sundry Creditors 24,800 Cash in hand 2,600
Outstanding Salary 1,000 Cash at bank 8,100
Outstanding Wages 2,000 Sundry Debtors 10,000
Commission received in advance 100 Prepaid Insurance 100
Accrued Interest 500
Capital 80,000 Closing Stock 16,000
Add: Net Profit 19,200 Patent 8,000
99,200 Lee: Depreciation 1,600 6,400
Less: Drawings 9,000 90,200 Machinery 36,000
Less: Depreciation 3,600 32,400
Building 42,000
1,18,100 1,18,100
135
Chapter 13
COMPUTERISED ACCOUNTING SYSTEM
Public Examination- September-2021 Focus Area
1. Concept of Computerised accounting System
2. Comparison between Manual and Computerised accounting
3. Advantages of Computerised Accounting System
Concept of Computerised Accounting System (CAS)

Computerised accounting is the process of entering business transactions and generating financial
statements and reports with the help of computers. In simple words, accounting with the help of
computers is called computerised accounting.
A computerised accounting system is an accounting information system that processes the
financial transactions and events as per Generally Accepted Accounting Principles (GAAP) to
produce reports as per user requirements. In CAS accounting transactions are taken as inputs and
then processed through accounting software to generate reports like Day book, Ledger, Trial
balance, Profit and loss account and Balance sheet.
Every accounting system, manual or computerized, has two aspects:
1. It has to work under a set of well-defined concepts called Generally accepted Accounting
Principles (GAAP)
2. There must be a user defined frame work for maintenance of records and generation of reports.
Operating Environment in Computerised accounting System
The framework of storage and processing of data in computerized accounting system is called
Operating Environment. It consists of hardware as well as software in which the accounting system
works. Both hardware and software are interdependent. Modern computerized accounting systems
are based on the concept of database. A database is implemented using a Database Management
System (DBMS). DBMS is a software that enable the users to create and maintain a database. DBMS
helps in collection of data, their storage, manipulation, retrieve etc.
Every Computerised accounting system has two basic requirements:
1. Accounting Frame work: It consists of set of accounting principles, coding and grouping the
structure of accounting.
2. Operating Procedure: It is a set of operating procedures designed according to the need and
the suitability of the operating environment of the particular organization.
136
Modern computerized accounting systems are based on the concept of database. In any database-
oriented application has 4 basic requirements as mentioned below:
1. Front-end interface: It is an interactive link between the user and DBMS through which the
user communicates to the back-end-database.
Example: A transaction relating to purchase of goods may be dealt with the accounting
system through a purchase voucher, which appears on the computer’s monitor of the data
entry operator and when entered into the system is stored in the database.
2. Back-end Database: It is the data storage system that is hidden from the user and responds
to the requirements of the user.
3. Data Processing: It is a sequence of actions that are taken to transform the data into
‘decision useful information’.
4. Reporting System: The report generator extracts useful information from DBMS files and
displays it in structured format based on defined specifications. This information may be used
for further analysis, decision making, or business intelligence.
Comparison between Manual and Computerised Accounting

Accounting is the systematic process of identifying, recording, classifying, summarising, interpreting
and communicating financial information to users. Its purpose is to produce the financial reports for
their ultimate analysis. Let us understand these activities in the context of manual and computerised
accounting system.
1. Identifying: The identification of transactions, based on application of accounting principles
is, common to both manual and computerized accounting system.
2. Recording: In manual accounting, business transactions are recorded through the book of
original entry (Journal). In computerised accounting system recording of transactions takes
place in customised database.
3. Classification: In a manual accounting system, transactions recorded in the books of original
entry are further classified by posting them into ledger accounts. This results in transaction
data duplicity. In computerized accounting, no such data duplication is made. In order to
produce ledger accounts, the stored transaction data is processed to prepare the desired
result.
4. Summarising : In manual accounting system Trial Balance is prepared by ascertaining the
balances of various accounts. As a result, preparation of ledger accounts becomes a
137
prerequisite for preparing the trial balance. However, in computerized accounting, the
originally stored transactions data are processed and prepare trial balance directly.
5. Financial Statements: In a manual system of accounting, the preparation of financial
statements pre-supposes the availability of trial balance. However, in computerised
accounting, financial statements can be prepared by direct processing of originally stored
transaction data.
6. Closing the Books : After the preparation of financial reports, the accountants make
preparations for the next accounting period. This is achieved by posting of closing and
reversing journal entries. In computerised accounting, there is year-end processing to create
and store opening balances of accounts in database.
7. Financial statements: In a manual accounting system, financial systems are prepared at the
end of the period. While in a computerized accounting system, your financial statements and
trial balance are just a click away.
Difference between Manual Accounting andCoputerised Accounting

Manual Accounting Computerised Accounting
1.Transactions are recorded manually 2.Transactions are recorded using computer
2.Transactions are recorded in volumes of 2.Transactions are recorded in well-designed
books. database
3. Journal, ledger, trial balance, financial 3.Once transaction recorded through
statements etc. are prepared manually vouchers, data are processed automatically
and ledger, trial balance, financial statements
etc. are automatically prepared.
4.Retrieval of data is very difficult in 4. Retrieval of data is very easy in
manual accounting computerized accounting.
5.It takes lot of time. 5. It save lot of time.
6. Closing entries are necessary in Manual 6. Closing entries are not necessary in
Accounting computerized Accounting
7. Possibility of errors are high. 7. Possibility of errors are less in
Computerised Accounting
138
Advantages of computerized accounting system

The following are the advantages of computerized accounting system:
1. Accuracy: The reports generated in computerized accounting are free from mistakes. This is
because the computers can carry out even complex calculations at high rate of accuracy.
2. Simplicity: In computerized accounting the job of an accountant is only to enter accounting

transactions through appropriate vouchers. The computer system will automatically process
data and generate various accounts, trial balance, financial statements etc.
3. Storage and retrieval of data is very easy
Under computerized accounting, a large volume of data can be stored in a very small space;
further quick retrieval of data from the system is easily possible.
4. No difficulty in alterations
It is very easy to make corrections in computerized accounting.
5. Preparation of bank reconciliation statement: Preparation of bank reconciliation statement

is possible in CAS. Hence an organization can reconcile its book with bank balance.
6. Diligence: A computer is free from tiredness and lack of concentration.
7. Automatic carrying forward of balances: While entering transactions, net closing balance of
the ledger is obtained automatically. Hence, there is no need to carry forward previous year’s
closing balance as next year’s opening balance.
=================================================================
Questions:
1) The physical components of a computer is called-------
[a. software b. Hardware c. Live ware] Ans: Hardware

2) -------is a software that create and manages a database.
Ans: (DBMS – Database Management System)

3) The framework of storage and processing of data is called as------------- (Operating
environment)
4) Processed data becomes------- Ans: Information
5) Database implemented using--------- (Database management system)
6) A sequence of actions that are taken to transform the data into ‘decision useful
information’ is called---------------- (Data Processing)
139

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HSE-I Accountancy with CA Focus Area-2021

Accounting is the systematic process of identifying, recording, classifying, summarising, interpreting

Example for business transaction / Example for Non-Economic Events

Need for accounting

Users of Accounting Information

Qualitative Characteristics of Accounting Information

To be relevant, information is to be available on time and must help in prediction.

Understandability of accounting information means users of accounting information must

Basic Terms in Accounting

It can be transactions like purchase of goods, receipt of money, payment to a creditor,

Features of business transactions

1. Non –Current Assets (Fixed Assets)

that eventually are used and then have no remaining value.

Purchase Return( Return outwards)

Example for Revenue Receipts:

Deferred Revenue Expenditure

Example-Purchased goods worth Rs 50,000 from Rajan at a trade discount of 10%.Here

Closing stock in case of manufacturing concern consists of raw-materials; work –in –

Father of Accounting- Luca Pacioli

6. Find the odd one and state the reason

15. Distinguish between expenses and expenditure?

Focus Area – Pubic Examination September-

1. Basic Accounting Concept

Accounting is the language of business. Language should be understandable to everyone. There

Generally Accepted Accounting principles (GAAP)

GAAP can be classified into the following four categories:-

Concepts/Assumptions Conventions/Principles Modifying principles Accounting

5. Dual aspect Concept (Duality/Accounting Equation Concept)

Impact of Conservatism Concept or Principle of Prudence

7 According to......concept accountant are in favour of Conservatism (prudence)

9 Create Provision for doubtful debts Conservatism (Prudence)

Focus Area-Public Examination-September-2021

Assets = Liabilities + Capital

Assets – Liabilities = Capital Assets= Equites

Assets – Capital = Liabilities Assets = Owner’s equity + Outsiders’ equity

Assets= Owner’s Claim (Capital)+ Outsiders Claim (Liability)

Process of preparing Accounting Equation

Step-2: Analyses the effect of transactions in two accounts (asset,liabilities,capital,revenue or

Step-3: Record the effect on the relevant side of the equation.

Effects of Transactions on accounting Equation

1. Transactions affecting two items.

2. Transactions affecting more than two items.

1 (a) Transactions affecting opposite sides are:

1 (b) Transactions affecting same side but in opposite direction

Assets = Liabilities + Capital

Assets = Liabilities + Capital

Assets = Liabilities + Capital

Assets = Liabilities + Capital

Assets = Liabilities + Capital

Assets = Liabilities + Capital

Creditors Bills of 0 0 -500 +500 99,000

Assets = Liabilities + Capital

Illustration (NCERT Text)

1. Introduced Rs.8,00,000 as cash and Rs.50,000 by stock

Rules for Debit and Credit:

1. Asset Accounts (Land and Building, Plant and machinery,furniture,stock,debtors,cash,bank etc)

Debit the decreases and credit the increases

Debit the increases and Credit the decreases

Example:1 Started business with cash Rs. 1, 00,000.