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www.tntextbooks.in, , GOVERNMENT OF TAMILNADU, , ACCOUNTANCY, , VOLUME - I, , HIGHER SECONDARY FIRST YEAR, , Untouchability is Inhuman and a Crime, A publication under Free Textbook Programme of Government of Tamil Nadu, , Department of School Education
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www.tntextbooks.in, , Government of Tamil Nadu, First Edition - 2018, , NOT FOR SALE, , Content Creation, , The wise, possess all, , State Council of Educational, Research and Training, © SCERT 2018, , Printing & Publishing, , Tamil NaduTextbook and Educational, Services Corporation, www.textbooksonline.tn.nic.in, , II
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www.tntextbooks.in, , CONTENTS, Accountancy, , UNIT 1, , , , UNIT 2, , UNIT 3, , INTRODUCTION TO ACCOUNTING, 1.1, , Introduction to Accounting, , 1.2, , Evolution of Accounting, , , , 0HDQLQJDQG'H¿QLWLRQRI$FFRXQWLQJ, , 1.4, , Accounting cycle, , 1.5, , Objectives of Accounting, , 1.6, , Functions of Accounting, , 1.7, , Importance of Accounting, , 1.8, , Basic Accounting terminologies, , 1.9, , Branches of Accounting, , 1.10, , Bases of Accounting, , 1.11, , Users of Accounting information, , 1.12, , Role of an accountant, , CONCEPTUAL FRAMEWORK OF ACCOUNTING, 2.1, , Book-keeping – An introduction, , 2.2, , Book- keeping Vs. Accounting, , 2.3, , Relationship among Book-keeping, Accounting and Accountancy, , 2.4, , Accounting Principles, , 2.5, , Accounting Standards (AS), , 2.6, , International Financial Reporting Standards (IFRS), , 2.7, , Accounting Standards in India, , BOOKS OF PRIME ENTRY, , 1, , 18, , 31, , 3.1, , Introduction, , 3.2, , Source documents, , 3.3, , Double entry system, , 3.4, , Transaction, , 3.5, , Account, , 3.6, , Approaches of recording transactions, , 3.7, , Accounting rules, , 3.8, , Journal entries, III
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www.tntextbooks.in, UNIT 4, , UNIT 5, , UNIT 6, , UNIT 7, , LEDGER, , 81, , 4.1, , Introduction, , 4.2, , Utilities of ledger, , 4.3, , Format of ledger account, , 4.4, , Distinction between journal and ledger, , 4.5, , Procedure for posting, , 4.6, , Balancing of ledger accounts, , TRIAL BALANCE, , 107, , 5.1, , Introduction to trial balance, , 5.2, , Need for preparing trial balance, , 5.3, , Definition of trial balance, , 5.4, , Features of trial balance, , 5.5, , Objectives of preparing trial balance, , 5.6, , Limitations of trial balance, , 5.7, , Methods of preparing trial balance, , 5.8, , Suspense account, , SUBSIDIARY BOOKS - I, , 133, , 6.1, , Introduction, , 6.2, , Meaning of subsidiary books, , 6.3, , Types of subsidiary books, , 6.4, , Advantages of subsidiary books, , 6.5, , Purchases book, , 6.6, , Purchases returns book, , 6.7, , Sales book, , 6.8, , Sales returns book, , 6.9, , Bills of exchange, , 6.10, , Bills receivable book, , 6.11, , Bills payable book, , 6.12, , Journal proper, , SUBSIDIARY BOOKS - II, , 170, , 7.1, , Introduction, , 7.2, , Meaning of cash book, , 7.3, , Cash book – A subsidiary book and principal book of accounts, , 7.4, , Importance of cash book, , 7.5, , Types of cash book, , 7.6, , Single column cash book, , IV
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www.tntextbooks.in, , UNIT 8, , 7.7, , Cash discount and trade discount, , 7.8, , Double column cash book, , 7.9, , Three column cash book, , 7.10, , Petty cash book, , BANK RECONCILIATION STATEMENT, , , , E-Book, , 209, , 8.1., , Introduction, , 8.2., , Bank reconciliation statement (BRS), , , , 5, HDVRQVZK\EDQNFROXPQRIFDVKERRNDQGEDQNVWDWHPHQWPD\GL൵HU, , 8.4., , Preparation of bank reconciliation statement, , Assessment, , Digi-Link, , Lets use the QR code in the text books ! How ?, • Download the QR code scanner from the Google PlayStore/ Apple App Store into your smartphone, • Open the QR code scanner application, • Once the scanner button in the application is clicked, camera opens and then bring it closer to the QR code in the text book., • Once the camera detects the QR code, a url appears in the screen.Click the url and goto the content page., , V
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www.tntextbooks.in, , Dear Students!, This Accountancy textbook is the source of knowledge to provide you with the basic understanding of Accountancy, and to make use of your analytical ability to make you an excellent person in applying the accounting principles to real, business situations through various activities given in the textbook., The book contains 14 units, within which the subdivisions and various student activities are given in an organised way to, make learning easy, systematic and a pleasure., The method of using this book effectively to learn the concepts and methods contained in it and explanation of the, important items included in the text book are given below to have a better learning experience., , UNITS, , Units are the broad divisions of the book which contain, several subdivisions in each of them so that the students can, have understanding of the specific substance in various parts, of Accountancy education. Each unit gives the specialised, knowledge on the content discussed. The units are to be learnt, in the order given in the book to have continuity of learning and, proper understanding of the subject matter., , SUBDIVISIONS, , HOW TO USE, THE BOOK, , POINTS TO RECALL, , KEY TERMS, , VI
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www.tntextbooks.in, , SELF-EXAMINATION, QUESTIONS, , TO EXPLORE FURTHER, , GLOSSARY, We wish you a meaningful and successful learning., , Team of Authors., VII
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www.tntextbooks.in, , SCOPE OF ACCOUNTANCY EDUCATION, “Accountancy” as a field of knowledge is all pervasive in nature. It offers enormous opportunities, for higher education and employment both in India and abroad. The scope after higher, secondary programme in Accountancy is given below:, , EDUCATIONAL OPPORTUNITIES, Any of the following Degree, Programmes can be pursued, by the students both on, regular mode and distance, education mode, , Any of the following, professional courses/, programmes, , Any of the following, programmes in India or, abroad after a formal degree, programme anywhere in, colleges, Universities, , Any of the following, professional courses/, programmes after, a formal degree, programme, , • B.Com–Bachelor of, Commerce (General), • B.Com–(Hons.), • B.Com–(Accounting &, Finance), • B.Com–(Corporate, Secretaryship), • B.Com–(Computer, Applications), • B.Com–(International, Business), • B.Com–(Bank Management), • B.B.A–(Bachelor of Business, Administration), • B.B.M–(Bachelor of Bank, Management), • B.Com–(Co-operation), • M.Com–(Master of, Commerce–Five year, Integrated programme), , • CA–Chartered, Accountancy, • CMA–Cost and, Management, Accountancy, • CS–Company, Secretaryship, • BL–Bachelor of Law, – Five year Integrated, Programme, • CIMA (Chartered, Institute of, Management, Accountants, • ACCA (Association, of Chartered Certified, Accountants (UK)), • CPA (Certified Public, Accountant (USA)), • CFP–Certified, Financial, Planner(USA), , • M.Com–, Master of Commerce, • M.Com–, (Accounting and Finance), • M.Com–(Corporate, Secretaryship), • M.Com– (Computer, Applications), • M.Com– (International, Business and Banking), • M.Com– (Co operative, Management), • M.B.A–Master of Business, Administration, • M.B.A–(Finance), • M.B.A–(Marketing), • M.B.A–(Human Resource, Management), • M.B.A–(Advertisement and, Salesmanship), • M.B.A–(Hospital, Management), • MHRM (Master of Human, Resource Management), • MLM (Master of Labour, Management), , • Indian Administrative • M.Phil– Master of, Philosophy, Service (IAS), • Indian Police Service • Ph.D– Doctor of, Philosophy, (IPS), • Indian Foreign, Service (IFS), • Indian Revenue, Service (IRS), • Indian Audit and, Account Service, (IA&AS), • B.Ed., (Bachelor of, Education) and, followed by, • M.Ed., (Master, of Education), Programmes, • PG Diploma, programme, , EMPLOYMENT OPPORTUNITIES, Accounts assistant, , Accountant, , Audit assistant, , Cost analyst, , Investment consultant, , Financial advisor, , Tax practitioner, , Chartered Accountant, , Company Secretary, , Cost and Management Accountant, , Teaching, , State and Central Government jobs, , VIII, , Any of the research, programme after a, formal post graduation
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www.tntextbooks.in, , Unit 1, , INTRODUCTION TO ACCOUNTING, , Contents, , Points to recall, , 1.1 Introduction to Accounting, 1.2 Evolution of Accounting, 1.3 Meaning and, Accounting, , Definition, , The following points are to be recalled, before, learning, introduction, to, Accounting:, , of, , 1.4 Accounting cycle, , • Barter system, , 1.5 Objectives of Accounting, 1.6 Functions of Accounting, , • Money as a medium of exchange, , 1.7 Importance of Accounting, , • Activities involving transfer of money, or money’s worth, , 1.8 Basic Accounting terminologies, 1.9 Branches of Accounting, 1.10 Bases of Accounting, 1.11 Users of Accounting information, 1.12 Role of an accountant, , Key terms to know, , Learning Objectives, To enable the students to, •, Understand the meaning and, functions of accounting, •, Analyse the importance of, accounting, •, Understand the basic accounting, terminologies, •, Analyse the role of an accountant, , 1, , •, , Accounting, , •, , Accountant, , •, , Cash basis, , •, , Accrual basis
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www.tntextbooks.in, , 1.1 Introduction to Accounting, Business entities and other organisations carry on activities which involve exchange of money, or money’s worth or economic resources. Where the volume of these activities are large in, number it is necessary that these are recorded for the purpose of taking important decisions as, to whether the activities are viable, gainful and are to be continued or not. Information about, the business and other organisations is required not only to the proprietors and managers, of business and other organisations but also to various other interested users such as the, government, investors, customers, employees and researchers., Raising and utilising of finance for various purposes must be recorded systematically,, scientifically and uniformly. It is very important because finance is the most important resource, next to the human element for any economic activity. Hence, there is a need for principles,, methods and procedures to be followed to record all these information and to derive from, these information, the feasibility and benefit of the activities carried out. Accountancy provides, the basic theory, principles and methods to be followed to account for all financial activities, taking place in an organisation. Accounting the financial activities in a systematic way helps in, ascertaining the efficiency of performance of these activities and provides data about the state, of affairs of the organisation for further analysis and planning., Accounting is the language of business. The most important function of a language is to, facilitate communication. The information about business entities regarding their operating, performance and financial status can be obtained from the financial information recorded in, the accounting records. This information is communicated to the interested users of business, information such as proprietors, management, investors, customers and the government., 1.2 Evolution of Accounting, In India, 23 centuries ago, Chandragupta Maurya’s Minister Kautilya wrote a book named, ‘Arthashastra’, wherein some references can be traced regarding the way of maintaining, accounting records., In the earliest days of civilisation, accounting was done by stewards who managed the, properties of wealthy people. They rendered accounts periodically to the owners of property., The stewardship accounting is said to be the root of accounting. Records of debit and credit, were found in the 12th century itself., In 1494, Luca Pacioli an Italian developed double-entry book-keeping system. Due to the, industrial revolution in the 18th and 19th centuries, large scale operations were carried on, and joint stock companies emerged as an important form of organisation which required, separation of ownership from management. Hence, to safeguard the interest of owners and, investors, the business establishments required detailed information about business which, paved the way for development of comprehensive financial accounting information system., 2
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www.tntextbooks.in, , In the 20th century, the need for analysis of financial information for managerial decision, making caused emergence of Management Accounting as a separate branch of accounting., Though accounting was individual centric in the initial stage of evolution of accounting, it has, gradually developed into Social Responsibility Accounting in the 21st century, due to the vast, growth in business activities as a result of development in various fields. Thus, accounting has, become inevitable in the modern world for business., 1.3 Meaning and Definition of Accounting, Student activity, Think: Before the evolution of money, commodities were exchanged for commodities. In, such situations, how would people have maintained their accounts?, Accounting is the systematic process of identifying, measuring, recording, classifying, summarising,, interpreting and communicating financial information. Accounting gives information on:, (i) the resources available, (ii) how the available resources have been employed and, (iii) the results achieved by their use., The profit earned or loss incurred during the accounting period, value and nature of assets,, liabilities and capital can be ascertained from the information recorded in accounts., According to the American Institute of Certified Public Accountants “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 ”., American Accounting Association has defined accounting as “the process of identifying,, measuring, and communicating economic information to permit informed judgements and, decisions by users of the information”., From the above definitions, the following attributes of accounting emerge:, i), , Accounting is an art. It requires the expertise and skill of accountants to design accounting, system and policies, to decide the accounting process in order to suit the requirements of, an organisation., , ii), , The transactions or events of a business must be recorded in monetary terms., , iii) Accounting process involves recording, classifying and summarising of transactions and, analysis and interpretation of the results., iv) The results of such analysis must be communicated to the persons who are interested in, such information., 3
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www.tntextbooks.in, , 1.4 Accounting cycle, Preparing Balance, Sheet, Preparing Profit, Transactions, and loss, Account, , Opening, Entry, Preparing Trading, , Journalising, , Account, , Preparing Trial, , Posting and, , Balance, , Balancing, Accounting cycle, , Accounting cycle is the sequence of steps involved in the accounting process. Accounting, cycle starts with the identification and recording of financial transactions of an organisation, and ends with the preparation of final accounts for the accounting year. The cycle continues, for the next accounting year with the opening balances of assets and liabilities which are the, closing balances of the preceding year. The steps involved are:, (i) Identifying the transactions and journalising, , The first step in the accounting process is identifying the financial transactions of a business., All the monetary transactions are recorded in the books of original entry called journals., Recording the transactions in the journal is called journalising. Entries are made in the journals, on the basis of source documents in the chronological order, i.e., the order of occurrence of, the transactions., (ii) Posting and balancing, , Transferring the entries from the journal to the ledger is called posting. In the ledger, entries, are made in each account after classifying them under common heads. Finding the difference, 4
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www.tntextbooks.in, , between the total of the debit column and credit column of all the ledger accounts is called, balancing., (iii) Preparation of trial balance, , The list of ledger balances namely trial balance is prepared as the next step. On the basis of, ledger balances the financial statements are prepared., (iv) Preparation of trading account, , Next step is preparation of trading account for a particular accounting period. All the direct, revenues and direct expenses are transferred to trading account. The balance in the trading, account is the gross profit or gross loss., Y 3UHSDUDWLRQRISUR¿WDQGORVVDFFRXQW, , Profit and loss account is prepared next for a particular accounting period. All the indirect, revenues and indirect expenses along with gross profit or gross loss are transferred to profit, and loss account. The balance in the profit and loss account is the net profit or net loss., (vi) Preparation of balance sheet, , A statement showing the balances of assets and liabilities namely balance sheet is prepared as, the final step in the accounting process. It is prepared on a particular date, normally, on the, last day of the accounting period., The closing balances of an accounting year are taken as the opening balances for the next, accounting year. The transactions identified and recorded for the next year are followed by, posting and other steps., The results are communicated to the users of accounting information for the purpose of, analysis and decision making., 1.5 Objectives of Accounting, Following are the objectives of accounting:, i) To keep a systematic record of financial transactions and events, ii) To ascertain the profit or loss of the business enterprise, iii) To ascertain the financial position or status of the enterprise, iv) To provide information to various stakeholders for their requirements, v) To protect the properties of an enterprise and, vi) To ascertain the solvency and liquidity position of an enterprise, 5
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www.tntextbooks.in, , 1.6 Functions of Accounting, The main functions of accounting are as follows:, (i) Measurement, , The main function of accounting is to keep systematic record of transactions, post them to the, ledger and ultimately prepare the final accounts. Accounting works as a tool for measuring the, performance of the business enterprises. It also shows the financial position of the business, enterprises., (ii) Forecasting, , With the help of the various tools of accounting, future performance and financial position of, the business enterprises can be forecasted., (iii) Comparison, , Accounting helps to compare the actual performance with the planned performance. It is also, possible to compare with the accounting policies. Through comparison of the actual financial, results of the business enterprises with projected figures and standards, effective measures can, be taken to enhance the efficiency of various operations., (iv) Decision making, , Accounting provides relevant information to the management for planning, evaluation of, performance and control. This will help them to take various decisions concerning cost, price,, sales, level of activity, etc., Decision refers to choosing a desirable course of action from alternative, courses of action., (v) Control, , As accounting works as a tool of control, the strengths and weaknesses are identified to provide, feedback on various measures adopted. It serves as a tool for evaluating compliance of business, policies and programmes., , Control refers to comparison of actual performances with planned performances,, measure deviation and take corrective action., (vi) Assistance to government, , Government needs full information on the financial aspects of the business for various, purposes such as taxation, grant of subsidy, etc. Accounting provides relevant information, about the business to exercise government control on business enterprises., 6
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www.tntextbooks.in, , 1.7 Importance of Accounting, Accounting is a basic necessity for all enterprises., Importance of accounting is enumerated as below:, , ◆ Systematic records, ◆ Preparation of financial statements, IMPORTANCE, ◆ Assessment of progress, , (i) Systematic records, , All the transactions of an enterprise which are, financial in nature are recorded in a systematic way, in the books of accounts. The records are classified, under common heads and summaries are prepared., , OF, , ◆ Aid to decision making, ◆ Satisfies legal requirements, ◆ Information to interested groups, , ◆ Legal evidence, ◆ Computation of tax, ACCOUNTING, ◆ Settlement during merger, , LL 3UHSDUDWLRQRI¿QDQFLDOVWDWHPHQWV, , Results of business operations and the financial position of the concern can be ascertained, from accounting periodically through the preparation of financial statements namely, income, statement or trading and profit and loss account and balance sheet. This helps in distribution, of profits to the owners and to provide funds for future growth of the business., (iii) Assessment of progress, , Analysis and interpretation of financial data can be done to assess the progress made in different, areas and to identify the areas of weaknesses. Management is provided with a complete picture, of the liquidity, profitability and solvency of the business., (iv) Aid to decision making, , Management of a firm has to make routine and strategic decisions while discharging its, functions. Accounting provides the relevant data to make appropriate decisions. Future policies, and programmes can be planned by the management based on the accounting data provided., Y 6DWLV¿HVOHJDOUHTXLUHPHQWV, , Various legal requirements like maintenance of Provident Fund (PF) for employees, Employees, State Insurance (ESI) contributions, Tax Deducted at Source (TDS), filing of tax returns are, properly fulfilled with the help of accounting. Preparation of accounts and financial statements, as per the legal requirements is also facilitated., (vi) Information to interested groups, , Accounting supplies appropriate information to different interested groups like owners,, management,creditors, employees, financial institutions, tax authorities and the government., (vii) Legal evidence, , Accounting records are generally accepted as evidence in courts of law and other legal, authorities in the settlement of disputes., , 7
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www.tntextbooks.in, , (viii) Computation of tax, , Accounting records are the basic source for computation and settlement of income tax and, other taxes., (ix) Settlement during merger, , When two or more business units decide to merger, accounting records provide information, for deciding the terms of merger and any compensation payable as a consequence of merger., , Two or more business units forming a single entity is known as merger., , 1.8 Basic Accounting terminologies, Accounting is a versatile system which serves a large number of purposes in the modern, business world. Hence, the following terminologies need to be understood., Transaction, , An activity which involves transfer of money or money’s worth (goods,, services, ideas) from one person to another., , Cash transaction, , It is a transaction which involves immediate cash receipt or immediate, cash payment., , Credit transaction, , It is a transaction in which cash is not received or paid immediately, but, will be received or paid later., , Account, , It is the basic unit for measurement in accounting. It is used for, identifying a person, or an item in accounting. An account is opened, individually for a person, asset, expense, income, etc. In ledger, an, account is a summary of transactions under a head., , Capital, , It is the amount invested by the owner or proprietor in an organisation., , Drawings, , It is the amount of cash or value of goods, assets, etc., withdrawn from, the business by the owner for the personal use of the owner., , Voucher, , Any written or printed document in support of a business transaction, is called a voucher. Examples: cash receipt, invoice, cash memo, bank, pay-in- slip, etc., , Invoice, , It is a statement prepared by a seller of goods to be sent to the buyer. It, shows details of quantity, price, value, etc. of the goods and any discount, given, finally showing the net amount payable by the buyer., , Goods, , It includes articles, things or commodities in which a business is dealing, with. Example: Furniture will be goods for those who deal in furniture., 8
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www.tntextbooks.in, , Purchases, , Buying of goods with the intention of resale is called purchases., , Purchases returns or When goods bought are returned to the suppliers, it is known as, returns outward, purchases returns or returns outward., Sales, , When goods meant for resale are sold, it is called sales., , Sales returns or, returns inward, , When goods sold are returned by the customers, it is called as sales, returns or returns inward., , Stock, , Unsold goods lying in a business on a particular date are known as stock., , Income, , It is the amount receivable or realised from sale of goods and earnings, from interest, dividend, commission, etc., , Expense, , It is the amount incurred in order to produce and sell the goods and, services., , Solvency, , Solvency is the capability of a person or an enterprise to pay the debts., , Insolvency, , Insolvency is the incapability of a person or an enterprise to pay the, debts., , Asset, , Any physical thing or right owned that has a monetary value is called, asset., , Liability, , It refers to the financial obligation of the business., , Debtor, , A person who receives a benefit without giving money or money’s worth, immediately, but liable to pay in future or in due course of time., , Creditor, , A person who gives a benefit without receiving money or money’s worth, immediately but to claim in future., , Depreciation, , It refers to the gradual reduction in the value of fixed assets due to usage, and passage of time., , Bad debt, , It is a loss to the business arising out of failure of a debtor to pay the, dues. It is irrecoverable debt., , 1.9 Branches of Accounting, Depending on the informational needs of various, users of accounting information, several branches, or subfields of accounting have been developed., , Financial, Accounting, , Human, Resources, Accounting, , Cost, Accounting, , Accounting, , The various branches of accounting are:, (i) Financial Accounting, , Social, It involves recording of financial transactions, Management, Responsibility, Accounting, Accounting, and events. It is historical in nature and records, are maintained for transactions and events which, have already occurred. It provides financial information to the users for taking decisions. It is, concerned with identification, recording, classifying and summarising of financial transactions, , 9
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www.tntextbooks.in, , and events and ends up with the preparation of financial statements, namely, trading and profit, and loss account or income statement and balance sheet and communication of the same to, the interested users. Trading and profit and loss account shows the profit or loss made during, an accounting period and the balance sheet shows the financial position of the business as on, a particular date., (ii) Cost Accounting, , It involves the collection, recording, classification and appropriate allocation of expenditure, for the determination of the costs of products or services and for the presentation of data for, the purposes of cost control and managerial decision making., (iii) Management Accounting, , It is concerned with the presentation of accounting information in such a way as to assist, management in decision making and in the day-to-day operations of an enterprise. The, information collected from financial accounting, cost accounting, etc. are grouped, modified, and presented as per the requirements of management for discharging their functions and for, decision making., (iv) Social Responsibility Accounting, , It is concerned with presentation of accounting information by business entities and other, organisations from the view point of the society by showing the social costs incurred such, as environmental pollution by the enterprise and social benefits such as infrastructure, development and employment opportunities created by them. It arises because of corporate, social responsibility., (v) Human Resources Accounting, , It is concerned with identification, quantification and reporting of investments made in human, resources of an enterprise., Student activity, Think: Do you think financial accounting, cost accounting and management accounting, can be maintained by the same person?, 1.10. Bases of Accounting, There are three bases of accounting in common usage, namely, i., , Cash basis, , ii., , Accrual or mercantile basis, , iii. Mixed or hybrid basis., 10
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www.tntextbooks.in, , (i) Cash basis, , Under cash basis of accounting, actual cash receipts and actual cash payments are recorded., In this basis, revenue is recognised when cash is received and expenses are recognised when, cash is paid. Credit transactions are not recorded till cash is actually received or paid. Under, this basis,, a., , Any income received, , b., , Any expenditure paid, , c., , Any asset purchased for which cash is paid, , d., , Any liability paid during the accounting period whether related to the past, present or, future is taken into account., , (ii) Accrual or mercantile basis, , Under accrual basis of accounting, the revenue whether received or not, but has been earned, or accrued during the accounting period and expenses incurred whether paid or not are, recorded. In other words, revenue is recognised when it is earned or accrued and expenses are, recognised when these are incurred. Under this basis,, a., , Any income earned whether received or not, , b., , Any expenditure incurred whether paid or not, , c., , Any asset purchased whether cash is paid or not, , d., , Any liability incurred whether paid or not during the accounting period is recorded., , Under section 128(3) of the Indian Companies Act, 2013, all the companies are required to, maintain the books of accounts according to the accrual basis of accounting., (iii) Hybrid or mixed basis, , This basis is a combination of cash basis and accrual basis of accounting. Under mixed basis of, accounting, both cash basis and accrual basis are followed. Revenues and assets are generally, recorded on cash basis whereas expenses and liabilities are generally taken on accrual basis., 1.11 Users of Accounting information, Student activity, Think: ‘Accounting is useful only to the owner of the business’ – Do you agree?, There are several persons who need the accounting information for various purposes. They, can be classified into two:, A) Internal users and, B) External users, 11
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www.tntextbooks.in, , A) Internal Users, , The internal users are owners,, management and employees who, are within the organisation., , Users of accounting information, , Internal, , (i) Owners, , External, , i. Owners, , i. Creditors and financial, The owners of a business provide, institutions, ii. Management, capital to be used in the business., ii. Investors, iii. Employees, They are interested to know, iii. Customers, iv. Tax authorities and, whether the business has earned, regulatory bodies, profit or not during a particular, v. Government, period and also its financial, vi. Researchers, vii. General public, position on a particular date. They, want accounting reports in order to, have an appraisal of performance and also for an assessment of future prospects to ensure that, they will get their expected returns from the business and get back their capital safely., , (ii) Management, , Accounting data are the basis for most of the decisions made by the management. The trends in, sales and purchases, relationship of expenses to the sales, efficiency of employees, comparative, profitability of different departments, capital structure and solvency position are some of the, vital data required by management for planning and controlling the business operations., Financial statements and other reports prepared under financial accounting provide this, information to the management., , Capital structure refers to the mix of a firm’s permanent long-term financing, represented by debt, preference share capital and equity shareholders’ funds., , (iii) Employees, , The employees are interested in the profit earning capacity of the business which will affect, their remuneration, working conditions and retirement benefits and stability and growth of, the enterprise., B) External users, , External users are the persons who are outside the organisation but make use of accounting, information for their purposes. They are:, , 12
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www.tntextbooks.in, , L &UHGLWRUVDQG¿QDQFLDOLQVWLWXWLRQV, , Suppliers of goods and services, commercial banks, public deposit holders and debentureholders, are included in this category. They are interested in knowing the liquidity position and repaying, capacity of the business to ensure the safety of getting the amount due to them or interest and, the principal amount., (ii) Investors, , Persons who are interested in investing their funds in an organisation should know about, the financial condition of a business unit while making their investment decisions. They are, more concerned about future earnings and risk bearing capacity of the organisation which will, affect the return to the investors., (iii) Customers, , Customers who buy and use the products and services of business enterprises are interested, in knowing the details of the products and the prices charged to them. They are interested, in knowing the stability and profitability of an enterprise to ensure continued supply of the, products or services by the enterprise., (iv) Tax authorities and other regulatory bodies, , Accounting information helps the tax authorities in computing income tax and taxes on goods, and services and other taxes to be collected from business units. Other regulatory bodies also, require information about revenues, expenses and other financial aspects of business to ensure, that the enterprises comply with statutory requirements., (v) Government, , The scarce resources of the country are used by business enterprises. Information about, performance of business units in different industries helps the government in policy, formulation for development of trade and industry, allocation of scarce resources, grant, of subsidy, etc. Government also administers prices of certain commodities. In such cases,, government agencies have to ensure that the guidelines for pricing are followed., (vi) Researchers, , Researchers to carry out their research can use accounting information and make use of the, published financial statements for analysis and evaluation., (vii) General public, , From accounting information, the general public at large can get a view of the earning capacity, and stability of the enterprise as well as the social responsibility measures undertaken by the, enterprise particularly in its area of operation and also the employment opportunities provided, to the local people., 13
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www.tntextbooks.in, , 1.12 Role of an accountant, An accountant designs the accounting procedures for, an enterprise. He plays several roles in an organisation, as follows:, (i) Record keeper, , The accountant maintains a systematic record of, financial transactions. He also prepares the financial, statements and other financial reports., , ROLE, OLE, , OF AN, , ACCOUNTANT, , Record, keeper, , Provider, der of, information, mation, , Protector of, business, assets, , Financial, ncial, advisor, visor, , Tax, manager, , Public, relation, officer, , (ii) Provider of information to the management, , The accountant assists the management by providing financial information required for, decision making and for exercising control., (iii) Protector of business assets, , The accountant maintains records of assets owned by the business which enables the, management to protect and exercise control over these assets. He advises the management, about insurance of various assets and the maintenance of the same., (iv) Financial advisor, , The accountant analyses financial information and advises the business managers regarding, investment opportunities, strategies for cost savings, capital budgeting, provision for future, growth and development, expansion of enterprise, etc., (v) Tax manager, , The accountant ensures that tax returns are prepared and filed correctly on time and payment, of tax is made on time. The accountant can advise the managers regarding tax management,, reducing tax burden, availing tax exemptions, etc., YL 3XEOLFUHODWLRQRFHU, , The accountant provides accounting information to various interested users for analysis as per, their requirements., Points to remember, •, •, , •, , Accounting is termed as the language of the business., There are various branches of accounting such as financial accounting, cost, accounting, management accounting, social responsibility accounting and human, resource accounting., There are three bases of accounting namely cash basis, accrual or mercantile basis and, mixed or hybrid basis., 14
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www.tntextbooks.in, , •, , There are several persons who need the accounting information - internal users and, external users., , •, , Accountants have several roles and responsibilities., 6HOIH[DPLQDWLRQTXHVWLRQV, , I Multiple choice questions, Choose the correct answer, 1., , 2., , The root of financial accounting system is, (a) Social accounting, , (b) Stewardship accounting, , (c) Management accounting, , (d) Responsibility accounting, , Which one of the following is not a main objective of accounting?, (a) Systematic recording of transactions, (b) Ascertainment of the profitability of the business, (c) Ascertainment of the financial position of the business, (d) Solving tax disputes with tax authorities, , 3., , 4., , Which one of the following is not a branch of accounting?, (a) Financial accounting, , (b) Management accounting, , (c) Human resources accounting, , (d) None of the above., , Financial position of a business is ascertained on the basis of, (a) Journal, , 5., , (b) Trial balance, , (c) Balance Sheet, , (d) Ledger, , Who is considered to be the internal user of the financial information?, (a) Creditor, , (b) Employee, , (c) Customer, , (d) Government, , Answers, , 1 (b), , 2 (d), , 3 (d), , 4 (c), , ,,9HU\VKRUWDQVZHUTXHVWLRQV, , 1., , Define accounting., , 2., , List any two functions of accounting., , 3., , What are the steps involved in the process of accounting?, 15, , 5 (b)
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www.tntextbooks.in, , 4., , Who are the parties interested in accounting information?, , 5., , Name any two bases of recording accounting information., , ,,,6KRUWDQVZHUTXHVWLRQV, , 1., , Explain the meaning of accounting., , 2., , Discuss briefly the branches of accounting., , 3., , Discuss in detail the importance of accounting., , 4., , Why are the following parties interested in accounting information?, (a) Investors, , 5., , (b) Government, , Discuss the role of an accountant in the modern business world., , A Self-Help Group (SHG) is an informal, self-managed voluntary group of, 5-20 individuals, who come together to address their common problems and, are generally engaged in credit and savings activities operating on principles of mutuality, and solidarity. Most SHG members are minimally educated. Regardless, every SHG should, be aware of the status of its outstanding loans to members, the status of its loans from external, institutions and the member payments due. Book-keeping is a difficult task for SHGs., Now, discuss on the following points:, How do SHGs maintain their accounting?, Do you think that financial accounting system is suitable for all businesses?, , To explore further, Can each business unit follow its own way for maintaining accounting records?, Will it serve the requirements of different users of accounting information?, Reference, 1. M C Shukla, T S Grewal and S C Gupta, Advanced Accounts, 19th ed., 2017, S.Chand Publishing, New Delhi., 2. R L Gupta and V K Gupta, Financial Accounting, 11th ed., 2014, Sultan Chand and Sons, New Delhi., 3. S P Jain and K L Narang, Advanced Accountancy Vol – I, 2016, Kalyani Publishers, New Delhi., 4. Dalston L Cecil and Jenitra L Merwin, Financial Accounting, 3rd ed., 2017, Learntech Press, Trichy., 5. Fundamentals of Accounting, 2017, The Institute of Chartered Accountants of India, New Delhi., , 16
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www.tntextbooks.in, , ICT CORNER, INTRODUCTION TO ACCOUNTANCY, , Lets get introduced to, Basic Accounting, , Steps:, • This is an Android app activity. Open the Browser and type the URL given, (or) Scan the QR Code. (Or) search for “Basic Accounting” in google play, store. Install and open the app. This is Hands on Lesson., • Select any one of the topic you want to learn. Open “Introduction to, Accounting., • In the Next page you have sub menus. Select one by one and go through, the lesson., , Step1, , Step2, Pictures are indicatives only*, , URL:, https://play.google.com/store/apps/details?id=com.paradigmsc.basicaccounting, (or) scan the QR Code, , 17, , Step3
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www.tntextbooks.in, , Unit 2, , CONCEPTUAL FRAMEWORK OF, ACCOUNTING, , Contents, , Points to recall, , 2.1 Book-keeping – An introduction, The following points are to be recalled, before learning conceptual framework of, accounting:, , 2.2 Book- keeping Vs. Accounting, 2.3 Relationship among Book-keeping,, Accounting and Accountancy, , •, , 2.4 Accounting Principles, 2.5 Accounting Standards (AS), , •, •, •, , 2.6 International Financial Reporting, Standards (IFRS), , Meaning and definition of, Accounting, Functions of Accounting, Users of Accounting, Basic Accounting terminologies, , 2.7 Accounting Standards in India, , Key terms to know, Learning Objectives, To enable the students to, •, •, •, •, , Understand the meaning, definition, and features of book-keeping, Evaluate the advantages and, limitations of book-keeping, Understand the accounting concepts, and conventions, Understand the meaning of and need, for Accounting Standards, , 18, , •, , Book-keeping, , •, , Accountancy, , •, , Accounting cycle, , •, , Accounting concepts, , •, , Accounting Standards
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www.tntextbooks.in, , 2.1 Book-keeping-An introduction, The first tstep in the accounting process is identifying and recording of transactions in the, books of accounts. This is necessary for any business as the transactions happening in a, business entity must be recorded so that the information is available for further analysis., Book-keeping forms the base for the preparation of financial statements and interpretation which, are the important functions of accounting. In a broad sense, accounting includes book-keeping, also. In a small business, the entire accounting work may be performed by a single accountant., In a large firm, there may be a separate person or department for book-keeping work., 2.1.1 Meaning of book-keeping, , Book-keeping is the process of recording financial transactions in the books of accounts. It, is the primary stage in the accounting process. It includes recording the transactions and, classifying the same under proper heads. Book-keeping work is of routine nature. Transactions, may be recorded in the accounting note books and ledgers or may be recorded in a computer., 'H¿QLWLRQRIERRNNHHSLQJ, , “Book-keeping is an art of recording business dealings in a set of books”. - J.R.Batliboi., “Book-keeping is the science and art of recording correctly in the books of account, all those business transactions of money or money’s worth”. -R.N.Carter., 2.1.3 Features of book-keeping, , Following are the features of book-keeping:, i., , It is the process of recording transactions in the books of accounts., , ii., , Monetary transactions only are recorded in the accounts., , iii. Book-keeping is the primary stage in the accounting process., iv., , Book-keeping includes journalising and ledger processing., , 2.1.4 Objectives of book-keeping, , Following are the objectives of book-keeping:, i., , To have a complete and permanent record of all business transactions in chronological, order and under appropriate headings., , ii., , To facilitate ascertainment of the profit or loss of the business during a specific period., , iii. To facilitate ascertainment of financial position., iv., , To know the progress of the business., , v., , To find out the tax liabilities., , vi. To fulfil the legal requirements., 19
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www.tntextbooks.in, , 2.1.5 Advantages of Book-keeping, , Book-keeping has the following advantages:, i., , Transactions are recorded systematically in chronological order in the book of accounts., Thus, book-keeping provides a permanent and reliable record for all business transactions., , ii., , Book-keeping is useful to get the financial information., , iii. It helps to have control over various business activities., iv., , Records provided by business serve as a legal evidence in case of any dispute., , v., , Comparison of financial information over the years is possible. Also comparison of, financial information of different business units is facilitated., , vi. Book-keeping is useful to find out the tax liability., 2.1.6 Limitations of book-keeping, , Book-keeping has the following limitations:, i., , Only monetary transactions are recorded in the books of accounts., , ii., , Effects of price level changes are not considered., , iii. Financial data recorded are historical in nature, i.e., only past data are recorded., 2.2 Book-keeping Vs. Accounting, Following are the differences between book-keeping and accounting:, S. No Basis of distinction, Book-keeping, Accounting, 1, Scope, It is concerned with recording It is concerned with recording,, and classifying the business classifying, summarising,, transactions., analysing and interpreting the, financial data., 2, Stage, Book-keeping is the primary Apart from the primary stage,, stage in accounting. It is the it includes secondary stage of, base for accounting., analysis and interpretation., 3, Nature of job, It is routine and clerical in It is analytical in nature., nature., 4, Knowledge required It requires basic knowledge of It requires thorough, the principles of journalising knowledge of accounting, and posting., principles, procedures and, practices., 5, Skill required, Analytical skill is not required It requires analytical skill., for book-keeping., 20
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www.tntextbooks.in, , 2.3 Relationship among Book-keeping, Accounting and Accountancy, Book-keeping is part of Accounting. It is the primary stage in accounting. It is the process, of recording transactions in the books of accounts. Accounting is part of Accountancy., Accounting is the process of reording, classifying, analysing and interpreting of financial data., Accountancy is the systematic knowledge of accounting process and contains the standards,, principles, policies and procedures to be followed in accounting., Accountancy, Accounting, Book-keeping, , 2.4 Accounting Principles, Accounting principles are the basic norms and assumptions developed and established as the, basis for accounting system. These principles are adopted by the accountants universally. These, accounting principles provide uniformity and consistency in the accounting methods and, process. Such accounting principles are known as Generally Accepted Accounting Principles, (GAAP)., Accounting principles provide the basic framework within which the accounting records and, accounting reports are to be prepared. Accounting standards have been issued by national, and international regulatory authorities to ensure uniformity of accounting procedure and, accounting results. These accounting standards and GAAPs provide the theoretical base of, accounting. Accounting principles may be accounting concepts or accounting conventions., Accounting concepts are the basic assumptions whereas conventions are the guidelines based, upon practice or usage., Accounting concepts are the basic assumptions or conditions upon which accounting has, been laid. Accounting concepts are the results of broad consensus. The word concept means, a notion or abstraction which is generally accepted. Accounting concepts provide unifying, structure to the accounting process and accounting reports., The word convention refers to traditions or usage. The accounting conventions are the usage, or practices which are followed as a guide to the preparation of accounting statements., The utility of these accounting conventions have been recognised by regulatory authorities of, accountancy in making financial statements more realistic, reliable, and useful to all concerned, parties., The important accounting concepts and conventions are discussed below:, , 21
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www.tntextbooks.in, , (i) Business entityc oncept, This concept implies that a business unit is separate and distinct from the owner or owners,, that is, the persons who supply capital to it., Based on this concept, accounts are prepared from the point of view of the business and, not from the owner’s point of view. Hence, the business is liable to the owner for the capital, contributed by him/her., According to this concept, only business transactions are recorded in the books of accounts., Personal transactions of the owners are not recorded. But, their transactions with the business, such as capital contributed to the business or cash withdrawn from the business for the, personal use will be recorded in the books of accounts. It implies that the business itself owns, assets and owes liabilities., (ii) Moneym ea, s urement concept, This concept implies that only those transactions, which can be expressed in terms of money,, are recorded in the accounts. Since, money serves as the medium of exchange transactions, expressed in money are recorded and the ruling currency of a country is the measuring unit, for accounting., Transactions which do not involve money will not be recorded in the books of accounts., For example, working conditions in the work place, strike by employees, efficiency of the, management, etc. will not be recorded in the books, as they cannot be expressed in terms of, money., It helps in understanding of the state of affairs of the business as money serves as a common, measure by means of which heterogeneous facts about the business are recorded. For example,, if a business has 5 computers, 2 tables and 3 chairs, the assets cannot be added to give useful, information, unless, they are expressed in monetary terms ` 1,00,000 for computers, ` 10,000, for tables and ` 1,500 for chairs., (iii) Goingc oncern concept, It is the basic assumption that business is a going concern and will continue its operations, for a foreseeable future. Going concern concept influences accounting practices in relation to, valuation of assets and liabilities, depreciation of the fixed assets, treatment of outstanding and, prepaid expenses and accrued and unearned revenues. For example, assets are generally valued, at historical cost. Any increase or decrease in the value of assets in the short period is ignored., (iv, ) Cost concept, An asset is recorded in the books on the basis of the historical cost, that is, the acquisition, cost. Cost of acquisition will be the base for all further accounting. It does not mean that, the asset will always be shown at cost. It is recorded at cost at the time of its purchase, but is, systematically reduced in its book value by charging depreciation., 22
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www.tntextbooks.in, , The cost concept has the following limitations:, a), , In an inflationary situation, when prices of commodities increase, valuing the assets at, historical cost may not represent the true position of the business., , b), , The results of business units established at different dates are not comparable if assets are, recorded on historical basis., , c), , Assets which do not have acquisition cost such as human, resources are not recognised under this concept., , (v, ) Dual sa pect concept, According to this concept, every transaction or event has two, aspects, i.e., dual effect., For example, when Arun starts a business with cash ` 5,00,000,, on the one hand, the business gets cash of ` 5,00,000 and on, the other hand, a liability arises, that is, the business has to pay, Arun a sum of ` 5,00,000., This is the concept which recognises the fact that for every debit, there is a corresponding and, equal credit. This is the basis of the entire system of double entry book-keeping., From this concept arises the basic accounting equation, that is,, Capital + Liabilities = Assets, (vi ) Periodicityc oncept, This concept deals with preparing accounts for a particular period. As the proprietors,, investors, creditors, employees and the government are interested in knowing the performance, of the business unit periodically, it becomes necessary to select a particular period, normally, one year for measuring performance. Hence, financial statements are prepared after every, accounting period and not at the end of its life., This concept helps the business in distribution of income to the owners and comparing and, evaluating performance of different periods., (vi i) Ma, t chingc oncept, According to this concept, revenues during an accounting period are matched with expenses, incurred during that period to earn the revenue during that period. This concept is based, on accrual concept and periodicity concept. Periodicity concept fixes the time frame for, measuring performance and determining financial status., All expenses paid during the period are not considered, but only the expenses related to the, accounting period are considered., On the basis of this concept, adjustments are made for outstanding and prepaid expenses, and accrued and unearned revenues. Also due provisions are made for depreciation of the, 23
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www.tntextbooks.in, , fixed assets, bad debt, etc., relating to the accounting period. Thus, it matches the revenues, earned during an accounting period with the expenses incurred during that period to earn the, revenues before sharing any profit or loss., (v, i ii) Rea, l isa, t ion concept, According to realisation concept, any change in value of an asset is to be recorded only when, the business realises it. When assets are recorded at historical value, any change in value is to, be accounted only when it realises., (ix, ) Objectiv, e ev, i dence concept, Objective evidence concept requires that all accounting transactions recorded should be, based on objective evidence. The objective evidence includes documentary evidence like cash, receipts, invoices, etc. It ensures authenticity, accuracy and reliability of transactions entered, in the books of accounts., (x) Accrual concept, According to accrual concept, the effects of the transactions are recognised on mercantile basis, i.e.,, when they occur and not when cash is paid or received. Revenue is recognised when it is earned, and expenses are recognised when they are incurred. All expenses and revenues related to the, accounting period are to be considered irrespective of the fact that whether revenues are received in, cash or not and whether expenses are paid in cash or not. For example, i) Credit sale is recognised, as sale though the amount has not been received immediately. ii) Rent for the month of March-2018, has not been paid and if the accounting period is 1.4.2017 to 31.3.2018, it will still be recorded as an, expense for the accounting year 2017-2018 because it had become due., (xi) Convention of consistency, , The consistency convention implies that the accounting policies must be followed consistently, from one accounting period to another. The results of different years will be comparable only, when same accounting policies are followed from year to year. For example, if a firm follows the, straight line method of charging depreciation since its purchase or construction, the method, should be followed without any change. However, it does not mean that changes are not possible., Change in accounting policy can be incorporated in the following circumstances:, a), , To comply with the provision of law, , b), , To comply with accounting standards issued and, , c), , To reflect true and fair view of state of affairs of the business., , (xii) Convention of full disclosure, , It implies that the accounts must be prepared honestly and all material information should be, disclosed in the accounting statement. This is important because the management is different, from the owners in most of the organisations., The disclosure should be full, fair and adequate so that the users of the financial statements can, make correct assessment about the financial position and performance of the business unit., 24
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www.tntextbooks.in, , Business entity, , Money measurement, , Going concern, , Owner and business are two different, entities, Only monetary transactions are recorded, Business will continue for a foreseeable, future, , A, C, , Cost, , C, O, , Assets are recorded at cost price, , Dual aspect, , Every transaction has two aspects – debit, aspect and credit aspect, , Periodicity, , Accounts are closed at the end of, accounting period. It is generally one year, , Matching, , Expenses relating to a particular period are, to be matched with revenues relating to that, period., , Realisation, , Revenue should be recorded only when it is, realised., , Objective evidence, , Every transaction must have a supporting, evidence, , U, N, T, I, N, G, , p, R, I, N, C, , Accrual, , I, , Transaction is recorded when it is entered, into and not when settlement takes place., , P, L, E, , Consistency, , Accounting rules and practices should be, continuously observed, , S, , Full disclosure, , Materiality, , Conservatism, , Accounts must disclose full and fair, information, , Relatively important and significant, monetary items are to be recorded and, disclosed in the financial statements, , While recording transactions, only the, prospective losses and not the prospective, incomes should be considered, , 25
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www.tntextbooks.in, , (xiii) Convention of materiality, , According to this convention, financial statements should disclose all material items which, might influence the decisions of the users of financial statements. Hence, any item which is not, significant and is not relevant to the users need not be disclosed in the financial statements., This principle is basically an exception to the full disclosure principle. The term materiality, is subjective in nature. Materiality depends on the amount involved in the transaction, size of, the business, nature of information, requirements of the person making decision, etc. An item, material to one person may be immaterial to another person., (xiv) Convention of conservatism or prudence, , It is a policy of caution or playing safe. While recording the business transactions one has to, anticipate no income but provide for all possible losses., For example, the closing stock in the factory is valued at ` 35,000 at cost price and ` 25,000 at, its realisable price. But while recording in the books the value of ` 25,000 will be considered, being the lower of the two. According to realisation concept, any increase in value is not to be, accounted unless it has materialised. The conservatism convention puts further restriction on it., Any unrealised gain is not to be anticipated but provision can be made against all possible losses., Going concern concept, Convention of consistency and Accrual concept are, considered as fundamental accounting assumptions., 2.5 Accounting Standards (AS), , Student activity, Think: In your school, there are some basic rules to be followed by every student., What are they? What will happen if there is no such rule?, Accounting Standards provide the framework and norms to be followed in accounting so, that the financial statements of different enterprises become comparable. It is necessary to, standardise the accounting principles to ensure consistency, comparability, adequacy and, reliability of financial reporting., In the words of Kohler, “Accounting standards are codes of conduct imposed by customs, law or, professional bodies for the benefit of public accountants and accountants generally”, Thus, Accounting Standards are written policy documents issued by the expert accounting body, or by government or other regulatory body covering the aspects of recognition, measurement,, treatment, presentation and disclosure of accounting transactions and events in the financial, statements., , 26
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www.tntextbooks.in, , 2.5.1 Need for accounting standards, , The need for accounting standards is as follows:, i., ii., iii., iv., v., , To promote better understanding of financial statements, To help accountants to follow uniform procedures and practices, To facilitate meaningful comparison of financial statements of two or more entities., To enhance reliability of financial statements, To meet the legal requirements effectively, , 2.6 International Financial Reporting Standards (IFRS), International Financial Reporting Standards (IFRS) are issued by the International Accounting, Standard Board (IASB). IFRS is a set of International Accounting Standards stating how, particular types of transactions and other events should be reported in financial statements., IFRS are issued to develop Accounting Standards that would be acceptable worldwide and to, improve financial reporting internationally., 2.7 Accounting Standards in India, In India, Standards of Accounting is issued by the Institute of Chartered Accountants of India (ICAI)., The Council of the Institute of Chartered Accountants of India constituted Accounting Standards, Board (ASB) on 21st April, 1977 recognising the need for Accounting Standards in India. ASB, formulates Accounting Standards so that such standards may be established by the Council of the, Institute in India. The ASB will consider the applicable law, custom, usage, business environment and, the International Accounting Standards while framing Accounting Standards (AS) in India., Due to globalisation, the accounts prepared in India must be compatible with accounts, prepared in other countries. This has resulted in the existing AS being converged with the, IFRS. This convergence has resulted in what is known as Ind AS. Ind AS are basically the, International Accounting Standards which have been modified in accordance with Indian, accounting practices, customs and traditions. Presently, all big companies have to follow Ind, AS rules, but smaller business units are allowed to continue using AS. In future, it is expected, that all business entities in India will migrate to Ind AS., Student activity, Visit icai.org. Refer under Resources, Accounting Standards and Ind AS., Points to remember, •, , There are established accounting principles available which are to be applied in the, preparation of accounting records and financial statements., , •, , The Accounting Standards are designed to ensure uniformity in the accounting methods, and practices., 27
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www.tntextbooks.in, , Self-examination questions, I Multiple choice questions, , Choose the correct answer, 1. The business is liable to the proprietor of the business in respect of capital introduced by the, person according to, (a) Money measurement concept, , (b) Cost concept, , (c) Business entity concept, , (d) Dual aspect concept, , 2. The profounder of double entry system of book-keeping is, (a) J. R. Batlibai, , (b) Luca Pacioli, , (c) Old Kesal, , (d) Menhar, , 3. The concept which assumes that a business will last indefinitely is, (a) Business Entity, , (b) Going concern, , (c) Periodicity, , (d) Conservatism, , 4. GAAPs are:, (a) Generally Accepted Accounting Policies, (b) Generally Accepted Accounting Principles, (c) Generally Accepted Accounting Provisions, (d) None of these, 5. The rule of stock valuation ‘cost price or realisable value’ whichever is lower is based on the, accounting principle of:, (a) Materiality, , (b) Money measurement, , (c) Conservatism, , (d) Accrual, , 6. In India, Accounting Standards are issued by, (a) Reserve Bank of India, (b) The Cost and Management Accountants of India, (c) Supreme Court of India, (d) The Institute of Chartered Accountants of India, 7. Which of the following does not follow dual aspect concept?, (a) Increase in one asset and decrease in other asset, (b) Increase in both asset and liability, (c) Decrease in one asset and decrease in other asset, (d) Increase in one asset and increase in capital, Answers, , 1(c), , 2(b), , 3(b), , 4(c), , 5(c), 28, , 6(d), , 7(c)
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www.tntextbooks.in, , II Very short answer questions, , 1., , Define book-keeping., , 2., , What is meant by accounting concepts?, , 3., , Briefly explain about revenue recognition concept., , 4., , What is “Full Disclosure Principle” of accounting., , 5., , Write a brief note on ‘Consistency’ assumption., , III Short answer questions, , 1., , What is matching concept? Why should a business concern follow this concept?, , 2., , “Only monetary transactions are recorded in accounting”. Explain the statement., , 3., , “Business units last indefinitely”. Mention and explain the concept on which the statement, is based., , 4., , Write a brief note on Accounting Standards., Magesh started a new trading business. He buys and sells packing materials., He wants to be honest in doing his business. He has plans to establish his, business in the future. He has little accounting knowledge but has excellent, business skills. At the end of his first year of trading, he wanted to value his closing stock., He finds some of the goods are damaged. If he wants to sell them, then he has to spend, some amount for making them in a saleable condition. He also takes some money from, his business bank account for his personal use. But, he forgot to record that., Now, discuss on the following points, • Does every businessman need accounting knowledge?, •, , Identify some of the accounting concepts in this case study., , •, , How should his closing stock be valued?, , •, , Is it possible for him to compare his business results with that of his competitors?, To explore further, , Is it possible to compare the accounting records of an Indian company with that of an, International company? Do all the countries follow the same accounting practices?, Reference, 1. M C Shukla, T S Grewal and S C Gupta, Advanced Accounts, 19th ed., 2017, S.Chand Publishing, New Delhi., 2. R L Gupta and V K Gupta, Financial Accounting, 11th ed., 2014, Sultan Chand and Sons, New Delhi., 3. S P Jain and K L Narang, Advanced Accountancy Vol – I, 2016, Kalyani Publishers, New Delhi., 4. Dalston L Cecil and Jenitra L Merwin, Financial Accounting, 3rd ed., 2017, Learntech Press, Trichy., 5. Fundamentals of Accounting, 2017, The Institute of Chartered Accountants of India, New Delhi., , 29
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www.tntextbooks.in, , ICT CORNER, CONCEPTUAL FRAME WORK, , Learn the functions, objectives,, terms of reference about the, accounting standard., , Steps:, • Open the Browser and type the URL given (or) Scan the QR Code., • “The Institute of Chartered Accountants of India” site will open. Click on, “Resources” and in the drop-down menu select “Accounting Standard”, menu and then click “Knowledge page of Accounting Standards Board “, • Accounting Standards Board page will open. In the page go through the, Functions/Objectives/Terms of Reference and go back to see other two, menus and explore. Also explore the site to learn other activities related, to your book., , Step1, , Step2, Pictures are indicatives only*, , URL:, https://icai.org/, (or) scan the QR Code, , 30
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www.tntextbooks.in, , Unit 3, , BOOKS OF PRIME ENTRY, , Contents, , Points to recall, , 3.1 Introduction, 3.2 Source documents, 3.3 Double entry system, , The following points are to be recalled, before learning books of prime entry:, , 3.4 Transaction, , • Business entity concept, , 3.5 Account, , • Money measurement concept, , 3.6 Approaches of recording, transactions, , • Dual aspect concept, , 3.7 Accounting rules, , • Accrual concept, , 3.8 Journal entries, , • Materiality concept, , • Revenue realisation concept, , • Cost concept, , Key terms to know, Learning Objectives, , Source documents, , To enable the students to, , Cash receipt, , •, , Understand the meaning and principles, of double entry system, , Invoice, , •, , Analyse the transactions on the basis of, accounting equation approach, , •, , Debit note, Credit note, , Apply the rules of double entry system, to pass journal entries for transactions, , Pay-in-slip, Cheque, Double entry system, Accounting equation, Golden rules of accounting, Journal entry, 31
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www.tntextbooks.in, , 3.1 Introduction, Student activity, Think: A trader sold goods on credit to one of his customers for ` 2,000. After two days, the, customer returned some of the goods worth ` 300, which were in damaged condition. The, trader received back the goods. Later, when the customer paid ` 1,700, the trader demanded, for full payment. He forgot about the returned goods. How can this situation be avoided?, Accounting process starts with identifying transactions involving money or money’s worth and, recording these financial transactions in the books of accounts. Transactions are recorded as, and when they take place based on authentic documents or proofs or evidences. The authentic, proofs are called as the source documents., 3.2. Source documents, Source documents are the authentic evidences of financial transactions. These documents show, the nature of transaction, the date, the amount and the parties involved. Source documents, include cash receipt, invoice, debit note, credit note, pay-in-slip, salary bills, wage bills, cheque, record slips, etc. They are the bases of recording transactions in the books of accounts. They, also serve as legal evidence in case of any legal dispute. The source documents commonly used, are discussed below:, (i) Cash receipt/voucher, , It is a document that shows the date, amount and details of cash purchases and cash sales or, other cash transactions. Business persons receive cash receipt for cash purchases and issue, cash receipt for cash sales., Specimen of a cash receipt, , 32
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www.tntextbooks.in, , (ii) Invoice, , Invoice is used for credit purchases and credit sales. The date, amount and details of credit, purchases and credit sales are given in the invoices. Invoice is generally prepared by the seller, in three copies. The first copy is given to the purchaser, the second copy is sent along with the, goods for checking and the third is retained by the seller and used as the source document for, recording the transaction., Specimen of an invoice, , 33
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www.tntextbooks.in, , (iii) Debit note, , A buyer may return the goods to the seller in various situations such as when goods are defective, or damaged, goods do not meet the specifications, etc. When goods are returned by a buyer, the, buyer prepares a debit note and sends it to the seller. It contains details such as the description, of the goods, quantity returned and also their value. Two copies are prepared in general, one, copy is sent to the seller and another one is retained by the buyer. It is a document issued by a, buyer stating the amount owed by the seller. A debit note is also called as debit memo., Specimen of a debit note, , 34
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www.tntextbooks.in, , Student activity, Think: A customer has returned the goods to his supplier along with a debit note. But,, the supplier does not agree with the customer’s claim that the goods are damaged. Can, the customer consider his debit note as a valid source document and enter the purchases, returns?, (iv) Credit note, , It is a statement prepared by the seller who receives back from his customer the goods sold. It, contains details such as the description of the goods, quantity returned and also their value. It, is a document sent by a seller to the buyer, stating that a certain amount is owed to the buyer., It is also called as credit memo., Specimen of a credit note, , 35
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www.tntextbooks.in, , (v) Pay-in slip, , When cash or cheque is deposited in bank, a form is to be filled by a customer and submitted, to the banker along with cash or cheque. This is called as pay-in slip or deposit slip. The main, part of this will be retained by the bank and the counterfoil duly stamped and signed by the, banker is returned to the customer., Specimen of a pay-in slip, , (vi) Cheque, , Cheque is a negotiable instrument. Cheque book is issued by a bank to its customers for, withdrawing money for own use or for making payment to others. By issue of cheque, a bank is, directed to pay a specific amount of money from a person’s account either to the same person or, to the person in whose favour the cheque has been issued. Each cheque book has record slips for, entering the details of cheques issued. It remains with the account holder for future reference., Specimen of a cheque and record slip, , 36
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www.tntextbooks.in, , Student activity, Think: Crossed cheque is preferred to a bearer cheque. Why?, 3.3. Double entry system, Double entry system of book keeping is a scientific and complete system of recording the, financial transactions of an organisation. According to this system, every transaction has a, two fold effect. That is, there are two aspects involved, namely, receiving aspect and giving, aspect. It is denoted by debit (Dr.) and credit (Cr.). The basic principle of double entry system, is that for every debit there must be an equivalent and corresponding credit. Debit denotes an, increase in assets or expenses or a decrease in liabilities, income or capital. Credit denotes an, increase in liabilities, income or capital or a decrease in assets or expenses., ‘Dr.’ is abbreviation of ‘addebitare’, the Italian word and debere, the Latin word, meaning ‘debit’. Hence, though there is no ‘r’ in the word debit. It has been, abbreviated as ‘Dr.’ based on the Italian and Latin words having ‘r’ in these., 'H¿QLWLRQ, , “Every transaction involving money or money’s worth has two fold aspects, the receiving of a, value on the one hand and the giving of the same value on the other. This two fold nature in, all transactions must be recorded in the books and this gives rise to the term Double Entry, Book keeping”., – Munro and Palmer, “Every business transaction has a two-fold effect and that it affects two accounts in opposite, directions and if a complete record is to be made of each such transaction it is necessary to, debit one account and credit another account. It is this recording of two fold effect of every, transaction that has given rise to the term Double Entry”., – J.R Batliboi, 3.3.2. Principles of double entry system, , Following are the principles of double entry system:, (i), , In every business transaction, there are two aspects., , (ii) The two aspects involved are the benefit or value receiving aspect and benefit or value, giving aspect., (iii) These two aspects involve minimum two accounts; at least one debit and at least one, credit., (iv) For every debit, there is a corresponding and equivalent credit. If one account is, debited the other account must be credited., 37
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www.tntextbooks.in, , 3.3.3. Advantages of double entry system, , Following are the advantages of double entry system:, (i) Accuracy, , In this system, the two aspects of each transaction are recorded in the books of accounts. This, helps in checking the accuracy in accounting., (ii) Ascertainment of business results, , Details regarding expenses, losses, incomes, gains, assets, liabilities, debtors, creditors, etc.,, are readily available. This helps to ascertain the net profit earned or loss incurred during an, accounting period and also to know the financial position as on a particular date., (iii) Comparative study, , The business results of the current year can be compared with those of the previous years and, also with other business firms. It facilitates business planning for future., (iv) Common acceptance, , The business records maintained under this system are accepted by financial institutions,, government and others, because it is a systematic and scientific system., 3.4. Transaction, Transaction involves transfer of money or money’s worth (goods or services or ideas) from, one person to another. Transaction can be classified into cash transaction, bank transaction, and credit transaction., (a) Cash transaction, , When immediate cash is involved in a transaction, it is called cash transaction. For example,, goods are sold for cash ` 5,000. In this case, cash ` 5,000 comes into the business and goods, worth ` 5,000 go out of the business., (b) Bank transaction, , In a transaction, if bank is involved, it is a bank transaction. Bank transaction includes the, following:, (i), , Cash deposited into the bank, , (ii) Income of the business directly received by the bank, (iii) Receipts through Cash Deposit Machine (CDM), (iv) Payment made by the customers of the business through debit card, credit card, net, banking, National Electronic Funds Transfer (NEFT), Real Time Gross Settlement, (RTGS), etc., (v), , Cash withdrawn from the bank, , (vi) Bank charges levied by the bank, 38
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www.tntextbooks.in, , (vii) Payments made by the bank as per standing instructions, (viii) Payments made by cheque, (ix) Payments made by the business through debit card, credit card, net banking, NEFT, and RTGS, Automated Teller Machine (ATM): ATM is a computerised machine that, provides the customers of banks the facility of accessing their account for, dispensing cash and to carry out other financial and non-financial transactions, without the need to actually visit their bank branch., Cash Deposit Machine (CDM): It is an ATM like machine that allows depositing cash, directly into a customer’s account without any manual intervention of the bank employee., There is no need to fill deposit slips., Debit card: The debit cards are used to withdraw cash from an ATM, to purchase goods and, services at Point of Sale (POS) and in E-commerce (online purchase). A customer can use, debit card for the money he has in the bank account with some restrictions., Credit card: The credit cards are used to purchase goods and services at Point of Sale (POS), and in E-commerce (online purchase). A customer can use credit card within the limit, specified by the bank even if there is inadequate balance in the account The bank may, charge interest and other charges for credit card usage., , NEFT: National Electronic Funds Transfer (NEFT) is a nation-wide payment, system facilitating one-to-one funds transfer. Under this scheme, any person, can electronically transfer funds from any bank branch to any person having an, account with any other bank branch in the country., RTGS: The acronym ‘RTGS’ stands for Real Time Gross Settlement, which can be defined, as the continuous (real-time) settlement of funds transfers individually on an order by, order basis., (c) Credit transaction, , When settlement is not made by cash or through bank immediately in a transaction, it is called, credit transaction. But, the amount is to be settled within a specified period. For example,, purchase of goods on credit for ` 3,000. In this case, goods worth ` 3,000 come into the business, and a liability of creditors worth ` 3,000 arises., 3.5. Account, Every transaction has two aspects and each aspect affects minimum one account. An account, is the basic unit of identification in accounting. A ledger account is a summary of relevant, 39
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www.tntextbooks.in, , transactions at one place relating to a particular head. Account is the systematic presentation, of all material information regarding a particular person or item at one place, under one head., 3.6. Approaches of recording transactions, There are two approaches for recording transactions, namely, i) Accounting equation approach, and ii) Traditional approach., 3.6.1. Accounting equation approach, , The relationship of assets with that of liabilities to outsiders and to owners in the equation, form is known as accounting equation., Under the double entry system of book keeping, every transaction has two fold effect, which, causes the changes in assets and liabilities or capital in such a way that an accounting equation, is completed and equated., Capital + Liabilities = Assets, Capital can also be called as owner’s equity and liabilities as outsider’s equity., Accounting equation is a mathematical expression which shows that the total of assets is equal, to the total of liabilities and capital. This is based on the dual aspect concept of accounting., This means that total claims of outsiders and the proprietor against a business enterprise will, always be equal to the total assets of the business enterprise., As the revenues and expenses will affect capital, the expanded equation may be given as under:, Assets = Liabilities + Capital + Revenues – Expenses, Therefore, under this approach, accounts are classified into five categories: (i) Asset account, (ii), Liability account, (iii) Capital account, (iv) Revenue account and (v) Expense account as follows:, Account, Asset, (i), , Liability, , Capital, , Revenue, , Expense, , Asset account, Any physical thing or right owned that has a monetary value is called asset. The assets, , are grouped and shown separately; for example, Land and Buildings account, Plant and, Machinery account., (ii) Liability account, Financial obligations of the enterprise towards outsiders are shown under separate heads, as liabilities; for example, creditors account, expenses outstanding account., (iii) Capital account, Financial obligations of a business enterprise towards its owners are grouped under this, category; for example, capital contributed by owner., 40
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www.tntextbooks.in, , (iv) Revenue account, Accounts relating to revenues of an enterprise are grouped under this category, for, example; revenues from sale of goods, rent received., (v) Expense account, Expenses incurred and losses suffered for earning revenue are grouped under this, category; for example, purchase of goods, salaries paid., A transaction may have the effect on either side of the equation by the same amount or it may, have the effect on one side of the equation only, by both increasing and decreasing it by an, equal amount., Recording of transactions as per accounting equation approach is explained below:, (a) Increase in capital and increase in asset, , Commenced business with cash ` 1,00,000, Effects:, , (i) Cash comes in → Increase in asset, (ii) Capital provided by the owner → Increase in capital of owner, Capital, , =, , Assets, , Capital, , =, , Cash, , (+) ` 1, 00,000, , =, , (+) ` 1, 00,000, , (b) Decrease in liability and decrease in asset, , Paid creditors ` 10,000, Effects:, , (i) Cash goes out → Decrease in asset, (ii) Creditors are paid → Decrease in liability, Liabilities, , =, , Assets, , Creditors, , =, , Cash, , (–) ` 10,000, , =, , (–) ` 10,000, , (c) Decrease in one asset and increase in another asset, , Bought furniture costing ` 5,000 by paying cash, Effects:, , (i) Furniture comes in → Increase in asset, (ii) Cash goes out → Decrease in asset, Liabilities, , =, , Assets, , Liabilities, , =, , Cash + Furniture, , =, , (–) ` 5,000 (+) ` 5,000, , 41
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www.tntextbooks.in, , (d) Decrease in one liability and increase in another liability, , Accepted a bill drawn by creditors for ` 20,000, Effects:, , (i) Bills payable arises → Increase in liability, (ii) Reduction in creditors → Decrease in liability, Liabilities, , =, , Assets, , + Bills payable – Creditors, , =, , Assets, , (+) ` 10,000 (–) ` 10,000, , =, , Assets, , H 7UDQVDFWLRQVDHFWLQJPRUHWKDQWZRDFFRXQWV , , Goods costing ` 30,000 sold for ` 40,000, Effects:, , (i) Goods go out → Decrease in assets, (ii) Cash comes in → Increase in assets, (iii) Sold goods at a profit → Increase in capital, Liabilities + Capital, , =, , Assets, , Capital, , =, , Cash – Stock, , (+) ` 10,000, , =, , (+) ` 40,000 (–) ` 30,000, , Illustration 1, , Complete the missing items., Assets ` =, (a), (b), (c), (d), (e), (f), , Liabilities ` +, 30,000, 60,000, ?, ?, 25,000, 40,000, , Capital `, 20,000, 25,000, 25,000, 10,000, ?, ?, , ?, ?, 30,000, 80,000, 15,000, 30,000, , Solution, , Assets ` =, (a), (b), (c), (d), (e), (f), , Liabilities ` +, 30,000, 60,000, 55,000, 90,000, 25,000, 40,000, , Capital `, 20,000, 25,000, 25,000, 10,000, 10,000, 10,000, , 42, , 10,000, 35,000, 30,000, 80,000, 15,000, 30,000
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www.tntextbooks.in, , Illustration 2, Show the accounting equation on the basis of the following transactions for Rani, who is dealing in, automobiles., , (i), (ii), (iii), , Started business with cash, Goods bought on credit from Ramesh, Purchased furniture for cash, , (iv), , Paid creditors by cash, , ` 80,000, ` 10,000, ` 6,000, ` 8,000, , Solution, , In the books of Rani, , Transaction, (i) Started business with cash, Equation, , Assets, Cash `, Stock `, +80,000, , +80,000, , +80,000, , =, , (ii) Credit purchases, , +10,000, , Equation, , +80,000 +10,000, , (iii) Cash purchase of furniture, Equation, , –6,000, , Equation, , +80,000, +10,000, , =, , +80,000, , +10,000, , +6,000 =, , +80,000, , +10,000, , +6,000, , +74,000 +10,000, , (iv) Paid creditors by cash, , Capital ` Creditors `, , Furniture `, , –8,000, , –8,000, , +66,000 +10,000, , +6,000 =, , +80,000, , +2,000, , Illustration 3, , Show the accounting equation on the basis of the following:, (a), , Started business with cash, , ` 60,000, , (b), , Purchased goods for cash, , ` 20,000, , (c), , Sold goods for cash costing ` 10,000 for, , ` 15,000, , (d), , Paid rent by cash, , ` 500, , Solution, , Assets, , Transaction, , Cash `, , (a) Started business with cash, , +60,000, , Equation, , Capital `, , Stock `, =, , +60,000, , (b) Cash purchases, Equation, (c) Sold goods for cash, 43, , +60,000, +60,000, , –20,000, , +20,000, , +40,000, , +20,000, , +15,000, , –10,000, , =, , +60,000, +5,000
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www.tntextbooks.in, , Equation, , +55,000, , (d) Paid rent by cash, , +10,000, , =, , –500, +54,500, , Equation, , +65,000, –500, , +10,000, , =, , +64,500, , Illustration 4, , Selvi is a dealer in furniture. Show the accounting equation for the following transactions., ` 1,00,000, , (i), , Started business with cash, , (ii), , Deposited cash into bank, , ` 60,000, , (iii), , Borrowed loan from bank, , ` 25,000, , (iv), , Bought goods and paid by cheque, , ` 10,000, , (v), , Cash withdrawn for personal use, , ` 5,000, , (vi), , Cash withdrawn from bank for office use, , `3, ,000, , Solution, , In the books of Selvi, , Transaction, (i) Started business with cash, Equation, (ii) Deposited cash with bank, Equation, (iii) Borrowed loan from bank, Equation, , Assets, Cash `, +1,00,000, +1,00,000, – 60,000, +40,000, , Capital `, =, , +60,000, +60,000 =, +25,000, +85,000 =, , +40,000, , +1,00,000, +1,00,000, +1,00,000, +25,000, +1,00,000 +25,000, , +10,000 –10,000, , (iv) Bought goods and paid by cheque, Equation, (v) Cash withdrawn for personal use, Equation, (vi) Cash withdrawn from bank for, office use, Equation, , Stock ` Bank `, , Bank, loan `, , +40,000 +10,000 +75,000 =, – 5,000, +35,000 +10,000 +75,000 =, +3,000, , +1,00,000 +25,000, –5,000, +95,000 +25,000, , –3,000, , +38,000 +10,000 +72,000 =, , +95,000 +25,000, , Illustration 5, , Show the effect of following business transactions on the accounting equation., (i), , Anbu started business with cash ` 20,000; goods ` 12,000 and machine, , ` 8,000, , (ii), , Purchased goods from Ramani on credit, , ` 7,000, , (iii), , Payment made to Ramani in full settlement, , ` 6,900, , 44
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www.tntextbooks.in, , (iv), , Sold goods to Rajan on credit costing ` 5,400 for, , ` 6,000, , (v), , Received from Rajan ` 5,800 in full settlement of his account, , (vi), , Wages outstanding, , ` 400, , Solution, , Assets, Transaction, , Cash, , Stock, , `, , `, , `, , (i) Started business with, cash, stock & machine, , +20,000, , +12,000, , +8,000, , Equation, , +20,000, , +12,000, , +8,000, , (ii) Credit purchases, Equation, (iii) Payment made, to Ramani in full, settlement, Equation, , (v) Cash receipt from, Rajan. in full settlement, Equation, , `, , `, , +20,000, , =, , +19,000, , +8,000, , =, , +19,000, , +8,000, , –5,400, +13,100, , +6,000, , +13,600, , +8,000, , +5,800, +18,900, , =, , +6,000 =, , –6,000, +13,600, , +8,000, , +18,900, , +13,600, , +8,000, , +40,000, , +7,000, , +100, , –7,000, , +40,100, +600, +40,700, , –200, =, , (vi) Wages outstanding, Equation, , +40,000, +7,000, , –6,900, +13,100, , `, , +40,000, , +7,000, , (iv) Credit sales, Equation, , Capital Liabilities, , Machine Debtors, , =, , +40,500, , –400, , +400, , +40,100, , +400, , Illustration 6, , Veena is a dealer in tex, t iles. On January 1, 2018, her business showed the following balances:, Cash in hand: ` 20,000; Bank balance: ` 70,000; Stock: ` 15,000. Following are the transactions, made during January 2018. Show the effect of the transactions on accounting equation., 45
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www.tntextbooks.in, , (a), , Purchased goods (readymade shirts) on credit from Subbu, , ` 20,000, , (b), , Goods returned to Subbu and no cash is received, , ` 5,000, , (c), , Goods (shirts) costing ` 1,600 was sold to Janani on credit, , ` 2,000, , (d), , Janani returned 1 shirt of sales value, , (e), , Janani deposited the money due in cash deposit machine in a bank ` 1,500, , (f), , Insurance on building paid through net banking, , (g), , Of the insurance paid, prepaid during the year is, , ` 500, , ` 1,000, ` 100, , To Balance b/d, Equation, , +20,000 +70,000 +15,000, , = +1,05,000, , 20,000, , (e) Customer deposited, the money in CDM, Equation, (f) Insurance premium, paid through net, banking, Equation, , Creditors `, +20,000, –5,000, , +20,000 +70,000 +30,000, , = +1,05,000, , +15,000, , –1,600, , 2,000, , +400, , +20,000 +70,000 +28,400, , +2,000, , = +1,05,400, , +400, , –500, , –100, , +20,000 +70,000 +28,800, , +1,500, , = +1,05,300, , +15,000, , = +1,05,300, , +15,000, , +1,500, , +15,000, , –1,500, , +20,000 +71,500 +28,800, , –1,000, , –1,000, , +20,000 +70,500 +28,800, , (g) Prepaid insurance, Equation, , = +1,05,000, , –5,000, , (d) Sales return the, cost of which is ` 400, and no cash paid, Equation, , +20,000, , +20,000 +70,000 +35,000, , (c) Goods sold on, credit, Equation, , Prepaid, insurance `, , +1,05,000, , (b) Goods returned, and no cash received, Equation, , Debtors `, , +20,000 +70,000 +15,000, , (a) Purchased goods, on credit, Equation, , Stock `, , Bank `, , Transaction, , Cash `, , Assets, , Capital `, , Solution, , = +1,04,300, +100, , +20,000 +70,500 +28,800, 46, , +15,000, , +100, , +100 = +1,04,400, , +15,000
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www.tntextbooks.in, , 3.6.2. Traditional approach, , Under this approach, the two fold aspects (debit and credit) in each transaction are recorded, in the journal by following double entry system. For the purpose of recording the transactions,, accounts are classified into personal and impersonal accounts., &ODVVL¿FDWLRQRIDFFRXQWV , , Under double entry system of book keeping, for the purpose of recording the various financial, transactions, the accounts are classified as personal accounts and impersonal accounts., (i), , Personal account: Account relating to persons is called personal account. The personal, account may be natural, artificial or representative personal account., (a), , Natural person’s account: Natural person means human beings. Example: Vinoth, account, Malini account., , (b) Artificial person’s account: Artificial person refers to the persons other than, human beings recognised by law as persons. They include business concerns,, charitable institutions, etc. Example: BHEL account, Bank account., (c), , Representative personal accounts: These are the accounts which represent persons, natural or artificial or a group of persons. Example: Outstanding salaries account,, Prepaid rent account. When expenses are outstanding, it is payable to a person., Hence, it represents a person., , (ii) Impersonal accounts: All accounts which do not affect persons are called impersonal, accounts. These are further classified into a) Real accounts and b) Nominal accounts., (a), , Real account: All accounts relating to tangible and intangible properties and, possessions are called real accounts., 1. Tangible real accounts: These include accounts of properties and possessions, which can be seen and touched. These have physical existence. Example: Plant,, Machinery, Building, Furniture, Stock., 2. Intangible real accounts: These include accounts of properties and possessions, which can not be seen and touched. These do not have physical existence., Example: Goodwill, Patents, Copy rights., , (b) Nominal account: The accounts relating to expenses, losses, revenues and gains are, called nominal accounts. Example: Salaries, wages, rental income, interest income,, etc. These are temporary accounts and are transferred to Trading and Profit and, Loss account depending on whether these are direct or indirect respectively., , 47
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www.tntextbooks.in, , &ODVVL¿FDWLRQRIDFFRXQW, , Account, Personal, Natural, , Impersonal, , Artificial, , Representative, , Real, Tangible, , Nominal, Intangible, , 3.7. Accounting rules, , All the above classified accounts have two rules each, one related to debit and another related, to credit for recording the transactions which are termed as golden rules of accounting or rules, of double entry system., Golden rules of double entry system, , Personal account, , Debit the receiver, , Credit the giver, , Real account, , Debit what comes in, , Credit what goes out, , Nominal account, , Debit all expenses and losses, , Credit all incomes and gains, , Illustration 7, , Classify the following into personal, real and nominal accounts., (a) Capital, , (b) Building, , (c) Carriage inwards, , (d) Cash, , (e) Commission received, , (f) Bank, , (g) Purchases, , (h) Chandru, , (i) Outstanding wages, Solution, , Sl. No., (a), (b), (c), (d), (e), (f), (g), (h), (i), , Items, , Classification, , Capital, Building, Carriage inwards, Cash, Commission received, Bank, Purchases, Chandru, Outstanding wages, , Personal account, Real account, Nominal account, Real account, Nominal account, Personal account, Nominal account, Personal account, Personal account, 48
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www.tntextbooks.in, , • Purchases is treated as a nominal account as it is an expenditure and sales, is treated as a nominal account as it is a revenue to the business., • Purchases, Purchases returns, Sales and Sales returns may also be treated, as real accounts as they are related to goods., 3.8 Journal entries, The word journal has been derived from the French word ‘Jour’ which means day. So, journal, means daily. Transactions are recorded daily in the journal as and when the transactions take, place. As soon as a transaction takes place, its debit and credit aspects are analysed and recorded, in the journal together with a short description called narration. This facilitates making entries, in the ledger. Since transactions are first recorded in the journal, it is called book of original, entry or prime entry or primary entry or preliminary entry, or first entry. Journalising is the, beginning of the accounting process for the financial transactions., 3.8.1 Meaning, , Journal is the book of original entry in which business transactions are recorded in, chronological order, that is, in the order of occurrence. Transactions are recorded for the first, time in the journal. Entries are made in the journal based on source documents. Record of, business transactions in the journal is known as Journal entry. The process of recording the, transactions in journal is called as journalising., According to Professor Carter, “The journal as originally used, is a book of prime entry in, which transactions are copied in order of date from a memorandum or waste book. The entries, as they are copied are classified into debits and credits, so as to facilitate their being correctly, posted, afterwards in the ledger”., 3.8.2. Format of Journal, , The format of journal is given below:, In the books of…, ., …, Journal, , Date, , Particulars, , L.F., , Debit `, , Credit `, , A journal contains five columns; Date, Particulars, L.F., Debit and Credit., Date column: In this column the date of the transaction is recorded., Particulars column: The accounts involved in the transaction are recorded in this column., The account debited is recorded first with the word ‘Dr.’ entered towards the end of the row, and the account credited is entered in the next line after leaving a little space on the left and, preceded by the word ‘To’., 49
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www.tntextbooks.in, , Leder Folio column (L.F.): The page number of ledger in which the accounts debited and credited, are maintained is recorded here. Folio means page and ledger folio means page number of ledger., This L.F. helps in cross verification of accounts in the ledger and helps in audit of accounts., Debit column: The amount to be debited is recorded in this column. The unit of measurement,, that is, amount expressed in the currency of the country is recorded in this column. For, example, in India amount is recorded in rupees (`)., Credit column: The amount to be credited is recorded in this column. The unit of measurement,, that is, the currency of the country is written in this column. For example, in India amount is, recorded in rupees (`)., Narration: A short description of each transaction is written under each entry which is called, narration., Tutorial note, , (i), , While entering the date, the year may be written at the top, then the month and then, the particular date., , (ii) The narration must be simple and complete. The words ‘Being’ or ‘For’ may also be, prefixed before the narration., (iii) It is customary to write ‘Dr’ and ‘To’ in the journal entries., (iv) L.F. column is filled when the transaction is posted to the ledger. In computerised, accounting, it is the reference number., (v), , The amount columns of a journal may be totalled at the end of the each page and the, grand total may be given at the end of the month., , (vi) To show each journal entry separately, a line may be drawn after narration in particulars, column., (vii) When transactions of similar nature take place on the same date, they may be combined, while they are journalised., 3.8.3 Steps in journalising, , The process of analysing the business transactions under the heads of debit and credit and, recording them in the journal is called journalising. An entry made in the journal is called a, journal entry. The following steps are followed in journalising:, (1), , Analyse the transactions and identify the accounts (based on aspects) which are, involved in the transaction., , (2), , Classify the above accounts under Personal account, Real account or Nominal account, , (3), , Apply the rules of debit and credit for the above two accounts., , (4), , Find which account is to be debited and which account is to be credited by the, application of rules of double entry system, 50
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www.tntextbooks.in, , (5), , Record the date of transaction in the date column., , (6), , Enter the name of the account to be debited in the particulars column very close to the, left hand side of the particulars column followed by the abbreviation ‘Dr.’ at the end, in the same line. Against this, the amount to be debited is entered in the debit amount, column in the same line., , (7), , Write the name of the account to be credited in the second line starting with the word, ‘To’ prefixed a few spaces away from the margin in the particulars column. Against, this, the amount to be credited is entered in the credit amount column in the same, line., , (8), , Write the narration within brackets in the next line in the particulars column., , 'LHUHQWW\SHVRIMRXUQDOHQWULHV, , The journal entries may be of the following types:, , (i), , (i), , Single entry, , (ii), , Compound entry, , (iii), , Opening entry, , (iv), , Closing entry, , (v), , Rectifying entry, , (vi), , Adjusting entry, , (vii), , Transferring entry, , Single entry: Single entry is an entry in which only two accounts are involved, one, account is debited and another is credited., , (ii) Compound entry: Compound entry is an entry in which more than two accounts are, involved. Either more than one account is debited or more than one account is credited, or both., (iii) Opening entry: Through opening entry the balances of assets and liabilities at the end of, the previous accounting year are brought forward to the current accounting year. This is, dealt in chapter 6., (iv) Closing entry: At the end of the accounting period, the nominal accounts are closed by, transferring to trading account or profit and loss account. All direct expenses and direct, revenues are transferred to Trading Account. All indirect expenses and indirect revenues, are transferred to Profit and Loss Account. This is dealt in chapter 6., (v) Rectifying entry: Rectifying entries are passed to make correction of errors in accounting., This is dealt in chapter 9., 51
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www.tntextbooks.in, , (vi) Adjusting entry: Adjusting entry is the entry made for the transactions which remain, unrecorded or require adjustment after closing the accounts for the accounting year., This is dealt in chapter 13., (vii) Transfer entry: Transfer entry is the entry through which amount is transferred from, one account to another account., 3.8.5 Application of rules of double entry system, , Rules of double entry system of book-keeping are applied for business transactions as follows:, (i), , Personal account, ‘Debit the receiver and Credit the giver’. In case of personal accounts, the rule is debit the, account of the person who receives the benefit and credit the account of the person who, gives the benefit., Example, , :, , Paid Anbu ` 10,000 by cheque, , Accounts affected, , :, , Anbu account and Bank account, , Nature of accounts, , :, , Both are personal accounts in nature, , Rule, , :, , Debit the receiver and credit the giver, , Applying the rule, , :, , Anbu is the receiver and the Bank is the giver, , Debit, , Anbu account, , Credit, , Bank account, , (ii) Real account, ‘Debit what comes in and Credit what goes out’. In case of real accounts, the rule is debit, what comes in and credit what goes out., Example, , :, , Furniture purchased for cash ` 5,000, , Accounts affected, , :, , Furniture account and Cash account, , Nature of accounts, , :, , Both are real accounts in nature, , Rule, , :, , Debit what comes in and credit what goes out, , Applying the rule, , :, , Furniture comes in and cash goes out, , Debit, , Furniture account, , Credit, , Cash account, , 52
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www.tntextbooks.in, , (iii) Nominal account, ‘Debit all expenses and losses and Credit all incomes and gains’. For nominal accounts,, the rule is debit all expenses and losses and credit all incomes and gains., Example, , :, , Paid rent of ` 5,000 in cash, , Accounts affected, , :, , Rent account and cash account, , Nature of accounts, , :, , Rent is a nominal account and cash account is a real account, , Rule, , :, , Debit all the expenses and losses and credit all the, incomes and gains, , Applying the rule, , :, , Rent is an expense and cash goes out, , Debit, , Rent account, , Credit, , Cash account, , 3.8.6 Analysis of transactions, Example 1, , Transaction: Somu commenced printing business with cash ` 50,000., Analysis: This is a cash transaction as cash is involved., Accounts, involved, , Transaction, , Nature of, accounts, , How affected in, business, , Debit /, Credit, , Real A/c, Cash comes in, Debit, Somu commenced business with Cash A/c, cash ` 50,000, Somu’s capital A/c Personal A/c Somu is the giver Credit, Journal entry, , Date, , Particulars, , L.F., Dr., , Cash A/c, To Somu’s capital A/c, (Somu commenced business with capital), , Debit `, 50,000, , Credit `, 50,000, , Example 2, , Transaction: Bought goods for cash ` 4,000, Analysis: This is a cash transaction as cash is involved., Transaction, Bought goods for cash ` 4,000, , Accounts, involved, , Nature of, accounts, , How affected in, business, , Purchases A/c Nominal A/c Expenses made, Cash A/c, Real A/c, Cash goes out, 53, , Debit /, Credit, Debit, Credit
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www.tntextbooks.in, , Journal entry, , Date, , Particulars, , L.F., , Debit `, , Dr., , Purchases A/c, To Cash A/c, (Cash purchase made), , Credit `, , 4,000, 4,000, , Example 3, , Transaction: Purchased goods from Rahul for ` 10,000 on credit, Analysis: This is a credit transaction., Transactions, , Accounts, involved, , Purchased goods from Rahul for, ` 10,000 on credit, , Nature of, accounts, , How affected in, business, , Purchases A/c Nominal A/c Expenses made, Rahul A/c, Personal A/c Rahul is the giver, , Debit /, Credit, Debit, Credit, , Journal entry, , Date, , Particulars, , L.F., , Purchases A/c, , Debit `, , Dr., , Credit `, , 10,000, , To Rahul A/c, , 10,000, , (Bought goods from Rahul on credit), Example 4, , Transaction: Cash paid to Rahul ` 4,000, Analysis: This is a cash transaction as cash is involved., Transaction, Paid Rahul ` 4,000, , Accounts, involved, , Nature of, accounts, , How affected in, business, , Debit /, Credit, , Rahul A/c, , Personal A/c Rahul is the receiver, , Debit, , Cash A/c, , Real A/c, , Credit, , Cash goes out, , Journal entry, , Date, , Particulars, , L.F., , Rahul A/c, , Dr., , To Cash A/c, , Debit `, , Credit `, , 4,000, 4,000, , (Paid Rahul), , 54
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www.tntextbooks.in, , Example 5, , Transaction: Withdrew cash for personal use ` 8,000, Analysis: This is a cash transaction as cash is involved., Accounts, Nature of, How affected in, Debit /, involved, accounts, business, Credit, Withdrew cash for personal use Drawings A/c Personal A/c Propreitor is the receiver Debit, ` 8,000, Cash A/c, Real A/c, Cash goes out, Credit, Transactions, , Journal entry, , Date, , Particulars, , L.F., , Drawings A/c, , Debit `, , Dr., , Credit `, , 8,000, , To Cash A/c, , 8,000, , (Cash withdrawn for personal use), Example 6, , Transaction: Cash deposited into bank ` 5,000, Analysis: This is a cash transaction as cash is involved., Accounts, involved, , Transaction, Cash deposited, `5,000, , into, , bank Bank A/c, Cash A/c, , Nature of, accounts, , How affected in, business, , Debit /, Credit, , Personal A/c Bank is the receiver, , Debit, , Real A/c, , Credit, , Cash goes out, , Journal entry, , Date, , Particulars, , L.F., , Bank A/c, , Debit `, , Dr., , Credit `, , 5,000, , To Cash A/c, , 5,000, , (Cash deposited into bank), Example 7, , Transaction: Paid salary by cheque ` 3,000, Analysis: This is a bank transaction as bank is involved., Transaction, Paid salary by cheque ` 3,000, , Accounts, involved, Salary A/c, , Nature of, How affected in, accounts, business, Nominal A/c Expense made, , Debit /, Credit, Debit, , Bank A/c, , Personal A/c Bank is the giver, , Credit, , 55
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www.tntextbooks.in, , Journal entry, , Date, , Particulars, , L.F., , Salaries A/c, , Debit `, , Dr., , Credit `, , 3,000, , To Bank A/c, , 3,000, , (Salary paid by cheque), Example 8, , Transaction: Sold goods to Mahesh on credit ` 9,000, Analysis: This is a credit transaction., Accounts, involved, , Transaction, , Sold goods to Mahesh on credit Mahesh A/c, ` 9,000, Sales A/c, , Nature of, accounts, , How affected in, business, , Debit /, Credit, , Personal A/c Mahesh is the receiver, , Debit, , Nominal A/c Revenue earned, , Credit, , Journal entry, , Date, , Particulars, , L.F., , Mahesh A/c, , Dr., , Debit ` Credit `, 9,000, , To Sales A/c, , 9,000, , (Sold goods to Mahesh on credit), Example 9, , Transaction: Goods sold to Mahendran for cash ` 5,000, Analysis: This is a cash transaction as cash is involved., Accounts, involved, , Transaction, , Cash sales made to Mahendran Cash A/c, for ` 10,000, Sales A/c, , Nature of, accounts, Real A/c, , How affected in, business, Cash comes in, , Debit /, Credit, Debit, , Nominal A/c Revenue earned, , Credit, , Journal entry, , Date, , Particulars, , L.F., , Cash A/c, , Dr., , To Sales A/c, , Debit `, , Credit `, , 5,000, 5,000, , (Cash sales made), , 56
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www.tntextbooks.in, , Example 10, , Transaction: Borrowed loan from Bank ` 10,000, Analysis: This is a cash transaction as cash is involved., Accounts, involved, , Transaction, , Borrowed loan from Bank Cash A/c, `10,000, Bank loan A/c, , Nature of, accounts, Real A/c, , How affected in, business, Cash comes in, , Debit /, Credit, Debit, , Personal A/c Bank is the giver, , Credit, , Journal entry, , Date, , Particulars, , L.F., , Cash A/c, , Dr., , Debit ` Credit `, 10,000, , To Bank loan A/c, , 10,000, , (Borrowed loan from bank), Example 11, , Transaction: Received commission of ` 5,000 by cash, Analysis: This is a cash transaction as cash is involved., Transaction, Received commission, ` 5,000, , Cash A/c, , Nature of, accounts, Real A/c, , Commission A/c, , Nominal A/c Receipt of commission, , Accounts involved, , How affected in, business, Cash comes in, , Debit /, Credit, Debit, Credit, , Journal entry, , Date, , Particulars, , L.F., , Cash A/c, , Dr., , Debit ` Credit `, 5,000, , To Commission received A/c, , 5,000, , (Commision received), Example 12, , Transaction: Paid ` 4,800 in full settlement of ` 5,000 due to the creditor, Keerthana., Analysis: This is a cash transaction as cash is involved., Transaction, , Accounts involved, , Nature of, How affected in, Debit /, accounts, business, Credit, Personal A/c Keerthana is the receiver Debit, , Paid ` 4,800 in full Keerthana A/c, settlement of ` 5,000 Cash A/c, Real A/c, Cash goes out, to Keerthana, Discount received A/c Nominal A/c Discount is a gain, 57, , Credit, Credit
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www.tntextbooks.in, , Journal entry, , Date, , Particulars, , L.F., , Keerthana A/c, , Dr., , Debit `, , Credit `, , 5,000, , To Cash A/c, , 4,800, , To Discount received A/c, , 200, , (Paid Keerthana in full settlement), Example 13, , Transaction: Dinesh, a customer is declared insolvent and 40 paise in a rupee is received from, the estate for his due ` 10,000., Analysis: This is a cash transaction as cash is involved., Accounts, Nature of, How affected in, involved, accounts, business, Real A/c, Cash comes in, Dinesh who owed ` 10,000, Cash A/c, became insolvent and 40 paise, Bad debts A/c Nominal A/c Bad debts is a loss, in a rupee is received from his, Dinesh A/c, Personal A/c Dinesh is the giver, estate, , Debit /, Credit, Debit, , Transaction, , Debit, Credit, , Journal entry, , Date, , Particulars, , L.F., , Cash A/c, , Dr., , Bad debts A/c, , Dr., , Debit ` Credit `, 4,000, 6,000, , To Dinesh A/c, , 10,000, , (Cash received in final settlement on insolvency), , Tutorial note, Though the procedure for analysis of transactions, classification of accounts and rules for, recording transactions under accounting equation approach and traditional approach are, different, the accounts affected and entries in affected accounts remain the same under both, approaches. In other words, accounts to be debited and credited to record the dual aspect, remain the same under both the approaches., Illustration 8, , Jeyaseeli is a sole proprietor having a provisions store. Following are the transactions during, the month of January, 2018. Journalise them., Jan., , `, , 1, , Commenced business with cash, , 2, , Deposited cash with bank, , 80,000, 58, , 40,000
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www.tntextbooks.in, , 3, , Purchased goods by paying cash, , 4, , Purchased goods from Lipton & Co. on credit, , 10,000, , 5, , Sold goods to Joy and received cash, , 11,000, , 6, , Paid salaries by cash, , 7, , Paid Lipton & Co. by cheque for the purchases made on 4th Jan., , 8, , Bought furniture by cash, , 4,000, , 9, , Paid electricity charges by cash, , 1,000, , 10, , 5,000, , 5,000, , Bank paid insurance premium on furniture as per standing instructions, , 300, , Solution, , In the books of Jeyaseeli, Journal entries, , Date, , Particulars, , L.F., , Debit `, , Credit `, , 2018, Jan. 1, , Cash A/c, , Dr., , 80,000, , To Jeyaseeli’s Capital A/c, , 80,000, , (Jeyaseeli commenced business with cash), 2, , Dr., , Bank A/c, , 40,000, 40,000, , To Cash A/c, (Deposited cash into bank), 3, , Purchases A/c, , Dr., , 5,000, , To Cash A/c, , 5,000, , (Goods purchased by cash), 4, , Purchases A/c, , Dr., , 10,000, , To Lipton & Co. A/c, , 10,000, , (Goods purchased on credit), 5, , Cash A/c, , Dr., , To Sales A/c, , 11,000, 11,000, , (Cash sales made), , 59
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www.tntextbooks.in, , 6, , Salaries A/c, , Dr., , 5,000, , To Cash A/c, , 5,000, , (Salaries paid), 7, , Lipton & Co. A/c, , Dr., , 10,000, , To Bank A/c, , 10,000, , (Payment made by cheque), 8, , Furniture A/c, , Dr., , 4,000, 4,000, , To Cash A/c, (Furniture bought for cash), 9, , Electricity charges A/c, , Dr., , 1,000, , To Cash A/c, , 1,000, , (Electricity charges paid), 10, , Insurance premium A/c, , Dr., , 300, , To Bank A/c, , 300, , (Insurance premium on furniture paid), Illustration 9, , Ananth is a trader dealing in textiles. For the following transactions, pass journal entries for, the month of January, 2018., Jan., , `, , 1, , Commenced business with cash, , 70,000, , 2, , Purchased goods from X and Co. on credit, , 30,000, , 3, , Cash deposited into bank, , 40,000, , 4, , Bought a building from L and Co. on credit, , 95,000, , 5, , Cash withdrawn from bank for office use, , 5,000, , 6, , Cash withdrawn from bank for personal use of Ananthu, , 4,000, , 7, , Towels given as charities, , ,3000, , 8, , Shirts taken over by Ananth for personal use, , 9, , Sarees distributed as free samples, , 10, , 12,000, 3,000, , Goods (table clothes) used for office use, 60, , 200
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www.tntextbooks.in, , Solution, , In the books of Ananth, Journal entries, , Date, 2018, Jan. 1, , Particulars, , L.F., , Cash A/c, , Dr., , Debit `, 70,000, , To Ananth’s capital A/c, 2, , 70,000, , (Commenced business with cash), Purchases A/c, , Dr., , 30,000, , To X and Co. A/c, 3, , 30,000, , (Credit purchases made), Bank A/c, , Dr., , 40,000, , To Cash A/c, 4, , 40,000, , (Cash deposited into bank), Buildings A/c, , Dr., , 95,000, , To L and Co. A/c, 5, , 95,000, , (Building bought on credit), Cash A/c, , Dr., , 5,000, , To Bank A/c, 6, , 5,000, , (Cash withdrawn from bank for office use), Drawings A/c, , Dr., , 4,000, , To Bank A/c, 7, , 4,000, , (Cash withdrawn from bank for personal use), Charities A/c, , Dr., , 3,000, , To Purchases A/c, 8, , 3,000, , (Goods given for charities), Drawings A/c, , Dr., , 12,000, 12,000, , To Purchases A/c, 9, , (Goods taken over for personal use), Sales promotion A/c, , Dr., , 3,000, 3,000, , To Purchases A/c, 10, , Credit `, , (Goods distributed as free samples), Office expenses A/c, , Dr., , To Purchases A/c, , 200, 200, , (Goods used for office use), 61
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www.tntextbooks.in, , Illustration 10, , Arun is a trader dealing in automobiles. For the following transactions, pass journal entries, for the month of January, 2018, Jan., , `, , 1, , Commenced business with cash, , 90,000, , 2, , Purchased goods from X and Co. on credit, , 40,000, , 3, , Accepted bill drawn by X and Co., , 20,000, , 4, , Sold goods to D and Co. on credit, , 10,000, , 5, , Paid by cash the bill drawn by X and Co., , 6, , Received cheque from D and Co. in full settlement, and deposited the same in bank, , 9,000, , 7, , Commission received in cash, , 5,000, , 8, , Goods costing ` 40,000 was sold and cash received, , 9, , Salaries paid in cash, , 50,000, 4,000, , Building purchased from Kumar and Co. for ` 1,00,000 and an, advance of ` 20,000 is given in cash, , 10, , Solution, , In the books of Arun, Journal entries, , Date, , Particulars, , L.F., , 2018, Jan. 1 Cash A/c, To Arun’s capital A/c, (Arun commenced business with cash), , Dr., , Debit `, , Credit `, , 90,000, 90,000, , 2 Purchases A/c, To X and Co. A/c, (Credit purchases made), , Dr., , 3 X and Co. A/c, To Bills payable A/c, (Bill drawn by X and Co. accepted), , Dr., , 4 D and Co. A/c, To Sales A/c, (Goods sold on credit), , Dr., , 40,000, 40,000, 20,000, 20,000, 10,000, 10,000, , 62
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www.tntextbooks.in, , 5, , 6, , 7, , 8, , 9, , 10, , Bills payable A/c, To Cash A/c, (Bills payable paid), , Dr., , Bank A/c, Discount A/c, To D and Co. A/c, (Cheque received from D and Co. in full settlement), , Dr., Dr., , Cash A/c, To Commission A/c, (Commission received in cash), , Dr., , Cash A/c, To Sales A/c, (Cash sales made), , Dr., , Salaries A/c, To Cash A/c, (Salaries paid in cash), , Dr., , Buildings A/c, To Cash A/c, To Kumar and Co. A/c, (Building bought by giving advance money), , Dr., , 20,000, 20,000, 9,000, 1,000, 10,000, , 5,000, 5,000, 50,000, 50,000, 4,000, 4,000, 1,00,000, 20,000, 80,000, , Illustration 11, , Bragathish is a trader dealing in electronic goods who commenced his business in 2015. For, the following transactions took place in the month of March 2018, pass journal entries., March, , `, , 1., , Purchased goods from Y and Co. on credit, , 60,000, , 2., , Sold goods to D and Co. on credit, , 30,000, , .3, , Paid Y and Co. through bank in full settlement, , 58,000, , 4., , D and Co. accepted a bill drawn by Bragathish, , 30,000, , 5., , Sold goods to L on credit, , 20,000, , 6., , Sold goods to M on credit, , 40,000, , 7., , Received a cheque from M in full settlement, and deposited the same to the bank, , 93,000, , 8., , Goods returned to Y and Co., , 4,000, 63
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www.tntextbooks.in, , 9., 10., , L became insolvent and only 90 paise, per rupee is received by cash in final settlement, Goods returned by M, , 3,000, , Solution, , In the books of Bragathish, Journal entries, , Date, , Particulars, , L.F., , 2018, March 1 Purchases A/c, To Y and Co. A/c, (Goods purchased on credit), 2 D and Co. A/c, To Sales A/c, (Credit sales made to D and Co.), 3 Y and Co. A/c, To Bank A/c, To Discount received A/c, (Payment made to Y and Co. and discount received), 4 Bills Receivable A/c, To D and Co. A/c, (Bills received from D and Co.), 5 L A/c, To Sales A/c, (Goods sold on credit to L), 6 M A/c, To Sales A/c, (Goods sold on credit to M), 7 Bank A/c, Discount allowed A/c, To M A/c, (Cheque received and discount allowed), 8 Y and A/c, To Purchases returns A/c, (Goods returned to Y and Co.), 9 Cash A/c (20,000 × 0.9), Bad debts A/c, To L A/c, (Cash received from L in final settlement), 10 Sales returns A/c, To M A/c, (Goods returned by M), 64, , Dr., , Debit `, , Credit `, , 60,000, 60,000, , Dr., , 30,000, 30,000, , Dr., , 60,000, , 58,000, 2000, Dr., , 30,000, 30,000, , Dr., , 20,000, 20,000, , Dr., , 40,000, 40,000, , Dr., Dr., , 39,000, 1000, 40,000, , Dr., , 4,000, 4,000, , Dr., Dr., , 18,000, 2,000, 20,000, , Dr., , 3,000, 3,000
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www.tntextbooks.in, , Illustration 12, , Valluvar is a sole trader dealing in tex, t iles. From the following transactions, pass journal, entries for the month of March, 2018., March, 1, , `, , Commenced business with cash, , 90,000, , with goods, , 60,000, , 2, , Purchased 20 readymade shirts from X and Co. on credit, , 10,000, , 3, , Cash deposited into bank through Cash Deposit Machine, , 30,000, , 4, , Purchased 10 readymade sarees from Y and Co. by cash, , 5, , Paid X and Co. through NEFT, , 6, , Sold 5 sarees to A and Co. on credit, , 7, , A and Co. deposited the amount due in Cash Deposit Machine, , 8, , Purchased 20 sarees from Z & Co. and paid through debit card, , 9, , Stationery purchased for and paid through net banking, , 10, , 6,000, 4,000, 12,000, 6,000, , Bank charges levied, , 200, , Solution, , In the books of Valluvar, Journal entries, , Date, , Particulars, , 2018, March 1, , 2, , 3, , 4, , L.F., , Cash A/c, Stock A/c, To Valluvar’s Capital A/c, (Valluvar commenced business with cash and goods), , Dr., Dr., , Purchases A/c, To X and Co. A/c, (Credit purchases made), , Dr., , Bank A/c, To Cash A/c, (Deposited cash into bank), , Dr., , Purchases A/c, To Cash A/c, (Goods purchased by cash), , Dr., , Debit `, , Credit `, , 90,000, 60,000, 1,50,000, , 10,000, 10,000, , 30,000, 30,000, , 6,000, 6,000, , 65
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www.tntextbooks.in, , 5, , 6, , 7, , 8, , 9, , 10, , X and Co. A/c, To Bank A/c, (Deposited cash into bank), , Dr., , A and Co. A/c, To Sales A/c, (Credit sales made to A and Co.), , Dr., , Bank A/c, To A and Co. A/c, (Money received through CDM), , Dr., , Purchases A/c, To Bank A/c, (Purchases made), , Dr., , Stationery A/c, To Bank A/c, (Stationery purchased), , Dr., , Bank charges A/c, To Bank A/c, (Bank charges levied), , Dr., , 10,000, 10,000, , 4,000, 4,000, , 4,000, 4,000, , 12,000, 12,000, , 6,000, 6,000, , 200, 200, , Illustration 13, , Deri is a sole trader dealing in automobiles. From the following transactions, pass journal, entries for the month of January, 2018., Jan., 1, , `, , Commenced business with cash, , 1,00,000, , with goods, , 2,00,000, , with buildings, , 5,00,000, , 2, , Purchased goods from A and Co. on credit, , 3, , Cash deposited into bank, , 4, , Purchased goods from B and Co. and payment, made through credit card, , 3,00,000, 80,000, , 5, , Paid A and Co. through RTGS, , 6, , Sold goods to C and Co. and cheque received, , 7, , Deposited the cheque received from C and Co. with the bank, , 8, , Purchased goods from Z & Co. and paid through debit card, 66, , 5,000, 50,000, 12,000
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www.tntextbooks.in, , 9, , Stationery purchased for and paid through net banking, , 10, , 6,000, , Income taxof Deri is paid by cheque, , 10,000, , Solution, , In the books of Deri, Journal entries, , Date, 2018, Jan. 1, , 2, , 3, , 4, , 5, , 6, , 7, , 8, , 9, , 10, , Particulars, , L.F., , Cash A/c, Stock A/c, Buildings A/c, To Deri’s capital A/c, (Deri commenced business with cash, goods and, buildings), , Dr., Dr., Dr., , Purchases A/c, To A and Co. A/c, (Credit purchases made), , Dr., , Bank A/c, To Cash A/c, (Amount deposited in the bank), , Dr., , Purchases A/c, To Bank A/c, (Goods purchased through credit card), , Dr., , A and Co. A/c, To Bank A/c, (Payment through RTGS), , Dr., , Cash A/c, To Sales A/c, (Sales made and cheque received), , Dr., , Bank A/c, To Cash A/c, (Cheque received from C and Co. deposited in the, bank), , Dr., , Purchases A/c, To Bank A/c, (Goods purchased by debit card), , Dr., , Stationery A/c, To Bank A/c, (Stationery purchased through net banking), , Dr., , Drawings A/c, To Bank A/c, (Income tax of the owner paid), , Dr., , Debit `, , Credit `, , 1,00,000, 2,00,000, 5,00,000, 8,00,000, , 3,00,000, 3,00,000, 80,000, 80,000, 5,000, 5,000, 3,00,000, 3,00,000, 50,000, 50,000, 50,000, 50,000, , 12,000, 12,000, 6,000, 6,000, 10,000, 10,000, , 67
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www.tntextbooks.in, , Illustration 14, , Chandran is a sole trader dealing in sports items. From the following transactions, pass, journal entries for the month of March, 2018., March, , `, , 1, , Commenced business with cash, , 4,00,000, , 2, , Cash deposited into bank, , 3,00,000, , 3, , Purchased goods from Ravi and payment made through net banking, , 90,000, , 4, , Sales made to Kumar, who deposited the money through CDM, , 10,000, , 5, , Sales made to Vivek, who made the payment by debit card, , 60,000, , 6, , Sold goods to Keerthana, who made the payment through credit card, , 50,000, , 7, , Dividend directly received by bank, , 2,000, , 8, , Money withdrawn from ATM, , 3,000, , 9, , Salaries paid through ECS, , 6,000, , 10, , Cricket bats donated to a trust, , 10,000, , Solution, In the books of Chandran, Journal entries, , Date, , Particulars, , 2018, March 1, , 2, , 3, , 4, , L.F., , Cash A/c, To Chandran’s capital A/c, (Capital contributed by Chandran), , Dr., , Bank A/c, To Cash A/c, (Cash deposited into bank), , Dr., , Purchases A/c, To Bank A/c, (Goods purchased and payment made by net banking), , Dr., , Bank A/c, To Sales A/c, (Sales made and money received through CDM), , Dr., , Debit `, , Credit `, , 4,00,000, 4,00,000, , 3,00,000, 3,00,000, , 68, , 90,000, 90,000, , 10,000, 10,000
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www.tntextbooks.in, , 5, , 6, , 7, , 8, , 9, , 10, , Bank A/c, To Sales A/c, (Sales made and money credited through debit card), , Dr., , 60,000, 60,000, , Dr., Bank A/c, To Sales A/c, (Sales made and money credited through credit card), , 50,000, , Bank A/c, To Dividend A/c, (Dividend directly received by bank), , Dr., , 2,000, , Cash A/c, To Bank A/c, (Cash withdrawn through ATM), , Dr., , Salaries A/c, To Bank A/c, (Salaries paid through ECS), , Dr., , Donation A/c, To Purchases A/c, (Cricket bats donated to a trust), , Dr., , 50,000, , 2,000, , 3,000, 3,000, , 6,000, 6,000, , 10,000, 10,000, , Illustration 15, , Deepak is a dealer in stationery items. From the following transactions, pass journal entries, for the month of January and February, 2018., Jan., , `, , 1, , Commenced business with cash, , 2,00,000, , 2, , Opened a bank account by depositing cash, , 1,00,000, , 3, , ‘A 4 papers’ sold on credit to Padmini and Co., , 4, , Bills received from Padmini and Co. for the amount due, , 5, , Bills received from Padmini and Co. discounted with the bank, , Feb., 15, , Bills of Padmini and Co. dishonoured, , 69, , 60,000, , 58,000
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www.tntextbooks.in, , Solution, In the books of Deepak, Journal entries, , Date, 2018, Jan. 1, , 2, , 3, , 4, , 5, , Feb. 15, , Particulars, , L.F., , Cash A/c, To Deepak’s capital A/c, (Capital contributed by Deepak), , Dr., , Bank A/c, To Cash A/c, (Cash deposited with the bank), , Dr., , Padmini and Co. A/c, To Sales A/c, (Credit sales to Padmini and Co.), , Dr., , Bills receivable A/c, To Padmini and Co. A/c, (Bill received for the amount due), , Dr., , Bank A/c, Discount A/c, To Bills receivable A/c, (Bills receivable discounted with the bank), , Dr., Dr., , Padmini and Co. A/c, To Bank A/c, (Bill discounted with the bank dishonoured), , Dr., , Debit `, , Credit `, , 2,00,000, 2,00,000, , 1,00,000, 1,00,000, 60,000, 60,000, 60,000, 60,000, 58,000, 2,000, 60,000, 60,000, 60,000, , 3.8.7 Advantages of journal, , Following are the advantages of journal:, (i), , Complete information about the business transactions can be obtained on time basis, as the transactions are recorded in chronological order., , (ii) Correctness of the entry can be checked through narration., (iii) Journal forms the basis for posting the entries in the ledger., , 70
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www.tntextbooks.in, , •, , Points to remember, Transactions are recorded in the books of account with the help of source documents., , •, , There are two aspects involved in every business transaction namely debit and credit., , •, , Every debit has a corresponding and equal credit., , •, , Every credit has a corresponding and equal debit., , •, , Accounts can be classified into personal, real and nominal., , •, , Assets = Capital + Liabilities, , •, , Transactions are first recorded in journal., , Golden rules of accounting:, Personal account, , Debit the receiver, , Credit the giver, , Real account, , Debit what comes in, , Credit what goes out, , Nominal account, , Debit all expenses and losses, , Credit all incomes and gains, , Self-examination questions, I Multiple choice questions, &KRRVHWKHFRUUHFWDQVZHU , , 1., , Accounting equation signifies, (a) Capital of a business is equal to assets, (b) Liabilities of a business are equal to assets, (c) Capital of a business is equal to liabilities, (d) Assets of a business are equal to the total of capital and liabilities, , 2., , ‘Cash withdrawn by the proprietor from the business for his personal use’ causes, (a) Decrease in assets and decrease in owner’s capital, (b) Increase in one asset and decrease in another asset, (c) Increase in one asset and increase in liabilities, (d) Increase in asset and decrease in capital, , 3., , A firm has assets of ` 1,00,000 and the external liabilities of ` 60,000. Its capital would be, (a) ` 1,60,000, , (b) ` 60,000, , (c) ` 1,00,000, , (d) ` 40,000, 71
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www.tntextbooks.in, , 4., , The incorrect accounting equation is, , 5., , (a) Assets = Liabilities + Capital, , (b) Assets = Capital + Liabilities, , (c) Liabilities = Assets + Capital, , (d) Capital = Assets – Liabilities, , Accounting equation is formed based on the accounting principle of, , 6., , (a) Dual aspect, , (b) Consistency, , (c) Going concern, , (d) Accrual, , Real account deals with, , 7., , (a) Individual persons, , (b) Expenses and losses, , (c) Assets, , (d) Incomes and gains, , Which one of the following is representative personal account?, , 8., , (a) Building A/c, , (b) Outstanding salary A/c, , (c) Mahesh A/c, , (d) Balan & Co, , Prepaid rent is a, , 9., , (a) Nominal A/c, , (b) Personal A/c, , (c) Real A/c, , (d) Representative personal A/c, , Withdrawal of cash from business by the proprietor should be credited to, , 10., , (a) Drawings A/c, , (b) Cash A/c, , (c) Capital A/c, , (d) Purchases A/c, , In double entry system of book keeping, every business transaction affects, (a) Minimum of two accounts, , (b) Same account on two different dates, , (c) Two sides of the same account, , (d) Minimum three accounts, , Answers, , 1. (d), , 2. (a), , 3. (d), , 4. (c), , 5. (a), , 6. (c), , II Very short answer questions, , 1. What are source documents?, 2. What is accounting equation?, 3. Write any one transaction which, a) Decreases the assets and decreases the liabilities, b) Increases one asset and decreases another asset, 72, , 7. (b), , 8. (d), , 9. (b), , 10. (a)
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www.tntextbooks.in, , 4. What is meant by journalising?, 5. What is real account?, 6. How are personal accounts classified?, 7. State the accounting rule for nominal account., 8. Give the golden rules of double entry accounting system., III Short answer questions, , 1. Write a brief note on accounting equation approach of recording transactions., 2. What is an Account? Classify the accounts with suitable examples., 3. What are the three different types of personal accounts?, 4. What is the accounting treatment for insurance premium paid on the life of the proprietor?, 5. State the principles of double entry system of book keeping., 6. Briefly explain about steps in journalising., 7. What is double entry system? State its advantages., IV Exercises, 1., , Complete the accounting equation, (a), , Assets, , =, , Capital, , +, , Liabilities, , ` 1,00,000, , =, , ` 80,000, , +, , ?, , =, , Capital, , +, , Liabilities, , ` 2,00,000, , =, , ?, , +, , ` 40,000, , Assets, , =, , Capital, , +, , Creditors, , =, , ` 1, 60,000, , +, , ` 80,000, , (b) Assets, (c), , ?, 2., , For the following transactions, show the effect on accounting equation., (a) Raj Started business with cash, , ` 40,000, , (b) Opened bank account with a deposit of, , ` 30,000, , (c) Bought goods from Hari on credit for, , ` 12,000, ` 1,000, , (d) Raj withdrew cash for personal use, (e) Bought furniture by using debit card for, , ` 10,000, , (f) Sold goods to Murugan and cash received, , ` 6,000, , (g) Money withdrawn from bank for office use, , ` 1,000, , 73
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www.tntextbooks.in, , 3., , Prepare accounting equation for the following transactions., (a) Murugan commenced business with cash ` 80,000, (b) Purchased goods for cash ` 30,000, (c) Paid salaries by cash ` 5,000, (d) Bought goods from Kumar for ` 5,000 and deposited the money in CDM., (e) Introduced additional capital of ` 10,000, , 4., , What will be the effect of the following on the accounting equation?, (a) Sunil started business with ` 1,40,000 cash and goods worth ` 60,000, (b) Purchased furniture worth ` 20,000 by cash, (c) Depreciation on furniture ` 800, (d) Deposited into bank ` 40,000, (e) Paid electricity charges through net banking ` 500, (f) Sold goods to Ravi costing ` 10,000 for ` 15,000, (g) Goods returned by Ravi ` 5,000, , 5., , Create an accounting equation on the basis of the following transactions:, (i) Rakesh started business with a capital of ` 1,50,000, (ii) Deposited money with the bank ` 80,000, (iii) Purchased goods from Mahesh and paid through credit card ` 25,000, (iv) Sold goods (costing ` 10,000) to Mohan for ` 14,000 who pays through debit card, (v) Commission received by cheque and deposited the same in the bank ` 2,000, (vi) Paid office rent through ECS ` 6,000, (vii) Sold goods to Raman for ` 15,000 of which ` 5,000 was received at once, , 6., , Create an accounting equation on the basis of the following transactions:, (i) Started business with cash ` 80,000 and goods ` 75,000, (ii) Sold goods to Shanmugam on credit for ` 50,000, (iii) Received cash from Shanmugam in full settlement ` 49,000, (iv) Salary outstanding ` 3,000, (v) Goods costing ` 1,000 given as charity, (vi) Insurance premium paid ` 3000, (vii) Out of insurance premium paid, prepaid is ` 500, 74
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www.tntextbooks.in, , 7., , Create accounting equation on the basis of the following transactions:, (i) Opening balance on 1st January, 2018 cash ` 20,000; stock ` 50,000 and bank ` 80,000, (ii) Bought goods from Suresh ` 10,000 on credit, (iii) Bank charges ` 500, (iv) Paid Suresh ` 9,700 through credit card in full settlement., (v) Goods purchased on credit from Philip for ` 15,000, (vi) Goods returned to Philip amounting to ` 4,000, , 8., , Enter the following transactions in the journal of Manohar who is dealing in textiles:, 2018, `, , March, , 9., , 1, , Manohar started business with cash, , 60,000, , 2, , Purchased furniture for cash, , 10,000, , 3, , Bought goods for cash, , 25,000, , 6, , Bought goods from Kamalesh on credit, , 15,000, , 8, , Sold goods for cash, , 28,000, , 10, , Sold goods to Hari on credit, , 10,000, , 14, , Paid Kamalesh, , 12,000, , 18, , Paid rent, , 25, , Received from Hari, , 8,000, , 28, , Withdrew cash for personal use, , 4,000, , 500, , Pass journal entries in the books of Sasi Kumar who is dealing in automobiles., 2017, `, , Oct, 1, , Commenced business with goods, , 40,000, , 3, , Cash introduced in the business, , 60,000, , 4, , Purchased goods from Arul on credit, , 70,000, , 6, , Returned goods to Arul, , 10,000, , 10, , Paid cash to Arul on account, , 60,000, , 15, , Sold goods to Chandar on credit, , 30,000, , 18, , Chandar returned goods worth, , 6,000, , 20, , Received cash from Chandar in full settlement, , 25, , Paid salaries through ECS, , 30, , Sahil took for personal use goods worth, , 23,000, 2,000, , 75, , 10,000
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www.tntextbooks.in, , 10. Pass Journal entries in the books of Hari who is a dealer in sports items, 2017, `, , Jan., 1, , Commenced business with cash, , 50,000, , 2, , Purchased goods from Subash on credit, , 20,000, , 4, , Sold goods to Ramu on credit, , 15,000, , 8, , Ramu paid the amount through cheque, , 10, , Cheque received from Ramu is deposited with the bank, , 15, , Sports items purchased from Gopal on credit, , 18, , Paid rent for the proprietor’s residence, , 20, , Paid Gopal in full settlement after deducting 5 % discount, , 25, , Paid Subash ` 4,750 and discount received, , 28, , Paid by cash: wages ` 500; electricity charges ` 3,000, , 10,000, 1,500, ` 250, ` 1,000, , and trade expenses, , 11. Karthick opened a provisions store on 1st April, 2017. Journalise the following transactions, in his books:, 2017, April, ` 2,00,000, , 1, , Paid into bank for opening a current account, , 3, , Goods purchased by cheque, , ` 40,000, , 5, , Investments made in securities, , ` 40,000, , 6, , Goods sold to Radha for ` 20,000 and cheque, received and deposited into bank, , 7, , Amount withdrawn from bank for office use, , ` 15,000, , 10, , Purchased goods from Kamala and cash deposited in CDM, , `10,000, , 12, , Sold goods to Vanitha who paid through debit card, , ` 10,000, , 15, , Interest on securities directly received by the bank, , ` 1,000, , 20, , Insurance paid by the bank as per standing instructions, , ` 2,000, , 25, , Sales made to Kunal who made payment through CDM, , ` 6,000, , 76
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www.tntextbooks.in, , 12. Journalise the following transactions in the books of Ramesh who is dealing in computers:, 2018, March, 1, , Ramesh started business with cash ` 3,00,000, Goods ` 80,000 and Furniture, ` 27,000., , 2, , Money deposited into bank ` 2,00,000, , 3, , Bought furniture from M/s Jayalakshmi Furniture for ` 28,000 on credit., , 4, , Purchased goods from Asohan for ` 5,000 by paying through debit card., , 5, , Purchased goods from Guna and paid through net banking for cash ` 10,000, , 6, , Purchased goods from Kannan and paid through credit card ` 20,000, , 7, , Purchased goods from Shyam on credit for ` 50,000, , 8, , Bill drawn by Shyam was accepted for ` 50,000, , 9, , Paid half the amount owed to M/s Jayalakshmi Furniture by cheque, , 10, , Shyam’s bill was paid, , 13. Journalise the following transactions in the books of Sundar who is a book seller., 2017, `, , Dec, 1, , Commenced business with cash, , 2,00,000, , 2, , Bought goods from X and Co. on credit, , 80,000, , 4, , Opened a bank account with, , 50,000, , 5, , Sold goods to Naresh who paid the amount through net banking, , 5,000, , 6, , Sold goods to Devi who paid through credit card, , 7,000, , 7, , Sold goods to Ashish on credit, , 8, , Money withdrawn from bank through ATM for office use, , 1,000, , 9, , Purchased a furniture and paid through debit card, , 2,000, , 10, , Salaries paid by cash, , 6,000, , 11, , Furniture purchased from Y for ` 25,000 and advance given, , 5,000, , 700, , 14. Raja has a hotel. The following transactions took place in his business. Journalise them., `, , Jan., 1, , Started business with cash, , 3,00,000, , 2, , Purchased goods from Rajiv on credit, , 1,00,000, , 3, , Cash deposited with the bank, , 2,00,000, 77
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www.tntextbooks.in, , 20, , Borrowed loan from bank, , 1,00,000, , 22, , Withdrew from bank for personal use, , 23, , Amount paid to Rajiv in full settlement through NEFT, , 25, , Paid club bill of the proprietor by cheque, , 26, , Paid electricity bill of the proprietor’s house through debit card, , 2,000, , 31, , Lunch provided at free of cost to a charity, , 1,000, , 31, , Bank levied charges for locker rent, , 1,000, , 800, 99,000, 200, , 15. From the following transactions of Shyam, a stationery dealer, pass journal entries for the, month of August 2017., Aug., 1, , Commenced business with cash ` 4,00,000, Goods ` 5,00,000, , 2, , Sold goods to A and money received through RTGS ` 2,50,000, , 3, , Goods sold to Z on credit for ` 20,000, , 5, , Bill drawn on Z and accepted by him ` 20,000, , 8, , Bill received from Z is discounted with the bank for ` 19,000, , 10, , Goods sold to M on credit ` 12,000, , 12, , Goods distributed as free samples for ` 2,000, , 16, , Goods taken for office use ` 5,000, , 17, , M became insolvent and only 0.80 per rupee is received in final settlement, , 20, , Bill of Z discounted with the bank is dishonoured, , 16. Mary is a cement dealer having business for more than 5 years. Pass journal entries in her, books for the period of March, 2018., `, , March, 1, , Cement bags bought on credit form Sibi, , 20,000, , 2, , Electricity charges paid through net banking, , 3, , Returned goods bought form Sibi, , 5,000, , 4, , Cement bags taken for personal use, , 1,000, , 5, , Advertisement expenses paid, , 2,000, , 6, , Goods sold to Mano, , 7, , Goods returned by Mano, , 8, , Payment received from Mano through NEFT, , 500, , 20,000, 5,000, , 78
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www.tntextbooks.in, , Student activity, )LOOLQWKHPLVVLQJLQIRUPDWLRQLQWKHIROORZLQJMRXUQDOHQWULHV , , Date, , Particulars, , L.F., , ……………………….A/c, , Dr., , Debit `, , Credit `, , ---------, , To ……………………A/c, , ---------, , (Goods purchased for cash ` 20,000), ………………………A/c, , Dr., , ---------, , ………………………A/c, , Dr., , ---------, , To Niha A/c, , ---------, , (Received ` 18,800 from in full settlement of the, due ` 19,000), , Student activity, Write the narration with reference to the following journal entries., In the books of Shyam, Journal entries, , Date, 2018, April, , Particulars, , L.F., , Cash A/c, 1, , Dr., , Debit ` Credit `, 3,00,000, , To Shyam’s capital A/c, , 3,00,000, , (................................................................................), 2 Bank A/c, To Cash A/c, , Dr., , 2,70,000, 2,70,000, , (................................................................................), , 79
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www.tntextbooks.in, , Pearlita is a trader. She buys and sells electronic goods. She maintains double, entry book- keeping. She purchases and sells goods both on cash and credit, bases. If the purchased goods are not in good condition, she sends them back to her, supplier. At the same time, she also accepts if her customers return the goods sold to them,, when the goods are not in good condition. She maintains a bank account for her business., She receives and pays money through bank transactions., Now, discuss on the following:, •, , Why does she maintain double entry book keeping?, , •, , Do all the business units engage in credit transaction?, , •, , Can you think of some business units that have only cash transactions?, , •, , Is it necessary for Pearlita to maintain a separate bank account for business?, , •, , What will happen if she uses her personal bank account for her business transactions?, , •, , Identify the business documents involved in this case study., , •, , Can you think of some assets and liabilities for Pearlita’s business?, , To explore further, For small business entities generally full set of accounts ay not be maintained. Is it possible, to calculate profit or loss for such entities? How?, Reference, 1. M C Shukla, T S Grewal and S C Gupta, Advanced Accounts, 19th ed., 2017, S.Chand Publishing, New Delhi., 2. R L Gupta and V K Gupta, Financial Accounting, 11th ed., 2014, Sultan Chand and Sons, New Delhi., 3. S P Jain and K L Narang, Advanced Accountancy Vol – I, 2016, Kalyani Publishers, New Delhi., 4. Dalston L Cecil and Jenitra L Merwin, Financial Accounting, 3rd ed., 2017, Learntech Press, Trichy., 5. Fundamentals of Accounting, 2017, The Institute of Chartered Accountants of India, New Delhi., , 80
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www.tntextbooks.in, , Unit 4, , LEDGER, , Contents, , Points to recall, , 4.1 Introduction, 4.2 Utilities of ledger, , The following points are to be recalled, before learning Ledger:, , 4.3 Format of ledger account, 4.4 Distinction between journal and, ledger, , • Classification of accounts, • Golden rules of double entry system, of book keeping, , 4.5 Procedure for posting, 4.6 Balancing of ledger accounts, , • Steps in journalising the transactions, and passing journal entries, , Key terms to know, Learning Objectives, , Ledger, , To enable the students to, •, •, •, , Ledger posting, , Understand the meaning of ledger, account, Understand the procedure for, posting, Post the journal entries to the, ledger accounts and balance the, ledger accounts, , Balancing the ledger account, Debit balance, Credit balance, , 81
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www.tntextbooks.in, , 4.1 Introduction, Student activity, Think: A trader has been selling goods both on cash and credit bases. Most of the goods are, sold on credit. The owner has lost track of ‘who has to pay how much?’ Is there any quick, way to get this information?, Ledger account is a summary statement of all the, Transaction, transactions relating to a person, asset, liability,, expense or income which has taken place during a, given period of time and it shows their net effect., Journal / Subsidiary books, From the transactions recorded in the journal,, the ledger account is prepared. Ledger is known, as principal book of accounts. It is a book which, Ledger, contains all sets of accounts, namely, personal, real, and nominal accounts. Accountwise balance can be, determined from the ledger. The ledger accounts are prepared based on journal entries passed., , ↓, ↓, , The balances in the ledger accounts show the net effect of transactions during a particular, period in various accounts. The personal accounts give the net amount due to creditors, and the net amount due from debtors, real accounts show the values of assets and nominal, accounts show incomes and expenses. The financial statements can be prepared from the, ledger balances., Ledger may be maintained in the business enterprises in the form of a bound register or in the, form of loose sheets with spiral binding. Normally one page or one sheet may be provided for, one account. An index is provided in the beginning of the ledger giving details of the accounts, contained in it such as specific code for each account, page number, etc. Where computerised, accounting is followed, once the transactions are recorded in the journal, ledger accounts are, automatically prepared., 4.2. Utilities of ledger, Following are the utilities of ledger:, i) Quick information about a particular account, , Ledger account helps to get all information about a particular account like sales, purchases,, machinery, etc., at a glance. For example, where there are several transactions with a debtor,, the net amount due from a debtor can be known from the ledger account., ii) Control over business transactions, , From the ledger balances extracted, a thorough analysis of account balances can be made, which helps to have control over the business transactions., 82
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www.tntextbooks.in, , iii)Trial balance can be prepared, , With the balances of ledger accounts, trial balance can be prepared to check the arithmetical, accuracy of entries made in the journal and ledger., LY +HOSVWRSUHSDUH¿QDQFLDOVWDWHPHQWV, , From the ledger balances extracted, financial statements can be prepared for ascertaining net, profit or loss and the financial position., 4.3 Format of ledger account, The ledger account is prepared in T format. It is divided into two parts. Left side is debit side, and right side is credit side. Each side contains four columns. The name or title of the account, is placed at the top middle and the details are entered in the ledger. The format of ledger, account is given below:, Dr., Date, , Name of the ledger account, Particulars, , J.F., , Amount `, , Date, , Cr., Particulars, , J.F., , Amount `, , Following are the details contained in the various columns in the ledger:, Date : Date of the transaction is recorded in this column., Particulars : The account debited or credited is recorded in this column. On the debit side, the, entries are made starting with ‘To’ and on the credit side, entries are made starting with ‘By’., Journal Folio (J.F.): In this column, the page number of the journal or subsidiary books from, which the entry has been posted to the ledger is noted., Amount : The amount of the transaction is recorded in this column., 4.4 Distinction between journal and ledger, Following are the differences between journal and ledger:, Basis, 1. Recording, , 2. Stage of recording, , Journal, Ledger, As and when transactions take In ledger, entries may be posted either, place entries are made in journal. on the same day or at the end of a, specified period such as weekly or, fortnightly especially when subsidiary, books are maintained., Recording in the journal is the first Recording in the ledger is the second, stage, stage, which is done on the basis of, entries made in the journal., 83
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www.tntextbooks.in, , 3. Order of recording, , Entries are made in the chronological Entries are made accountwise., order, i.e., datewise in the order of, occurrence., , 4. Process, , The process of recording in journal The process of recording in the ledger, is called journalising, is called posting., , 5. Facilitating, preparation of trial, balance, , Amount from the journal does not Ledger balances serve as the basis for, serve as the basis for preparing trial preparing trial balance., balance., , 6. Basis of entries, , Entries in the journal are made on Posting is done in ledger on the basis, the basis of source documents., of journal entries., , 7. Net position, , Net position of an account cannot Net position of an account can be, be ascertained from journal., ascertained from ledger account., , 4.5 Procedure for posting, The process of transferring the debit and credit items from the journal to the ledger accounts, is called posting. The procedure of posting from journal to ledger is as follows:, a), , Locate the ledger account that is debited in the journal entry. Open the respective account, in the ledger, if already not opened. Write the name of the account in the top middle. If, already opened, locate the account from the ledger index. Now entries are to be made on, the debit side of the account., , b), , Record the date of the transaction in the date column on the debit side of that account., , c), , Record the name of the account credited in the journal with the prefix ‘To’ in particulars, column., , d), , Record the amount of the debit in the ‘amount column’., , e), , Locate the ledger account that is credited in the journal entry. Open the respective account, in the ledger, if already not opened. Write the name of the account in the top middle. If, already opened, locate the account from the ledger index. Now entries are to be made, on the credit side of the account. Record the date of the transaction in the date column., Record the name of the account debited in the journal entry in the particulars column, with the prefix ‘By’ and write the amount in the amount column., , Tutorial note, The name of the account in the top never appears in the particulars column. In the particulars, column the account entered is the other account in the journal entry., Student activity, Think: What will happen if an account debited or credited is left out while posting from, journal to ledger?, 84
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www.tntextbooks.in, , Illustration 1, , Pass journal entries for the following transactions and post them in the ledger accounts., 2017, June 1, , Basu started business with cash ` 50,000, , 4, , Purchased furniture by paying cash for ` 6,000, , 7, , Purchased machinery on credit from Harish ` 10,000, , 10, , Bought goods for cash ` 4,000, , 18, , Paid insurance premium ` 100, , Solution, In the books of Basu, Journal entries, , Date, 2017, June 1, June 4, , Particulars, , L.F., , Cash A/c, , Dr., , Debit `, 50,000, , Credit `, , To Basu’s capital A/c, , 50,000, , (Started business with cash), Furniture A/c, , Dr., , 6,000, , To Cash A/c, June 7, , 6,000, , (Furniture bought for cash), Machinery A/c, , Dr., , 10,000, , To Harish A/c, June 10, , 10,000, , (Machinery bought on credit from Harish), Purchases A/c, Dr., , 4,000, , To Cash A/c, June 18, , 4,000, , (Goods bought for cash), Insurance premium A/c, , Dr., , 100, , To Cash A/c, , 100, , (Insurance premium paid), Ledger accounts, , Dr., Date, 2017, , Cash account, Particulars, , June 1 To Basu’s capital A/c, , J.F., , `, , Date, 2017, , Cr., Particulars, , J.F., , `, , By Furniture A/c, , 6,000, , 10 By Purchases A/c, , 4,000, , 50,000 June 4, , 18 By Insurance premium A/c, 85, , 100
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www.tntextbooks.in, , Dr., , Basu’s Capital account, , Date, , Particulars, , `, , J.F., , Date, 2017, , Particulars, , June 1, , Dr., , Cr., J.F., , By Cash A/c, , `, 50,000, , Furniture account, , Date, 2017, June 4, , Particulars, , `, , J.F., , To Cash A/c, , Date, , Cr., Particulars, , J.F., , `, , 6,000, , Dr., , Machinery account, , Date, 2017, , Particulars, , June 7, , To Harish A/c, , `, , J.F., , Date, , Cr., Particulars, , J.F., , `, , 10,000, , Dr., , Harish account, , Date, , Particulars, , `, , J.F., , Dr., , Cr., , Date, 2017, , Particulars, , June 7, , By Machinery A/c, , J.F., , `, 10,000, , Purchases account, , Date, 2017, , Particulars, , `, , J.F., , June 10 To Cash A/c, , Date, , Cr., Particulars, , J.F., , `, , 4,000, , Dr., , Insurance premium account, , Date, 2017, , Particulars, , J.F., , June 18 To Cash A/c, , `, , Date, , Particulars, , Cr., J.F., , `, , 100, , 4.5.1 Posting of opening journal entry, , In case of existing business enterprises, opening entry is made at the beginning of the accounting, period to bring into account the balances of accounts which were not closed in the preceding, accounting period. The accounts not closed are capital, liabilities and assets appearing in the, balance sheet of the previous year. The entry passed is as follows:, Assets A/c (individually), , Dr. xxx, , To Liabilities A/c (individually), , xxx, , To Capital A/c, , xxx, 86
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www.tntextbooks.in, , While posting the opening entry in the individual ledgers, the term balance brought down, (balance b/d) is used. The steps involved in posting the opening entry are as follows:, Step 1: The items debited in the opening entry are entered on the debit side of respective accounts., The words ‘To Balance b/d’ are written in the particulars column with respective amounts, in the amount column, date being the first day of the accounting period., Step 2: The items credited in the opening entry are entered on the credit side of respective, accounts. The words ‘By Balance b/d’ are written in the particulars column with respective, amounts in the amount column, date being the first day of the accounting period., Illustration 2, , Prepare necessary ledger accounts in the books of Joy from the following opening entry:, In the books of Joy, Journal entries, , Date, 2017, Jan 1, , Particulars, , L.F., , Debit `, , Cash A/c, , Dr., , 45,000, , Stock A/c, , Dr., , 50,000, , Sohan A/c, , Dr., , 35,000, , Furniture A/c, , Dr., , 50,000, , To Ram A/c, , Credit `, , 20,000, , To Joy’s capital A/c, , 1,60,000, , (Balances of assets and liabilities brought forward), Solution, Ledger accounts, , Dr., Date, 2017, Jan 1, , Cash account, Particulars, , J.F., , To Balance b/d, , `, , Jan 1, , Jan 1, , J.F., , `, , Stock account, Particulars, , J.F., , To Balance b/d, , `, , Date, , Cr., Particulars, , J.F., , `, , 50,000, , Dr., Date, 2017, , Particulars, , 45,000, , Dr., Date, 2017, , Date, , Cr., , Sohan account, Particulars, To Balance b/d, , J.F., , `, , Date, , 35,000, 87, , Cr., Particulars, , J.F., , `
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www.tntextbooks.in, , Dr., Date, 2017, Jan 1, , Furniture account, Particulars, , `, , J.F., , To Balance b/d, , J.F., , `, , Ram account, Particulars, , `, , J.F., , Dr., , Cr., , Date, 2017, Jan 1, , Date, , Particulars, , 50,000, , Dr., Date, , Date, , Cr., , Particulars, , J.F., , By Balance b/d, , `, 20,000, , Joy’s capital account, Particulars, , `, , J.F., , Date, 2017, Jan 1, , Particulars, , Cr., J.F., , By Balance b/d, , `, 1,60,000, , 4.5.2 Posting of compound journal entry, , When a journal entry has more than one debit or more than one credit or both, it is called, a compound entry. For items debited in the compound entry, entries are made on the debit, side in the respective accounts with the respective amount debited. For items credited in, the compound entry, entries are made on the credit side in the respective accounts with, the respective amount credited. Posting of such entries to ledger accounts is explained in, illustrations 3 and 4., Illustration 3, , Journalise the following transactions and post them to ledger. On May 20, 2018, Ram paid, salaries ` 15,000; Electricity charges ` 8,000 and wages ` 2,000., Solution, In the books of Ram, Journal entries, , Date, 2018, May 20, , Particulars, , L.F., , Debit `, , Salaries A/c, , Dr., , 15,000, , Electricity charges A/c, , Dr., , 8,000, , Wages A/c, , Dr., , 2,000, , To Cash A/c, , Credit `, , 25,000, , (Expenses paid), 88
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www.tntextbooks.in, , Ledger accounts, , Dr., Date, 2018, May 20, , Salaries account, Particulars, To Cash A/c, , May 20, , May 20, , Particulars, , `, , J.F., , To Cash A/c, , J.F., , `, , Date, , Cr., , Particulars, , J.F., , `, , 8,000, , Wages account, Particulars, , `, , J.F., , To Cash A/c, , Cr., , Date, , Particulars, , J.F., , `, , 2,000, , Dr., Date, , Particulars, , Electricity charges account, , Dr., Date, 2018, , Date, , 15,000, , Dr., Date, 2018, , `, , J.F., , Cr., , Cash account, Particulars, , `, , J.F., , Cr., , Date, 2018, , Particulars, , J.F., , `, , May 20 By Salaries A/c, , 15,000, , By Electricity, charges A/c, , 8,000, , By Wages A/c, , 2,000, , Illustration 4, , On 15th March, 2017, Ramesh paid ` 13,800 in full settlement of his account ` 15,000 due to, his creditor Dinesh. Pass journal entry and prepare ledger accounts., Solution, In the books of Ramesh, Journal entry, , Date, 2017, March 15, , Particulars, , L.F., , Dinesh A/c, , Dr., , To Cash A/c, , Debit `, , Credit `, , 15,000, 13,800, , To Discount received A/c, , 1,200, , (Paid Dinesh in full settlement of his account), 89
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www.tntextbooks.in, , Ledger accounts, , Dr., Date, 2017, , Dinesh account, Particulars, , Date, , Particulars, , J.F., , To Discount, received A/c, , 1,200, , Dr., , Cash account, Particulars, , J.F., , `, , Date, 2017, , Cr., Particulars, , J.F., , March 15 By Dinesh A/c, , Dr., Date, , `, , 13,800, , March 15 To Cash A/c, , Date, , `, , J.F., , Cr., , `, 13,800, , Discount received account, Particulars, , J.F., , `, , Date, 2017, , Cr., Particulars, , March 15 By Dinesh A/c, , J.F., , `, 1,200, , Student activity, Think: What will happen to the ledger account postings? Do you think that it will continue, for an indefinite period of time? Where will the accounting process stop?, 4.6 Balancing of ledger accounts, After posting the transactions, the business person is interested to know the position of various, accounts. For this purpose, the accounts are balanced at the end of the accounting period or, after a certain period to ascertain the net balance in each account. Balancing means that the, debit side and credit side amounts are totalled and the difference between the total of the two, sides is placed in the amount column as ‘Balance c/d’ on the side having lesser total, so that the, total of both debit and credit columns are equal., When the total of the debit side is more than the total of credit side the difference is debit, balance and is placed on the credit side as ‘By Balance c/d’. If the credit side total is more than, the total of debit side, the difference is credit balance and is placed on the debit side as ‘To, Balance c/d’., , 90
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www.tntextbooks.in, , 4.6.1 Procedure for balancing an account, , Following is the procedure for balancing an account:, i) The debit and credit columns of an account are to be totalled separately., ii), , The difference between the two totals is to be ascertained., , iii) The difference is to be placed in the amount column of the side having lesser total., ‘Balance c/d’ is to be entered in the particulars column against the difference and in the, date column the last day of the accounting period is entered., iv) Now both the debit and credit columns are to be totalled and the totals will be equal., The totals of both sides are to be recorded in the same line horizontally. The total is to be, distinguished from other figures by drawing lines above and below the amount., v), , The difference has to be brought down to the opposite side below the total. ‘Balance b/d’, is to be entered in the particulars column against the difference brought down and in the, date column, the first day of the next accounting period is entered., , vi) If the total on the debit side of an account is higher, the balancing figure is debit balance, and if the credit side of an account has higher total, the balancing figure is credit balance., If the two sides are equal, that account will show nil balance., The rules for determining the balance is as follows:, Total of debit, , > Total of credit = Debit balance (By balance c/d and To balance b/d), , Total of credit > Total of debit, Total of debit, , = Credit balance (To balance c/d and By balance b/d), , = Total of credit = Nil balance, , It may be noted that totalling of a ledger account is known as casting. At the time of, balancing an account, debit balance is the balancing figure on the credit side and credit, balance is the balancing figure on the debit side. This balance is known as closing balance., The closing balance of an accounting period is the opening balance of the next accounting, period., Tutorial note, i., , Cash account cannot have a credit balance, , ii., , Balances in real accounts and personal accounts are carried forward to the next accounting, year., , iii. Balances in the nominal accounts are not carried forward to next accounting year. They, are closed by transferring to trading and profit and loss account., iv., , Instead of the abbreviations c/d and b/d the abbreviations c/o and b/o (carried over and, brought over) may be recorded if the balance is taken to the next successive page. If the, balance is taken to a different non-successive page the abbreviation c/f and b/f (carried, forward and brought forward) may be used., 91
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www.tntextbooks.in, , Illustration 5, , Thmizhanban started book selling business on 1st January, 2018. Following are the transactions took place in his business for the month of January, 2018. Pass journal entries and prepare ledger accounts., 2018, Jan. 1 Started business with cash ` 3,00,000, 2 Opened bank account by depositing ` 2,00,000, 5 Goods bought from Tamilnadu Textbook Corporation for cash ` 10,000, 15 Sold goods to MM Traders for cash ` 5,000, 22 Purchased goods from X and Co. for ` 15,000 and the payment is made through net, banking., 25 Sold goods to Y and Co. for ` 30,000 and the payment is received through NEFT, Solution, In the books of Thamizhanban, Journal entries, , Date, , Particulars, , L.F., , Debit, `, , Credit, `, , 2018, Jan. 1, , Cash A/c, , Dr., , 3,00,000, , To Thamizhanban’s capital A/c, 2, , 3,00,000, , (Started business with cash), Bank A/c, , Dr., , 2,00,000, , To Cash A/c, 5, , 2,00,000, , (Cash deposited with the bank), Purchases A/c, , Dr., , 10,000, , To Cash A/c, 15, , 10,000, , (Goods purchased for cash), Cash A/c, , Dr., , 5,000, , To Sales A/c, 22, , 5,000, , (Goods sold for cash), Purchases A/c, , Dr., , 15,000, , To Bank A/c, , 25, , 15,000, , (Goods purchased and payment made through net, banking), Bank A/c, , Dr., , To Sales A/c, , 30,000, 30,000, , (Goods sold and the payment is received through NEFT), 92
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www.tntextbooks.in, , Dr., , Cash account, , Date, , Particulars, , J.F., , `, , Date, , Jan. 2, , To Thamizhanban’s, capital A/c, , 15, , Feb. 1, , Particulars, , J.F., , `, , 2018, , 2018, Jan. 1, , Cr., , To Sales A/c, , 2,00,000, , 3,00,000, , 5, , By Purchases A/c, , 10,000, , 5,000, , 31, , By Balance c/d, , 95,000, , 3,05,000, 95,000, , To Balance b/d, , Dr., , By Bank A/c, , 3,05,000, , Thamizhanban’s capital account, , Date, 2018, Jan. 31, , Particulars, , J.F., , `, , Date, , Particulars, , Cr., J.F., , 2018, To Balance c/d, , 3,00,000, 3,00,000, , Dr., , Jan. 1, , By Cash A/c, , Feb. 1, , By Balance b/d, , 3,00,000, 3,00,000, 3,00,000, , Bank account, , Date, , Particulars, , J.F., , `, , Cr., , Date, , 2018, , Particulars, , J.F., , To Cash A/c, , 25, , To Sales A/c, , 2,00,000 Jan. 22 By Purchases A/c, 30,000, , 15,000, , 31 By Balance c/d, , 2,15,000, , 2,30,000, 2,15,000, , To Balance b/d, , Dr., , 2,30,000, , Purchases account, , Date, , `, , 2018, , Jan. 2, , Feb. 1, , `, , Particulars, , J.F., , `, , Date, , 2018, , Cr., Particulars, , J.F., , `, , 2018, , Jan. 5, , To Cash A/c, , 10,000 Jan. 31 By Balance c/d, , 25,000, , 22, , To Bank A/c, , 15,000, 25,000, 25,000, , 25,000, , Feb. 1, , To Balance b/d, , 93
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www.tntextbooks.in, , Dr., , Sales account, , Date, , Particulars, , `, , J.F., , Cr., , Date, , 2018, , Particulars, , J.F., , `, , 2018, , Jan. 31, , To Balance c/d, , 35,000, , Jan. 15 By Cash A/c, , 5,000, , 25 By Bank A/c, , 30,000, 35,000, 35,000, , 35,000, Feb. 1 By Balance b/d, Illustration 6, , Bharathi is a sole trader dealing in oil products for the past five years. The books of accounts, showed the following balances on 1st April, 2018: Cash in hand ` 25,000; Cash at bank, ` 3,00,000. The following transactions took place for the month of April 2018., April 1 Goods bought by giving cheque ` 30,000, 5 Goods sold to Naveen and payment received through NEFT ` 40,000, 6 Goods sold to Xavier for cash ` 20,000, 9 Goods sold on credit to Abdul for ` 25,000, 18 Cash received from Abdul ` 10,000, Pass Journal entries for the above transactions and prepare ledger accounts., Solution, In the books of Bharathi, Journal entries, , Date, , Particulars, , L.F., , Debit, , Credit, , `, , `, , 2018, Apr. 1, , Purchases A/c, , Dr., , 30,000, , To Bank A/c, , 30,000, , (Goods purchased and payment made, 5, , through cheque), Bank A/c, , Dr., , 40,000, , To Sales A/c, , 40,000, , (Goods sold and payment received, 6, , through NEFT ), Cash A/c, , Dr., , To Sales A/c, , 20,000, 20,000, , (Goods sold for cash), , 94
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www.tntextbooks.in, , 9, , Abdul A/c, , Dr., , 25,000, , To Sales A/c, , 25,000, , ( Goods sold on credit to Abdul), Cash A/c, , 18, , Dr., , 10,000, , To Abdul A/c, , 10,000, , (Cash received from Abdul), , Dr., , Cash account, , Date, , Particulars, , `, , J.F., , Cr., Date, , 2018, , Particulars, , J.F., , `, , 2018, , Apr. 1 To Balance b/d, , 25,000 Apr 30 By Balance c/d, , 6 To Sales A/c, , 20,000, , 18 To Abdul A/c, , 10,000, 55,000, 55,000, , May 1, , To Balance b/d, , Dr., , 55,000, , 55,000, , Bank account, , Dat e, , Pa, r ticula, r s, , J.F ., , Dat e, , `, , 2018, Apr. 1, 5, May 1, , To Balance b/d, , 3,00,000, , To Sales A/c, , 40,000, 3,40,000, ,310,000, , To Balance b/d, , J.F ., , `, , Apr. 1 By Purchases A/c, 30, , 30,000, , By Balance c/d, , ,103, 3,40,000, , Purchases account, Pa, r ticula, r s, , J.F ., , Apr. 1, , To Bank A/c, , May 1, , To Balance b/d, , 03,000, 30,000, 03,000, , Dr., , Cr., , Dat e, , Pa, r ticula, r s, , 2018, Apr. 30, , By Balance c/d, , `, , 2018, , Date, , Pa, r ticula, r s, , 2018, , Dr., Dat e, , Cr., , J.F ., , 03,000, 30,000, , Sales account, Particulars, , J.F., , `, , Apr. 30 To Balance c/d, , Cr., , Date, , 2018, , `, , Particulars, , J.F., , `, , 2018, 85,000 Apr. 5 By Bank A/c, 6, , By Cash A/c, , 20,000, , 9, , By Abdul A/c, , 25,000, 85,000, 85,000, , 85,000, May. 1, 95, , 40,000, , By Balance b/d
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www.tntextbooks.in, , Dr., , Abdul account, , Dat e, , Pa, r ticula, r s, , J.F ., , Dat e, , `, , 2018, Apr. 9, , Cr., J.F ., , `, , 2018, To Sales A/c, , 25,000 Apr. 18 By Cash A/c, 30, , May 1, , Pa, r ticula, r s, , 10,000, , By Balance c/d, , 15,000, 25,000, , 25,000, 15,000, , To Balance b/d, , 4.6.2 Direct ledger posting, Illustration 7, , Prepare cash account from the following transactions for the month of January 2018., Jan 1 Commenced business with cash ` 62,000, 3 Goods purchased for cash ` 12,000, 10 Goods sold for cash ` 10,000, 12 Wages paid ` 4,000, 25 Furniture purchased for cash ` 6,000, Solution, , Dr., , Cash account, , Date, 2018, Jan 1, 10, , Feb 1, , Particulars, , J.F., , `, , Date, 2018, , Cr., Particulars, , J.F., , `, 12,000, , To Capital A/c, , 62,000 Jan 3, , By Purchases A/c, , To Sales A/c, , 10,000, , 12, , By Wages A/c, , 4,000, , 25, , By Furniture A/c, , 6,000, , 31, , By Balance c/d, , To Balance b/d, , 72,000, 50,000, , 50,000, 72,000, , Illustration 8, , The following are the transactions of Kumaran, dealing in stationery items. Prepare ledger accounts., 2017, June, , 5, 8, 12, 15, 22, 25, 28, , Started business with cash ` 2,00,000, Opened bank account by depositing ` 80,000, Bought goods on credit from Sri Ram for ` 30,000, Sold goods on credit to Selva for ` 10,000, Goods sold for cash ` 15,000, Paid Sri Ram ` 30,000 through NEFT, Received a cheque from Selva and deposited the same in bank ` 10,000, 96
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www.tntextbooks.in, , Solution, , Ledger accounts., Dr., , Cash account, , Date, 2017, , Particulars, , June 5, , To Kumaran’s, , J.F., , July 1, , 2,00,000, , To Sales A/c, To Balance b/d, , Particulars, , J.F., , To Balance c/d, , By Bank A/c, , Amount `, 80,000, , By Balance c/d, , 1,35,000, 2,15,000, , `, , Date, 2017, 2,00,000 June 5, 2,00,000, July 1, , Particulars, , Cr., J.F., , By Cash A/c, , `, 2,00,000, 2,00,000, 2,00,000, , By Balance b/d, , Bank account, , Date, 2017, June 8, 28, , To Cash A/c, To Selva A/c, , July 1, , To Balance b/d, , Particulars, , J.F., , Dr., , `, , Date, 2017, 80,000 June 25, 30, 10,000, 90,000, 60,000, , Cr., Particulars, , J.F., , By Sri Ram A/c, By Balance c/d, , `, 30,000, 60,000, 90,000, , Purchases account, , Date, 2017, June 12, , To Sri Ram A/c, , July 1, , To Balance b/d, , Particulars, , J.F., , Dr., , June 25, , J.F., , Kumaran’s capital account, , Dr., , Date, 2017, , 25, , Particulars, , 15,000, 2,15,000, 1,35,000, , Dr., Date, 2017, June 30, , Date, 2017, June 8, , capital A/c, 22, , `, , Cr., , `, , Date, 2017, 30,000 June 30, 30,000, 30,000, , Cr., Particulars, , J.F., , By Balance c/d, , `, 30,000, 30,000, , Sri Ram account, Particulars, To Bank A/c, , J.F., , `, , Date, 2017, , 30,000 June 12, 30,000, , 97, , Cr., Particulars, By Purchases A/c, , J.F., , `, 30,000, 30,000
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www.tntextbooks.in, , Dr., , Selva account, , Date, 2017, June 15, , Particulars, , J.F., , To Sales A/c, , `, , Cr., , Date, 2017, , 10,000 June 28, 10,000, , Dr., , Particulars, , J.F., , By Bank A/c, , `, 10,000, 10,000, , Sales account, , Date, 2017, , Particulars, , June 30, , To Balance c/d, , J.F., , `, , Cr., , Date, 2017, , Particulars, , J.F., , `, , 25,000 June 15, , By Selva A/c, , 10,000, , 22, , By Cash A/c, , 15,000, 25,000, 25,000, , 25,000, July 1, , By Balance b/d, , After posting the journal entries to ledger accounts and extracting the balance of ledger, accounts, the trial balance is prepared. Trial balance is a statement which shows debit and, credit balances of all accounts in the ledger. It helps to test the arithmetical accuracy of entries, made in the journal and ledger., The three accounting concepts – business entity, duality and money, measurement - associated with double-entry book keeping are applied in, ledger., Points to remember, , •, •, •, •, •, •, , Left side of the ledger account is Debit [ Dr.], Right side of the ledger account is Credit [Cr.], For each type of asset, liability, expense and income, separate ledger accounts are, prepared., If the total on the debit side exceeds the total on the credit side, it results in debit balance., If the total on the credit side exceeds the total on the debit side, it results in credit balance., Closing balance of the current year in the ledger account is the opening balance of the, next year., , 98
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www.tntextbooks.in, , Self-examination questions, I Multiple choice questions, Choose the correct answer, , 1., , Main objective of preparing ledger account is to, (a) Ascertain the financial position, (b) Ascertain the profit or loss, (c) Ascertain the profit or loss and the financial position, (d) Know the balance of each ledger account, , 2., , The process of transferring the debit and credit items from journal to ledger accounts is, called, (a) Casting, , 3., , (b) Posting, , (c) Journalising, , J.F means, (a) Ledger page number, , (b) Journal page number, , (c) Voucher number, , (d) Order number, , (d) Balancing, , 4., , The process of finding the net amount from the totals of debit and credit columns in a, ledger is known as, (a) Casting, (b) Posting, (c) Journalising, (d) Balancing, , 5., , If the total of the debit side of an account exceeds the total of its credit side, it means, (a) Credit balance, (b) Debit balance, (c) Nil balance, (d) Debit and credit balance, , 6., , The amount brought into the business by the proprietor should be credited to, (a) Cash account, (b) Drawings account, (c) Capital account, (d) Suspense account, , Answers, , 1 (d), , 2 (b), , 3 (b), , 4 (d), , II Very short answer questions, , 1., 2., 3., 4., 5., , What is a ledger?, What is meant by posting?, What is debit balance?, What is credit balance?, What is balancing of an account?, , III Short answer questions, , 1., 2., 3., 4., , Distinguish between journal and ledger., What is ledger? Explain its utilities., How is posting made from the journal to the ledger?, Explain the procedure for balancing a ledger account., 99, , 5 (b), , 6 (c)
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www.tntextbooks.in, , IV Exercises, , 1., , Journalise the following transactions and post them to ledger., `, , 2016, Jan 1 Started business with cash, , 10,000, , 5 Paid into bank, , 5,000, , 7 Purchased goods from Ram for cash 1,000, Answer:, Cash A/c, ` 4,000 Dr. Bank A/c, Capital A/c ` 10,000 Cr. Purchases A/c, , ` 5,000 Dr., ` 1,000 Dr., , 2. Give journal entries for the following transactions and post them to ledger., 2015, `, Mar 1 Goods sold to Somu on credit 5,000, 7 Furniture purchased for cash 300, 15 Interest received, 1,800, Answer:, Somu A/c, ` 5,000 Dr. Furniture A/c, ` 300 Dr., Cash A/c, ` 1,500 Dr. Sales A/c, ` 5,000 Cr., Interest received A/c, ` 1,800 Cr., 3., , Pass journal entries for the following transactions and post them to ledger., 2017, Aug. 1, 6, 10, 20, , Dharma started business with cash, Cash received from Ganesan, Rent paid, Received commission from Anand, , `, 70,000, 10,000, 3000, 5000, , Answer:, ` 82,000 Dr. Capital A/c, ` 10,000 Cr. Rent A/c, ` 5,000 Cr., , Cash A/c, Ganesan A/c, Commission received A/c, 4., , ` 70,000 Cr., ` 3,000 Dr., , Record the following transactions in the journal of Banu and post them to the ledger., 2018, Sep 1, 5, 12, , Commenced business with cash, Rent received, Purchased 6 tables from Gobu& Co. for cash, Answer:, Cash A/c, Rent received A/c, , `, 90,000, 4,000, 6,000, , ` 88,000 Dr. Capital A/c, ` 4,000 Cr. Furniture A/c, 100, , ` 90,000 Cr., ` 6,000 Dr.
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www.tntextbooks.in, , 5., , The following balances appeared in the books of Vinoth on Jan 1, 2018, Assets: Cash ` 40,000;, Machinery ` 40,000, , Stock ` 50,000; Amount due from Ram ` 20,000;, Liabilities: Amount due to Vijay ` 10,000, , Pass the opening journal entry and post them to Vinoth’s Capital account., Answer:, Vinoth’s Capital A/c, 6., , ` 1,40,000 Cr., , Prepare Furniture A/c from the following transactions, `, , 2016, Jan 1, 1, 30, , Furniture in hand, , 2,000, , Purchased furniture for cash, , 4,000, , Sold furniture, , 400, Answer:, Furniture A/c, , 7., , ` 5,600 Dr., , The following balances appeared in the books of Kumaran on April 1, 2017., Assets: Cash ` 1,00,000;, , Stock ` 40,000; Amount due from Rohit ` 10,000;, , Furniture ` 10,000; Liabilities: Amount due to Anush ` 40,000;, Kumaran’s capital ` 1,20,000, Find the capital and show the ledger posting for the above opening balances., Answer:, Cash A/c, ` 1,00,000 Dr. Stock A/c, Rohit A/c, ` 10,000 Dr. Furniture A/c, Anush A/c, ` 40,000 Cr. Kumaran’s capital, 8., , ` 40,000 Dr., ` 10,000 Dr., ` 1,20,000 Cr., , Give journal entries and post them to cash account., `, , 2016, June 1 Commenced business with cash, , 1,10,000, , 10 Introduced additional capital, , 50,000, , 28 Withdrawn for personal use, , 20,000, Answer:, Cash A/c, , 9., , ` 1,40,000 Dr., , Give journal entries from the following transactions of Mohit, dealing in Textiles and, post them to ledger:, `, , 2014, Aug 1, 7, , Commenced business with cash, Opened bank account with SBI, 101, , 1,10,000, 50,000
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www.tntextbooks.in, , 3, , Purchased furniture for cash, , 20,000, , Answer:, Cash A/c, SBI A/c, , ` 40,000, ` 50,000, , Dr. Capital A/c, ` 1,10,000, Dr. Furniture A/c, ` 20,000, , Cr., Dr., , 10. Give journal entries for the following transactions and post them to ledger., `, , 2016, Sep 1, , Commenced business with cash, , 80,000, , Bought goods for cash from Roopan, , 10,000, , 10, , Purchased goods from Hema on credit, , 42,000, , 22, , Goods returned to Hema, , 23, , Cash paid to Hema, Answer:, , 7, , Purchases A/c, Hema A/c, , 2,000, 10,000, , ` 52,000 Dr. Cash A/c, ` 30,000 Cr. Purchases return A/c, , ` 60,000 Dr., ` 2,000 Cr., , 11. Give Journal entries for the following transactions and post them to Cash a/c and Sales A/c., `, , 2017, Aug 10, , Sold goods and cheque received but not deposited, , 14 Sold goods on credit to Gopi, , 30,000, 12,000, , 20 Received cash from Gopi, 12,000, Answer:, Sales A/c ` 42,000 Cr. Cash A/c, , ` 42,000 Dr., , 12. Journalise the transactions given below and post them to ledger., `, , 2017, Oct 18 Paid trade expenses, 25 Bought postage stamps, , 1,000, 100, , 30 Commission received, , 6,000, , 30 Rent paid, Answer:, , 4,000, , Trade expenses A/c, Commission received A/c, Rent A/c, , ` 1,000, ` 6,000, ` 4,000, , Dr. Stationery A/c ` 100, Cr. Cash A/c, ` 900, Dr., , 13. Journalise the following transactions and prepare ledger accounts., `, , 2015, Feb 1, , Sold goods for cash, , 5,000, 102, , Dr., Dr.
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www.tntextbooks.in, , 2, , Purchased goods from Kumar on credit 4,000, , 5, , Sold goods to Prabu on credit, , 8,000, , 12, , Received cash from Prabu, , 1,200, , 20, , Paid to Kumar, , 2,000, , 25, , Paid salary, , 3,000, Answer:, ` 13,000 Cr. Cash A/c, ` 4,000 Dr. Kumar A/c, ` 6,800 Dr. Salary A/c, , Sales A/c, Purchases A/c, Prabu A/c, , ` 1,200 Dr., ` 2,000 Cr., ` 3,000 Dr., , 14. Enter the following transactions in the books of Ganesan and post them into ledger., `, , 2017, Oct 1, 5, , Started business with cash, , 25,000, , Deposited into bank, , 12,500, , 10, , Purchased furniture and payment by cheque, , 2,000, , 15, , Goods purchased for cash, , 5,000, , 19, , Sold goods to Vasu on credit, , 4,000, , 22, , Goods worth ` 500 taken for personal use, Answer:, ` 7,500, ` 10,500, ` 4,500, ` 4,000, , Cash A/c, Bank A/c, Purchases A/c, Vasu A/c, , Dr., Dr., Dr., Dr., , Capital A/c, Furniture A/c, Sales A/c, Drawings A/c, , ` 25,000 Cr., ` 2,000 Dr., ` 4,000 Cr., ` 500 Dr., , 15. Journalise the following transactions in the books of Arun and post them to ledger, accounts., `, , 2017, Dec 1, , Arun started his business with cash, , 10,000, , 3, , Bought goods for cash, , 1,500, , 8, , Sold goods to Krishna on credit, , 4,000, , 14, , Purchased goods from Govind on credit, , 2,000, , 25, , Received cash from Krishna, , 3,000, , 28, , Cash paid to Govind, , 1,000, , Answer:, Cash A/c, Krishna A/c, Purchases A/c, 103, , ` 10,500, ` 1,000, ` 3,500, , Dr. Capital A/c, Dr. Sales A/c, Dr. Govind A/c, , ` 10,000, ` 4,000, ` 1,000, , Cr., Cr., Cr.
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www.tntextbooks.in, , 16. Journalise the following transactions and post them to ledger in the books of Raja., `, , 2018, Mar 1 Sold goods to Senthil for cash, , 9,000, , 5, , Sold goods to Murali on credit, , 4,500, , 9, , Cash sales, , 6,000, , 18, , Bought goods from Mani on credit, , 3,200, , 23, , Received ` 4,000 from Murali in full settlement of his account, Answer:, ` 19,000, ` 3,200, ` 500, , Cash A/c, Mani A/c, Discount allowed A/c, , Dr. Purchases A/c, Cr. Sales A/c, Dr., , ` 3,200 Dr., ` 19,500 Cr., , 17. Journalise the following transactions and post them to the ledger., `, , 2017, July 1, , Cash in hand, , 50,000, , 5, , Goods purchased by cash, , 30,000, , 7, , Insurance paid, , 2,500, , 10, , Machinery purchased for cash, , 9,000, , 15, , Interest received, , 2,000, , 18, , Goods sold for cash, Answer:, , 7,000, , Purchases A/c, Insurance A/c, Interest received A/c, , ` 30,000 Dr. Cash A/c, ` 2,500 Dr. Machinery A/c, ` 2,000 Cr. Sales A/c, , ` 17,500 Dr., ` 9,000 Dr., ` 7,000 Cr., , 18. Journalise the following transactions in the books of Vasu and post them to ledger, accounts., 2017, Cash in hand ` 1,00,000; Cash at bank: ` 30,000, Vasu sold goods to Jothi for ` 25,000 against a cheque and deposited the same, in the bank, 4 Received as commission ` 5,000, 8 Bank paid ` 15,000 directly for insurance premium of Vasu., 15 Cash deposited into bank ` 30,000, 20 Cash withdrawn from bank for personal use ` 45,000., Answer:, , Nov 1, 2, , Bank A/c, Insurance premium A/c, Drawings A/c, , ` 25,000 Dr. Commission received A/c, ` 15,000 Dr. Cash A/c, ` 45,000 Dr. Sales A/c, 104, , ` 5,000, ` 75,000, ` 25,000, , Cr., Dr., Cr.
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www.tntextbooks.in, , 19. Prepare Anand’s account from the following details., `, , 2017, July 1, 15, 18, 20, 25, , Credit balance of Anand’s A/c, Amount paid to Anand, Goods purchased from Anand on credit, Paid to Anand, Discount allowed by him, Goods purchased from Anand, , 4,000, 2,000, 8,000, 3,960, 40, 5,000, Answer:, Anand A/c ` 11,000 Cr., , 20. Prepare a Sales account from the following transactions., `, , 2018, Jan 1, , Sold goods to Sam, , 4,000, , Sold goods to Suresh, , 2,500, , 11, , Sold goods to Joy, , 8,000, , 17, , Sold goods to Rajan, , 3,000, , 4, , Answer:, Sales A/c ` 17,500 Cr., 21. Show the direct ledger postings for the following transactions:, 2017, June 1, , Raja commenced business with cash ` 50,000,, , 6, , Sold goods for cash ` 8,000, , 8, , Sold goods to Devi on credit ` 9,000, , 15, , Goods purchased for cash ` 4,000, , 20, , Goods purchased from Shanthi on credit ` 5,000, Answer:, Cash A/c, Sales A/c, Purchases A/c, , ` 54,000, ` 17,000, ` 9,000, , Dr. Capital A/c, Cr. Devi A/c, Dr. Shanthi A/c, , 22. Show the direct ledger postings for the following transactions:, 2017, July 1, 5, 9, 19, 20, , Shankar commenced business with a cash of ` 1,00,000, Sold goods for cash ` 10,000, Wages paid ` 6,000, Salaries paid ` 8,000, Advertisement expenses paid ` 4,000, 105, , ` 50,000, ` 9,000, ` 5,000, , Cr., Dr., Cr.
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www.tntextbooks.in, , Answer:, Cash A/c, ` 92,000 Dr. Capital A/c, ` 1,00,000 Cr., Sales A/c, ` 10,000 Cr. Wages A/c, ` 6,000 Dr., Salaries A/c ` 8,000 Dr. Advertisement A/c, ` 4,000 Dr., , Imagine you have been called for an interview with an auditor. The, auditor shows you the following ledger account of Mr. Raheem, a dealer, in food products., Dr., Date, , SitaA/c, Particulars, , J.F., , Amount, `, , 2017, April 1, , Cr., , Date, , Particulars, , J.F, , Amount, `, , 2017, To Balance b/d, , 7,000 April 12, , By Bank A/c, , 5,000, , Sept. 25 To Sales A/c, , 10,000 May 2, , By Cash A/c, , 2,000, , Dec. 29, , 10,000 Oct. 3, , By Sales returns A/c, , 1,000, , Nov. 17, , By Cash A/c, , 3,000, , Dec. 21, , By Bank A/c, , 4,000, , To Sales A/c, , 2018, Mar. 31, , By Balance c/d, , 27,000, , 12,000, 27,000, , 2018, Apr 1, , To Balance b/d, , 12,000, , The auditor wants you to explain each posting in the above account and also to state where, will the double entry for each posting be found., , To explore further, , ‘Accounts of debtors will always have debit balance’. - Do you agree?, Reference, 1. M C Shukla, T S Grewal and S C Gupta, Advanced Accounts, 19th ed., 2017, S.Chand Publishing, New Delhi., 2. R L Gupta and V K Gupta, Financial Accounting, 11th ed., 2014, Sultan Chand and Sons, New Delhi., 3. S P Jain and K L Narang, Advanced Accountancy Vol – I, 2016, Kalyani Publishers, New Delhi., 4. Dalston L Cecil and Jenitra L Merwin, Financial Accounting, 3rd ed., 2017, Learntech Press, Trichy., 5. Fundamentals of Accounting, 2017, The Institute of Chartered Accountants of India, New Delhi., , 106
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www.tntextbooks.in, , Unit 5, , TRIAL BALANCE, , Contents, , Points to recall, , 5.1 Introduction to trial balance, , 5.4 Features of trial balance, , •, , The following points are to be, recalled before learning trial balance:, Rules of double entry, , 5.5 Objectives of preparing trial, balance, , •, , Balancing ledger accounts, , •, , Dual aspect concept, , 5.2 Need for preparing trial balance, 5.3 Definition of trial balance, , 5.6 Limitations of trial balance, 5.7 Methods, balance, , of, , preparing, , trial, , 5.8 Suspense account, , Key terms to know, , Learning Objectives, , Trial balance, , To enable the students to, •, •, •, , Debit balance, , Understand the meaning and, features of trial balance, Understand the objectives of, preparing trial balance, Prepare the trial balance, , Credit balance, Arithmetical accuracy, , 107
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www.tntextbooks.in, , 5.1 Introduction to trial balance, Student activity, Think: Do you think that the ledger account postings are error free? If not, how do you, make sure that the entries are correct?, Trial balance is a statement containing the debit and credit balances of all ledger accounts on, a particular date. It is arranged in the form of debit and credit columns placed side by side and, prepared with the object of checking the arithmetical accuracy of entries made in the books of, accounts and to facilitate preparation of financial statements., The fundamental principle of the double-entry system of book-keeping is that every debit, has a corresponding and equal credit and vice-versa. Therefore, the total of the debit balances, must be equal to the total of the credit balances. When such an agreement between the total, of all debit balances and the total of all credit balances takes place, it offers an immediate and, apparent proof of arithmetical accuracy of the book-keeping work on a particular day. At the, same time, it should not be taken as the conclusive proof of arithmetical accuracy as certain, errors such as error of principle, compensating errors and complete omission of a transaction, are not disclosed by the trial balance., Though the trial balance can be prepared on any day (at the end of the month, quarter, etc.), it, is normally prepared at the end of the accounting period., The preparation of trial balance is the third step in, the accounting process. The first step is recording the, business transactions in subsidiary books or journal., The second step is preparing ledger accounts on the, basis of subsidiary books or journal., 5.2 Need for preparing trial balance, Trial balance helps to check the arithmetical accuracy, of entries made in the accounting records. Trial balance, serves as a lubricant for the smooth movement and, completion of the accounting cycle, because, it is with the, help of the trial balance that discrepancies in the book, keeping work are detected. If these discrepancies are not, detected and set right, the cycle cannot be completed, properly. The trial balance helps in discovering errors, which may have been committed in the accounting, records. However, in computerised accounting system,, once the transactions are recorded in the journals, all the, 108, , Ledger, Journal, , Trial, balance
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www.tntextbooks.in, , other records are made simultaneously, i.e., ledger postings, trial balance and final accounts., Hence, arithmetic errors and errors in posting the entries from journal to ledger and further, will not occur in computerised accounting., 'H¿QLWLRQRIWULDOEDODQFH, “A trial balance is a statement, prepared with the debit and credit balances of the ledger, accounts to test the arithmetical accuracy of the books”., – J.R. Batliboi, 5.4 Features of trial balance, Following are the features of trial balance:, a), , Trial balance contains the balances of all ledger accounts., , b), , It is prepared on a specific date. That is why, the word, “as on…” is used at the top., , c), , When double entry system is followed, the totals of the debit and the credit columns, of the trial balance must be equal. Thus, trial balance helps to check the arithmetical, accuracy of entries made in the books of accounts., , d), , If there is a difference between the totals of debit column and credit column of the trial, balance, it is an indication of errors being committed somewhere., , e), , If both the debit column and the credit column of the trial balance have the same total, it, does not mean that there is no mistake in accounting, since some errors are not disclosed, by the trial balance., , 5.5 Objectives of preparing trial balance, Trial balance is prepared with the following objectives:, i) Test of arithmetical accuracy, , Trial balance is the means by which the arithmetical accuracy of the book-keeping work is, checked. When the totals of debit column and credit column in the trial balance are equal,, it is assumed that posting from subsidiary books, balancing of ledger accounts, etc. are, arithmetically correct. However, there may be some errors which are not disclosed by trial, balance., LL %DVLVIRUSUHSDULQJ¿QDODFFRXQWV, , Financial statements, namely, trading and profit and loss account and balance sheet are, prepared on the basis of summary of ledger balances obtained from the trial balance., iii) Location of errors, , When the trial balance does not tally, it is an indication that certain errors have occurred., The errors may have occurred at one or more of the stages of accounting process, namely,, journalising or recording in subsidiary books, totalling subsidiary books, posting in ledger, 109
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www.tntextbooks.in, , accounts, balancing the ledger accounts, carrying ledger account balances to the trial balance,, totalling the trial balance columns, etc. Hence, the errors should be located and rectified before, preparing the financial statements., iv) Summarised information of ledger accounts, , The summary of ledger accounts is shown in the trial balance. Ledger accounts have to be seen, only when details are required in respect of an account., 5.6 Limitations of trial balance, The following are the limitations of trial balance:, a), , It is possible to prepare trial balance of an organisation, only if the double entry system is, followed., , b), , Even if some transactions are omitted, the trial balance will tally., , c), , Trial balance may tally even though errors are committed in the books of account., , d), , If trial balance is not prepared in a systematic way, the final accounts prepared on the, basis of trial balance may not depict the actual state of affairs of the concern., , e), , Agreement of trial balance is not a conclusive proof of arithmetical accuracy of entries, made in the accounting records. This is because there are certain errors which are not, disclosed by trial balance such as complete omission of a transaction, compensating, errors and error of principle., , 5.7 Methods of preparing trial balance, A trial balance can be prepared in the following methods:, i), , Balance method, In this method, the balance of every ledger account either debit or credit, as the case may, be, is recorded in the trial balance against the respective accounts. The balance method is, widely used, as it helps in the preparation of financial statements., , ii), , Total method, Under this method, the total amounts on the debit side of the ledger accounts and the, total amounts on the credit side of the ledger accounts are ascertained and recorded in, the trial balance. This method is not commonly used as it cannot help in the preparation, of financial statements., , iii) Total and Balance method, This method is a combination of both total method and balance method. Under this, method, four columns are provided, namely, a) totals of debit side of the ledger accounts,, b) totals of the credit side of the ledger accounts c) debit balances of ledger accounts and, d) credit balances of the ledger accounts. This method is not in practice., 110
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www.tntextbooks.in, , 5.7.1 Balance method, Following are the steps to be followed to prepare trial balance under this method:, Step 1: Calculate the balances of all ledger accounts including the cash book., Step 2: Record the names of the accounts in the particulars column and the amounts of debit, balances in the debit column and credit balances in the credit column., Step 3: Enter the page number of ledger from which the balance is taken in the Ledger Folio, column., Step 4: Total the debit and credit columns. It must be equal. If not equal, locate the errors and, make the trial balance agree., Trial balance is prepared in the following format under the balance method:, Trial balance as on …, S. No., , Name of account / Particulars, , L.F., , Debit balance `, , Credit balance `, , Specimen of a trial balance, Trial balance of Mr. X as on …, S.No., 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, , Particulars, , L.F., , Cash in hand, Cash at bank, Bills receivable, Sundry debtors, Opening stock, Plant and Machinery, Land and Building (Premises), Furniture and Fixtures, Vehicles, Goodwill, Investment, Drawings, Purchases, Sales returns, Carriage inwards, Carriage outwards, Rent paid, Commission paid, Interest paid, Bad debts, 111, , Debit `, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, , Credit `
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www.tntextbooks.in, , 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, , Insurance premium, General expenses, Sundry expenses, Electricity charges, Selling expenses, Travelling expenses, Wages, Sales, Purchases returns, Capital, Bank loan, Sundry creditors, Bills payable, Bank overdraft, Rent received, Interest received, Provision for bad debts, Total, , xxx, xxx, xxx, xxx, xxx, xxx, xxx, , xxx, , xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, xxx, , Tutorial note, , 1., , If the value of closing stock is known on the day when trial balance is prepared, then, opening stock and closing stock are adjusted with purchases. Hence, opening stock will, not appear in the trial balance. Closing stock and adjusted purchases will appear in the, trial balance. If the value of closing stock is not known then opening stock and purchases, will appear in the trial balance. Thus, either opening stock and purchases or closing stock, and adjusted purchases will appear in the trial balance., , 2., , Under balance method, if an account does not have a balance, it is excluded., Student activity, , Think: Analyse the above format. Can you identify accounts that have only debit balances/, credit balances always?, Only debit, balances, , Tutorial note, , There are certain accounts which have only debit, balances. Similarly, certain accounts have only credit, balances. The following chart gives examples of such, accounts:, , 112, , Assets, (cash, debtors,, building, furniture,etc.), Drawings, Purchases, Sales returns, Expenses, Losses, , Only credit, balances, , Liabilities, (creditors, bank, overdraft, provisions,, reserves, etc.), Incomes, Sales, Purchases returns, Gains
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www.tntextbooks.in, , For example, the following transactions took place in the business of Rathna Kumar, who deals, in textiles., 2017, January, 1, 5, 10, 15, 18, 20, 25, 30, 31, 31, , `, 5,00,000, 6,000, 10,000, 25,000, 2,500, 32,000, 72,000, 7,000, 2,800, 22,000, , Commenced business with capital, Bought furniture for cash, Purchased goods for cash, Bought goods on credit from Jeyanthi, Returned goods to Jeyanthi, Sold goods for cash, Sold goods to Elizabeth on credit, Paid salaries to Krishnan by cash, Received commission from Kumar by cash, Received cash from Elizabeth, , The journal entries, ledger postings and trial balance for the transactions will appear as below, in the books of Rathna Kumar., In the books of Rathna Kumar, Journal entries, , Date, 2017, Jan 1, Jan 5, , Jan 10, , Jan 15, , Jan 18, , Jan 20, , Jan 25, , Particulars, , L.F., , Cash A/c, To Rathna Kumar’s capital A/c, (Business commenced with capital), Furniture A/c, To Cash A/c, (Furniture purchased for cash), Purchases A/c, To Cash A/c, (Goods purchased for cash), Purchases A/c, To Jeyanthi A/c, (Credit purchases from Jeyanthi), Jeyanthi A/c, To Purchases returns a/c, (Goods returned to Jeyanthi), Cash A/c, To Sales A/c, (Goods are sold for cash), Elizabeth A/c, To Sales A/c, (Goods sold on credit), 113, , Dr., , Debit `, 5,00,000, , Credit `, 5,00,000, , Dr., , 6,000, 6,000, , Dr., , 10,000, 10,000, , Dr., , 25,000, 25,000, , Dr., , 2,500, 2,500, , Dr., , 32,000, 32,000, , Dr., , 72,000, 72,000
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www.tntextbooks.in, , Jan 30, , Jan 31, , Jan 31, , Salaries A/c, To Cash A/c, (Salary paid by cash), Cash A/c, To Commission A/c, (Commission received by cash), Cash A/c, To Elizabeth A/c, (Cash received from Elizabeth), , Dr., , 7,000, 7,000, , Dr., , 2,800, 2,800, , Dr., , 22,000, 22,000, , Ledger, , Dr., Date, , Cash Account, Particulars, , J.F. Amount, `, , To Rathnakumar’s capital A/c, , Jan 20 To Sales A/c, Jan 31 To Elizabeth A/c, To Balance b/d, , Dr., Date, , 5,00,000 Jan 5, 32,000 Jan 10, , Jan 31 To Commission A/c, , Feb 1, , Date, , J.F Amount, `, , By Furniture A/c, , 6,000, , By Purchases A/c, , 10,000, , 2,800 Jan 30, , By Salaries A/c, , 7,000, , 22,000 Jan 31, 5,56,800, 5,33,800, , By Balance c/d, , 5,33,800, 5,56,800, , Rathna Kumar’s Capital Account, Particulars, , J.F., , Amount, `, , 2017, , Date, , Particulars, , Cr., J.F, , Amount, `, , 2017, , Jan 31 To Balance c/d, , 5,00,000 Jan 1, 5,00,000, Feb 1, , Dr., Date, , Particulars, , 2017, , 2017, Jan 1, , Cr., , By Cash A/c, , 5,00,000, 5,00,000, 5,00,000, , By Balance b/d, , Furniture Account, Particulars, , J.F., , Amount, `, , 2017, , Date, , Cr., Particulars, , J.F, , Amount, `, , 2017, , Jan 5, , To Cash A/c, , Feb 1, , To Balance b/d, , 6,000 Jan 31, 6,000, 6,000, , 114, , By Balance c/d, , 6,000, 6,000
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www.tntextbooks.in, , Dr., Date, , Purchases Account, Particulars, , J.F., , Amount, `, , 2017, , Date, , 10,000 Jan 31, , Jan 15 To Jayanthi A/c, , 25,000, 35,000, 35,000, , To Balance b/d, , Dr., Date, , Particulars, , J.F., , Amount, `, , By Balance c/d, , 35,000, 35,000, , Amount, `, , Date, , Cr., Particulars, , J.F, , Amount, `, , 2017, , Jan 18 To Purchases returns A/c, , 2,500 Jan 15, , Jan 31 To Balance c/d, , Dr., , By Purchases A/c, , 25,000, , By Balance b/d, , 25,000, 22,500, , 22,500, 25,500, Feb 1, , Purchases returns Account, Particulars, , J.F., , Amount, `, , 2017, , Date, , Cr., Particulars, , J.F, , Amount, `, , 2017, , Jan 31 To Balance c/d, , Dr., Date, , J.F, , Jeyanthi Account, , 2017, , Date, , Particulars, , 2017, , Jan 10 To Cash A/c, , Feb 1, , Cr., , 2,500 Jan 18, 2,500, Feb 1, , By Jeyanthi A/c, , 2,500, 2,500, 2,500, , By Balance b/d, , Sales Account, Particulars, , J.F., , Amount, `, , 2017, , Cr., Date, , J.F, , Amount, `, , 2017, Jan 20, , Jan 31 To Balance c/d, , Particulars, , 1,04,000 Jan 25, , By Cash A/c, , 32,000, , By Elizabeth A/c, , 72,000, , 1,04,000, Feb 1, , 115, , By Balance b/d, , 1,04,000, 1,04,000
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www.tntextbooks.in, , Dr., , Elizabeth Account, , Date, , Particulars, , J.F., , 2017, Jan 25 To Sales A/c, , Feb 1, , Amount, `, , Date, , 2017, 72,000 Jan 31, Jan 31, 72,000, 50,000, , To Balance b/d, , Dr., , Cr., Particulars, , J.F, , Amount, `, 22,000, 50,000, 72,000, , By Cash A/c, By Balance c/d, , Salaries Account, , Date, , Particulars, , J.F., , 2017, Jan 30 To Cash A/c, Feb 1, , Amount, `, , Date, , 2017, 7,000 Jan 31, 7,000, 7,000, , To Balance b/d, , Dr., , Cr., Particulars, , J.F, , Amount, `, , By Balance c/d, , 7,000, 7,000, , Commission Account, , Date, , Particulars, , J.F., , 2017, , Amount, `, , Date, , 2017, 2,800 Jan 31, 2,800, Feb 1, , Jan 31 To Balance c/d, , Cr., Particulars, , J.F, , Amount, `, , By Cash A/c, , 2,800, 2,800, 2,800, , By Balance b/d, , Trial balance under balance method, , Trial balance as on 31st January, 2017, S. No, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, , Particulars, , L.F., , Cash A/c, Rathnakumar’s capital A/c, Furniture A/c, Purchases A/c, Jeyanthi A/c, Purchases returns A/c, Sales A/c, Elizabeth A/c, Salaries A/c, Commission A/c, Total, , Debit balance, , Credit balance, , `, , `, 5,33,800, 6,000, 35,000, 50,000, 7,000, 6,31,800, , 116, , 5,00,000, 22,500, 2,500, 1,04,000, 2,800, 6,31,800
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www.tntextbooks.in, , 5.7.2 Total method, , Steps to be followed to prepare trial balance under total method are given below:, Step 1: Calculate the totals of debit side and credit side of all the ledger accounts including, cash book individually., Step 2: Enter the name of the account in the particulars column and enter the debit total in the, debit column and credit total in the credit column for each account separately., Step 3: Enter the page number of ledger from which the balance is taken in the Ledger Folio, column., Step 4: Find the sum of the debit total and credit total columns. It must be equal. If not equal,, locate the errors and make the trial balance agree., For the above example, trial balance will be prepared under total method as follows:, Trial balance as on 31st January, 2017 (total method), S. No, , Particulars, , 1, , Cash A/c, , 2, , Rathnakumar’s capital A/c, , 3, , L.F., , Debit total, , Credit total, , `, , `, 5,56,800, , 23,000, , -, , 5,00,000, , Furniture A/c, , 6,000, , -, , 4, , Purchases A/c, , 35,000, , -, , 5, , Jeyanthi A/c, , 2,500, , 25,000, , 6, , Purchases returns A/c, , -, , 2,500, , 7, , Sales A/c, , -, , 1,04,000, , 8, , Elizabeth A/c, , 72,000, , 22,000, , 9, , Salaries A/c, , 7,000, , -, , 10, , Commission A/c, , 6,79,300, , 2,800, 6,79,300, , Total, 5.7.3 Total and Balance method, , Steps to be followed to prepare trial balance under total and balance method are given below:, Step 1: Calculate the totals of debit and credit columns of all ledger accounts and calculate the, balances in each ledger account., Step 2: Enter the name of the account in the particulars column and enter the debit total in the, debit total column and credit total in the credit total column for each account separately., Also enter the debit balances in the debit balance column and credit balances in the, credit balance column for each account., Step 3: Enter the page number of ledger from which the balance is taken in the Ledger Folio column, 117
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www.tntextbooks.in, , Step 4: Total all the amount columns. Total of debit total column and total of credit total, column must be equal. Also total of debit balance column and total of credit balance, column must be equal. If not equal, locate the errors and make the trial balance agree., For the above example, trial balance will be prepared under total and balance method as follows:, S.No., , Particulars, , 1, , Cash A/c, , 2, , Rathnakumar’s capital A/c, , 3, , L.F., , Debit total Credit total, `, `, 5,56,800, 23,000, , Debit, balance `, 5,33,800, , Credit, balance `, -, , -, , 5,00,000, , -, , 5,00,000, , Furniture A/c, , 6,000, , -, , 6,000, , -, , 4, , Purchases A/c, , 35,000, , -, , 35,000, , -, , 5, , Jeyanthi A/c, , 2,500, , 25,000, , -, , 22,500, , 6, , Purchases returns A/c, , -, , 2,500, , -, , 2,500, , 7, , Sales A/c, , -, , 1,04,000, , -, , 1,04,000, , 8, , Elizabeth A/c, , 72,000, , 22,000, , 50,000, , -, , 9, , Salaries A/c, , 7,000, , 2,800, , 7,000, , -, , 10, , Commission A/c, , 6,79,300, , 6,79,300, , 6,31,800, , 2,800, 6,31,800, , Total, , Note: Students will be tested on balance method only, 5.8 Suspense account, Student activity, Think: Do you think the trial balance tallies all the time? What should be done when it does, not tally?, After transferring all the ledger account balances, if the trial balance does not tally, steps, must be taken to locate and rectify errors. If the errors cannot be rectified, then trial balance, is tallied by transferring the difference between the total of debit balances and the total of, credit balances to a temporary account, called suspense account for timely preparation of, the financial statements. If the trial balance shows lesser debit total, suspense account will, be debited. Similarly, if the trial balance shows lesser credit total, suspense account will be, credited. Later, when errors are located and rectified, the trial balance will get tallied., Illustration 1, , State whether the balance of each of the following accounts should be placed in the debit or the, credit column of the trial balance:, 1) Sundry debtors, , 2) Sundry creditors, , 3) Cash in hand, , 4) Bank overdraft, , 5) Salary, , 6) Discount allowed, , 7) Plant and machinery, , 8) Furniture, , 118
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www.tntextbooks.in, , Solution, , S.No., , Name of account, , Debit balance, , 1, , Sundry debtors, , 2, , Sundry creditors, , 3, , Cash in hand, , 4, , Bank overdraft, , 5, , Salary, , Debit, , 6, , Discount allowed, , Debit, , 7, , Plant and machinery, , Debit, , 8, , Furniture, , Debit, , Credit balance, , Debit, Credit, Debit, Credit, , Illustration 2, , From the following balances extracted from the books of Raju a trader on automobiles, prepare, trial balance as on 31st March, 2017:, `, , Particulars, Cash in hand, , Particulars, 5,500 Direct expenses, , Discount received, , 300 Carriage outwards, , `, 5,000, 3,500, , Creditors, , 15,000 Capital, , 45,000, , Buildings, , 50,000 Purchases, , 49,700, , Opening stock, , 6,000 Sales, , Solution, , 59,400, , In the books of Raju, Trial balance as on 31st March, 2017, , S. No, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, , Name of account, , L.F., , Cash in hand, Discount received, Creditors, Buildings, Opening stock, Direct expenses, Carriage outwards, Capital, Purchases, Sales, Total, , Debit balance `, , Credit balance `, , 5,500, 300, 15,000, 50,000, 6,000, 5,000, 3,500, 45,000, 49,700, 59,400, 1,19,700, 119, , 1,19,700
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www.tntextbooks.in, , Illustration 3, , From the following balances extracted from the books of Pearl, a trader, prepare trial balance, as on 31st March, 2017., `, , Particulars, Capital, , `, , Particulars, , 44,000 Interest on investment, , Bills receivable, , 2,000, , 5,000 Customs duty, , Wages, , 3,000, , 800 Computer, , Drawings, , 20,000, , 4,000 Sales, , Purchases, , 72,000, , 75,000 Opening stock, , 10,200, , Solution, In the books of Pearl, Trial balance as on 31st March, 2017, , S. No., , Name of account, , L.F., , Debit balance `, , 1, , Capital, , 2, , Bills receivable, , 3, , Wages, , 4, , Drawings, , 4,000, , 5, , Purchases, , 75,000, , 6, , Interest on investment, , 7, , Customs duty, , 8, , Computer, , 9, , Sales, , 10, , Opening stock, , Credit balance `, 44,000, , 5,000, 800, , 2,000, 3,000, 20,000, 72,000, 10,200, , Total, , 1,18,000, , 1,18,000, , Illustration 4, , The following balances are extracted from the books of Murali, as on 31st March, 2017. Prepare, trial balance., Particulars, Sales, Interest paid, , `, , Particulars, , 35,000 Audit fees, 350 Octroi duty, , `, 1,000, 8,000, , Returns inward, , 2,500 Land, , 90,000, , Depreciation, , 2,400 Capital, , 60,000, , Office rent, , 2,000 Bank overdraft, , 11,250, , 120
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www.tntextbooks.in, , Solution, , In the books of Murali, Trial balance as on 31st March, 2017, , S. No., , Name of account, , L.F., , Debit balance `, , Credit balance `, , 1, , Sales, , 2, , Interest paid, , 3, , Returns inward, , 2,500, , 4, , Depreciation, , 2,400, , 5, , Office rent, , 2,000, , 6, , Audit fees, , 1,000, , 7, , Octroi duty, , 8,000, , 8, , Land, , 9, , Capital, , 60,000, , 10, , Bank overdraft, , 11,250, , 35,000, 350, , 90,000, , Total, , 1,06,250, , 1,06,250, , Illustration 5, , From the following balances extracted from the books of Ashok, a merchant of Chennai,, prepare trial balance as on 31st December, 2017., Particulars, Buildings, Bills payable, , `, , Particulars, , 20,000 Conveyance charges, , `, 3,500, , 3,000 Salary, , 5,600, , Debtors, , 20,000 Capital, , 40,000, , Cash at bank, , 16,800 Furniture, , 10,000, , Insurance paid, , 1,600 Motor vehicles, , 5,000, , Rent received, , 5,000 Patents, , 2,000, , Donation given, , 2,500 Goodwill, , 3,000, , Loan borrowed, , 42,000, , 121
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www.tntextbooks.in, , Solution, , In the books of Ashok, Trial balance as on 31st December, 2017, , S. No., , Name of account, , L.F., , Debit balance `, , 1, , Buildings, , 2, , Bills payable, , 3, , Debtors, , 20,000, , 4, , Cash at bank, , 16,800, , 5, , Insurance paid, , 6, , Rent received, , 7, , Donation given, , 8, 9, 10, , Loan borrowed, Conveyance charges, Salary, , 11, , Capital, , 12, , Furniture, , 13, , Motor vehicles, , 5,000, , 14, , Patents, , 2,000, , 15, , Goodwill, Total, , Credit balance `, , 20,000, 3,000, , 1,600, 5,000, 2,500, 42,000, 3,500, 5,600, 40,000, 10,000, , 3,000, 90,000, , 90,000, , Illustration 6, , Prepare trial balance as on 31st December, 2017 from the following balances of Balaraman., `, Capital, , `, , 2,20,000, , Repairs, , 2,400, , Drawings, , 24,000, , Office lighting, , 2,600, , Furniture, , 63,500, , Printing and stationery, , 2,700, , Stock at the beginning, , 62,050, , Bank loan, , 7,500, , Bills receivable, , 9,500, , Computer, , 25,000, , Bills payable, , 8,750, , Debtors, , 46,500, , 88,100, , Cash in hand, , 15,000, , 1,35,450, , Cash at bank, , 27,250, , Purchases, Sales, Discount allowed, , 7,100, , General expenses, , 7,100, , Discount received, , 3,500, , Creditors, , 7,600, , 122
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www.tntextbooks.in, , Solution, , In the books of Balaraman, Trial balance as on 31st December, 2017, , S. No., , Name of account, , L.F., , Debit balance `, , 1, , Capital, , 2, , Drawings, , 24,000, , 3, , Furniture, , 63,500, , 4, , Stock at the beginning, , 62,050, , 5, , Bills receivable, , 6, , Bills payable, , 7, , Purchases, , 8, , Sales, , 9, , Discount allowed, , 10, , Discount received, , 11, , Repairs, , 2,400, , 12, , Office lighting, , 2,600, , 13, , Printing and stationery, , 2,700, , 14, , Bank loan, , 15, , Computer, , 25,000, , 16, , Debtors, , 46,500, , 17, , Cash in hand, , 15,000, , 18, , Cash at bank, , 27,250, , 19, , General expenses, , 20, , Creditors, , Credit balance `, 2,20,000, , 9,500, 8,750, 88,100, 1,35,450, 7,100, 3,500, , 7,500, , 7,100, 7,600, , Total, , 3,82,800, , 3,82,800, , Illustration 7, , The following balances are extracted from the books of Prabhu, as on 31st March, 2017., Prepare trial balance and transfer the difference if any to suspense accoount., Particulars, Discount allowed, Cash in hand, , `, , Particulars, 250 Loan borrowed, , 4,200 Lighting, , Capital, , 50,000 Commission paid, , Salaries, , 12,000 Purchases, , Furniture, , 7,500 Sales, 123, , `, 7,000, 12,000, 3,000, 29,050, 35,000
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www.tntextbooks.in, , Solution, , In the books of Prabhu, Trial balance as on 31st March, 2017, , S. No., , Name of account, , L.F., , Debit balance `, , Credit balance `, , 250, , 1, , Discount allowed, , 2, , Cash in hand, , 3, , Capital, , 4, , Salaries, , 5, , Furniture, , 6, , Loan borrowed, , 7, , Lighting, , 8, , Commission paid, , 9, , Purchases, , 10, , Sales, , 11, , Suspense account*, , 24,000, , Total, , 92,000, , 4,200, 50,000, 12,000, 7,500, 7,000, 12,000, 3,000, 29,050, 35,000, 92,000, , * Note: Since the credit balance is more than the debit balance, the difference is transferred to, suspense account., Illustration 8, , From the following balances extracted from the books of Chitra, prepare trial balance as on, 31st March, 2017., Particulars, Adjusted purchases, , `, , Particulars, , 60,000 Advertisement, , `, 4,000, , Rent paid, , 2,000 General expenses, , 700, , Discount received, , 1,000 Commission paid, , 1,500, , Carriage inward, , 2,700 Capital, , Closing stock, , 18,600 Sales, , 124, , 40,000, 48,500
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www.tntextbooks.in, , Solution, , In the books of Chitra, Trial balance as on 31st March, 2017, , S. No., , Name of account, , L.F., , Debit balance `, , Credit balance `, , 1, , Adjusted purchases, , 2, , Rent paid, , 3, , Discount received, , 4, , Carriage inward, , 5, , Closing stock, , 18,600, , 6, , Advertisement, , 4,000, , 7, , General expenses, , 700, , 8, , Commission paid, , 1,500, , 9, , Capital, , 40,000, , 10, , Sales, , 48,500, , 60,000, 2,000, 1,000, 2,700, , Total, , 89,500, , 89,500, , Illustration 9, , The following trial balance has certain errors. Redraft it., Trial balance as on 31st March, 2017, , Debit balance `, , Name of account, Building, , 60,000, , Machinery, , 17,000, , Returns outward, , 2,600, , Bad debts, , 2,000, , Cash, , Credit balance `, , 400, , Discount received, , 3,000, , Bank overdraft, , 10,000, , Creditors, , 50,000, , Purchases, , 1,00,000, , Capital, , 72,800, , Fixtures, , 5,600, , Sales, , 1,04,000, , Debtors, , 60,000, , Interest received, Total, , 2,45,000, 125, , 2,600, 2,45,000
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www.tntextbooks.in, , Solution, Redrafted Trial balance as on 31st March, 2017, , Debit balance `, , Name of account, Building, , 60,000, , Machinery, , 17,000, , Credit balance `, , Returns outward, , 2,600, , Bad debts, , 2,000, , Cash, , 400, , Discount received, , 3,000, , Bank overdraft, , 10,000, , Creditors, , 50,000, , Purchases, , 1,00,000, , Capital, , 72,800, , Fixtures, , 5,600, 1,04,000, , Sales, Debtors, , 60,000, , Interest received, Total, , 2,45,000, , 2,600, 2,45,000, , Duality concept is applied in trial balance. This concept requires two aspects, to be entered for every transaction. This means that there are at least two, accounts involved for every transaction., , Points to remember, •, , Trial balance is prepared on a particular date. The date must be mentioned in the title of, trial balance., , •, , A trial balance is prepared with the help of balances of ledger accounts., , •, , Trial balance is prepared to check the arithmetical accuracy of entries made in the books, of accounts., , •, , Under balance method, the debit balances of the accounts are to be written in debit, column, and the credit balances of the accounts are to be written in the credit column of, trial balance. Under balance method, if an account does not have a balance, it is excluded., , •, , If the trial balance does not tally, the difference between debit and credit columns should, be taken to a temporary account called ‘suspense account’ if financial statements are to, prepared immediately., 126
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www.tntextbooks.in, , Self-examination questions, I Multiple choice questions, , Choose the correct answer, , 1., , Trial balance is a, (a) Statement, , 2., , (b) Account, , 4., , (d) Journal, , After the preparation of ledger, the next step is the preparation of, (a) Trading account, (c) Journal, , 3., , (c) Ledger, , (b) Trial balance, (d) Profit and loss account, , The trial balance contains the balances of, (a) Only personal accounts, , (b) Only real accounts, , (c) Only nominal accounts, , (d) All accounts, , Which of the following is/are the objective(s) of preparing trial balance?, (a) Serving as the summary of all the ledger accounts, (b) Helping in the preparation of final accounts, (c) Examining arithmetical accuracy of accounts, (d) a, b and c, , 5., , While preparing the trial balance, the accountant finds that the total of the credit column, is short by ` 200. This difference will be, (a) Debited to suspense account, (b) Credited to suspense account, (c) Adjusted to any of the debit balance, (d) Adjusted to any of the credit balance, , 6., , A list which contains balances of accounts to know whether the debit and credit balances, are matched is, (a) Journal, , 7., , 8., , (b) Day book, , (c) Trial balance (d) Balance sheet, , Which of the following method(s) can be used for preparing trial balance?, (a) Balance method, , (b) Total method, , (c) Total and Balance method, , (d) a, b and c, , The account which has a debit balance and is shown in the debit column of the trial, balance is, (a) Sundry creditors account, , (b) Bills payable account, , (c) Drawings account, , (d) Capital account, 127
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www.tntextbooks.in, , 9., , The difference of totals of both debit and credit side of trial balance is transferred to:, (a) Trading account, , (b) Difference account, , (c) Suspense account, , (d) Miscellaneous account, , 10. Trial balance is prepared:, (a) At the end of the year, , (b) On a particular date, , (c) For a year, , (d) None of the above, , Answers, , 1 (a), , 2 (b), , 3 (d), , 4 (d), , 5 (b), , 6 (c), , 7 (d), , 8 (c), , 9 (c), , 10 (b), , II Very short answer questions, , 1., , What is trial balance?, , 2., , Give the format of trial balance., , 3., , What are the methods of preparation of trial balance?, , 4., , State whether the balance of the following accounts should be placed in the debit or the, credit column of the trial balance:, (i), , Carriage outwards, , (ii), , Carriage inwards, , (iii) Sales, , (iv) Purchases, , (v), , Bad debts, , (vi) Interest paid, , (vii) Interest received, , (viii) Discount received, , (ix) Capital, , (x), , (xi), , (xii) Purchase returns, , Drawings, , Sales returns, , III Short answer questions, , 1., , What are the objectives of preparing trial balance?, , 2., , What are the limitations of trial balance?, , 3., , ‘A trial balance is only a prima facie evidence of the arithmetical accuracy of records’. Do, you agree with this statement? Give reasons., , IV Exercises, , 1., , Prepare a trial balance with the following information:, , Name of the account, Purchases, Bank Loan, Debtors, Stock, , `, 1,00,000, 75,000, 1,50,000, 35,000, , Name of the account, Sales, Creditors, Cash, Capital, , `, 1,50,000, 50,000, 90,000, 1,00,000, , (Answer: Trial balance total ` 3,75,000), , 128
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www.tntextbooks.in, , 2., , Prepare the trial balance from the following information:, , Name of the account, Bank loan, Bills payable, Stock, Capital, , `, 2,00,000, 1,00,000, 70,000, 2,50,000, , Name of the account, Purchases, Sales, Debtors, Bank, , `, 1,80,000, 3,00,000, 4,00,000, 2,00,000, , (Answer: Trial balance total ` 8,50,000), 3., , Prepare the trial balance from the following balances of Chandramohan as on 31st March, 2017., , Capital, Drawings, Loan borrowed, Sales, Purchases, , `, 1,24,500, 2,000, 7,000, 53,400, 40,000, , Bank overdraft, Motor car, General expenses, Building, Stock, , `, 5,800, 20,000, 2,500, 1,10,000, 16,200, , (Answer: Trial balance total ` 1,90,700), 4., , Prepare the trial balance from the following balances of Babu as on 31st March, 2016., `, , Cash in hand, Sundry debtors, Salaries, Bad debts, Opening stock, 5., , 7,000, 5,400, 6,800, 200, 15,400, , `, , Bills receivable, 7,000, Sundry creditors, 11,800, Capital, 25,000, Purchases, 45,000, Sales, 50,000, (Answer: Trial balance total ` 86,800), , From the following balances of Arjun, prepare the trial balance as on 31st March, 2018., , Cash at bank, Opening stock, Insurance, Purchases, Wages, , `, 12,500, 25,000, 1,500, 45,000, 1,750, , Discount received, Postage, Bills payable, Capital, Sales, , `, 1,675, 425, 5,600, 20,000, 58,900, , (Answer: Trial balance total ` 86,175), 6., , Prepare the trial balance from the following balances of Rajesh as on 31st March, 2017., , Bills receivable, Bank charges, Conveyance charges, Discount received, Cash in hand, , `, 13,000, 750, 350, 1,300, 1,000, , Drawings, Sundry debtors, Bills payable, Capital, , 129, , `, 7,000, 17,100, 12,000, 25,900, , (Answer: Trial balance total ` 39,200)
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www.tntextbooks.in, , 7., , Prepare the trial balance from the following balances of Karthik as on 31st March, 2017., , Rent and Taxes, Discount allowed, Capital, Insurance premium, Drawings, , `, 5,000, 350, 10,000, 4,000, 5,000, , Rent, General expenses, Legal expenses, Purchases, Sales, , `, 6,000, 3,000, 2,000, 40,000, 55,350, , (Answer: Trial balance total ` 65,350), 8., , From the following balances of Rohini, prepare the trial balance as on 31st March, 2016., , Capital, Discount received, Purchases, Plant and machinery, Advertising expenses, , `, 60,000, 3,250, 58,000, 40,000, 5,000, , Sales, Lighting, Drawings, Car expenses, Motor car, , `, 82,000, 800, 5,250, 1,200, 35,000, , (Answer: Trial balance total ` 1,45,250), 9., , Balan who has a car driving school gives you the following ledger balances. Prepare trial, balance as on 31st December, 2016., , Computer, Salaries to drivers, Taxes and insurance, Fuel and Power, Rent and rates, , `, 26,000, 4,000, 16,500, 2,000, 1,500, , Freehold land, Bank loan, Fees received, Capital, Advertisement, , `, 30,000, 15,000, 18,150, 53,850, 7,000, , (Answer: Trial balance total ` 87,000), 10. The following balances are extracted from the books of Ravichandran on 31st December,, 2016. Prepare the trial balance., Capital, Debtors, Rent received, Bank overdraft, Creditors, Premises, Opening stock, Purchases, , `, 1,50,000, 22,800, 500, 3,100, 5,500, 1,46,000, 10,000, 45,000, , Sales, Return inwards, Discount allowed, Discount received, Wages, Salaries, Commission paid, General expenses, , `, 75,000, 1,000, 800, 1,000, 2,900, 3,500, 1,100, 2,000, , (Answer: Trial balance total ` 2,35,100), 11. From the following balances, prepare trial balance of Baskar as on 31st March, 2017., Transfer the difference, if any, to suspense account., 130
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www.tntextbooks.in, , `, 40,000, 90,000, 1,77,200, 12,000, 9,450, 2,350, 16,000, 85,000, , Opening stock, Capital, Sales, Salaries, Bills payable, Telephone charges, Creditors, Purchases, , Debtors, Carriage inwards, Bills receivable, Commission received, Cash at bank, Furniture, Plant & Machinery, Repairs, , `, 25,000, 16,500, 20,000, 5,550, 17,000, 19,000, 55,800, 550, , (Answer: Suspense account: ` 5,000 (Dr.) Trial balance Total: ` 2,98,200), 12. From the following balances extracted from the books of Rajeshwari as on 31st March,, 2017, prepare the trial balance., Cash at bank, Sundry debtors, Furniture and Fixtures, Office equipment, Adjusted purchases, Sales returns, Closing stock, Sales, , `, 28,000, 59,600, 1,72,000, 1,10,000, 2,80,000, 3,000, 15,000, 2,36,000, , Rent and rates, Bank charges, Bad debts, Drawings, Insurance premium, Capital, Sundry creditors, Loan (Cr.), , `, 4,000, 400, 4,000, 20,000, 4,000, 3,00,000, 64,000, 1,00,000, , (Answer: Trial balance total ` 7,00,000), 13. Correct the following trial balance:, Debit Balance `, 1,00,000, 36,000, 1,32,000, 35,000, 18,000, 9,000, 6,000, 3,48,000, 60,000, , Particulars, Opening Stock, Salaries, Creditors, Bank, Carriage inwards, Rent received, Discount allowed, Purchases, Bills payable, Debtors, Carriage outwards, Capital, Returns inward, Discount received, Trade expenses, Sales, Building, Total, , 7,44,000, , Credit Balance `, , 45,000, 15,000, 1,63,000, 9,000, 12,000, 18,000, 3,68,000, 1,14,000, 7,44,000, , (Answer: Trial balance total ` 7,44,000), 131
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www.tntextbooks.in, , Student activity, Imagine that you start a small shop with an investment of ` 10,000. Record imaginary, business transactions for 10 days [include cash and credit transactions]. Prepare journal,, ledger and trial balance with them., , Mary runs a textile store. She has prepared the following trial balance from, her ledger balances. Her trial balance does not tally. She needs your help to, check whether what she has done is correct., S. No., , Name of account, , L.F., , Debit balance ` Credit balance `, , 1, , Capital, , 2, , Discount received, , 3, , Rent paid, , 4, , Salaries paid, , 5, , Purchases of textiles, , 20,000, , 6, , Sale of textiles, , 30,000, , 7, , Salesmen commission paid, , 8, , Transport charges paid, , 9, , Cash balance, , 32,000, , Total, , 89,000, , 50,000, 3,000, 15,000, 1,000, , 9,000, 6,000, 77,000, , To explore further, , Is it possible to find out the profit earned by the business by preparing trial balance? What, can be done to know the profit?, , Reference, 1. M C Shukla, T S Grewal and S C Gupta, Advanced Accounts, 19th ed., 2017, S.Chand Publishing, New Delhi., 2. R L Gupta and V K Gupta, Financial Accounting, 11th ed., 2014, Sultan Chand and Sons, New Delhi., 3. S P Jain and K L Narang, Advanced Accountancy Vol – I, 2016, Kalyani Publishers, New Delhi., 4. Dalston L Cecil and Jenitra L Merwin, Financial Accounting, 3rd ed., 2017, Learntech Press, Trichy., 5. Fundamentals of Accounting, 2017, The Institute of Chartered Accountants of India, New Delhi., , 132
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www.tntextbooks.in, , Unit 6, , SUBSIDIARY BOOKS - I, Contents, , Points to recall, , 6.1 Introduction, , •, , The following points are to, be recalled before learning, subsidiary books:, Goods, , •, , Cash purchases, , •, , Credit purchases, , •, , Cash sales, , •, , Credit sales, , •, , Purchases returns, , •, , Sales returns, , •, , Assets, , •, , Ledger account, , 6.2 Meaning of subsidiary books, 6.3 Types of subsidiary books, 6.4 Advantages of subsidiary books, 6.5 Purchases book, 6.6 Purchases returns book, 6.7 Sales book, 6.8 Sales returns book, 6.9 Bills of exchange, 6.10 Bills receivable book, 6.11 Bills payable book, 6.12 Journal proper, , Key terms to know, , •, , Purchases book, , •, , Sales book, , •, , Purchases returns book, , •, , Sales returns book, , •, , Debit note, , Apply the knowledge of accounting, process in the preparation of subsidiary, books, , •, , Credit note, , •, , Bill of exchange, , •, , Understand the method of recording of, bill transactions, , •, , Bills receivable book, , •, , Post entries from subsidiary books to, ledger accounts, , •, , Bills payable book, , •, , Journal proper, , Learning Objectives, To enable the students to, •, •, , Understand the meaning and kinds of, subsidiary books, , 133
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www.tntextbooks.in, , 6.1 Introduction, Business entities carry on transactions of different nature. The types of transactions depend, on the nature of business and the management policy. Many transactions may be of repetitive, type, that is, similar nature of transactions take place repeatedly in a business entity. Therefore,, transactions can be classified and grouped conveniently according to their nature. Generally,, transactions are of two types: cash and non cash transactions (credit). Cash receipts and, payments can be grouped in one category and credit transactions in another category. Thus,, in practice, for easy, convenient, speedy and appropriate maintenance of accounts, the main, journal may be sub-divided in such a way that a separate book is used for each category or, group of transactions which are repetitive and sufficiently large in number. Each subdivision, of the books is a special journal and a book of primary record or a book of primary entry or, subsidiary book., Journal entries are not passed when records are made in subsidiary books. When journal is the, only book of prime entry it is possible for only one book-keeper to enter transaction in it at a, time. In case of business entities having large volume of transactions, one person cannot do, all the recording work by himself. There is a need for sub-division of the book-keeping work, leading to the sub-division of the journal into parts or subsidiary journals., 6.2 Meaning of subsidiary books, Subsidiary books are sub-divisions of journal in each of which transactions of similar nature, are recorded. These are the books of prime entry. Instead of recording in one journal, the, transactions are recorded in a number of prescribed books., 6.3 Types of subsidiary books, The number of subsidiary books may vary according to the requirements of each business., Based on the nature of business and the volume of transactions, the following subsidiary books, are maintained:, Cash transactions, Transactions, , Credit transactions, , (i), , Cash book, Purchases book, Purchases returns book, Sales book, Sales returns book, Bills receivable book, Bills payable book, Journal proper, , Subsidiary book for entering cash transactions - Cash book, , (ii) Subsidiary books (special journal) for entering non-cash transactions:, (a), , Purchases book or purchases journal – for recording only credit purchase of goods in, which the trader deals., 134
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www.tntextbooks.in, , (b) Sales book or sales journal–for recording only credit sale of goods dealt in by the, trader., (c), , Purchases returns or returns outward book – for recording return of goods purchased, by the trader, for which no cash is immediately received., , (d) Sales returns or returns inward book – for recording the goods returned (out of, previous sale) by customers for which no cash is immediately paid., (e), , Bills receivable book – to record bills drawn or promissory notes received., , (f), , Bills payable book – to record bills accepted or promissory notes given., , (iii) Journal proper – The general journal or all purpose journal to record transactions which, do not find a place in the above seven subsidiary books., 6.4 Advantages of subsidiary books, The advantages of maintaining subsidiary books can be summarised as under:, (i), , Proper and systematic record of business transactions, All the business transactions are classified and grouped conveniently as cash and non, cash transactions, which are further classified as credit purchases, credit sales, returns,, etc. As separate books are used for each type of transactions, individual transactions are, properly and systematically recorded in the subsidiary books., , (ii) Convenient posting, All the transactions of a particular nature are recorded at one place, i.e., in one of the, subsidiary books. For example, all credit purchases of goods are recorded in the purchases, book and all credit sales of goods are recorded in the sales book. It facilitates posting to, purchases account, sales account and concerned personal accounts., (iii) Division of work, As journal is sub-divided, the work will be sub-divided and different persons can work, on different books at the same time and the work can be speedily completed., (iv) Efficiency, The sub-division of work gives the advantage of specialisation. When the same work, is done by a person repeatedly the person becomes efficient in handling it. Thus,, specialisation leads to efficiency in accounting work., (v) Helpful in decision making, Subsidiary books provide complete details about every type of transactions separately., Hence, the management can use the information as the basis for deciding its future, actions. For example, information regarding sales returns from the sales returns book, will enable the management to analyse the causes for sales returns and to adopt effective, measures to remove deficiencies., 135
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www.tntextbooks.in, , (vi) Prevents errors and frauds, Internal check becomes more effective as the work can be divided in such a manner, that the work of one person is automatically checked by another person. With the use, of internal check, the possibility of occurrence of errors or fraud may be avoided or, minimised., (vii) Availability of requisite information at a glance, When all transactions are entered in one journal, it is difficult to locate information about, a particular item. When subsidiary books are maintained, details about a particular type, of transaction can be obtained from subsidiary books. The maintenance of subsidiary, books helps in obtaining the necessary information at a glance., (viii) Detailed information available, As all transactions relating to a particular item are entered in a subsidiary book, it gives, detailed information. It is easy to arrive at monthly or quarterly totals., (ix) Saving in time, As there are many subsidiary books, work of entering can be done simultaneously by, many persons. Thus, it saves time and accounting work can be completed quickly., (x) Labour of posting is reduced, Labour of posting is reduced as posting is made in periodical totals to the impersonal, account, for example, Purchases account., Student activity, Think: Visit some business units in your area. Find out the books maintained by them. Do, they maintain special subsidiary books? If not, discuss with them the need and guide them, on maintaining the special subsidiary books., 6.5. Purchases book, Purchases book is a subsidiary book in which only credit purchases of goods are recorded., When business wants to know the information about the credit purchases of goods at a glance,, the information can be made available if purchases of goods on credit are separately recorded., Goods here mean the items in which the business entity is dealing. In other words, it is the, item which is purchased for regular sales. For example, furniture will be treated as goods in the, case of the firm dealing in furniture. For other firms, which are not dealing in furniture it will, be an asset. Hence, while recording transactions in the purchases book, it must be ascertained, whether the credit purchase is related to the item in which the firm is dealing. Purchases of, assets and purchase of goods for cash are not entered in purchases book., 136
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www.tntextbooks.in, , Format of purchases book / purchases journal, , Date, , Particulars (Name of the, suppliers and details of, goods purchased), , Invoice No., , L.F., , (i), , (ii), , (iii), , (iv), , Purchase A/c, , (i), , Amount `, Details, Total, (v), , (vi), , Dr., , Date, In the date column, the date of purchases of goods on credit is recorded., , (ii) Particulars, In this column the name of the supplier from whom goods have been purchased and, details of goods purchased are given. It contains the name, quantity, quality and rate of, goods purchased, trade discount and any other specification and specialties of the goods, are recorded in this column., (iii) Invoice number, Invoice is the statement prepared by the seller of goods. It contains details about the, goods, its price and other expenses incurred. The invoice number is entered in this, column., (iv) Ledger Folio (L.F.), The page number of the ledger in which the supplier’s account appears is recorded in, this column. Purchases of goods must be posted to the personal accounts of suppliers., Purchases book contains the page number of supplier’s account in the ledger. It helps in, posting and also in checking the records., (v) Amount column (Details), Amount column is divided into two parts, i.e., details and total. The details column is used, to record the amount of various individual items purchased from a particular supplier., The amount of trade discount allowed is deducted. This column is used for adjustment, of additions and subtractions., (vi) Total amount column (Total), The net amount payable to the supplier of goods is recorded in the total amount column., 6.5.1 Invoice, , Entries in the purchases day book are made from invoices which are popularly known as bills., Invoice is a business document or bill or statement, prepared and sent by the seller to the, buyer giving the details of goods sold, such as quantity, quality, price, total value, etc. Thus, the, invoice is a source document of prime entry both for the buyer and the seller., 137
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www.tntextbooks.in, , 6.5.2 Trade discount, , Trade discount is a deduction given by the supplier to the buyer on the list price or catalogue, price of the goods. It is given as a trade practice or when goods are purchased in large, quantities. It is shown as a deduction in the invoice. Trade discount is not recorded in the, books of accounts. Only the net amount is recorded. Example: Suppose the sale of goods for, `10,000 was made and 10% was allowed as trade discount, the entry regarding sales will be, made for ` 9,000 (10,000 – 10 per cent of 10,000). In the same way, purchaser of goods will also, record purchases as ` 9,000)., Student activity, Think: Is trade discount the same as cash discount?, Illustration 1, , Record the following transactions in the purchases book of Shanthi Furniture Mart:, 2017, March 1, , Purchased from Mohan Furniture Mart, Madurai, 20 chairs @ ` 450 each, 2 tables @ ` 1,000 each, Less: Trade discount @ 10%, , March 7, , Bought from Ramesh & Co., Royapettah, 2 stools @ ` 500 each, 10 rolling chairs @ ` 200 each, Delivery charges and cartage ` 150, , March 21, , Purchased from Kamal & Co., Karaikkal, 10 chairs @ ` 750 each, 15 steel cabinets @ ` 1,500 each, Packing and delivery charges ` 250, Less: Trade discount @ 10%, , March 25, , Purchased from Jemini & Sons, Chennai, 2 typewriters @ ` 7,750 for office use, , 138
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www.tntextbooks.in, , Solution, , In the books of Shanthi Furniture Mart, Purchases book / Purchases journal, , Date, 2017, , Particulars, , Invoice, No., , Amount `, Details, Total, , Mohan Furniture Mart, Madurai, 20chairs@ `450 each, , March 1, , 9,000, , 2 tables@ ` 1,000 each, , 2,000, 11,000, 1,100, , Less: Trade discount @ 10%, March 7, , L.F., , 9,900, , Ramesh & Co., Royapettah, 1,000, , 2 stools @ ` 500 each, 10 rolling chairs @ ` 200 each, , 2,000, 3,000, , Add: Delivery charges and cartage, March 21, , 150, , 3,150, , Kamal & Co., Karaikal, 7,500, , 10 chairs @ ` 750 each, , 22,500, 30,000, , 15 steel cabinets @ ` 1,500 each, , 3,000, 27,000, , Less: Trade discount @ 10%, Add: Packing and delivery charges, Purchases A/c, , Dr., , 250, , 27,250, 40,300, , Tutorial note, , 1., , Trade discount is allowed on the purchase price of goods excluding delivery charges and, cartage., , 2., , Delivery charges and cartage are direct expenses, chargeable from purchaser, so they are, added to the amount payable., Student activity, Think: Why the purchase of typewriter is not recorded? How do you record this, transaction?, 139
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www.tntextbooks.in, , Illustration 2, , Record the following transactions in the purchases book of Raja Furniture:, 2017, May 4, , Purchased from Kasi Furnitures, Kanyakumari, 10 chairs @ ` 300 each, 4 tables @ ` 800 each, , May 6, , Purchased for cash from Welcome Furniture, Vellore, 2 almirahs @ ` 2,000 each, 4 chairs @ ` 200 each, Less: Trade discount 5%, , May 10, , Bought furniture from Murugan Furniture Mart, Nagapattinam, 10 chairs @ ` 250 each, 5 tables @ ` 750 each, Delivery and packing charges ` 150, , May 20, , Purchased 2 computers for office use from Anandan & Co., Adyar on credit, for `15,550 each, , May 25, , Purchased from Gowtham & Co., Chennai, 10 chairs @ ` 550 each, 15 steel cabinets @ ` 2,000 each, Delivery charges ` 200, Less: Trade discount 10%, , 140
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www.tntextbooks.in, , Solution, , In the books of Raja Furniture, Purchases Book / Purchases Journal, , Date, 2017, May 4, , May 10, , May 25, , Particulars, , Invoice, No., , Kasi Furnitures, Kanyakumari, 10 chairs @ ` 300 each, 4 tables @ ` 800 each, Murugan Furniture Mart, Nagapattinam, 10 chairs @ ` 250 each, 5 tables @ ` 750 each, Add: Delivery and packing charges, Gowtham & Co., Chennai, 10 chairs @ ` 550 each, 15 steel cabinets @ ` 2,000 each, , Amount `, Details, Total, , 3,000, 3,200, , 6,200, , 2,500, 3,750, 6,250, 150, , 6,400, , 5,500, 30,000, 35,500, 3,550, 31,950, , Less: Trade discount @ 10%, Add: Delivery charges, Purchases A/c, , L.F., , 200, Dr., , 32,150, 44,750, , Note:, (a), , Purchases on 6th May, 2017 will not be recorded in the purchases book, because it is, cash purchases., , (b) Purchases of computers on 20th May, 2017 will not be recorded in the purchases book,, because computer is an asset for the firm dealing in furniture and it is for office use., 6.5.3, , Posting from purchases book, , After the transactions are recorded in the purchases book, posting them to ledger involves two, steps:, Step 1: Posting to personal accounts of creditors: Every day, each entry is posted to the, credit side of the respective personal account of the creditor by entering the words ‘By, Purchases account’., Step 2: Posting to purchases account: Generally, at the end of the month, the purchases book, is totalled. The monthly total of purchases is posted to the debit side of purchases, account by writing the words ‘To Sundry creditors A/c’., 141
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www.tntextbooks.in, , Illustration 3, , From the following transactions of Ram Home Appliances for July, 2017 prepare purchases, book and ledger accounts connected with this book:, 2017, July 5, , Purchased on credit from Kannan & Co., 50 iron boxes @ ` 500 each, 10 grinders @ ` 3,000 each, , July 6, , Purchased for cash from Siva & Bros., 25 fans @ ` 1,250 each, , July 10, , Purchased from Balan & Co. on credit, 20 grinders @ ` 2,500 each, 10 mixies @ ` 3,000 each, Trade discount 10%, Delivery charges ` 1,000, , July 20, , Purchased on credit, one copier machine from Kumar for ` 35,000, , Solution, , In the books of Ram Home Appliances, Purchases book, , Date, , Particulars, , Invoice No., , L.F., , Amount `, Details, , Total, , 2017, July 5, , July 10, , Kannan & Co., 50 iron boxes @ ` 500, , 25,000, , 10 grinders @ ` 3,000, , 30,000, , 55,000, , Balan & Co., 20 grinders @ ` 2,500, , 50,000, , 10 Mixies @ ` 3,000, , 30,000, 80,000, 8,000, , Less: Trade discount 10%, , 72,000, Add: Delivery charges, Purchases A/c, , 1,000, , 73,000, 1,28,000, , Dr., 142
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www.tntextbooks.in, , Ledger Accounts, Dr., , Purchases A/c, , Date, , Particulars, , J.F., , Amount `, , Cr., , Date, , Particulars, , J.F., , Amount `, , 2017, July 31, , To Sundry creditors, , Dr., , Date, , 1,28,000, Kannan & Co. Account, , Particulars, , J.F., , Amount `, , Date, , Cr., , Particulars, , J.F., , Amount `, , 2017, July 5, Dr., , Date, , By Purchases A/c, , 55,000, , Balan & Co. Account, , Particulars, , J.F., , Amount `, , Date, , Cr., , Particulars, , J.F., , Amount `, , 2017, July 10, , By Purchases A/c, , 73,000, , Note: 6th July, transaction is a cash transaction and 20th July, transaction is purchase of an, asset. Hence, both will not be recorded in the purchases book., 6.6 Purchases returns book, After purchases of goods, the business unit may find that some of the goods are not upto the, satisfactory level because of the following reasons:, (a), , Goods may be defective., , (b) They might have been damaged in transit., (c), , Quantities delivered may not agree with the invoice., , (d) They might have been received quite late (off-season)., (e), , They might not be as per the samples or specifications., , (f), , There may be a breach of agreement., , Therefore, the buyer may return them to the suppliers., Purchases returns book is a subsidiary book in which transactions relating to return of, previously purchased goods to the suppliers, for which cash is not immediately received are, recorded. Since goods are going out to the suppliers, they are also known as returns outward, and the book is called as ‘returns outward book or returns outward journal’. This book is, prepared like purchases book and details are entered as mentioned in the format given below:, 143
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www.tntextbooks.in, , Format, Purchases returns book, , Date, , Particulars, , Debit Note, No., , L.F., , Date Names of persons to whom Posting, goods are returned and the reference, of, return details of goods returned, Purchases Returns A/c, , Amount `, Details, Total, Detailed, calculations, , Remarks, , Cr., , 6.6.1 Posting from the purchases returns book, After the transactions are recorded in the purchases returns book, posting them to ledger, involves two steps:, Step 1: Posting to personal accounts of creditors: Every day, each entry in purchases returns, book is posted to the debit side of the respective personal account of the creditor by, writing the words ‘To Purchases Returns account’., Step 2: Posting to Purchases returns account: At the end of the month, the aggregate of the, purchases returns is ascertained. It is the total purchases returns for the month and is, posted to the credit side of purchases returns account by debiting ‘Sundry creditors, account’., 6.6.2 Debit note – the source document for returns outward, A ‘debit note’ is a document, bill or statement sent to the person to whom goods are returned., This statement informs that the supplier’s account is debited to the extent of the value of goods, returned. It contains the description and details of goods returned, name of the party to whom, goods are returned and net value of the goods so returned with reason for return., Student activity, Think: Do you think the supplier will accept the debit note sent by the customer, as it is? If, not, why will he not accept?, Illustration 4, , Enter the following transactions in the purchases returns book of Hari who is dealing in, automobiles and post them into the ledger., 2017, Jan. 5, , Returned to Anand 5 clutch plates @ ` 200 each, not in accordance with order., 144
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www.tntextbooks.in, , Jan. 14, , Returned to Chandran 4 brake shoes @ ` 200 each and 10 rear view mirrors @, ` 350 each, due to inferior quality., , Solution, , In the books of Hari, Purchases returns book, , Date, , Particulars, , Debit, Note No., , L.F., , Amount, Details, Total, , 2017, Jan 5 Anand, 5 clutch plates @ ` 200 each, Jan 14 Chandran, 4 brake shoes @ ` 200 each, 10 rear view mirrors @ ` 350, each, Purchases Returns A/c Cr., , Remarks, , Not in, 1,000 accordance with, order, 800, 3,500, , 4,300, 5,300, , Due to inferior, quality, , Ledger Accounts, Dr., , Purchases returns A/c, , Date, , Particulars, , J.F., , Amount, `, , Date, 2017, , Particulars, , J.F., , creditors A/c, , 5,300, , Anand Account, , Date, 2017, Jan 5, , Particulars, , J.F., , Amount, `, , Date, , Cr., , Particulars, , J.F., , returns A/c, , 1,000, Chandran Account, , 2017, Jan 14, , Amount, `, , To Purchases, , Dr., , Date, , Amount, `, , By Sundry, , Jan 31, Dr., , Cr., , Particulars, , J.F., , Amount, `, , Date, , Cr., , Particulars, , J.F., , Amount, `, , To Purchases, returns A/c, , 4,300, , 6.7 Sales book, Sales book is a subsidiary book maintained to record credit sale of goods. Goods mean the, items in which the business is dealing. These are meant for regular sale. Cash sale of goods and, sale of property and assets whether for cash or on credit are not recorded in the sales book., This book is also named as sales day book, sold day book, sales journal or sale register., 145
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www.tntextbooks.in, , The preparation of the sales book is similar to that of purchases book. The entries are made in, the sales book on the basis of copies of the invoice sent to the buyer., Format, Sales Book, , Amount `, Date, , Particulars, , Date of sale, , Name of the, customers and the, details of goods sold, Sales A/c, , L.F., , Invoice, No., , Posting, reference, , Details, Detailed, calculations, , Total, Net amount, of the, invoice, , Cr., , In the date column of the sales book, the date of credit sales is recorded. Particulars column, contains the name of party purchasing goods or the party to whom goods have been sold. It, also shows the details of goods as regards its quantity, quality, other descriptions and the rate of, trade discount allowed. In Ledger Folio (L.F.) column the page number of debtors account in, the ledger is recorded for reference. The amount of various items of the goods sold is entered in, the details column. Adjustments for trade discount, packing charges, etc., are made in the details, column. In the total column, the net amount payable by individual customer is recorded. The, total of the amount column is the total credit sales during the period., 6.7.1 Posting from sales book, After the transactions are recorded in the sales book, posting them to ledger involves two steps:, Step 1: Posting to personal accounts of debtors: Every day, each entry is posted to the debit, side of the respective personal account of the debtor., Step 2: Posting to Sales account: At the end of the month, the aggregate of the sales is posted, to the credit side of sales account by writing the words ‘By Sundry debtors A/c’., Illustration 5, , From the transactions given below, prepare the sales book of Kumar Stationery for July 2017., 2017, July 5, , Sold on credit to Saravana Traders of Sayalkudi, 10 packs of A4 sheets @ ` 250 per pack, 10 dozens of writing pads @ ` 850 per dozen, Less : 10% trade discount for both, , July 8, , Sold to Raja for cash, 15 packs of A4 sheets @ ` 250 per pack, 146
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www.tntextbooks.in, , July 20, , Sold to Mohan & Co. of Mudukulathur, 5 white boards @ ` 2,200 each, 10 dozens of writing pads @ ` 850 per dozen, , July 23, , Sold on credit to Narayanan old motor car for ` 5,000, , July 28, , Sold to Kumaran for cash 15 packets of marker pens @ ` 250 per packet, , Solution, In the books of Kumar Stationery, Sales book, , Date, 2017, July 5, , Particulars, , Invoice, No., , L.F., , Amount, Details `, , Total `, , Saravana Traders, Sayalkudi, 10 packs of A4 Sheets @ ` 250 per pack, , 2,500, , 10 dozens writing pads @ ` 850 per dozen, , 8,500, 11,000, 1,100, , Less: 10% Trade discount, July 20, , 9,900, , Mohan & Co., Mudukulathur, 5 white boards @ ` 2,200 each, , 11,000, , 10 dozens writing pads @ ` 850 per dozen, Sales A/c, , 8,500, , 19,500, 29,400, , Cr., Ledger Accounts, , Dr., , Sales A/c, , Date, , Particulars, , J.F., , Amount `, , Cr., , Date, 2017, , Particulars, , debtors A/c, , 29,400, , Saravana traders A/c, , Date, , Particulars, , J.F., , Amount `, , Amount `, , By Sundry, , July 31, Dr., , J.F., , Date, , Cr., , Particulars, , J.F., , Amount `, , 2017, July 5, , To Sales A/c, , 9,900, , Dr., , Mohan & Co. A/c, , Date, , Particulars, , J.F., , Amount `, , Date, , 2017, July 20, , To Sales A/c, , 19,500, 147, , Cr., , Particulars, , J.F., , Amount `
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www.tntextbooks.in, , Note:, (a), , Sales on 8th July and 28th July will not be recorded in the sales because they are cash, sales., , (b) Sale of old motor car on 23rd July will not be recorded in the sales book, because, motor car is an asset for the firm dealing in stationery., 6.8, , Sales returns book, , Sales returns book is a subsidiary book, in which, details of return of goods sold for which cash, is not immediately paid are recorded. Just as goods may be returned to suppliers, goods may, be returned by customers for the following reasons:, (i), , Defect in the goods, , (ii), , Delay in the dispatch of goods to the customers, , (iii) Over-supply of goods, (iv) Goods not being in accordance with the samples and specifications, (v), , Violation of the terms of the contract, etc., , Goods returned by the customers is known as ‘returns inwards’., This book is not concerned with the return of assets or return of goods for which cash is paid., This book is prepared just like the other day books., 6.8.1 Posting from sales returns book, After the transactions are recorded in the sales returns book, posting them to ledger involves, two steps:, Step 1: Posting to personal accounts of debtors: Each entry in the sales returns book is, posted to the credit side of the respective personal account of the debtor on daily basis, by writing the words ‘By Sales returns account’., Step 2: Posting to Sales returns account: At the end of the month, the aggregate of the sales, returns is posted to the debit side of sales returns account by writing the words ‘To, Sundry debtors A/c’., 6.8.2 Credit note – Source document for returns inward, A credit note is prepared by the seller and sent to the buyer when goods are returned indicating, that the buyer’s account is credited in respect of goods returned. Credit note is a statement, prepared by a trader who receives back from his customer the goods sold. It contains details, such as the description of goods returned by the buyer, quantity returned and also their value., , 148
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www.tntextbooks.in, , Format, Sales returns book, , Date, , Name of suppliers, , L.F., Posting, reference, , Names of persons from, Date, whom goods are received, of, return back and details of goods, returned, Sales returns A/c, , Amount `, , Credit, Note, No., , Details, , Remarks, , Total, , Detailed, Net amount, calculations of the, invoice, , Dr., , Illustration 6, , Enter the following transactions in returns inward book of Magesh a textile dealer:, 2017, April 6, , Returned by Shankar 30 shirts each costing ` 150 due to inferior quality., , April 8, , Amar Tailors returned 10 T-shirts, each costing ` 100, on account of being not in, accordance with their order., , April 21, , Prema Stores returned 12 Salwar sets each costing ` 200, being not in accordance with, order., , Solution, In the books of Magesh, Sales returns book, , Date, , Particulars, , L.F., , Credit, Note No., , Amount, Details `, , Remarks, , Total `, , 2017, April 6, , Shankar, 30 Shirts @ ` 150, , April 8, , 4,500, , Due to inferior, quality, , 1,000, , Not in accordance, with the order, , 2,400, , 7,900 Not in accordance, with the order, , Amar Tailors, 10 T-Shirts @ ` 100, , April 21 Prema Stores, 12 Salwar sets @ `200, , Sales Returns A/c, , 7,900, , Dr., , 149
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www.tntextbooks.in, , Ledger Accounts, , Dr., , Sales returns A/c, , Date, 2017, April 30, , Particulars, , J.F., , Amount, `, , Date, , Cr., , Particulars, , J.F., , To Sundry, debtors A/c, , 7,900, , Dr., , Shankar A/c, , Date, , Particulars, , J.F., , Dr., , Amount, `, , Cr., , Date, , Particulars, , 2017, April 6, , By Sales returns A/c, , J.F., , Particulars, , J.F., , Dr., , Amount, `, , Cr., , Date, , Particulars, , 2017, April 8, , By Sales returns A/c, , J.F., , Particulars, , J.F., , Amount, `, , Date, , Amount, `, 1,000, , Prema Stores A/c, , Date, , Amount, `, 4,500, , Amar Tailors A/c, , Date, , Amount, `, , Cr., , Particulars, , 2017, April 21 By Sales returns A/c, , J.F., , Amount, `, 2,400, , Student activity, Think: Visit a stationery shop nearby. Observe its business activities for a week. After, having discussed with the shop keeper, prepare a list of purchased and sold items by the, shop. Record them in the appropriate books., , 6.9 Bills of exchange, 6.9.1 Introduction, , To increase the sales, a seller sells the goods on credit to his customers. If sale is made on, credit, cash will not be received immediately. The seller may draw a bill on the customer for, the amount due from him. If the customer accepts it, the seller can get the same discounted, with the bank and get cash immediately., 150
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www.tntextbooks.in, , 'H¿QLWLRQRIELOORIH[FKDQJH, , According to the Negotiable Instruments Act, 1881, “Bill of exchange is an instrument in, writing containing an unconditional order, signed by the maker, directing a certain person to, pay a certain sum of money only to, or to the order of a certain person or to the bearer of the, instrument”., 6.9.3 Features of bills of exchange, , An analysis of the definition given above, highlights the following important features of a bill, of exchange:, (i), , It is a written document., , (ii) It is an unconditional order., (iii) It is an order to pay a certain sum of money., (iv) It is signed by the drawer., (v), , It bears stamp or it is drafted on a stamp paper., , (vi) It is to be accepted by the acceptor., (vii) The amount of the bill is paid to the drawer or the endorsee., 6.9.4 Specimen of bill of exchange, Bill of exchange, 328, Bazaar Street,, Saidapet, Chennai-15, 01.06.2017, , Stamp, ` 10,000/-, , Three months after date pay to me or to my order the sum of Rupees Ten Thousand only, for value received, To, Thiru. Jothi Kumar,, 430, Mint Street,, Chennai- 1., , Ramesh Babu, , 6.9.5 Important terms, Explanation of some terms connected with bill of exchange is given below:, (i) Drawing of a bill, , The seller (creditor) prepares the bill in the form presented above. The act of preparing the bill, by the seller or creditor in its complete form with the signature is known as ‘drawing’ a bill., 151
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www.tntextbooks.in, , (ii) Parties, , There are three parties to a bill of exchange as under:, (a), , Drawer: The person who prepares the bill is called the drawer, i.e., a creditor, , (b) Drawee: The person who has to make the payment or who accepts to make the, payment is called the drawee, i.e., a debtor, (c), , Payee: The person who receives the payment is payee. He may be a third party or the, drawer of the bill., , In the above specimen, drawer and payee is Ramesh Babu. Jothi Kumar is the drawee., (iii) Acceptance, , In a bill, drawee gives his/her acceptance by writing the word ‘accepted’ and signs the same, with the date. Now the bill becomes a legal document enforceable in the court of law., (iv) Due date and days of grace, , When a bill is drawn payable after a specified period, the date on which the payment should, be made is called ‘Due date’. In the calculation of the due date, three extra days are added to, the specified period of the bills called ‘Days of grace’. If the date of maturity falls on a holiday,, the bill will be due for payment on the preceding day., Example:, , Date of bill, 1st March, , Period of bill, , Days of grace, , Due date, , 2 months, , 3, , 12th July, , 1 month, , 3, , 4th May, 14th August, since 15th August (being Independence, , 1st October, , 30 days, , 3, , day) is a public holiday., 3rd November, , If the maturity date falls on an emergency holiday, succeeding day will be the, due date for payment., (v) Endorsement, , Endorsement means signing on the face or back of a bill for the purpose of transferring the title, of the bill to another person. The person who endorses is called the “Endorser”. The person to, whom a bill is endorsed is called the “Endorsee”. The endorsee is entitled to collect the money., (vi) Discounting, , When the holder of a bill is in need of money before the due date of a bill, cash can be received, by discounting the bill with the banker. This process is referred to as the discounting of bill., The banker deducts a small amount of the bill which is called discount and pays the balance, in cash immediately to the holder of the bill., 152
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www.tntextbooks.in, , (vii) Retiring of bill, , An acceptor may make the payment of a bill before its due date and may discharge the liability, on the bill. It is called as retirement of a bill. Usually, the holder of the bill allows a concession, called rebate to the drawee for the unexpired period of the bill., (viii) Renewal, , When the acceptor of a bill knows in advance that he/she will not be able to meet the bill on its, due date, he/she may request the drawer for extension of time for payment. The drawer of the, bill may agree to cancel the original bill and draw a new bill for the amount due with interest, thereon. This is referred to as renewal., (ix) Dishonour, , Dishonour of the bill means the non payment of the amount of the bill, when it is presented, for payment., 6.10 Bills receivable book, Bills receivable refers to bills drawn, the payment for which has to be received. In case of credit, sales of goods, the entity may draw a bill on the buyer (debtor), for a certain period. This is, called bills receivable for the business entity and bills payable for the debtor who has accepted, the bill. Where number of bills receivable is large, then a separate bills receivable book may be, maintained by a business entity to record the details of bills receivable. Such bills are drawn, on debtor for a specified amount payable at sight on or after specified period. Bills receivable, book contains the details of bills drawn and its disposal. The format of the bills receivable book, is given below:, Format, Bills receivable book, , Date of, From whom bill, receipt of bill, is received, (i), , (i), , (ii), , Term of, the bill, , Due date of, the bill, , L.F., , Amount of the, Bill `, , Remark, , (iii), , (iv), , (v), , (vi), , (vii), , Date: In this column, the date of the acceptance of the bill is recorded., , (ii) From whom received: In this column, the name of the debtor, who has accepted the bill, and promised to make its payment, is recorded. The bill legally comes into existence after, its acceptance., (iii) Term or period: The bill is drawn for a specified period. This period may be one month,, two months, three months, etc. or even 60 days, 90 days, 120 days, etc. Period of the bill, for which the bill has been drawn is mentioned here., (iv) Due date: Due date is the date on which the payment of the bill is actually due. It is also, known as date of maturity. In order to calculate the due date, three days of grace is added, to the term of the bill., 153
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www.tntextbooks.in, , (v) Ledger Folio (L.F.): This column contains the page number of the ledger in which the, account of the acceptor of the bill appears., (vi) Amount of the bill: The actual amount of the bill is recorded in this column., (vii) Remark: This column contains the details of disposal of the bill, whether the bill has, been discounted or endorsed, honoured or dishonoured etc., 6.11 Bills payable book, Details recorded in the bills payable book are the names of the parties whose bills are accepted,, date of the bills payable, due date, amount, etc. The individual accounts of the parties whose, bills are accepted will be debited with the corresponding amount in the bills payable book. The, specimen of bills payable book is given below:, Format, Bills payable book, , Date of acceptance, To whom, Term of, of the bill, acceptance is given the bill, , (i), , (ii), , (iii), , Due date, Amount of, L.F., the bill `, of the bill, (iv), , (v), , (vi), , Remark, , (vii), , These columns record almost the same particulars which are recorded in the bills receivable, book. When there is credit purchases of goods, the business entity may accept a bill drawn by, the supplier or creditor. It is called bills payable for the business entity. Where there are large, number of such bills payable, a separate bills payable book may be maintained. Thus, bills, payable book is a subsidiary book maintained to record the details of bills payable., The preparation of the bills receivable and bills payable book is explained through the following, example:, 2017, July 1, , Acceptance received from Nirmala for ` 5,000 payable after 3 months., , July 20, , Acceptance given to Shailaja’s bill for ` 3,000 payable after 3 months., , July 31, , Acceptance received from Faisal for ` 1,000 payable after 60 days., , Aug. 5, , Farid’s bill for ` 1,000 payable after 6 months accepted., , Aug.11, , Mohan’s acceptance for ` 700 payable after 90 days received., , 154
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www.tntextbooks.in, , The bills receivable and bills payable books are prepared as follows:, Bills Receivable Book, , Date, , From whom, received, , Term, , 2017, , Due date, , L.F., , Remark, , 2017, , July 1, , Nirmala, , July 31, Aug 11, , 3 months October 4, , 5,000, , Faisal, , 60 days October 1, , 1,000, , Mohan, , 90 days November 12, , 700, 6,700, , Total, , Note:, , Amount `, , On 31st July, for Faisal bill, due date is 1st October, since 2nd October,, (being Gandhi Jayanthi) is a public holiday., Bills Payable Book, , Date, , To whom, accepted, , Term, , 2017, July 20, , Due date, , L.F., , Amount `, , Remark, , 2017, Shylaja, , 3 months, , October 23, , 3,000, , 2018, Aug 5, , Farid, , 6 months, , February 8, , Total, , 1,000, 4,000, , 6.12 Journal proper, Journal proper is a residuary book which contains record of transactions, which do not find a, place in the subsidiary books such as cash book, purchases book, sales book, purchases returns, book, sales returns book, bills receivable book and bills payable book. Thus, journal proper or, general journal is a book in which the residual transactions which cannot be entered in any of, the sub divisions of journal are entered. The usual entries that are passed through this journal, are given below:, (i), , Opening journal entry, , (ii) Closing journal entry, (iii) Adjusting entries, (iv) Transfer entries, (v), , Rectifying entries, , (vi) Miscellaneous entries, 155
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www.tntextbooks.in, , (i) Opening journal entry, , At the end of the accounting year, all nominal accounts are closed but the business has to be, carried on with previous year’s assets and liabilities. Hence, these accounts are to be brought, into the accounts of the current year. Journal entry made in the beginning of the current year, with the balances of assets and liabilities of the previous year is opening journal entry. In this, entry, asset accounts are debited, liabilities and capital accounts are credited., Example, , Ramnath carried forward the following items. Make the opening entry in journal proper as on, 1st January, 2017., ` 30,000, , Cash, , ` 3,000, , Furniture, , Stock, , ` 15,000, , Sundry Creditors, , ` 10,000, , Opening Entry, , Date, 2017, , Cash A/c, , Dr., , Debit `, 30,000, , Jan 1, , Stock A/c, , Dr., , 15,000, , Furniture A/c, , Dr., , 3,000, , Particulars, , L.F., , Credit `, , To Sundry creditors A/c, , 10,000, , To Capital A/c, , 38,000, , (Balance of assets and liabilities brought forward), (ii), , Closing journal entry, , At the end of the accounting period, all the ledger accounts relating to purchases, sales, purchases, returns, sales returns, stock and other accounts concerning expenses, losses, incomes and, gains are closed by transfer to trading and profit and loss account so that financial statements, can be prepared. It should be noted that closing entries are made for nominal accounts only., Example: Salaries account ` 10,000. The closing entry as on 31st December, 2017 is:, Closing Entry, , Date, 2017, , Particulars, Profit and Loss A/c, , December 31, , L.F., Dr., , To Salaries A/c, , Debit `, 10,000, , Credit `, 10,000, , (Salaries A/c transferred to Profit and, Loss A/c), iii) Adjusting entries, , After preparing the trial balance, but before preparing the final accounts, if any adjustment is, required in the accounts for items or transactions left out, adjusting entries are made., 156
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www.tntextbooks.in, , Example, Book value of the machinery as on 1st January, 2017 ` 1,00,000. Rate of depreciation is 10%, p.a. Adjusting entry as on 31st December, 2017 is:, Adjusting Entry, , Date, 2017, , Particulars, Depreciation A/c (1,00,000 × 10%), , Dec 31, , L.F., Dr., , Debit `, 10,000, , Credit `, 10,000, , To Machinery A/c, (Depreciation written off), , (iv) Transfer entries, , Transfer entries are passed in the journal proper for transferring an item entered in one, account to another account. For example, transferring net profit of ` 5,000 to capital account,, the following entry is passed:, Transfer Entry, , Date, , Particulars, Profit and Loss A/c, , L.F., Dr., , Debit `, 5,000, , To Capital A/c, , Credit `, 5,000, , (Net profit transferred to capital account), (v) Rectifying entries, , Rectifying entries are passed for rectifying errors which are committed in the books of accounts., Example, Purchase of furniture by a stationery dealer for ` 10,000 was debited to purchases account., Pass rectifying entry on December 31, 2017., Rectifying Entry, , Date, 2017, Dec 31, , Particulars, , L.F., , Furniture A/c, To Purchases A/c, (Wrong debit to purchases account, rectified), , Dr., , Debit `, 10,000, , Credit `, 10,000, , (vi) Miscellaneous entries, , These are entries which do not occur frequently such as:, (i), , Credit purchases and credit sale of assets which cannot be recorded through purchases, or sales book., 157
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www.tntextbooks.in, , (ii) Endorsement, renewal and dishonor of bill of exchange which cannot be recorded, through bills book., (iii) Other adjustments like interest on capital, bad debts, reserves, etc., (iv) Goods withdrawn by the owner for personal use., (v), , Goods distributed as samples for sales promotion., , (vi) Loss of goods by fire, theft and spoilage., Illustration 7, , Record the following transactions of Vijay Electrical & Co., in the purchases book, purchases, returns book, sales book and sales returns book., 2017, Jan 1, , Purchased on credit from Preethi & Co.,, 25 table fans @ ` 1,400 each, 10 fans @ ` 2,000 each, Add: Auto charges @ ` 100, , Jan 5, , Sold on credit to Sheela & co.,, 10 electric iron box @ ` 1,250 each, 20 electric stoves @ ` 450 each, Less: 10% Trade discount, , Jan 10, , Purchased for cash from Brinda & Co.,, 10 electric stoves @ ` 1,300 each, , Jan 18, , Returned to Preethi & Co.,, 5 table fans being defective for which cash is not received, , Jan 20, , Purchased from Sathya & Co.,, 10 fans @ ` 1,200 each, Less: Trade discount 5%, , Jan 21, , Sheela & Co., returned 3 electric iron boxes as defective for which cash is not paid, , Jan 23, , Purchased from Elizabeth & Co., 10 water purifiers @ ` 4,700 each on credit, , Jan 25, , Sold on credit to M/s. Bhavani & Co., 7 fans @ ` 1,450 each, , Jan 27, , Returned to Sathya & Co., 2 damaged fans for which cash is not received, , 158
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www.tntextbooks.in, , Solution, In the books of Vijay Electrical & Co., Purchases Book, , Date, , Invoice, No., , Particulars, , Amount `, L.F., , Details, , Total, , 2017, Jan. 1, , Jan. 20, , Preethi & Co., 25 table fans @ ` 1400 each, , 35,000, , 10 fans @ ` 2,000 each, , 20,000, 55,000, 100, , Add: Auto charges, Sathya & Co., 10 fans @ ` 1,200 each, , 12,000, 600, , Less: Trade discount (5%), Jan. 23, , 55,100, , 11,400, , Elizabeth & Co, 10 water purifiers @ ` 4,700 each, , 47,000, , Purchases A/c, , 1,13,500, , Dr., Sales Book, , Date, , Invoice, No., , Particulars, , L.F., , Amount `, Details, Total, , 2017, Jan. 5, , Sheela & Co., 10 electric iron boxes @ ` 1,250 each, , 12,500, 9,000, , 20 electric stoves @ ` 450 each, , 21,500, Jan. 25, , 2,150, , Less: Trade discount (10%), M/s. Bhavani & Co., , 19,350, 10,150, , 7 fans @ ` 1,450 each, Sales A/c, , Cr., , 159, , 29,500
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www.tntextbooks.in, , Purchases Returns Book, , Date, , Amount `, Debit, L.F., Note No., Details, Total, , Particulars, , Remarks, , 2017, Jan. 18 Preethi & Co., , Being, 7,000 defective, , 5 table fans @ ` 1,400 each, Jan. 27 Sathya & Co., , 2,280 Damaged, fans, , 2 fans @ ` 1,140 each, (List Price – Trade discount), (1,200 – 60), Purchase Returns A/c, , 9,280, , Cr., Sales Returns Book, , Date, , Amount `, Credit, L.F., Note No., Details, Total, , Particulars, , Remarks, , 2017, Jan. 21 Sheela & Co., 3 electric Iron boxes @ ` 1,125 each, , 3,375 Being, defective, , (List Price – Trade discount), (1,250 – 125), , Sales Returns A/c, , Dr., , 3,375, , Student activity, Think: Prepare a flow chart/mind map to show how entries are posted from subsidiary, books to ledger?, , 160
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www.tntextbooks.in, , Points to remember, • Business transactions are entered in the subsidiary books before they are posted to the, ledger., • Sales book is meant for recording sales of goods on credit., • Sales book is prepared with the help of invoices sent to the customers., • Sales returns book is prepared based on the credit notes issued to the customers., • Purchases book is meant for recording purchases of goods on credit., • Purchases returns book is prepared based on the credit notes received from the suppliers., • At the end of each month, totals of the sales, purchases, and returns b are transferred to, the sales, purchases, and returns accounts respectively., Self-examination questions, I Multiple choice questions, Choose the correct answer, , 1., , 2., , 3., , 4., , 5., , Purchases book is used to record, (a) all purchases of goods, , (b) all credit purchases of assets, , (c) all credit purchases of goods, , (d) all purchases of assets, , A periodic total of the purchases book is posted to the, (a) debit side of the purchases account, , (b) debit side of the sales account, , (c) credit side of the purchases account, , (d) credit side of the sales account, , Sales book is used to record, (a) all sales of goods, , (b) all credit sales of assets, , (c) all credit sales of goods, , (d) all sales of assets and goods, , The total of the sales book is posted periodically to the credit of, (a) Sales account, , (b) Cash account, , (c) Purchases account, , (d) Journal proper, , Purchase returns book is used to record, (a) returns of goods to the supplier for which cash is not received immediately, (b) returns of assets to the supplier for which cash is not received immediately, (c) returns of assets to the supplier for which cash is received immediately, (d) None of the above, 161
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www.tntextbooks.in, , 6., , Sales return book is used to record, (a) Returns of goods by the customer for which cash is paid immediately, (b) Returns of goods by the customer for which cash is not paid immediately, (c) Returns of assets by the customer for which cash is not paid immediately, (d) Returns of assets by the customer for which cash is paid immediately, , 7., , Purchases of fixed assets on credit basis is recorded in, , 8., , (a) Purchases book, , (b) Sales book, , (c) Purchases returns book, , (d) Journal proper, , The source document or voucher used for recording entries in sales book is, , 9., , (a) Debit note, , (b) Credit note, , (c) Invoice, , (d) Cash receipt, , Which of the following statements is not true?, (a) Cash discount is recorded in the books of accounts, (b) Assets purchased on credit are recorded in journal proper, (c) Trade discount is recorded in the books of accounts, (d) 3 grace days are added while determining the due date of the bill, , 10., , Closing entries are recorded in, (a) Cash book, , (b) Ledger, , (c) Journal proper, , (d) Purchases book, , Answer, , 1. (c), , 2. (a), , 3. (c), , 4. (a), , 5. (a), , 6. (b), , II Very short answer questions, , 1., , Mention four types of subsidiary books., , 2., , What is purchases book?, , 3., , What is purchases returns book?, , 4., , What is sales book?, , 5., , What is sales returns book?, , 6., , What is debit note?, , 7., , What is credit note?, 162, , 7. (d), , 8. (c), , 9. (c), , 10. (c)
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www.tntextbooks.in, , 8., , What is journal proper?, , 9., , Define bill of exchange., , 10. What is an opening entry?, 11., , What is an invoice?, , III Short answer questions, , 1., , Give the format of purchases book., , 2., , Mention the subsidiary books in which the following transactions are recorded., (i) Sale of goods for cash, (ii) Sale of goods on credit, (iii) Purchases of goods on credit, (iv) When the proprietor takes goods for personal use, (v) Goods returned to suppliers for which cash is not received immediately, (vi) Asset purchased as credit., , 3., , What are the advantages of subsidiary books?, , 4., , Write short notes on:, (a) Endorsement of a bill and, (b) Discounting of a bill, , IV Exercises, , 1., , Enter the following transactions in the Purchases book of M/s. Subhashree Electric Co.,, which deals in electric goods., 2017, April 5, , Purchased from Karthik Electric Co., on credit, 10 Electric iron box @ ` 2,500 each, 5 electric stoves @ ` 2,000 each, , April 19, , Purchased on credit from Khaitan Electric Co.,, 3 electric heaters @ ` 6,000 each, , April 25, , Purchased from Polar Electric Co., on credit, 10 Fans @ ` 2,000 each, , April 29, , Purchased from M & Co. for cash, 10 electric stoves @ ` 3,000 each, (Answer: Purchases A/c. (Dr.) ` 73,000), 163
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www.tntextbooks.in, , 2., , Enter the following credit transactions in the purchases book of Manoharan, a Provisions, Merchant., 2017, May 2, , Bought from Vasu 100 bags of rice @ ` 800 per bag, , May 8, , Bought from Cheyyar Sugar Mills Ltd., 20 bags of sugar @ ` 2,600 per bag, , May 10, , Bought from Ram Flour Mill, Coimbatore, 10 bags of wheat flour @ ` 750, per bag, , May 15, , Bought from Nilgiri Tea Co., Nilgiris, 15 cases of tea @ ` 900 per case, , May 25, , Bought from Sairam Coffee Works Ltd., 100 kgs of Coffee @ ` 190 per kg., , May 29, , Bought from X & Co. furniture worth ` 2,000, (Answer: Purchases A/c (Dr.) ` 1,72,000), , 3., , From the following transactions write up the Sales day book of M/s. Ram & Co., a, stationery merchant., 2017, Jan. 1, , Sold to Anbu& Co., on credit 20 reams of white paper @ ` 150 per ream, , Jan. 2, , Sold to Jagadish& Sons on credit 6 dozen pens @ ` 360 per dozen, , Jan. 10, , Sold old newspapers for cash @ ` 620, , Jan. 15, , Sold on credit M/s. Elango& Co., 10 drawing boards @ ` 170 per piece, , Jan. 20, , Sold to Kani & Co., 4 writing tables at ` 1,520 per table for cash, (Answer: Sales A/c (Cr.) ` 6,860), , 4., , Enter the following transactions in the Sales book of Kamala Stores, a furniture shop., 2017, May 2, , Sold to Naveen Stores, Trichy on credit 5 computer tables @ ` 1,750 per, table, , May 9, , Sold to Deepa & Co., Madurai on credit 6 dining tables @ ` 1,900 per dining, table, , May 15, , Sold to Rajesh 10 dressing tables @ ` 2,750 each on credit, , May 24, , Sold to Anil 5 wooden tables @ ` 1,250 per table on credit, , May 27, , Sold to Gopi 3 old computers @ ` 3,500 each, , May 29, , Sold 50 chairs to Anil @ ` 275 each for cash, (Answer: Sales A/c (Cr.) ` 53,900), , 164
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www.tntextbooks.in, , 5, , Enter the following transactions in the purchases and sales books of Kannan, an, automobile dealer, for the month of December, 2017., `, , 2017, , 6., , Dec. 1, , Bought from Sumathi gear boxes on credit, , 17,800, , Dec. 4, , Sold goods to Rani on credit, , 15,200, , Dec. 6, , Purchased goods on credit from Mani, , Dec. 10, , Sold goods on credit to Saranya, , 12,500, , Dec. 17, , Sold goods to Hussain on credit, , 13,250, , Dec. 21, , Purchased goods on credit from Raghunathan, , 10,000, , Dec. 26, , Sold goods to Shyam for cash, 3,000, (Answer: Purchases A/c (Dr.): ` 34,800 Sales A/c (Cr.): ` 40,950), , 7,000, , Prepare Purchases book and Sales book in the books of Santhosh Textiles Ltd., from the, following transactions given for April, 2017., 2017, April 1, , Purchased goods from Prasad, Kancheepuram on credit, 100 meters Silk @ ` 450 per meter, 75 meters Velvet @ ` 180 per meter, , April 10, , Sold goods to Rathinam, Chennai on credit, 60 meters Silk @ ` 490 per meter, 50 meters Velvet @ ` 210 per meter, , April 18, , Nathan & Sons purchased from us on credit, 100 meters Silk @ ` 510 per meter, , April 20, , Purchased goods from Hari Ram & Sons, Madurai on credit, 50 rolls kada cloth @ ` 730 per roll, 80 rolls cotton cloth @ ` 650 per roll, , April 24, , Purchased from Mohan, Karur for cash, Shirting cloth @ ` 7,000, Sarees @ ` 25,000, (Answer: Purchases A/c (Dr.): ` 1,47,000 & Sales A/c (Cr.) ` 90,900), , 7., , From the following information, prepare purchase day book and purchases returns book, for the month of June, 2017 and post them into ledger accounts in the books of Robert, Furniture Mart., 2017, June 1, , Purchased from Balu Traders 20 chairs @ ` 150 each on credit, , June 13, , Bought from Subash @ Co., on credit, 165
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www.tntextbooks.in, , 2 Almirah @ ` 3,100 each, 10 tables @ ` 1,500 each, 15 chairs @ ` 200 each, Less: 10 % Trade discount on all items, Add: Freight charges ` 220, June 21, , Returned 2 damaged chairs to Balu Traders and cash not received, , June 24, , Purchased from Sunrise Furniture Mart on credit, 25 Almirahs @ ` 1,300 each, , June 27, , Purchased from Mouli Traders on credit, 10 executive tables @ ` 3,275 each, , June 29, , 8., , Returned 3 Almirahs to Sunrise Furniture Mart and cash not received, (Answer: Purchases A/c(Dr.): ` 90,250 Purchases Returns A/c (Cr.) ` 4,200), , Enter the following transactions in the proper subsidiary books of Suman who is dealing, in electronic goods for the month of January, 2017., 2017, Jan. 2, , Purchased from M/s. Raj Electronics on credit, 20 cell phones @ ` 5,500 per piece, 10 colour TVs @ ` 14,500 per piece, , Jan. 5, , Purchased from M/s. Ruby Electronics on credit, 10 radios @ ` 1,650 per piece, 8 Tape recorders @ ` 2,500 per piece, Trade discount on all items @ 10%, , Jan. 10, , Returned to M/s. Raj Electronics 4 cell phones damaged and cash not, received, , Jan. 20, , Purchased from M/s. Suganthi Electronics on credit, 10 radios @ ` 3,700 per piece, 2 Sony colour TVs @ ` 27,000 per piece, Trade discount @ 5% on all items, (Answer: Purchases A/c. (Dr.) ` 3,74,300; Purchases returns A/c (Cr.): ` 22,000), , 9., , Enter the following transactions in the sales book and sales returns book of M/s. Guhan, & Sons, who is a textile dealer., 2017, May 2, , Sold to M/s. Karan & Co., on credit, 100 pieces towels @ ` 280 per piece, 200 metres shirtings @ ` 270 per metre, 166
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www.tntextbooks.in, , May 5, , Sold to M/s. Veeran & Sons on credit, 10 pieces ready-made dress @ ` 1,500 per piece, , May 16, , Sold to M/s. Jain & Sons on credit, 50 blankets @ ` 240 each, , May 20, , Damaged 10 pieces towels returned by Karan & co. and cash not paid, , May 25, , Sold old furniture to M/s. Saran & Co., on credit ` 18,000, , May 27, , Returned 2 pieces ready-made dresses by M/s. Veeran & Sons due to inferior, quality and cash not paid, (Answer: Sales A/c. (Cr.) ` 1,09,000 Sales Returns A/c (Dr.) ` 5,800), , 10. Record the following transactions in the sales book and sales returns book of M/s. Ponni, & Co., and post them to ledger., 2017, Aug 1, Aug 4, Aug 7, Aug 15, Aug 20, Aug 25, , Sold goods to Senthil as per Invoice No. 68 for ` 20,500 on credit, Sold goods to Madhavan as per Invoice No. 74 for ` 12,800 on credit, Sold goods to Kanagasabai as per Invoice No. 78 for ` 7,500 on credit, Returns inward by Senthil as per Credit Note no. 7 for ` 1,500 for which, cash is not paid, Sold goods to Selvam for ` 13,300 for cash, Sales returns of ` 1,800 by Madhavan as per Credit Note No. 11 for which, cash is not paid, (Answer: Sales A/c (Cr.) ` 40,800; Sales Returns A/c (Dr.) ` 3,300;, Senthil A/c (Dr.) ` 19,000; Madhavan A/c (Dr.) ` 11,000, & Kanagasabai A/c (Dr.) ` 7,500), , 11. Prepare necessary subsidiary books in the books of Niranjan and also Sachin account, and Mukil account from the following transactions for the month of February, 2017., `, , 2017, Feb. 1, , Purchased goods from Mukil Traders on credit, , 12,480, , Feb. 4, , Goods sold to Sachin Traders on credit, , 15,000, , Feb. 6, , Sold goods to Manish Traders on credi, , 12,100, , Feb. 7, , Sachin Traders returned goods for which cash is not paid, , Feb. 9, , Returned goods to Mukil Traders for which cash is not received 1,500, , Feb. 10, , Sold goods to Manish & Co., on credit, , 13,300, , Feb. 14, , Purchased from Mukil Traders on credit, , 15,200, , 1,200, , (Answer: Purchases A/c (Dr.) ` 27,680; Sales A/c (Cr.) ` 40,400,, Purchases Returns A/c (Cr.) ` 1,500, Sales Returns A/c (Dr.) ` 1,200;, Mukil A/c (Cr.) ` 26,180; Sachin A/c (Dr.) ` 13,800), 167
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www.tntextbooks.in, , 12. From the following information, prepare the necessary subsidiary books for Nalanda, Book Stores., 2017, Dec. 1, , Dec. 7, , Dec. 10, , Dec. 15, Dec. 18, Dec. 26, , Bought from M/s. Umadevi on credit, 100 copies Business Statistics Book @ ` 80 each, 100 copies Accountancy Book @ ` 150 each, Sold to Sridevi & Co., on credit, 240 copies Business Statistics @ ` 90 each, 250 copies Accountancy books @ ` 170 each, Bought from Subha & Co.,, 40 Copies Economics books @ ` 80 each, Less: 15% Trade Discount, Returned to M/s. Uma Devi 10 copies of damaged Accountancy book for, which cash is not received, Sold to Gupta Bros., on credit, 200 copies of Economics book @ ` 95 each, Returned 6 copies of Economics books to Subha & Co.,, (Answer: Purchases A/c (Dr.) ` 25,720, Sales A/c (Cr.) ` 83,100,, Purchases Returns A/c (Cr.) ` 1,908), , 168
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www.tntextbooks.in, , Mr. Joseph started a trading business of selling readymade clothes. In the, earlier period, he dealt only with cash, because he felt that would be risk-free., But, later on, he had to give credit period for his regular customers in order to retain them., For some customers, when they made bulk purchase, he offered them some discount. That, brought him even more customers. But, some of his customers are not prompt in making, the payment., He expanded his business and employed few staff. As the credit transactions were, numerous, he found it difficult to maintain properly. One of his friends, who is a Chartered, Accountant advised him to maintain subsidiary books., Discuss on the following points., •, , What could be the reason for Joseph’s feeling that dealing in cash is risk free?, , •, , What type of discount is offered by Joseph?, , •, , Suggest some ways to Joseph for making his customers to pay on time., , •, , Do you think that maintaining the subsidiary books will be useful to Joseph?, , •, , What business documents are needed to maintain the subsidiary books?, , To explore further, , How do you make sure that the subsidiary books are maintained without any error?, , Reference, 1. M C Shukla, T S Grewal and S C Gupta, Advanced Accounts, 19th ed., 2017, S.Chand Publishing, New Delhi., 2. R L Gupta and V K Gupta, Financial Accounting, 11th ed., 2014, Sultan Chand and Sons, New Delhi., 3. S P Jain and K L Narang, Advanced Accountancy Vol – I, 2016, Kalyani Publishers, New Delhi., 4. Dalston L Cecil and Jenitra L Merwin, Financial Accounting, 3rd ed., 2017, Learntech Press, Trichy., 5. Fundamentals of Accounting, 2017, The Institute of Chartered Accountants of India, New Delhi., , 169
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www.tntextbooks.in, , Unit 7, , SUBSIDIARY BOOKS - II, CASH BOOK, , Contents, , Points to recall, , 7.1 Introduction, 7.2 Meaning of cash book, 7.3 Cash book – A subsidiary, book and principal book of, accounts, 7.4 Importance of cash book, 7.5 Types of cash book, 7.6 Single column cash book, 7.7 Cash discount and trade, discount, 7.8 Double column cash book, 7.9 Three column cash book, 7.10 Petty cash book, , The following points are to be recalled, before learning Subsidiary books-II, cash book:, •, , Golden rules of accounting, , •, , Journal entries, , •, , Ledger account, , •, , Subsidiary books, , Learning Objectives, To enable the students to, •, , Understand the meaning and, importance for cash book, , •, , Apply the rules of double entry, system in the preparation of, various types of cash book, , •, , Understand the meaning and types, of petty cash book, , •, , Prepare petty cash book, , Key terms to know, , 170, , •, , Cash book, , •, , Petty cash book, , •, , Bank overdraft, , •, , Cheque
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www.tntextbooks.in, , 7.1 Introduction, Student activity, Think: A stationery shop keeper maintains only one register to record all her business, transactions. She finds it difficult to know and check her shop’s cash balance at the end of, the day. Is there any way to help her? She needs your suggestion., In any business, many transactions take place every day involving cash such as cash sales,, receipts from debtors, cash purchases, payment to creditors and payment towards different, expenses. It is therefore necessary, that all the cash transactions are recorded in a separate, book, i.e., cash book. Cash book is the most important subsidiary book, because it keeps the, initial record of cash transactions of the business. Cash book is maintained by every business,, whether small or large in size. It is simply because every business is very cautious about its cash, management, i.e., cash receipts and cash payments. The cash book presents the true position, of cash transactions. Cash book also serves as a documentary evidence for the available cash, balance., 7.2 Meaning of cash book, Cash book is the book in which only cash transactions are recorded in the chronological order., The cash book is the book of original entry or prime entry as cash transactions are recorded, for the first time in it. Cash transactions here may include bank transactions also. Cash receipts, are recorded on the debit side while cash payments are recorded on the credit side., 7.3 Cash Book – A subsidiary book and principal book of accounts, All the cash transactions are recorded first in the cash book. It is therefore a subsidiary book., When cash book is maintained, there is no need for preparing cash account and bank account, in the ledger because in the cash book cash receipts and cash payments are compared and the, cash and bank balances at the end are arrived at. Thus, it serves as a ledger account also. Hence,, the cash book, unlike any other subsidiary book, is both a subsidiary book and a principal, book., 7.4 Importance of cash book, Importance of cash book is discussed below:, (i), , Serves as both journal and ledger, When cash book is maintained, it is not necessary to open a separate cash account in the, ledger. Thus, cash book serves the purpose of a journal and a ledger., , (ii) Saves time and labour, When cash transactions are recorded through journal entries, a lot of time and labour, will be involved. To avoid this, all cash transactions are straightaway recorded in the cash, book, which saves time and labour., 171
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www.tntextbooks.in, , (iii) Shows the cash and bank balance, It helps to know the cash and bank balance at any point of time by comparing the total, cash receipts and cash payments., (iv) Benefit of division of labour, As cash book is a separate subsidiary book, an independent person can maintain it., Hence, business can get the benefit of division of labour., (v) Effective cash management, Cash book provides all information regarding total receipts and payments of the business, concern during a particular period. It helps in formulating effective policy for cash, management., (vi) Prevents errors and frauds, Balance as per cash book and the balance in the cash box can be compared daily. If there, is any deficit or surplus, it can be found easily. It helps in preventing any fraud or error, in cash dealings., 7.5 Types of cash book, The main cash book may be of various types and following are the three most common types., (i), , Simple or single column cash book (only cash column), , (ii) Cash book with cash and discount column (double column cash book), (iii) Cash book with cash, discount and bank columns (three column cash book)., Apart from the main cash book, petty cash book may also be prepared to enter the petty, expenses, i.e., expenses involving small amount., 7.6 Single column cash book, Single column cash book or simple cash book, like a ledger account has only one amount, column, i.e., cash column on each side. Only cash transactions are recorded in this book. All, cash receipts and payments are recorded systematically in this book. The format of simple, cash book is given as under:, Dr., , Simple Cash Book, , Cr., , Date, , Receipts, , R.N., , L.F., , Amount `, , Date, , Payments, , V.N., , L.F., , Amount `, , (1), , (2), , (3), , (4), , (5), , (6), , (7), , (8), , (9), , (10), , The format of simple cash book shows that it has been divided into two parts. The left hand, side is ‘Debit’ which represents all cash receipts and the right hand side is ‘Credit’, showing all, cash payments., Columns (1) and (6) – Date: Date of receiving cash is recorded in the debit side and date of, paying cash is recorded in the credit side., 172
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www.tntextbooks.in, , Column (2) Receipts: Receipts column shows name of persons or parties from whom cash, has been received, income received, sale of asset like plant, cash sales and other receipts., Column (3) Receipt Number (R.N.): This column contains the serial numbers of the cash, receipts., Columns (4) and (9) – Ledger Folio (L.F.): This column is provided both on the debit and, credit side of the cash book. It is used for reference. The Ledger page number of every account, in the cash book is recorded in this column. This column facilitates vouching and verification, of transactions recorded., Columns (5) and (10) – Amount: This is the last column of the cash book on both the debit, and credit sides. In case of cash receipt, the amount of actual cash receipts and in case of, payments, the amount of actual cash payment is recorded. The opening balance of cash is, recorded on the debit side and the closing balance is the balancing figure on the credit side., Opening balance or capital contributed by cash in case of new business is the first item on the, debit side and the closing balance is the last item on the credit side., The word ‘To’ is conventionally used before different accounts at the debit side of cash book, in particulars column. The word ‘By’ is used before the different accounts at the credit side of, the cash book in particulars column., Column (7) Payments: The accounts to which payments are made are recorded here such as, names of persons to whom payment has been made, expenses paid, assets purchased, cash, purchases, etc., Column (8) Voucher Number (V.N.): This column contains the serial number of the voucher, towards which payment is made., Student activity, Think: Credit transactions are not recorded in the cash book. Where will they be recorded?, 7.6.1 Balancing of single column cash book, , Since the cash book serves as cash account, it must be balanced regularly. The balancing, procedure is the same like any other ledger account. It must be remembered that one cannot, pay more cash than what one has received. Therefore, the total of receipts is always more than, (or at least equal to, but never less than) the credit total (payments) and the cash book always, shows a debit balance (or nil balance, but never credit balance)., , 173
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www.tntextbooks.in, , Illustration 1, Enter the following transactions in a simple cash book of Kunal:, 2017, Jan., , `, , 1, , Cash in hand, , 11,200, , 5, , Received from Ramesh, , 7, , Paid rent, , 8, , Sold goods for cash, , 300, , 10, , Paid Mohan, , 700, , 27, , Purchased furniture for cash, , 200, , 31, , Paid salaries, , 100, , 300, 30, , Solution, , In the books of Kunal, Dr., , Cash Book (Single column), , Date, , Receipts, , L.F., , Amount `, , 2017, , Date, , Payments, , Cr., , L.F., , Amount `, , 2017, , Jan 1, , To Balance b/d, , 11,200 Jan 7, , Jan 5, , To Ramesh A/c, , 300 Jan 10, , By Mohan A/c, , 700, , Jan 8, , To Sales A/c, , 300 Jan 27, , By Furniture A/c, , 200, , Jan 31, , By Salaries A/c, , 100, , Jan 31, , By Balance c/d, , 10,770, , 11,800, Feb 1, , To Balance b/d, , By Rent A/c, , 30, , 11,800, , 10,770, , Explanation, , Jan 1: Cash in hand is the opening balance with the firm. This would have been the closing, balance on 31st December, 2017. Cash account always has debit balance so it has been shown, in the debit side of the cash book., Jan 5: It is a receipt from Ramesh, so it has been recorded in receipt side (debit side) of the, cash book., Jan 7: Payment of rent will decrease cash, so it has been recorded in payment side (credit side), of the cash book., Jan 8: Cash sales of goods will bring cash and increases the cash balance, so it has been recorded, in the debit side of the cash book., 174
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www.tntextbooks.in, , Jan 10: Payment to Mohan decreases cash, so it has been recorded in the credit side., Jan 27: Purchase of furniture for cash reduces cash, so it has been recorded in credit side., Jan 31: Payment of salaries in cash reduces cash, so it has been recorded in the credit side of, cash book., Student activity, Think: In cash book, receipts are entered on the debit side and payments are entered on, the credit side. Why?, Illustration 2, Enter the following transactions in a single column cash book of Pradeep for April, 2017, `, , April, 1, , Commenced business with cash, , 5, , Bought goods for cash, , 27,000, 6,000, , 10, , Goods sold for cash, , 13, , Paid into bank, , 5,000, , 14, , Goods sold to Sangeetha for cash, , 9,000, , 17, , Goods purchased from Preethi on credit, , 21, , Purchased stationery by cash, , 25, , Paid Murugan by cash, , 26, , Commission paid by cash, , 29, , Drew from bank for office use, , 4,000, , 30, , Rent paid by cheque, , 3,000, , Solution, , 11,000, , 13,000, 200, 14,000, 700, , In the books of Pradeep, Dr., , Date, , Cash Book (Single column), , Receipts, , 2017, April 1 To Pradeep’s, capital A/c, 10 To Sales A/c, 14 To Sales A/c, 29 To Bank A/c, , L.F. Amount `, , 27,000, 11,000, 9,000, 4,000, , Date, 2017, April 5, 13, 21, 25, 26, 30, , 51,000, May 1, , To Balance b/d, , Payments, By Purchases A/c, By Bank A/c, By Stationery A/c, By Murugan A/c, By Commission A/c, By Balance c/d, , Cr., , L.F. Amount `, 6,000, 5,000, 200, 14,000, 700, 25,100, , 51,000, , 25,100, 175
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www.tntextbooks.in, , Note: The transaction dated April 17th will not be recorded in the cash book as it is a credit, transaction. The transaction on 30th is not recorded as the payment is made through bank, which does not involve cash., 7.6.2 Posting from single column cash book, , Since cash book serves as ‘journal’ as well as ‘ledger account’, there is no need for preparing, separate cash account and posting thereto. But entering cash transactions in cash book means, recording only cash aspect of each transaction. The other aspect of the transaction remains, to be posted. When the related accounts are posted, the double entry will be completed. The, procedure for posting is:, •, , Credit the accounts mentioned on the receipts (or) debit side by entering ‘By Cash, account’ and, , •, , Debit the accounts mentioned on the payment (or) credit side by entering ‘To Cash, account’., , For example, for illustration 2, posting is made to sales account and purchases account as, follows:, Dr., , Date, 2017, , Sales, , Particulars, , L.F. Amount `, , April, , Dr., , Date, 2017, , Cr., , Date, 2017, , Particulars, , L.F. Amount `, , April 10 By Cash A/c, , 11,000, , 14 By Cash A/c, , 9,000, , Purchases A/c, , Particulars, , April 5 To Cash A/c, , L.F. Amount `, , Date, 2017, , Cr., , Particulars, , L.F. Amount `, , 6,000 April, , 7.7 Cash discount and trade discount, a) Cash discount, , Cash discount is allowed to the parties making prompt payment within the stipulated period, of time or early payment. It is discount allowed (loss) for the creditor and discount received, (gain) for the debtor who makes payment. The discount is allowed when payment is received, or made and hence, the entry for discount is also passed with the entry of payment. The earlier, the payment, the more may be the discount. Cash discount motivates the debtor to make the, payment at an earlier date to avail discount facility. For example, the terms may be., “5% discount will be allowed if the payment is made within one month., 3% discount will be allowed if the payment is made within two months”., 176
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www.tntextbooks.in, , Discount allowed account will be shown on the debit side of profit and loss account and, discount received account will be shown on the credit side of profit and loss account. When, cash discount is allowed in respect of sale of goods or services, the seller allows cash discount, to the buyer when payment is made., b) Trade discount, , Trade discount is a deduction given by the supplier to the buyer on the list price or catalogue, price of the goods. It is given as a trade practice or when goods are purchased in large, quantities. It is shown as a deduction in the invoice. Trade discount is not recorded in the, books of accounts. Only the net amount is recorded. Example: Suppose the sale of goods for, ` 10,000 was made and 10% was allowed as trade discount, the entry regarding sales will be, made for ` 9,000 (10,000 – 10 per cent of 10,000). In the same way, purchaser of goods will also, record purchases as ` 9,000)., 'LHUHQFHVEHWZHHQFDVKGLVFRXQWDQGWUDGHGLVFRXQW, , Following are the difference between cash discount and trade discount:, Basis, , Cash discount, , Trade discount, , 1. Purpose, , Cash discount is allowed to Trade discount is allowed to, encourage the buyers of goods to encourage buyers to buy goods in, make payment at an early date., large quantities., , 2. Time of, allowance, , Cash discount is allowed by the seller Trade discount is allowed by the, or creditor to the buyer or debtor at seller to the buyer when goods are, the time of making payment., sold., , 3. Amount of Cash discount is related to time. The Trade discount is generally related to, discount, earlier the payment, the more will be the quantity of purchase or sale. The, the cash discount., more the purchases, the more will be, the rate and amount of discount., 4. Recording, in books of, accounts, , Cash discount is recorded in the, books of account. Cash discount, allowed is shown on the debit side of, cash book. Cash discount received is, shown on the credit side of the cash, book., , Trade discount is not recorded in the, books of account. No journal entry, is made for the same. Details are, just shown in the purchases or sales, book., , 5. Deduction Cash discount is not deducted from Trade discount is deducted from the, from invoice the invoice value of goods., list price of the goods., value, 7.8 Double column cash book (Cash book with cash and discount column), It is a cash book with cash and discount columns. As there are two columns, i.e., discount and, cash columns, both on debit and credit sides, this cash book is known as ‘double column cash, book’., 177
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www.tntextbooks.in, , The double column cash book is prepared on the lines of simple cash book. It has only one, additional column, i.e., discount column on each side. Discount column represents discount, allowed on the debit side and discount received on the credit side., In the discount columns, cash discount, i.e., cash discount allowed and cash discount received, are recorded. The net amount received is entered in the amount column on the debit side and, the net amount paid is entered in the amount column on the credit side. For the seller who, allows cash discount, it is a loss and hence it is debited and shown on the debit side of the cash, book. For the person making payment, discount received is a gain because less payment is, made and it is credited and shown on the credit side of the cash book., The cash columns are balanced. Discount columns are not balanced, since debit represents, discount allowed and credit represents discount received. They are totalled, separately., The format of double column cash book is given below:, Dr., Date, , Cash book with cash and discount columns, Receipts, , Amount `, , R.N L.F, , Discount, , Date, , Payments, , Cash, , R.N L.F., , Cr., Amount `, Discount Cash, , Student activity, Think: Cash account cannot have a credit balance. Why?, 7.8.1 Balancing the double column cash book, , The cash columns should be balanced as usual and the balance should be carried forward to, the next date or period., However, discount columns are not to be balanced. They are to be totalled on the debit side and, credit side separately. The total of discount column on the debit side represents total discount, allowed to customers and is debited to discount allowed account. Total of discount column on, the credit side represents total discount received and is credited to discount received account., The periodical totals of discount columns are posted as under:, (i), , Debit Discount allowed account as ‘To Sundry Accounts as per Cash book’, with the, periodical total of the discount allowed column., , (ii) Credit Discount received account as ‘By Sundry Accounts as per Cash Book’ with the, periodical total of the discount received column., 178
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www.tntextbooks.in, , Illustration 3, Enter the following transactions in a cash book with cash and discount columns:, `, , 2017, Jan 1, , Cash in hand, , Jan 5, , Paid to Ramanathan by depositing in cash deposit machine, , Jan 8, Jan 10, , 11,500, 300, , Discount allowed by him, , 10, , Purchased goods for cash, , 400, , Cash received from Rajagopal, , 980, , Discount allowed, , 20, , Jan 15, , Sold goods for cash, , 400, , Jan 21, , Paid cash to Shanthi, , 295, , Discount received, , 5, , Jan 25, , Paid wages by cash, , 50, , Jan 31, , Paid to Sanjeev ` 390 in full settlement of his account, , 400, , Solution, , Dr., , Cash book with cash and discount columns, , Date, , Receipts, , L.F, , Amount `, Discount Cash, , 2017, Jan 1, , Date, , Payments, , Cr., L.F., , Amount `, Discount Cash, , 2017, To Balance b/d, , 10 To Rajagopal A/c, , 11,500 Jan 5, 20, , 15 To Sales A/c, , 10, , 8 By Purchases A/c, , 980, 400, , By Ramanathan A/c, , 21 By Shanthi A/c, , 400, 5, , 10, , 390, , 25, , 11,445, 12,880, , 31 By Balance c/d, 20, Feb 1, , To Balance b/d, , 12,880, 11,445, , 295, 50, , 25 By Wages A/c, 31 By Sanjeev A/c, , 300, , Note: Discount column is not to be balanced., 7.8.2 Posting from double column cash book, , Following is the procedure for posting entries from double column cash book:, (a) Cash columns: Debit the accounts mentioned on the credit side and the credit is to Cash, A/c with the amount mentioned in cash column; credit the accounts mentioned on the, debit side and the debit is for Cash A/c with the amount mentioned in cash column., 179
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www.tntextbooks.in, , (b) Discount columns: Debit the concerned personal account mentioned on the credit side, and the credit is to Discount received A/c with the amount mentioned in the discount, received column. Credit the concerned personal account mentioned on the debit side and, the debit is for Discount allowed A/c with the amount entered in the discount allowed, column., 7.9 Three column cash book (Cash book with cash, discount and bank, column), Student activity, Think: Is it safe and convenient to carry on the business transactions only in cash?, A three column cash book includes three amount columns on both sides, i.e., cash, bank and, discount. This cash book is prepared in the same way as simple and double column cash books, are prepared. The transactions which increase the cash and bank balance are recorded on the, debit side of the cash and bank columns respectively. Opening balance of cash and favourable, bank balance appear as the first item on the debit side of the three column cash book in case of, existing business. If the business is a new one, capital contributed in cash and/or bank deposit, appear as the first item on the debit side., All the transactions which decrease the cash and bank balance are recorded in the cash and, bank columns on the credit side. The balancing figures will be the closing balances of cash, and bank. Cash will always have debit balance. Bank balance may be debit or credit depending on, whether the balance is favourable or unfavourable respectively. If there is any discount allowed it is, entered in the discount column on the debit side against the particular account. Similarly, if there is, any discount received, it is entered in the discount column on the credit side., 7.9.1. Format, , Format of three column cash book is as follows:, Dr., , Cash book with cash, discount and bank columns or three column cash book, , Date, , Receipts, , L.F, , Amount `, Discount Cash Bank, , Date, , Payments, , L.F., , Cr., , Amount `, Discount Cash Bank, , Tutorial note, (i), , If a business entity has more than one bank account, columns may be provided in the, cash book for each bank account separately., , (ii) Treatment of cheques: In addition to cash dealings every business may use cheques as, a means of payment. For the purpose of accounting, cheques received are treated as, cash received. When cheques received are banked on the same day the amount is to, be directly debited to the bank account. When payments is made by cheque, the bank, account is credited., 180
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www.tntextbooks.in, , 7.9.2. Contra entry, , When the two accounts involved in a transaction are cash account and bank account, then, both the aspects are entered in cash book itself. As both the debit and credit aspects of a, transaction are recorded in the cash book, such entries are called contra entries., Example, , (i), , When cash is paid into bank, it is recorded in the bank column on the debit side and, in the cash column on the credit side of the cash book., , (ii) When cash is drawn from bank for office use, it is entered in cash column on the debit, side and in the bank column on the credit side of the cash book., To denote that there are contra entries, the alphabet ‘C’ is written in L.F. column on both sides., Contra means that particular entry is posted on the other side (contra) of the same book,, because Cash account and Bank account are there in the cash book only and there are no, separate ledger accounts needed for this purpose. The alphabet ‘C’ indicates that no further, posting is required and the relevant account is posted on the opposite side., Illustration 4, , Prepare three column cash book in the books of Thiru Durairaj., `, , 2017, March 1, , Cash in hand, , 12,000, , Cash at bank, , 15,000, , 2, , Cash paid into bank, , 11,000, , 3, , Goods sold ` 18,500. Half of it is received in, cash and half of it is received by cheque, which is immediately deposited in the bank, , 4, , Sold on credit to Jayaraj for, , 7,000, , 8, , Jayaraj sent a cheque in full settlement, , 6,900, , 12, , Jayaraj’s cheque was sent to bank, , 14, , Bought goods from Iqbal and issued a cheque, to him immediately, , 8,500, , 15, , Bought goods from Murali on credit, , 4,000, , 19, , Received a cheque from Kannappan in full, settlement of his account of ` 2,000, , 1,975, , 20, , Drew cash ` 3,000 and by cheque ` 5,000 for personal use, , 25, , Paid Vinod by cheque in full settlement of his account of ` 2,000, 181, , 1,850
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182, , To Kannappan A/c, , 19, , To Balance b/d, , To Cash A/c, , 12, , Apr 1, , To Jayaraj A/c, , To Sales, , 3, , 8, , To Cash A/c, , 2, , C, , C, , 42,150, , 26,800, , 30,125, , 9,225, , 125, , 6,900, 1,975, , 6,900, , 9,250, , 11,000, , 25, , 100, , 9,250, , 12,000, , Date, , 31, , 25, , 20, , 14, , 12, , 15,000 Mar 2, , To Balance b/d, , L.F, , Mar 1, , R.N, , 2017, , Particulars, , Discount, Allowed, , 2017, , Date, Cash, , Amount `, Particulars, , By Balance c/d, , By Vinod A/c, , By Drawings A/c, , By Purchases A/c, , By Bank A/c, , By Bank A/c, , Three-column cash book, , Bank, , Dr., , In the books of Durairaj, , C, , C, , V.N L.F., , Discount, Received, 150, , 150, , Amount `, , 30,125, , 9,225, , 3,000, , 6,900, , 11,000, , Cash, , Solution, , Bank, 42,150, , 26,800, , 1,850, , 5,000, , 8,500, , Cr., , www.tntextbooks.in
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www.tntextbooks.in, , Illustration 5, Record the following transactions in three column cash book of Gunasekaran., 2017, Jan, 1, 1, 2, 5, , Cash in hand, Cash at bank, Goods sold on credit to Rohini, Cheque received from Rohini in full settlement and deposited, into bank, 6, Cash deposited into bank through cash deposit machine, 7, Goods sold to Sridhar for ` 12,000. He made the payment, of ` 11,800 by debit card in full settlement by availing, a cash discount of ` 200, 10, Money withdrawn from bank for office use, 12, Purchased goods from Raja for ` 10,000 and paid through credit, card in full settlement by availing a cash discount of ` 200, 14, Nathiya who owed money made the payment through NEFT, 27, Cheque of Rohini dishonoured, (See the solution in pa, eg number 184), , `, , 50,000, 90,000, 15,000, 14,500, 18,000, , 2,000, 9,800, 18,000, , Illustration 6, Padmini is a dealer in stationery. She maintains three column cash book. Record the following, transactions in her cash book for the month of April, 2018., 2018, `, April, 1 Cash in hand: ` 1,00,000; Cash at bank:, 1,00,000, 3 Goods sold to Raji who made the payment through credit card, 10,000, 5 Goods purchased for ` 10,000 from Padma Traders. The payment, 9,500, is made after getting a cash discount of ` 500 through net banking, 6 Purchased furniture from ABC Co. and the payment is, made by cheque, 8,000, 9 Purchased goods from TNPL for ` 2,10,000 and the payment is, 2,00,000, made through RTGS after availing a cash discount of ` 10,000, 21 Supplied stationery items to BHEL for ` 33,000 and received the payment, 32,000, through NEFT after allowing a cash discount of for ` 1,000, 23 Supplied goods to Thangaraj who made the payment by cheque, which is deposited in the bank, 20,000, 27 Thangaraju’s cheque is dishonoured, 30 Bank charged for overdraft facility, 200, 30 Cash deposited into bank, 10,000, (See the solution in pa, eg number 185), 183
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C, , 184, 52,000, 34,000, , 700, , Feb. 1 To Balance b/d, , -, , -, , 14 To Nathiya A/c, , 2,000, , -, , 10 To Bank A/c, , -, , -, , 200, , -, , -, , 7 To Sales A/c, , 6 To Cash A/c, , 500, , 5 To Rohini A/c, , 50,000, , Discount, R.N. L.F. Allowed Cash, , -, , Particulars, 2017, , Date, , Particulars, , 1,52,300, 1,26,000, , 18,000, , -, , 11,800, , 18,000, , 14,500, , 31 By Balance c/d, , 27 By Rohini A/c, , 12 By Purchases A/c, , 10 By Cash A/c, , 90,000 Jan. 6 By Bank A/c, , Bank, , Three column cash book, , In the books of Gunasekaran, , Amount `, , Jan. 1 To Balance b/d, , 2017, , Date, , Dr., , Solution for illustration 5, , C, , 200, , -, , -, , 200, , -, , -, , Discount, V.N. L.F. Received, , 52,000, , 34,000, , -, , -, , -, , 18,000, , Cash, , Amount `, , -, , 1,52,300, , 1,26,000, , 14,500, , 9,800, , 2,000, , Bank, , C.r, , www.tntextbooks.in
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185, , May 1 To Balance b/d, , 90,000, , 1,00,000, , -, , 1,000, , -, , 30 To Cash A/c, , -, , -, , -, , 23 To Sales A/c, , -, , -, , -, , 1,000, , 21 To Sales A/c, , 30 To Balance c/d, , -, , 3 To Raji A/c, , C, , -, , 1 To Balance b/d, , 1,00,000, , 2,37,700, , 65,700, , 10,000, , 20,000, , 32,000, , 10,000, , 1,00,000, , Date, , Particulars, , May 1 By Balance b/d, , 30 By Balance c/d, , 30 By Bank A/c, , 30 By Bank charges, , 27 By Thangaraj A/c, , 9 By Purchases A/c, , 6 By Furniture A/c, , 5 By Purchases A/c, , Apr, , Bank, , Apr, , Cash, 2018, , Particulars, , Discount, R.N. L.F. Allowed, , Amount `, , Three column cash book, , In the books of Padmini, , 2018, , Date, , Dr., , Solution for illustration 6, , C, , 10,500, , -, , -, , -, , -, , 10,000, , -, , 500, , Discount, V.N. L.F. Received, , -, , -, , -, , -, , -, , 1,00,000, , 90,000, , 10,000, , Cash, , Amount `, , 65,700, , 2,37,700, , -, , -, , 200, , 20,000, , 2,00,000, , 8,000, , 9,500, , Bank, , Cr., , www.tntextbooks.in
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www.tntextbooks.in, , Illustration 7, From the following transactions prepare three column cash book of Udhayakumar, `, , 2017, Sep 1, , Cash balance, , 25,000, , 1, , Bank Balance (cr.), , 13,070, , 3, , Paid into bank, , 15,000, , 4, , Received cash from Shyamala & Co.,, , 9,380, , Discount allowed to them ` 120, 10, , Goods sold for cash, , 7,600, , 11, , Cash purchases, , 12, , Gave Padma a Cheque for ` 21,375 and was allowed a discount of, , 18, , Purchased a printer by cheque, , 7,600, , 23, , Received cash from Rajasekar, , 14,320, , 11,750, , Discount allowed to him ` 180, (See the solution in pa, eg, , number 187), , 186, , 125
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To Cash A/c, , To Shyamala & Co. A/c, , To Sales A/c, , To Rajasekar A/c, , To Balance c/d, , To Balance b/d, , 3, , 4, , 10, , 23, , 30, , Oct 1, , C, , 187, 300, , 180, , 120, , 29,550, , 56,300, , 14,320, , 7,600, , 9,380, , 25,000, , 42,045, , 27,045, , 15,000, , Date, , By Balance b/d, , By Balance c/d, , 30, , Oct 1, , By Printer A/c, , By Padma A/c, , 12, 18, , By Purchases A/c, , By Bank A/c, , By Balance b/d, , Particulars, , 11, , 3, , Sep 1, , To Balance b/d, , L.F, , Sep 1, , R.N, 2017, , Particulars, , Discount, Allowed, , 2017, , Date, Cash, , Amount `, , Three column cash book, , Bank, , Dr., , In the books of Udhayakumar, , C, , V.N L.F., , Discount, Received, 125, , 125, , Amount `, , 56,300, , 29,550, , 11,750, , 15,000, , Cash, , Solution for illustration 7, , Bank, 27,045, , 42,045, , 7,600, , 21,375, , 13,070, , Cr., , www.tntextbooks.in
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www.tntextbooks.in, , 7.10, , Petty cash book, Student activity, , Think: A cashier finds it difficult to maintain record of large volume of cash payments,, ranging from ` 5 to ` 10,00,000. Can you suggest a way to reduce his work burden?, Business entities have to pay various small expenses like taxi fare, bus fare, postage, carriage,, stationery, refreshment and other sundry items. These are small payments and repetitive in, nature. If all these small payments are recorded in the main cash book, it will be loaded with, lot of entries. Hence, all petty payments of the business may be recorded in a separate book,, which is called as petty cash book and the person who maintains the petty cash book is called, the petty cashier. Thus business concerns may maintain main cash book and petty cash book, separately., All the small payments must be supported by vouchers, that is, documentary evidences. The, vouchers must be numbered and filed in order. Petty cashier makes only cash payments. He, must not be allowed to receive any cash except for reimbursement. Petty cashier has to make, payments only within the specified limit. Payments involving large amounts must be made, only by main cashier. At the end of the relevant period, petty cash book is balanced. Balancing, of petty cash book is similar to the balancing of simple cash book., Student activity, Think: The main cashier thinks that the petty cashier spends too much on everyday, business activities. Is there any way to have a control on such expenses?, 7.10.1 Imprest system of petty cash, , Under this system, a fixed amount necessary or sufficient to meet petty payments determined, on the basis of past experience is paid to the petty cashier on the first day of the period. (It may, be a week or fortnight or month). The amount given to the petty cashier in advance is known, as “Imprest Money”. The word imprest means payment in advance. The petty cashier makes, payments from this amount and records them in petty cash book. At the end of a particular, period, the petty cashier submits the petty cash book to the head cashier. The head cashier, scrutinises the petty payments and gives amount equal to the amount spent by petty cashier so, that the total amount with the petty cashier is now equal to the amount he had received in the, beginning as advance. Under the system, the total cash with the petty cashier never exceeds, the imprest at any time during the period. This method thus provides an effective control over, petty payments., 188
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www.tntextbooks.in, , For example, On 1st June, 2017, ` 1,000 was given to the petty cashier. He had spent ` 940, during the month. He will be paid ` 940 on 30th June by the cashier so that he may again have, ` 1,000 for the next month i.e., July, 2017., 7.10.2 Advantages of maintaining petty cash book, , Following are the advantages of maintaining petty cash book:, (i), , There can be better control over petty payments., , (ii) There is saving of time of the main cashier., (iii) Cash book is not loaded with many petty payments., (iv) Posting of entries from main cash book and petty cash book is comparatively easy., 7.10.3 Types of petty cash book, , There are two types of petty cash books. They are:, (i), , Simple petty cash book, , (ii) Analytical petty cash book, (i) Simple petty cash book, , A simple petty cash book resembles the single column cash book. But the columns are different., On the debit side, only the advance received from the head cashier is recorded. On the credit, side, all payments are recorded in only one column. This is known as simple petty cash book., (ii) Analytical petty cash book, , In analytical petty cash book, a separate column is provided for different heads of payments, and one column for total payments. When the petty expenses are recorded in the total payment, column, same amount is also recorded in the appropriate expense column. This is known as, analytical petty cash book., , 189, , L.F., , Personal accounts, , Sundries, , Cr., , Refreshments, , Travelling expenses, , Carriage, , Stationery, , Postage, , Total payments, , V.N., , Particulars, , Date, , Format of analytical petty cash book, , C.B F.N, , Receipts, , Dr.
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www.tntextbooks.in, , Details entered in the various columns of the petty cash book are as follows:, 1) Receipts, , This is the first column of the petty cash book. The amount received by the petty cashier for, meeting petty expenses is recorded in this column. Generally, amount is received once on the, first day of every week or month. The opening balance of petty cash is recorded in this column, as the first item. This column shows the total amount available with the petty cashier., 2) Cash Book Folio Number (C.B.F.N.), , In this column, the page number of the cash book in which the entry is made is recorded., 3) Date, , In this column, the date of receipt of petty cash and payment of every petty expense is recorded., 4) Particulars, , The details of transactions are entered in this column. Cash received in the beginning is, recorded as ‘To Cash A/c’ and all the petty expenses are recorded as ‘By Concerned Expense, A/c” (name of the expense)., 5) Voucher Number (V.N.), , Every transaction in accounting must be supported by documentary evidence. All the, payments must have vouchers which must be arranged in the chronological order of payment, and serially numbered. Voucher number of every payment is written in this column., 6) Total, , The amount of every petty expense is recorded in this column. At the end of the week or, month expenses are totalled. The total expenses of the week or the month is compared with, the total of the receipts column and balance is obtained., 7) Postage, , Postal expenses incurred for post card, envelope, inland letter, postage stamps, registered, letter, parcel, etc. are recorded in this column., 8) Stationery, , It includes expenses incurred for purchasing materials such as paper, ink, pencil, eraser, carbon, paper and other similar stationery items., 9) Carriage, , It includes amount paid as wages, transport charges and other expenses., 10) Travelling or conveyance expenses, , In this column fare for auto rickshaw, taxi, bus, train, etc., are recorded., 11) Refreshments, , Amount spent for tea, coffee, snacks, etc., is recorded., 190
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www.tntextbooks.in, , 12) Sundries, , There may be certain expenses which are infrequent for which specific columns are not, provided. These are recorded in this column., 13) Personal accounts, , Small amount of money paid to individuals are entered in this column., 14) Ledger Folio (L.F.), , This refers to the page number of the ledger where the respective account is recorded., 7.10.4 Balancing petty cash book, At the end of the period, i.e., week or month the total of the total column, individual expenses, columns and sundries columns, is obtained. The total of the individual petty expenses column, must be equal to the total in the total column. The sum of the total column is compared with, the total of receipts column and the balance is obtained. The closing balance is shown as ‘By, Balance c/d’. The closing balance is carried forward to the next week or month. It is shown as, ‘To Balance b/d’. Cash received from the main cashier at the beginning of the next period is, entered as ‘To Cash A/c’ and the amount is recorded in the Receipts column., 7.10.5 Posting of entries from petty cash book to ledger, 1., , When petty cash is advanced at the beginning:, A separate petty cash account is opened in the ledger. When advance is received by the, petty cashier, petty cash account is debited and cash account is credited., , 2., , When individual expenses columns are periodically totalled:, The total of various petty expenses are debited and the petty cash account is credited, with the total of the payments made., , The petty cash account will show the balance of petty cash. This balance will be shown in the, balance sheet as part of cash balance., Tutorial note, Instead of debiting the total of each petty expense directly, a separate journal entry may also, be made and then credited to petty cash account. The journal entries are:, (a), , For receiving petty cash:, Petty cash A/c, , Dr., , To Cash A/c, (b) For expenses paid:, Respective expense A/c, , Dr., , To Petty cash A/c, 191
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www.tntextbooks.in, , Illustration 8, Prepare a analytical petty cash book from the following information on the imprest system:, `, , 2017, Jan. 1, , Received for petty cash, , Jan. 2, , Paid rickshaw charges, , Jan. 3, , Jan. 4, , Jan. 5, , 500, 5, , Paid cartage, , 12, , Paid for postage, , 15, , Paid wages to casual labourer, , 66, , Paid for stationery, , 134, , Paid for auto charges, , 18, , Paid for repairs, , 65, , Paid for bus fare, , 11, , Paid for cartage, , 24, , (See the solution in pa, eg, , number 193), , Illustration 9, Prepare analytical petty cash book in the books of Robert from the following transactions., 2017, Sept, 1, , `, , Balance in hand, , 230, , Received a cheque to make the imprest amount, , 2,270, , 2, , Postage, , 314, , 8, , Railway freight, , 280, , 10, , Repairs to computer, , 405, , 12, , Printing charges, , 500, , 16, , Refreshments to customers, , 20, , Pen and ink purchased, , 22, , Paid auto Charges, , (See the solution in pa, eg, , 72, 183, 75, , number 194), 192
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193, , Particulars, , 66, , By Wages, , 150, , Jan. 6 By Balance c/d, , Jan. 6 To Cash, , 350, , Total expenses, , 350, , 24, , By Cartage, , 500, , 11, , 65, , 18, , By Conveyance, , Jan. 5 By Repairs, , By Conveyance, , 134, , 15, , 5, , Jan. 3 By Postage, , Jan. 4 By Stationery, , Cr., , 34, , 11, , 18, , 5, , 36, , 24, , 12, , 134, , 134, , 15, , 15, , 66, , 66, , 65, , 65, , Total, Conveyance Cartage Stationery Postage Wages Sundries L.F., Payments, , 12, , V.N., , Analytical petty cash book (in `), , By Cartage, , Jan. 2 By Conveyance, , Jan. 1 To Cash, , 2017, , Date, , Jan. 6 To Balance b/d, , F.N, , C.B, , 150, , 500, , 500, , Receipts, , Dr., , Solution for illustration 8, , www.tntextbooks.in
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194, , 1,829, , 671, , 2,500, , 2270, , 230, , Receipts, , Dr., , F.N, , C.B, , Particulars, , 671, , 30 By Balance c/d, , Oct.1 To Cash, , Oct.1 To Balance b/d, , 1,829, , Total expenses, , 2,500, , 75, , 75, , 22 By Auto charges, , 683, , 280, , 183, , 20 By Pen and ink, , 314, , 75, , 72, , 16 By Refreshment, , 183, , 500, , 12 By Printing Charges, , Travelling, Expenses, , 405, , 280, , Carriage, , 10 By Computer Repairs, 500, , Printing &, Stationery, , 280, , 314, , Postage, , 8 By Railway Freight, , Total, Payments, , 314, , V.N., , Analytical Petty Cash Book - Analysis of Payments (in `), , In the books of Robert, , 2 By Postage, , To Cash A/c, , Sep. 1 To Balance b/d, , 2017, , Date, , Solution for illustration 9, , 405, , 405, , Repair to, computers, , 72, , 72, , SundL.F., ries, , Cr., , www.tntextbooks.in
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www.tntextbooks.in, , Student activity, 1), , Interview a banker or invite a banker to your class to know the procedure for opening, various types of bank accounts., , 2), , Imagine you have got a cash gift of ` 5,000. Come up with a small business plan., [Example: creating birthday cards on your own and selling them, buying and selling, stationery items, etc.] Prepare cash book using imaginary transactions relevant to, your chosen business., Points to remember, , • Three column cash book contains columns for discount, cash and bank on either side., • Contra entry appears on both sides of a three column cash book. A contra entry occurs, when cash is withdrawn from the bank or cash is deposited into the bank., • A petty cash book is maintained to record small cash payments., Self-examination questions, I Multiple choice questions, Choose the correct answer, , 1., , 2., , 3., , 4., , Cash book is a, (a) Subsidiary book, , (b) Principal book, , (c) Journal proper, , (d) Both subsidiary book and principal book, , The cash book records, (a) All cash receipts, , (b) All cash payments, , (c) Both (a) and(b), , (d) All credit transactions, , When a firm maintains a simple cash book, it need not maintain, (a) Sales account in the ledger, , (b) Purchases account in the ledger, , (c) Capital account in the ledger, , (d) Cash account in the ledger, , A cash book with discount, cash and bank column is called, (a) Simple cash book, , (b) Double column cash book, , (c) Three column cash book, , (d) Petty cash book, 195
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www.tntextbooks.in, , 5., , 6., , In Triple column cash book, the balance of bank overdraft brought forward will appear, in, (a) Cash column debit side, , (b) Cash column credit side, , (c) Bank column debit side, , (d) Bank column credit side, , Which of the following is recorded as contra entry?, (a) Withdrew cash from bank for personal use, (b) Withdrew cash from bank for office use, (c) Direct payment by the customer in the bank account of the business, (d) When bank charges interest, , 7., , 8., , 9., , If the debit and credit aspects of a transaction are recorded in the cash book, it is, (a) Contra entry, , (b) Compound entry, , (c) Single entry, , (d) Simple entry, , The balance in the petty cash book is, (a) An expense, , (b) A profit, , (c) An asset, , (d) A liability, , Petty cash may be used to pay, (a) The expenses relating to postage and conveyance, (b) Salary to the Manager, (c) Purchase of furniture and fixtures, (d) Purchase of raw materials, , 10. Small payments are recorded in a book called, (a) Cash book, , (b) Purchase book, , (c) Bills payable book, , (d) Petty cash book, , Answers, , 1. (d), , 2. (c), , 3. (d), , 4. (c), , 5. (d), , II Very short answer questions, , 1., , What is cash book?, , 2., , What are the different types of cash book?, , 3., , What is simple cash book?, 196, , 6. (b), , 7. (a), , 8. (c), , 9. (a), , 10. (d)
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www.tntextbooks.in, , 4., , Give the format of ‘Single column cash book’., , 5., , What is double column cash book?, , 6., , Give the format of ‘Double column cash book’., , 7., , What is three column cash book?, , 8., , What is cash discount?, , 9., , What is trade discount?, , 10. What is a petty cash book?, III Short answer questions, , 1., , Explain the meaning of imprest system of petty cash book., , 2., , Bring out the differences between cash discount and trade discount., , 3., , Write the advantages of maintaining petty cash book., , 4., , Write a brief note on accounting treatment of discount in cash book., , 5., , Brifly explain about contra entry with examples., , IV Exercises, Single Column Cash Book, , 1., , Enter the following transactions in a single column cash book of Seshadri for May, 2017., `, , May, 1, , Cash in hand, , 40,000, , 5, , Cash received from Swathi, , 4,000, , 7, , Paid wages in cash, , 2,000, , 10, , Purchased goods from Sasikala for cash, , 6,000, , 15, , Sold goods for cash, , 9,000, , 18, , Purchased computer, , 15,000, , 22, , Cash paid to Sabapathi, , 5,000, , 28, , paid salary, , 2,500, , 30, , Interest received, , 500, (Answer: Cash Balance ` 23,000), , 197
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www.tntextbooks.in, , 2., , Enter the following transactions in a single column cash book of Pandeeswari for the, month of June, 2017, `, , June, 2, , Started business with cash, , 50,000, , 8, , Paid rent in cash, , 4,000, , 10, , Purchased printer for cash, , 7,500, , 11, , Cash purchases, , 15,000, , 14, , Cash sales, , 10,000, , 17, , Commission received in cash, , 6,000, , 19, , Interest paid for loan in cash, , 2,000, , 20, , Cash withdrawn for personal use, , 3,000, , 21, , Paid speed post charges in cash, , 3,500, (Answer: Cash Balance ` 31,000), , 3., , Enter the following transactions in a single column cash book of Ramalingam for month, of July, 2017., `, , July, 1, , Cash in hand, , 32,000, , 5, , Received from Keerthana, , 6, , Paid packing charges in cash, , 7, , Cash purchases, , 8, , Sold goods for cash, , 2,600, , 10, , Paid salary to manager in cash, , 7,000, , 11, , Paid to Bala, , 3,000, , 12, , Purchased goods from Bose, , 2,500, , 24, , Cash deposited into bank through CDM, , 4,000, , 27, , Withdraw cash from bank, , 2,000, , 31, , Paid office rent in cash, , 6,000, , 5,000, 300, 12,400, , (Answer: Cash Balance ` 8,900), , 198
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www.tntextbooks.in, , Double column cash book, , 4., , Enter the following transactions in Ahamed’s cash book with discount and cash columns., 2017, `, , Oct, 1, , Cash balance, , 37,500, , 3, , Cash Sales, , 33,000, , 7, , Paid to Velan Rs. 15,850 and Discount allowed by him, , 150, , 13, , Sold goods to Perumal on credit, , 19,200, , 15, , Cash withdrawn for personal expenses, , 16, , Purchased goods from Subramanian, , 14,300, , 22, , Paid to Bank, , 22,700, , 25, , Cash received from Perumal in full settlement, , 19,000, , 26, , Draw a cheque for office use, , 17,500, , 27, , Paid cash to Gopalakrishnan, , 2,950, , Discount received from him, , 50, , 4,800, , 28, , Paid cash to Subramanian and settled his account, , 14,200, , 29, , Cash purchases, , 13,500, , 30, , Cash paid for advertising, , 1,500, (Answer: Cash Balance ` 31,500), , 5., , Enter the following transaction in Chandran’s cash book with cash and discount column., 2017, `, , Nov, 1, , Cash balance, , 22,000, , 2, , Cash Sales, , 14,000, , 3, , Credit sales to Govindan, , 12,000, , 4, , Credit purchases from Balaraman, , 27,000, , 5, , Cash purchases, , 8, , Govindan settled his account @ 2% cash discount, , 8,800, , 12, , Paid Balaraman ` 26,800 and settle his account, , 15, , Cash withdrawn for personal expenses, 199, , 4,000
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www.tntextbooks.in, , 28, , Cash paid into Bank, , 5,000, , 29, , Received from Madhan ` 4,800 in settlement, of his account for, , 5,000, , Paid salaries in cash, , 4,000, , 30, , (Answer: Cash balance ` 18,900), 6., , Enter the following transactions in cash book with discount and cash column of Anand, 2017, `, , Dec., 1, , Cash in hand, , 19,500, , 4, , Sold goods for cash, , 32,000, , 5, , Credit purchases from Gandhi, , 20,000, , 9, , Received from Gopu, , 11,800, , Discount allowed to him, , 200, , 15, , Cash paid for Electricity charges, , 12,500, , 17, , Bought computer and its accessories by cash, , 16,800, , 25, , Paid cash to Gandhi ` 19,700 in full settlement of his account, , 28, , Received cash from Thiruvengadam, , 8,900, , Discount allowed to him, 30, , 100, , Paid trade expenses in cash, , 3,500, (Answer: Cash balance ` 19,700), , Three column cash book, , 7., , Write out a cash book with discount, cash and bank columns in the books of Mahendran., 2017, Oct, 1, , 3, , `, , Cash balance, , 12,000, , Bank balance, , 48,500, , Received a cheque from Kesavan, , 15,850, , Allowed him discount, 4, 6, , 150, , Paid Shanmuganathan cheque for ` 7950 and discount, allowed by him, Cash Sales, , 50, 17,800, , 200
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www.tntextbooks.in, , 7, , Paid Sivasamy in cash, , 10,000, , 15, , Withdrew cash from bank, , 6,000, , 17, , Purchased goods and payment made through credit card, , 14,500, , 20, , Received cash from Janarthanam Rs. 10,000 and discount, allowed to him, , 100, , 21, , Cash remitted into bank through CDM, , 12,000, , 24, , Bought furniture for office use by cash, , 15,000, , 28, , Deepavali advance paid to staff through bank, , 10,000, , 30, , Salary for staff paid by cash, , 4,500, , Salary of Manager paid by through net banking, , 12,500, , (Answer: Cash Balance ` 23,050, Bank Balance ` 9,550), 8., , Enter the following transactions in the three column cash book of Kalyana Sundaram, 2017, Jan., 1, , `, , Balance in hand, , 42,500, , Balance at bank, , 35,000, , 3, , Received for cash sales, , 15,700, , 4, , Cash paid into bank, , 11,500, , 6, , Cash purchases, , 14,300, , 9, , Received dividend directly by the bank through ECS, , 2,000, , 10, , Pongal advance to staff paid through bank, , 17,000, , 12, , Received cash from Nagarajan, , 11,850, , and allowed him discount, , 150, , 17, , Paid Magesh in full settlement of his account ` 20,000, , 19,700, , 20, , Cash withdrawn for personal expenses, , 20,000, , 30, , Withdrawn cash from ATM for office use, , 1,500, , (Answer: Cash Balance ` 6,050, Bank Balance ` 30,000), , 201
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www.tntextbooks.in, , 9., , Enter the following transactions of Fathima in the cash book with cash, bank and discount, columns for the month of May, 2017., 2017, May, 1, , `, , Cash balance, , 17,200, , Bank balance, , 43,000, , 4, , Received from Rajkumar by cheque on account, , 9, , Sold goods to Kumar for cash, , 12,000, , Bought laptop for business use and, payment made through NEFT, , 21,000, , 15, , 6,500, , 17, , Withdrawn cash from Bank, , 9,600, , 24, , Goods purchased for cash ` 12,400 and by cheque, , 18,200, , 25, , Deposited cash with bank, , 14,000, , 28, , Paid staff salaries by cheque, , 8,000, , 29, , Dividend received in cash, , 4,700, , 30, , Paid office rent in cash, , 12,000, (Answer: Cash Balance ` 11,600, Bank Balance ` 200), , 10. Enter the following transactions in the three column cash book of Chozhan., 2017, April, , `, , 1, , Chozhan started business with cash, , 50,000, , 2, , Opened a current account with a bank, , 32,000, , 10, , Cash sales, , 14,000, , 11, , Cash paid in the bank, , 10,000, , 19, , Purchased computer for office use by cheque, , 24,000, , 22, , Withdrawn cash from bank, , 9,000, , 25, , Purchased goods by cheque, , 7,600, , 27, , Interest on overdraft charged by the bank, , 28, , Paid salary by ECS to employees, , 30, , Drew cahs for household expenses, , 350, 30,000, 6,500, , (Answer: Cash Balance ` 24,500, Bank Balance (Cr.) ` 28,950), 202
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www.tntextbooks.in, , 11. Enter the following transactions in a cash book with cash, bank and discount columns of, Sundari., 2017, April, , `, , 1, , Commenced business with cash, , 80,000, , 1, , Cash at bank, , 44,000, , 10, , Bought goods for and paid by cheque, , 13,850, , 11, , Bought furniture for cash, , 9,500, , 18, , Bought stationery for cash, , 1,850, , 20, , Received cheque from Santhosh and deposited in the bank, , 6,800, , Discount allowed to him, , 200, , 22, , Cheque issued to Rama, , 4,000, , 24, , Paid to Muralidharan half by cheque, half by cash, Discount received from him, , 12,400, 100, , 25, , Salaries paid through bank, , 6,500, , 27, , Withdrawn cash from bank, , 1,000, , 31, , Locker rent charged by the bank, , 150, , (Answer: Cash Balance ` 69,650, Bank Balance ` 12,900), 12. Record the following transaction in the three column cash book of Rajeswari for the, month of June, 2017., 2017, June, 1, , `, , Cash balance, , 30,000, , Bank balance, , 2,55,000, , 5, , Money withdrawn from bank for personal use, , 7,500, , 7, , Sold goods for cash, , 9,000, , 8, , Received cheque from Nirmala for ` 9,900, in full settlement of ` 10,000, , 10, , Nirmala’s cheque deposited with bank, , 11, , Sold goods to Dhanalakshmi on credit, , 16, , Nirmala’s cheque returned dishonoured, , 25, , Withdrawn cash from bank for office use, 203, , 7,000, , 5,000
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www.tntextbooks.in, , 28, , Chelladurai a customer paid money into bank by debit card 10,000, , 30, , Cash deposited in CDM, , 30, , Interest credited by the bank, , 30, , Payment made to Aavin through RTGS, , 15,000, 100, 2,00,000, , (Answer: Cash Balance ` 29,000, Bank Balance ` 67,600), 13. Record the following transactions in three column cash book of Ramachandran., 2017, Jan., 1, , `, , Cash in hand, , 25,000, , Cash at bank, , 75,000, , 2, , Paid into bank, , 5,000, , 5, , Goods purchased by cash, , 5,000, , Cash received from Manickam, , 9,800, , 10, , Discount allowed to him, , 200, , 15, , Goods sold for cash, , 8,000, , 17, , Payment made to Janaki by cheque, Discount received from her, , 14,500, 500, , 19, , Withdrawn cash from Bank for personal use, , 6,000, , 21, , Parthiban, a customer made payment through NEFT, , 15,000, , 30, , Withdrawn from ATM for office use, , 20,000, , 30, , Paid postal expenses by cash, , 2,800, , (Answer: Cash Balance ` 50,000, Bank Balance ` 54,500), 14. Record the following transactions in the three column cash book of John Pandian., 2017, Dec., , `, , 1, , Cash balance brought forward, , 12,600, , 1, , Bank overdraft brought forward, , 36,000, , 1, , Advance paid to petty cashier by cheque, , 5, , Goods sold for cash, , 7, , Dividend on shares collected by the banker, , 13, , 3,000, 12,000, , Cash paid into Bank, , 1,000, 10,000, , 204
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www.tntextbooks.in, , 14, , Interest charged by the bank for bank overdraft, , 1,500, , 18, , Cheque issued to Siddique, , 8,000, , Discount received from him, , 200, , 24, , Insurance claim received by cheque and deposited into bank 17,000, , 28, , Cash received from Baskar, , 15,000, , Discount allowed to him, 31, , 150, , Deposited into Bank all cash excess of `18,600, (Answer: Cash Balance: ` 18,600, Bank Balance: ` 9,500 (Cr.),, Excess cash deposited into Bank (Cr.) 11,000), , 15. Prepare a triple column cash book of Rahim from the following transactions:, 2017, Feb., 1, , `, , Cash in hand, , 25,000, , Cash at bank, , 10,000, , 5, , Water purifier purchased for office use by cheque, , 8,000, , 6, , Purchased goods for cash, , 9,000, , 8, , Received cash from Daniel, , 9,900, , Discount allowed to him, , 100, , 10, , Cheque received for goods sold and deposited in the bank, , 40,000, , 12, , Paid to Amala by cheque, , 14,500, , Discount received from her, , 500, , 13, , Paid transport charges by cash, , 5,000, , 14, , Withdrawn cash from bank for office use, , 20,000, , 24, , Cheque received from Kumar and deposited into the bank, , 15,000, , 28, , Kumar’s cheque dishonoured, (Answer: Cash Balance: ` 25,900, Bank Balance: ` 7,500), , 205
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www.tntextbooks.in, , Petty cash book, , 16. Prepare analytical petty cash book from the following particulars under imprest system:, 2017, July, , `, , 1, , Received advance form cashier, , 2,000, , 7, , Paid for writing pads and registers, , 8, , Purchased white papers, , 100, 50, , 10, , Paid auto charges, , 200, , 15, , Paid wages, , 300, , 18, , Postal charges, , 100, , 21, , Purchased stationery, , 450, , 23, , Tea expenses, , 25, , Paid for speed post, , 150, , 27, , Refreshment expenses, , 250, , 31, , Paid for carriage, , 150, , 60, , (Answer: ` 190), 17. From the following information prepare an analytical petty cash book under imprest, system:, 2017, Oct., , `, , 1, , Received from the cashier, , 2,500, , 2, , Paid for wages, , 260, , 5, , Paid for stationery, , 300, , 6, , Bus fare to workmen, , 200, , 12, , Refreshment to customers, , 180, , 16, , Paid for carriage, , 160, , 20, , Paid for conveyance, , 188, , 25, , Paid for travelling expenses, , 320, , 27, , Paid for revenue stamps, , 48, , 28, , Paid for office cleaning, , 140, , 29, , Pain for letters by registered post to suppliers, , 180, , 30, , Paid for taxi hire, , 219, (Answer: ` 305), 206
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www.tntextbooks.in, , 18. Record the following transactions in an analytical petty cash book and balance the same., On 1st November, 2017, the petty cashier started with imprest cash ` 2,000., 2017, Nov., , `, , 1, , Postage stamps purchased, , 155, , 2, , Paid to sweeper and scavenger, , 170, , 3, , Conveyance to Manager, , 125, , 6, , Lorry hire for goods sent, , 260, , 7, , Greeting cards purchased, , 110, , 10, , Carriage paid, , 70, , 11, , Repairs to furniture, , 13, , Ink and gum purchased, , 17, , Computer servicing charges paid, , 250, , 20, , Cleaning charges paid, , 120, , 22, , Gave charity to beggars, , 40, , 23, , Paid to Rammohan, , 80, , 25, , Paid railway fare, , 150, , 30, , Subscription paid to the Times of India, , 120, , 100, 50, , (Answer: ` 200), 19. Enter the following transactions in Iyyappan’s petty cash book with analytical columns, under imprest system., 2017, `, Jan., 1, Balance on hand, 250, 1, Cash received from the chief cashier, 1,050, 2, Purchased pencil, rubber and paper, 200, 4, Sent documents to Head Office by registered post, 120, 5, Travelling expenses paid to salesman, 150, 7, Paid for sundry expenses, 60, 9, Paid for office expenses, 50, 11, Paid for letter pad, 175, 13, Paid to Amutha on account, 66, 15, Paid for repairs to furniture, 78, 18, Carriage paid, 83, 20, Bought postal stamps, 55, 22, Paid for telephone charges, 175, (Answer: ` 88), 207
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www.tntextbooks.in, , Vetri is a sole trader selling food products. He maintains a simple cash, book. He sells and purchases goods both on cash and credit. He maintains, the cash book by himself. He allows discount and receives discount. He has, his personal bank account. He also has so many petty expenses. Now, he wants to establish, his business. But he wants to maintain the cash book all by himself., Now, discuss on the following points:, •, , What could be the reason that Vetri maintains the cash book by himself?, , •, , Is it convenient for him to record all the cash transactions in the simple cash book?, , •, , Will his personal bank account serve the purpose of his business transactions?, , •, , Suggest him some better ways of maintaining the cash transactions., , •, , When his business becomes large, what other books will he be maintaining?, , To explore further, When our country is moving towards cashless economy, will there be any change in, the existing system of maintaining cash book?, Reference, 1. M C Shukla, T S Grewal and S C Gupta, Advanced Accounts, 19th ed., 2017, S.Chand Publishing, New Delhi., 2. R L Gupta and V K Gupta, Financial Accounting, 11th ed., 2014, Sultan Chand and Sons, New Delhi., 3. S P Jain and K L Narang, Advanced Accountancy Vol – I, 2016, Kalyani Publishers, New Delhi., 4. Dalston L Cecil and Jenitra L Merwin, Financial Accounting, 3rd ed., 2017, Learntech Press, Trichy., 5. Fundamentals of Accounting, 2017, The Institute of Chartered Accountants of India, New Delhi., , 208
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www.tntextbooks.in, , Unit 8, , BANK RECONCILIATION STATEMENT, Contents, , Points to recall, , 8.1. Introduction, The following points are to be recalled, before learning bank reconciliation, statement:, , 8.2. Bank Reconciliation Statement (BRS), 8.3. Reasons why bank column of cash, book and bank statement may differ, , • When transactions are more in, number, subsidiary books are used., , 8.4. Preparation of bank reconciliation, statement, , • Cash and bank transactions are, recorded in the cash book., • Deposit made into the bank is debited, in the bank column of the cash book., • Payment made by the bank is credited, in the bank column of the cash book., • Debit balance as per bank column of, the cash book is favourable balance., • Credit balance as per bank column of, the cash book is overdraft., , Key terms to know, , Learning Objectives, To enable the students to, , Bank statement, , •, , Understand the meaning and, purpose of preparing bank, reconciliation statement, , Bank overdraft, , Analyse, the, causes, of, disagreement between balance, shown by bank column of the, cash book and balance shown by, bank statement, , Uncleared Cheques, , Prepare bank, statement, , Bank reconciliation statement., , •, , •, , Unpresented Cheques, , Dishonoured cheques, Standing instructions, , reconciliation, , 209
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www.tntextbooks.in, , 8.1 Introduction, , Student activity, Imagine that you are the owner of a small shop. You maintain the three column cash book, for your business. Now, think on the following points and discuss with the whole class:, •, How often would you check your cash balance in hand? Everyday/once in a week?, •, Why do you check your cash balance?, •, How will you make sure that the bank column in cash book is correct and is the, same as shown by the bank statement?, From the above activity, it is clear that physical cash in hand can be checked easily with the, cash column of cash book. But, checking the accuracy of transactions in the bank column of, the cash book cannot be done without bank statement (pass book)., 8.1.1 Bank statement or bank pass book, , It is very common in business these days, to deposit cheques received and cash, with the bank., Payments can also be made through bank. Because, dealing cash through bank is always safe., Also, it is legally necessary to operate the transactions through bank beyond a certain limit., When any bank transaction is undertaken, two records are kept of the transactions. One is, kept by the business [customers to the bank], which is the cash book. The other one is kept by, the bank, which is bank record [bank statement]. In other words, it can be said that the cash, book maintained by the business [customer of a bank] and the ledger accounts maintained by, the bank, record the same transactions. Bank statement or bank pass book is simply a copy, of the customer’s account in the books of a bank. A bank may send a statement at regular, intervals to its customers. It shows all the deposits, withdrawals and the balance available in, its customer’s account, on a particular date. In recent times, the copy of the records can be, obtained by the customer electronically, which is called E-statement., , Bank provides various services to its customers, , Business units are customers to banks, , Various types of accounts such as savings account, fixed deposit account, current account, etc.,, can be opened with the bank by different types of customers. But, current account is the most, suitable for business concerns. The facility of bank overdraft is not available to any account, other than current account., 210
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www.tntextbooks.in, , Inside the pass book, , Specimen of E-Statement, , Student activity, Think: Observe the above format. Why the withdrawals are shown as debit and deposits are, shown as credit in a bank statement? [Remember: in the cash book it is the reverse], When the entries in the bank statement are compared with the cash book, it will be found that, the accounting treatment is reverse in the cash book. This is because the cash book is prepared, from the point of view of business, whereas the bank statement is prepared from the bank’s, point of view., Following the double entry system, the credit balance in the bank pass book represents the, debit balance as per the cash book and vice-versa. This is because, bank is a debtor for the, business and business unit (customer to the bank) is a creditor for the bank when there is, a favourable balance in the bank. When money is deposited by the business into the bank,, customers account is credited in the bank’s book, as this is the amount owed by the bank to its, customer. Similarly, when the money is withdrawn or taken out of the bank by the business,, customer’s account is debited as this decreases the amount owed by the bank to the customer., As a result of this, favourable balance, as per bank statement (bank pass book), will appear as, a credit balance and overdrawn balance as a debit balance., 211
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www.tntextbooks.in, , 8.1.2 Bank overdraft, It is not possible to have unfavourable cash balance in the cash book. But, it is possible to, have unfavourable balance in the bank account. When the business is not having sufficient, money in its bank account, it can borrow money from the bank. As a result of this, amount is, overdrawn from bank., Record, , Debit balance, , Credit balance, , Bank statement Overdraft (negative balance), , Favourable balance (positive balance), , Cash book, , Overdraft (negative balance), , Favourable balance (positive balance), , 'LHUHQFHVEHWZHHQEDQNFROXPQRIFDVKERRNDQGEDQNVWDWHPHQW, Following are the differences between bank column of cash book and bank statement:, S.No., Bank column of cash book, Bank statement, 1, It is prepared by business concern., It is prepared by bank (banker)., 2, Cash deposits are entered on the debit side., Cash deposits are entered in the credit column., 3, Cash withdrawals are entered on the credit side. Cash withdrawals are entered in the debit, column., 4, Cheque deposits are debited on the day of Cheque deposits are credited only at the time of, deposit., realisation of cheque., 5, , Cheques issued are credited on the day of issue Cheques issued by customers are debited by, of cheque., bank on the date on which the payment is made., , 6, , Collections and payments as per standing Collections and payments as per standing, instructions of the business are entered only instructions of the business are entered in the, after checking with the bank statement., banker’s book on the date of realisation or, payment., , 7, , It is balanced at the end of a specific period., , It is balanced after each transaction., , 8.2 Bank Reconciliation Statement (BRS), If every entry in the cash book matches with the bank statement, then bank balance will be, the same in both the records. But, practically it may not be possible. When the balances do, not agree with each other, the need for preparing a statement to explain the causes arises. This, statement is called bank reconciliation statement (BRS). The bank reconciliation statement is, a statement that reconciles the balance as per the bank column of cash book with the balance, as per the bank statement by giving the reasons for such difference along with the amount., As a result of this, internal record of a business (bank column of cash) can be reconciled with, external record (bank statement)., 8.2.1 Need for bank reconciliation statement, , It is important to compare the bank statement and bank column of cash book. If the two, balances do not match, it is necessary to reconcile them to explain why the differences have, occurred. It may be prepared every month, every week or even daily depending on the number, of transactions and the needs of the business., 212
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www.tntextbooks.in, , %DODQFHDVSHUFDVKERRN, bank statement, , %DODQFHDVSHUFDVKERRN, bank statement, , The need for bank reconciliation statement is as follows:, (i) To identify the reasons for the difference between the bank balance as per the, cash book and bank balance as per bank statement., (ii) To identify the delay in the clearance of cheques., (iii) To ascertain the correct balance of bank column of cash book., (iv) To discourage the accountants of the business as well as bank from misusing funds., 5HDVRQVZK\EDQNFROXPQRIFDVKERRNDQGEDQNVWDWHPHQWPD\GLHU, The need for reconciliation arises only when there are differences in entries recorded in the, cash book and bank statement. Sometimes, the bank balance as per both the records may be, the same, but the entries may not match. In such cases also, bank reconciliation statement is, to be prepared. But, before preparing the bank reconciliation statement, it is necessary to find, out the reasons for the disagreement., Difference between the two records (bank column of cash book and bank statement) generally, occur because of the following reasons:, (i) Timing differences – The different times at which the same items are entered, (ii) Errors in recording - Difference arising due to errors in recording the entries, L 7LPLQJGLHUHQFHV, , (a), , cheques issued but not yet presented for payment, , (b) cheques deposited into bank but not yet credited, (c), , bank charges and interest on loan and overdraft, , (d) interest and dividends collected by the bank, (e), , dishonour of cheques and bills, , (f), , amount paid by parties directly into the bank, , (g), , payment made directly by the bank to others, , (h) bills collected by the bank on behalf of its customer, (ii) Errors in recording, , (a) errors committed in recording the transactions by the business in the cash book, (b) errors committed in recording the transactions by the bank., , 213
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www.tntextbooks.in, , 7LPLQJGLHUHQFHV, D &KHTXHVLVVXHGEXWQRW\HWSUHVHQWHGIRUSD\PHQW, , When the cheques are issued by the business, it is immediately entered on the credit side of the, cash book by the business. But, this may not be entered in the bank statement on the same day., It will be entered in the bank statement only after it is presented with the bank., For example, the balances as per cash book and bank statement are ` 20,000 for X & Co. X &, Co. issued a cheque in favour of Y & Co for ` 10,000, on 27th March 2017. So, X & Co’s cash, book is credited with ` 10,000 on 27th March 2017. But, the cheque is presented to bank on, 2nd April 2017. In case, bank sends a statement to X & Co, upto 31st March 2017, it will not, contain this transaction. As a result, there will be a difference of ` 10,000, between balance, shown as per cash book and balance as per bank statement. As a result of this,, Balance as per bank statement, (` LVPRUHWKDQ, EDODQFHDVSHUFDVKERRN, , %DODQFHDVSHUFDVKERRN, (` LVOHVVWKDQEDODQFH, as per bank statement, , E &KHTXHVGHSRVLWHGLQWREDQNEXWQRW\HWFUHGLWHG, , When the cheques are deposited into bank, the amount is debited in the cash book on the, same day. But, these may not be shown in the bank pass book on the same day because these, will be entered in the bank statement only after the collection of the cheques., For example, the balances as per cash book and bank statement are ` 20,000 for X & Co., X & Co. receives a cheque on 25th March 2016, from ABC Limited for ` 5,000. On the, same day, X & Co, debits its cash book with ` 5,000. But bank credits X & Co’s account, only when the cheque is collected from ABC Limited’s bank. This shows that is a time gap, between depositing the cheque by the customer (X & Co) and collection of cheque by the, bank. As a result of this,, Balance as per bank statement, (` LVOHVVWKDQEDODQFH, DVSHUFDVKERRN, , %DODQFHDVSHUFDVKERRN, (` LVPRUHWKDQ, balance as per bank statement, , F %DQNFKDUJHVDQGLQWHUHVWRQORDQDQGRYHUGUDIWFKDUJHGE\WKHEDQN, , The bank has to cover the cost of running the customer’s account. So debit is given to the, account of the business towards bank charges. Also, if the business had taken any loan or, overdrawn, interest has to be paid by the business. These entries for bank charges and interest, are made in the bank statement. But, the entry is made in the cash book only when the bank, statement is received by the business. Till then, the cash book shows more balance than bank, statement., For example, the opening balance as per cash book and the bank statement as on 1st March, 2017 is ` 7,000. Bank debits for bank charges ` 300 as on 27th March 2017. But there is no, entry for the same in the cash book as on such date. As a result of this,, 214
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www.tntextbooks.in, , Balance as per bank statement, (` LVOHVVWKDQEDODQFHDV, SHUFDVKERRN, , %DODQFHDVSHUFDVKERRN, (` LVPRUHWKDQEDODQFH, as per bank statement, , G ,QWHUHVWDQGGLYLGHQGVFROOHFWHGE\WKHEDQN, , The bank may collect dividends on its customer’s investment in shares and also interest on any, investment. The entry for this will be made in the bank statement on the date of collection. But, the entry is made in the cash book only when the bank statement is received by the customer., Till then, the cash book shows less balance than the bank statement., For example, the balances as per cash book and bank statement are `15,000. The bank has, collected dividends of `1,000. As a result of this, the balance as per bank statement is increased, to `16,000, whereas until the customer receives such information and records the same, balance, as per cash book is lesser by `1000. As a result of this,, Balance as per bank statement, (` LVPRUHWKDQ, EDODQFHDVSHUFDVKERRN, , %DODQFHDVSHUFDVKERRN, (` LVOHVVWKDQEDODQFH, as per bank statement, , H 'LVKRQRXURIFKHTXHVDQGELOOV, , When the cheque is received from outside parties, it is deposited with the bank and debited, in the cash book. If the cheque is dishonoured, the bank cannot collect the amount of such, cheque from outside parties’ bank. It is not credited in the bank statement. As a result of this,, the two records would differ., While discounting the bills receivables, in the cash book it is entered in the debit side and in, the bank statement it is credited. When the bill is presented by the bank to the drawee of the, bill and the payment is not received, the bank debits the same to cancel the credit. But, credit, is made in the cash book only when the customer gets the entries made in the bank statement, is received. The bank may also charge some amount for such dishonour., For example, opening balance as per cash book and bank statement is ` 5,000 as on 1st January,, 2017. A cheque for ` 1,000 deposited by the business into bank on 25th January, 2017 is, dishonoured and no entry for such transaction is made in the cash book as on that date. As a, result of this,, Balance as per bank statement, (` LVOHVVWKDQEDODQFHDV, SHUFDVKERRN, , %DODQFHDVSHUFDVKERRN, (` LVPRUHWKDQEDODQFH, as per bank statement, , I $PRXQWSDLGE\SDUWLHVGLUHFWO\LQWRWKHEDQN, , Sometimes, debtors or the customers of the business may directly deposit the money into, bank account of the business. It may be done by directly visiting the branch of the bank by, paying cash (including NEFT, RTGS) or swiping debit or credit or business card or depositing, the money in cash deposit machine or transfer through online banking facility. This will be, credited in the banker’s book. But the entry is made in the cash book only when the bank, statement is received by the customer. Until then, the cash book shows less balance than bank, statement., 215
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www.tntextbooks.in, , For example, as on 1st January, 2017, the balance as per cash book and the balance as per bank, statement show the same balance of ` 10,000, but on 22nd January, a debtor directly deposits, ` 5,000 into the bank account of the business. But no entry is made in the cash book as on that, date. As a result of this,, Balance as per bank statement, (` LVPRUHWKDQ, EDODQFHDVSHUFDVKERRN, , %DODQFHDVSHUFDVKERRN, (` LVOHVVWKDQEDODQFH, as per bank statement, , J $PRXQWSDLGGLUHFWO\E\WKHEDQNWRRWKHUV, , Sometimes the bank may be instructed to make payments such as, insurance premium,, instalment of loan, etc., as an agent of the customer on behalf of its customer. In all such cases,, debit is made in bank statement. But, the entry is made in the cash book only when the bank, statement is received by the customer. Till then, the cash book shows more balance than bank, statement., For example, on 1st, March, 2017, balance as per cash book and balance as per bank statement, show the same amount of `12,000. But, as per the standing instruction of its customer the bank, pays ` 2,000 as insurance premium as on 28th March, 2017. But, no entry for such transaction, is made in the cash book as on such date. As a result of this,, Balance as per bank statement, (` LVOHVVWKDQEDODQFH, DVSHUFDVKERRN, , %DODQFHDVSHUFDVKERRN, (` LVPRUHWKDQ, balance as per bank statement, , K %LOOVFROOHFWHGE\WKHEDQNRQEHKDOIRILWVFXVWRPHUV, , When goods are sold by the business, the documents may be sent through the bank. When, the bank collects the amount, it is credited in bank records. But, the entry is made in the cash, book only when the bank statement is received by the business. Till then, the bank statement, shows more balance than cash book., Balance as per bank statement, LVPRUHWKDQEDODQFHDVSHU, FDVKERRN, , %DODQFHDVSHUFDVKERRN, LVOHVVWKDQEDODQFHDVSHUEDQN, statement, , 8.3.2 Errors in recording, D (UURUVFRPPLWWHGLQUHFRUGLQJWKHWUDQVDFWLRQVE\WKHEXVLQHVVLQWKHFDVKERRN, , Sometimes, errors may be committed in the cash book. For example, omission or wrong, recording of transaction relating to cheques deposited or issued, wrong balancing, etc. In these, cases, obviously, there will be differences between bank balance as per bank statement and, bank balance as per cash book., For example, the cheque received for ` 10, 000 is not entered in the cash book, but has been, deposited with the bank. As a result, on collecting the money the balance as per bank statement, will be more by ` 10, 000., 216
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www.tntextbooks.in, , E (UURUVFRPPLWWHGLQUHFRUGLQJWKHWUDQVDFWLRQVE\WKHEDQN, , Sometimes errors may be committed in the banker’s book. For example, omission or wrong, recording of transaction relating to cheques deposited and wrong balancing. In these cases,, obviously, there will be differences between bank balance as per bank statement and bank, balance as per cash book., For example, the cheque deposited for ` 50000, wrongly entered by the bank as ` 15, 000. This, will lead to a difference of ` 35, 000 between the cash book balance and the balance as per, bank statement., , 1. Amounts deposited into, bank but not yet credited, 2. No entry made in cash book for, a) Bank charges and bank interest, b) Dishonoured cheques, c) Amount paid directly by, the bank to others, d) Debit made in the pass book, 3. Any error in addition to, these in the cash book or, bank statement which has the, effect of high balance as per, cash book, , 1. Cheques issued but not yet, presented, 2. No entry made in cash book for, a) Interest and dividends, collected by the bank, b) Amount paid by customer of, the business directly in to the bank, c) Bills collected by the bank, on behalf of the customer, 3. Any error in addition to these, in the cash book or bank, statement which has the effect, of low balance as per cash book, , the cash book balance, will be less than the bank, statement balance when:, , the cash book balance, will be more than bank, statement balance when:, , In a nutshell, based on the differences,, , 8.4 Preparation of bank reconciliation statement, After having identified the causes of differences, the reconciliation may be done in the following, way:, Bank reconciliation statement can be prepared either, from the balance as per cash book or bank statement. If, it is prepared from the balance of cash book, the effect, of the transaction will be studied on the balance as per, bank statement. If it is prepared from the balance as, per bank statement, the effect of the transaction will be, studied on the balance as per cash book., , Adjusting the cash book before preparing the bank reconciliation statement, is not compulsory, if reconciliation is done during different months. But if, reconciliation is done at the end of the accounting year or financial year, the, cash book must be updated so as to reflect the correct bank balance in the, balance sheet., 217
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www.tntextbooks.in, , Student activity, Think: Think on the following causes. Complete the following table (Two transactions are, done for you):, on, Reasons for the differences between cash Effect, book balance and balance as per bank statement, statement, (1), , (2), (3), (4), (5), (6), (7), (8), , bank How to find out, balance as per bank, statement from cash, book balance?, Cheques are issued by the business, but Bank statement, Add, not yet presented for payment, balance > cash book, balance, Cheque deposited into bank but not yet Bank statement, Less, credited by the bank, balance < cash book, Bank charges not yet informed by the, bank to the customer, Rent paid by bank as per standing, instruction, Dividend directly collected by the bank, on behalf of the customer, Debtor directly paid the amount into, bank, Cheque dishonoured, Wrong credit in the bank statement, , (9) Wrong debit in the bank statement, Given the causes of disagreement, the balance of one record (cash book or bank statement), can be either more or less compared to the other record (cash book or bank statement)., For example, if the reconciliation is started with debit balance as per cash book and there is a, cheque deposited in the bank, but not cleared, the balance as per bank statement will be less., In this case, the amount of cheque should be subtracted from the cash book balance to arrive, at the balance as per bank statement. Similarly, after making all the adjustments the balance as, per the other book is obtained. It is important to note that the debit balance as per cash book, means the credit balance as per bank statement and vice-versa., To illustrate it further, take an example of bank charges. The balance as per bank statement, will be lesser as compared to cash book. This is because, the bank balance has already been, reduced with the bank charges, but, it has not yet been recorded in the cash book. In this case,, if balance as per cash book is taken to prepare the reconciliation statement, the amount of, bank charges has to be subtracted, because the balance as per bank statement is lesser than, cash book balance., , 218
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www.tntextbooks.in, , Bank reconciliation statement can be prepared on the basis of, (a), , ‘Balance’ presentation, or, , (b) ‘Plus & Minus’ presentation, %DODQFHSUHVHQWDWLRQPHWKRG, When balance of cash book or bank statement is given:, Format, Bank Reconciliation Statement as on --------------------, , Amount `, , Particulars, Balance as per cash book (favourable balance), , Amount `, xxx, , Add:, xxx, , 1. Cheques issued but not presented, 2. Credits in the pass book only, (a) Interest credited in bank statement, , xxx, , (b) Dividend and other income, , xxx, , (c) Direct deposit by a party, , xxx, , 3. Any error in cash book/ bank statement which has the, effect of increasing the balance as per bank statement, , xxx, , Less:, , xxx, , xxx, , 1. Cheques deposited but not credited, , xxx, , 2. Cheques dishonoured but not entered in cash book, , xxx, , 3. Debits in bank statement only, (a) Interest debited, , xxx, , (b) Insurance premium, loan instalment, etc., paid as, per standing instructions, , xxx, , (c) Direct payment by banker, , xxx, , 4. Any error in cash book/ bank statement which has the, effect of decreasing the balance as per bank statement, Balance as per bank statement, , xxx, , xxx, xxx, , 219
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www.tntextbooks.in, , The abridged version of the above statement is given below:, Bank Reconciliation Statement as on ______________, , Amount `, , Particulars, , Amount `, , Balance as per cash book, Add:, The transactions which increase the balance as per bank, statement, , ---------, , ---------, , ---------, , ---------, , Less:, The transactions which decrease the balance as per bank, statement, Balance as per bank statement, , ---------, , If unfavourable balance as per cash book is the starting point, then reverse is the procedure, for preparing bank reconciliation statement. This means that, items that are added are to be, subtracted and items that are subtracted are to be added., Based on the earlier explanation the following table has been prepared for ready reference, when reconciliation is done on the basis of ‘balance presentation’. The final balance, which is, obtained after addition and subtraction, will be the balance as per the other book., Sl. No Causes of, differences, , Favourable, balance (Dr.), as per cash, book, , Unfavourable, balance (Cr.), as per cash, book, , Favourable, balance (Cr.), as per bank, statement, , Unfavourable, balance (Dr.), as per bank, statement, , Cheque issued but, not presented to, bank, , Add, , Subtract, , Subtract, , Add, , Cheque directly, deposited in bank, by a customer, , Add, , Subtract, , Subtract, , Add, , 3, , Income directly, received by bank, , Add, , Subtract, , Subtract, , Add, , 4, , Wrong credit in, the cash book, , Add, , Subtract, , Subtract, , Add, , 5, , Under casting of, debit side of bank, column of the cash, book, , Add, , Subtract, , Subtract, , Add, , 1, , 2, , 220
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www.tntextbooks.in, , 6, , Over casting of, credit side of bank, column of the cash, book, , Add, , Subtract, , Subtract, , Add, , Bill receivable, collected directly, by bank, , Add, , Subtract, , Subtract, , Add, , 8, , Cheque deposited, but not cleared, , Subtract, , Add, , Add, , Subtract, , 9, , Expenses directly, paid by bank, on standing, instructions, , Subtract, , Add, , Add, , Subtract, , 10, , Bank charges, levied by bank, , Subtract, , Add, , Add, , Subtract, , 11, , Locker rent levied, by bank, , Subtract, , Add, , Add, , Subtract, , 12, , Wrong debit in the, cash book, , Subtract, , Add, , Add, , Subtract, , 13, , Wrong debit in the, bank statement, , Subtract, , Add, , Add, , Subtract, , 14, , Over casting of, debit side of bank, column of the cash, book, , Subtract, , Add, , Add, , Subtract, , Under casting of, credit side of bank, column of the cash, book, , Subtract, , Add, , Add, , Subtract, , 16, , Interest on bank, overdraft charged, , Subtract, , Add, , Add, , Subtract, , 17, , Final balance, , If answer is, positive, then, favourable, balance (Cr.), as per bank, statement, and If,, negative then, unfavorable, balance (Dr.), as per bank, statement, , If answer is, positive, then, unfavourabe, balance (Dr.), as per bank, statement and, If, negative, then favorable, balance (Cr.), as per bank, statement, , If answer is, positive, then, favourable, balance (Dr.), as per cash, book and If,, negative then, unfavorable, balance (Cr.), as per cash, book, , If answer is, positive, then, unfavourabe, balance (Cr.), as per cash, book and If,, negative then, favorable, balance (Dr.), as per cash, book, , 7, , 15, , 221
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www.tntextbooks.in, , Student activity, Think: Remember, an item entered on the debit side of cash book is entered on the credit, side of bank statement and vice-versa. Now, keep this in mind, think on the following:, Is it possible to prepare bank reconciliation statement with bank statement as starting, point and ascertain the cash book balance? Prepare a specimen of bank reconciliation, statement with balance as per bank statement as the starting point., :KHQEDODQFHVRIFDVKERRNDQGRUEDQNVWDWHPHQWLVJLYHQ , ,OOXVWUDWLRQ :KHQEDODQFHDVSHUFDVKERRNLVIDYRXUDEOH, , From the following information, prepare bank reconciliation statement to find out balance as, per bank statement on 31st March, 2017., i), ii), iii), iv), vi), , `, , Particulars, Cheques deposited but not yet collected by the bank, Cheque issued but not yet presented for payment, Bank interest charged, Rent paid by bank as per standing instruction, Cash book balance, , 500, 1,000, 100, 200, 300, , Solution, %DQNUHFRQFLOLDWLRQVWDWHPHQWDVRQVW0DUFK, , Amount `, , Particulars, Balance as per cash book, , Amount `, 300, , Add: Cheque issued but not yet presented for payment, , 1,000, 1,300, , Less: Cheques deposited but not yet collected by the bank, , 500, , Bank interest charged, , 100, , Rent paid by bank as per standing instruction, , 200, , Balance as per bank statement, , 800, 500, , Student activity, Think: In the above illustration, what will be the bank statement balance if the cash book, balance is unfavourable?, 222
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www.tntextbooks.in, , Illustration 2, , On 31st March, 2018, the bank column of the cash book of Senthamarai Traders showed a, debit balance of ` 40,200. On examining the cash book and the bank statement, it was found, that:, (a), , A cheque for ` 2,240 deposited on 29th March, 2018 was credited by the bank only on, 4th April, 2018., , (b) A payment made through net banking for ` 180 has been entered twice in the cash, book., (c), , A bill of exchange for ` 1,000 was discounted by Senthamarai Traders with its bank., This bill was dishonoured on 30th March, 2018 but no entry had been made in the, books of Senthamarai Traders., , (d) Cheques amounting to ` 500 which were issued to trade payables and entered in the, cash book before 31st March, 2018 were not presented for payment until that date., (e), , Cheque amounting to ` 2,000 had been recorded in the cash book as having been, deposited into the bank on 30th March, 2018, but was entered in the bank statement, on 3rd April, 2018., , (f), , Transport subsidy amounting to ` 3,000 received from the Government of Tamilnadu, directly by the bank, but not advised to the Senthamarai Traders., , (g), , A sum of ` 1,500 was wrongly debited to Senthamarai Traders by the bank, for which, no details are available., , (h) On 31st March, 2018 the payment side of the cash book was undercast by ` 1,200, Solution, %DQNUHFRQFLOLDWLRQVWDWHPHQWRI6HQWKDPDUDLWUDGHUVDVRQVW0DUFK, , Amount `, , Particulars, Balance as per cash book, , Amount `, 40,200, , Add:, Net payment entered twice in the cash book, , 180, , Cheques issued to trade payables not yet presented, , 500, , Transport subsidy collected by bank, , 3,000, , Less:, , 3,680, 43,880, , Cheques deposited but not yet credited by bank, , 2,240, , Bill of exchange dishonoured, , 1,000, , Cheques deposited but not yet credited by bank, , 2,000, , Wrong debit by bank, , 1,500, , Undercasting of credit side of cash book, , 1,200, , 7,940, 35,940, , Balance as per bank statement, 223
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www.tntextbooks.in, , ,OOXVWUDWLRQ :KHQEDODQFHDVSHUFDVKERRNVKRZVRYHUGUDIW, , From the following information, prepare bank reconciliation statement as on 31st December,, , 2017 to find out the balance as per bank statement., `, 10,000, 5,000, 1,000, 500, 1,000, 300, , Particulars, (i) Overdraft as per cash book, (ii) Cheques deposited but not yet credited, (iii) Cheque issued but not yet presented for payment, (iv) Payment received from the customer directly by the bank, (v) Interest on overdraft debited by bank, (vi) Amount wrongly debited by bank, Solution, Bank reconciliation statement as on 31st December, 2017, , Amount `, , Particulars, Overdraft as per cash book, Add: Cheques deposited but not yet credited, , Amount `, 10,000, , 5,000, , Interest on overdraft debited by bank, , 1,000, , Amount wrongly debited by bank, , 300, , 6,300, 16,300, , Less: Cheque issued but not yet presented for payment, Payment received from the customer directly by the bank, , 1,000, 500, , 1,500, 14,800, , Overdraft balance as per bank statement, Illustration 4, , Rony is the proprietor of Veena photos. The bank column of cash account of his business was, balanced on 31st March 2018. It showed an overdraft of ` 12,000. The bank statement of Veena, photos showed a credit balance of ` 5,000. Prepare a bank reconciliation statement taking the, following into account., a), , The bank had directly collected dividend ` 3,000 but was not entered in the cash, book., , b), , Cheques amounting to ` 9,000 were issued on 27th March, 2018, of which, cheques, amounting to ` 7,000 were not presented for payment before 31st March 2018., , c), , The debit balance in the cash book of ` 4,100 was brought forward as a credit balance., , d), , Cheque book charges of ` 200 debited by the bank but not recorded in cash book., , e), , Bank locker rent of ` 1,000 debited by the bank but not recorded in cash book., 224
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www.tntextbooks.in, , Solution, %DQNUHFRQFLOLDWLRQVWDWHPHQWRI9HHQDSKRWRVDVRQVW0DUFK, , Amount `, , Particulars, , Amount `, 12,000, , Overdraft as per cash book, Add:, , Less:, , Cheque book charges not recorded in cash book, , 200, , Bank locker charges debited by bank, , 1,000, , Dividend directly collected by the bank, , 3,000, , Cheque issued but not yet presented for payment, , 7,000, , Debit balance of cash book wrongly brought forward, as credit balance, Favourable balance as per bank statement*, , 1,200, 13,200, , 8,200, , 18,200, í5,000, , *Note: Since the balance obtained is negative, it is favourable balance., ,OOXVWUDWLRQ :KHQEDODQFHDVSHUEDQNVWDWHPHQWLVIDYRXUDEOH, , Prepare bank reconciliation statement as on 31st December, 2017 from the following, information:, (a), , Balance as per bank statement (pass book) is ` 25,000, , (b), , No record has been made in the cash book for a dishonour of a cheque for ` 250, , (c), , Cheques deposited into bank amounting to ` 3,500 were not yet collected, , (d), , Bank charges of ` 300 have not been entered in the cash book., , (e), , Cheques issued amounting to ` 9,000 have not been presented for payment, , Solution, Bank reconciliation statement as on 31st December, 2017, , Amount `, , Particulars, Balance as per bank statement, Add:, , Amount `, 25,000, , Dishonour of a cheque, , 250, , Cheques deposited into bank , but not yet collected, Bank charges not entered in the cash book, , 3,500, 300, , 4,050, 29,050, , Less:, , Cheques issued, but not presented for payment, , 9,000, 20,050, , Balance as per cash book, 225
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www.tntextbooks.in, , Illustration 6, , From the following information, prepare bank reconciliation statement as on 31st December,, 2017 to find out the balance as per bank statement., `, , Particulars, (i), , Balance as per bank statement, , 6,000, , (ii), , Cheques deposited on 28th December, 2017 but not yet credited, , 2,000, , (iii) Cheques issued for 10,000 on 20th December, 2017 but not yet presented for, payment, , 3,000, , (iv) Interest on debentures directly collected by the bank not recorded in cash, book, , 4,000, , (v), , 1,000, , Insurance premium on building directly paid by the bank, , (vi) Amount wrongly credited by bank, Solution, , 500, , Bank reconciliation statement as on 31st December, 2017, , Amount `, , Particulars, Balance as per bank statement, Add:, Cheque deposited but not yet credited, Insurance premium on building directly paid by the bank, Less:, Cheque issued but not yet presented for payment, Interest on debentures directly collected by the bank not, entered in cash book, Amount wrongly credited by bank, Balance as per cash book, , Amount `, 6,000, , 2,000, 1,000, , 3,000, 9,000, , 3,000, 4,000, 500, , 7,500, 1,500, , ,OOXVWUDWLRQ :KHQEDODQFHDVSHUEDQNVWDWHPHQWLVDQRYHUGUDIW, , From the following data, ascertain the cash book balance as on 31st December, 2017., Particulars, , `, , 1), , Overdraft balance as per bank statement, , 6,500, , 2), , Cheques deposited into the bank but not yet credited, , 3), , Cheques issued, but not yet presented for payment, , 4), , Wrong debit by the bank, , 500, , 5), , Interest and bank charges debited by bank, , 180, , 10,500, 3,000, , 6) Insurance premium on goods directly paid by the bank as per standing instructions, 100, 226
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www.tntextbooks.in, , Solution, Bank reconciliation statement as on 31st December, 2017, , Amount `, , Particulars, Overdraft balance as per bank statement, Add: Cheques issued, but not yet presented for payment, Less:, , Cheques deposited into the bank but not credited, Wrong debit by the bank, Interest and bank charges debited by bank, Insurance premium directly paid by the bank as per, standing order, Balance as per cash book*, , 3,000, , Amount `, 6,500, 3,000, 9,500, , 10,500, 500, 180, 100, , 11,280, −1,780, , * Note: Since the balance obtained is negative, it is favourable balance., Student activity, Think: In the above illustration, what will be the cash book balance, if the balance as per, bank statement is favourable?, , Illustration 8, The bank statement of Sudha and Company showed an overdraft of ` 10,000 on 31st December,, 2017, prepare a bank reconciliation statement., (a), , A cheque deposited on 30th December 2017 for ` 15,000 was not credited by the, bank., , (b) Interest on term loan ` 500 was debited by bank on 31st December, 2017 but not, accounted in the books of Sudha and Company., (c), , A cheque issued for ` 550 on 24th December, 2017, paid by the bank was recorded as, ` 505 in the bank column of the cash book., , (d) One outgoing cheque on 27th December, 2017 of ` 200 was recorded twice in the cash, book., (e), , Bank recorded a cash deposit of ` 2,598 as ` 2,589., , (f), , A sum of ` 2,000 deposited in cash deposit machine by a customer of the business on, 31st December, 2017 was not recorded in the books of Sudha and Company., , (g), , Interest on overdraft of ` 600 was not recorded in the books of Sudha and Company., , (h) Two cheques issued on 29th December, 2017 for ` 500 and ` 700, but only the first, cheque was presented for payment before 31st December, 2017., 227
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www.tntextbooks.in, , Solution, %DQNUHFRQFLOLDWLRQVWDWHPHQWRI6XGKDDQG&RPSDQ\DVRQVW'HFHPEHU, , Amount ` Amount `, , Particulars, Overdraft as per bank statement (debit balance), , 10,000, , Add:, Cheque issued recorded twice in cash book, Direct cash deposit not entered in cash book, Unpresented cheque, , 200, 2,000, 700, , 2,900, 12,900, , Less:, Cheque deposited but not credited by bank, Interest on term loan not entered in cash book, , 15,000, 500, , Cheque issued amount entered lesser in cash book (550-505), , 45, , Cash deposit recorded lesser in bank statement (2,598-2,589), , 9, , Interest on overdraft not entered in cash book, Favourable balance as per cash book*, , 600, , 16,154, −3,254, , * Note: Since the balance obtained is negative, it is favourable balance., :KHQDQH[WUDFWRIFDVKERRNDQGEDQNVWDWHPHQWLVJLYHQ, , When an extract of the cash book and bank statement is given, the following points are to be, remembered:, Compare the items in the bank column, of the cash book with that of the, bank statement, , Tick the items in the cash book that match, with bank statement., Items not matched will be the, causes for disagreement, , Use those causes to prepare bank, reconciliation statement, , Remember, the starting balance in the bank reconciliation statement can be either cash book, balance or balance as per bank statement., 228
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www.tntextbooks.in, , ,OOXVWUDWLRQ :KHQDQH[WUDFWRIFDVKERRNDQGEDQNVWDWHPHQWLVJLYHQ, , Given below are the entries in the bank column of the cash book and the bank statement., Prepare a bank reconciliation statement as on 31st October, 2017., &DVKERRN, (Bank column), , Dr., , Cr., , Date, , Particulars, , Amount `, , Amount `, , 8 By Kamala A/c, , 12,000, , 26 By Magesh A/c, , 9,740, , 2017, , 2017, Oct. 1, 18, 19, 20, 20, , Particulars, , Date, , 20,525 Oct., , To Balance b/d, , 6,943, , To Ram A/c, , 11,780, , To Sales A/c ( Ravi), , 450, , 28 By Mala A/c, , To Commission A/c (Kala), , 200, , 30 By Salaries A/c, , 720, , 7,810, , 31 By Balance c/d, , 1,688, , To Nirmala A/c, , Nov. 1, , 35,928, , 35,928, , To balance b/d, , 1,688, Bank statement, , Date, , Particulars, , 1.10.17, , By Balance b/d, , 9.10.17, , To Kamala, , Dr., Withdrawals, `, , Cr., Deposits, `, , Balance, Dr./Cr., `, 20525 Cr, , 12,000, , 8525 Cr, , 19.10.17, , By Ram, , 6,943, , 15468 Cr, , 25.10.17, , By Ravi, , 450, , 15918 Cr, , 26.10.17, , To Magesh, , 27.10.17, , By Kala, , 28.10.17, , To Rajan (salaries), , 30.10.17, , By Bills receivable, , 9,740, 200, 720, , By Interest on Investment, 31.10.17, , 6178 Cr, , To Bills payable, , 4,000, , 229, , 6378 Cr, 5658 Cr, , 20,000, , 25658 Cr, , 1,820, , 27478 Cr, 23478 Cr
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www.tntextbooks.in, , Solution, Bank reconciliation statement as on 31st October 2017, , Amount `, , Particulars, Balance as per cash book, , Amount `, 1,688, , Add: Bills receivable collected, not entered in cash book, Interest on investment collected, not entered in cash book, Cheques issued but not presented – Mala, , 20,000, 1,820, 11,780, , 33,600, 35,288, , Less: Cheques deposited into bank, but not yet collected –Nirmala, Bills payable paid, not entered in cash book, , 7,810, 4,000, , 11,810, 23,478, , Balance as per bank statement, 8.4.2 Plus or Minus presentation, , Bank reconciliation statement can also be presented in an alternative method. In such, presentation, two columns are given, one to record items that increase the balance (plus items), and the other one to record items that decrease the balance (minus items). Balances as per the, cash book or bank statement are written as the starting balance., Points to be noted:, (a), , Debit balance of cash book is written in the “Plus” column., , (b) Credit balance of cash book (overdraft) is written in the “Minus” column., (c), , Debit balance as per bank statement (overdraft) is written in the “Minus” column., , (d) Credit balance as per bank statement is written in the “Plus” column., After the causes of difference are written, the two columns (plus column and minus column), are totalled and the difference is ascertained. The difference is the balance/ overdraft as per, cash book / bank statement, as per the given starting point., Balance as per bank statement is arrived by comparing the total of plus amount and the minus, amount. If the plus amount is more than the minus amount, then show the difference amount, in minus column. This represents favourable balance as per bank statement., If the plus amount is less than the minus amount, then show the difference amount in plus, column. This represents bank overdraft (unfavourable balance) as per bank statement., , 230
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www.tntextbooks.in, , )RUPDWRI3OXVRUPLQXVSUHVHQWDWLRQRIEDQNUHFRQFLOLDWLRQVWDWHPHQW , Bank reconciliation statement of _________________as on ______________, , Plus amount `, , Particulars, Balance as per cash book, , (if positive) xxx, , Cheques issued but not yet presented for payment, , xxx, , Amount directly deposited in bank, , xxx, , Standing instructions: dividend, interest, etc. directly, collected by the bank, , xxx, , Wrong credit in the cash book, , xxx, , Interest credited by bank, , xxx, , Undercasting of debit side in the bank column of cash book, , xxx, , Overcasting of credit side in the bank column of cash book, , xxx, , Bills receivable collected directly by bank, , xxx, , Minus amount `, ( if negative) xxx, , Cheques deposited but not yet collected / cleared, , xxx, , Expenses directly paid by bank on standing instructions, , xxx, , Bank charges levied by bank, , xxx, , Wrong debit in the cash book, , xxx, , Wrong debit in the bank statement, , xxx, , Overcasting of debit side of bank column in cash book, , xxx, , Undercasting of credit side of bank column in cash book, , xxx, , Interest charged on bank overdraft, , xxx, , Total, , xxx, , xxx, , Balance as per bank statement, Solution as per“Plus” and “Minus” presentation for illustration 1, , Bank reconciliation statement as on 31st March, 2017, Plus amount `, , Particulars, Balance as per cash book, , Minus amount `, , 300, , Cheques deposited but not yet collected by the bank, Cheque issued but not yet presented for payment, , 500, 1,000, , Bank interest charged, , 100, , Rent paid by bank as per standing instruction, , 200, , Total, , 1,300, , Balance as per bank statement, , 800, 500, , *Note: Students will be tested on balance presentation method only., 231
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www.tntextbooks.in, , Banks provide facility to maintain savings bank account for individuals and, trusts. Banks allow interest for such accounts. In such cases, adjustments need, to be made in bank reconciliation statement for interest allowed by the bank, on savings bank account., Points to remember, •, , Debit balance as per cash book is favourable, , •, , Credit balance as per bank column of the cash book is an overdraft, , •, , Debit balance as per bank statement is unfavourable, , •, , Credit balance as per bank statement is favourable, , •, , Bank reconciliation statement is prepared by the business entity, , •, , The purpose of preparing bank reconciliation statement is to explain the causes of disagreement, between balance as per bank column of cash book and bank statement, , •, , Most of the differences are caused by differences in the time at which items are recorded., , •, , Some items cannot be recorded in the bank column of the cash book until the bank statement is, received., , 6HOIH[DPLQDWLRQTXHVWLRQV, ,0XOWLSOHFKRLFHTXHVWLRQV, &KRRVHWKHFRUUHFWDQVZHU, , 1., , 2., , A bank reconciliation statement is prepared by, (a) Bank, , (b) Business, , (c) Debtor to the business, , (d) Creditor to the business, , A bank reconciliation statement is prepared with the help of, (a) Bank statement, (b) Cash book, (c) Bank statement and bank column of the cash book, (d) Petty cash book, , 3., , Debit balance in the bank column of the cash book means, (a) Credit balance as per bank statement, (b) Debit balance as per bank statement, (c) Overdraft as per cash book, (d) None of the above, 232
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www.tntextbooks.in, , 4., , A bank statement is a copy of, (a) Cash column of the cash book, (b) Bank column of the cash book, (c) A customer’s account in the bank’s book, (d) Cheques issued by the business, , 5., , A bank reconciliation statement is prepared to know the causes for the difference between:, (a) The balance as per the cash column of the cash book and bank column of the cash, book, (b) The balance as per the cash column of the cash book and bank statement, (c) The balance as per the bank column of the cash book and the bank statement, (d) The balance as per petty cash book and the cash book, , 6., , When money is withdrawn from bank, the bank, (a) Credits customer’s account, (b) Debits customer’s account, (c) Debits and credits customer’s account, (d) None of these, , 7., , Which of the following is not the salient feature of bank reconciliation statement?, a) Any undue delay in the clearance of cheques will be shown up by the reconciliation, b) Reconciliation statement will discourage the accountant of the bank from embezzlement, c) It helps in finding the actual position of the bank balance, d) Reconciliation statement is prepared only at the end of the accounting period, , 8., , Balance as per cash book is ` 2, 000. Bank charge of ` 50 debited by the bank is not yet, shown in the cash book. What is the bank statement balance now?, (a) ` 1,950 credit balance, (b) ` 1,950 debit balance, (c) ` 2,050 debit balance, (d) ` 2,050 credit balance, , 9., , Balance as per bank statement is ` 1, 000. Cheque deposited, but not yet credited by the, bank is ` 2, 000. What is the balance as per bank column of the cash book?, (a) ` 3,000 overdraft, (c) ` 1,000 overdraft, , (b) ` 3,000 favourable, 233, , (d) ` 1,000 favourable
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www.tntextbooks.in, , 10. Which one of the following is not a timing difference?, (a) Cheque deposited but not yet credited, (b) Cheque issued but not yet presented for payment, (c) Amount directly paid into the bank, (d) Wrong debit in the cash book, Answers, , 1. (b), , 2. (c), , 3. (a), , 4. (c), , 5. (c), , 6. (b), , 7. (d), , 8. (a), , 9. (b), , 10. (d), , ,,9HU\VKRUWDQVZHUTXHVWLRQV, , 1., , What is meant by bank overdraft?, , 2., , What is bank reconciliation statement?, , 3., , State any two causes of disagreement between the balance as per bank column of cash, book and bank statement., , 4., , Give any two expenses which may be paid by the banker as per standing instruction., , 5., , Substitute the following statements with one word/phrase, (a) A copy of customer’s account issued by the bank, (b) Debit balance as per bank statement, (c) Statement showing the causes of disagreement between the balance as per cash book, and balance as per bank statement, , 6., , Do you agree on the following statements? Write “yes” if you agree, and write “no” if you, disagree., (a) Bank reconciliation statement is prepared by the banker., (b) Adjusting the cash book before preparing the bank reconciliation statement is, compulsory., (c) Credit balance as per bank statement is an overdraft., (d) Bank charges debited by the bank increases the balance as per bank statement., (e) Bank reconciliation statement is prepared to identify the causes of differences between, balance as per bank column of the cash book and balance as per cash column of the, cash book., , 234
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www.tntextbooks.in, , ,,,6KRUWDQVZHUTXHVWLRQV, , 1., , Give any three reasons for preparing bank reconciliation statement., , 2., , What is meant by the term “cheque not yet presented?”, , 3., , Explain why does money deposited into bank appear on the debit side of the cash book,, but on the credit side of the bank statement?, , 4., , What will be the effect of interest charged by the bank, if the balance is an overdraft?, , 5., , State the timing differences in BRS with examples., , ,9([HUFLVHV, , 1., , From the following particulars prepare a bank reconciliation statement of Jayakumar as, on 31st December, 2016., (a) Balance as per cash book ` 7,130, (b) Cheque deposited but not cleared ` 1,000, (c) A customer has deposited ` 800 into the bank directly, (Answer: Balance as per bank statement ` 6,930), , 2., , From the following particulars of Kamakshi traders, prepare a bank reconciliation, statement as on 31st March, 2018., (a) Debit balance as per cash book ` 10,500, (b) Cheque deposited into bank amounting to `5,500 credited by bank, but entered twice, in the cash book, (c) Cheques issued and presented for payment amounting to ` 7,000 omitted in the cash, book, (d) Cheque book charges debited by the bank ` 200 not recorded in the cash book., (e) Cash of ` 1,000 deposited by a customer of the business in cash deposit machine not, recorded in the cash book., (Answer: Overdraft as per bank statement ` 1,200), , 235
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www.tntextbooks.in, , 3., , From the following information, prepare bank reconciliation statement to find out the, bank statement balance as on 31st December, 2017., Particulars, , `, , 1., , Balance as per cash book, , 15,000, , 2., , Cheques deposited but not yet credited, , 1,000, , 3., , Cheques issued and entered in the cash book before 31st December 2017 but, not presented for payment until that date, , 1,500, , 4., , Dividend directly received by bank, , 200, , 5., , Direct payment made by bank for rent, , 1,000, , 6., , Locker rent charged by the bank not recorded in cash book, , 1,200, , 7., , Wrong debit given by the bank on 30th December 2017, , 500, , 8., , A payment made through net banking has been entered twice in the cash, book, , 300, , (Answer: Balance as per bank statement ` 13,300), 4., , On 31st March, 2017, Anand’s cash book showed a balance of ` 1,12,500. Prepare bank, reconciliation statement., (a) He had issued cheques amounting to ` 23,000 on 28.3.2017, of which cheques, amounting to ` 9,000 have so far been presented for payment., (b) A cheque for ` 6,300 deposited into bank on 27.3.2017, but the bank credited the, same only on 5th April 2017., (c) He had also received a cheque for ` 12,000 which, although entered by him in the, cash book, was not deposited in the bank., (d) Wrong credit given by the bank on 30th March 2017 for ` 2,000., (e) On 30th March 2017, a bill already discounted with the bank for ` 3,000 was, dishonoured, but no entry was made in the cash book., (f) Interest on debentures of ` 700 was received by the bank directly., (g) Cash sales of ` 4,000 wrongly entered in the bank column of the cash book., (Answer: Balance as per bank statement ` 1,03,900), , 5., , From the following particulars of Siva and Company, prepare a bank reconciliation, statement as on 31st December, 2017., (a) Credit balance as per cash book ` 12,000, (b) A cheque of ` 1,200 issued and presented for payment to the bank, wrongly credited, in the cash book as ` 2,100., (c) Debit side of bank statement was undercast by ` 100, (Answer: Overdraft as per bank statement ` 11,000), 236
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www.tntextbooks.in, , 6., , From the following particulars of Raheem traders, prepare a bank reconciliation statement, as on 31st March, 2018., (a) Overdraft as per cash book ` 2,500, (b) Debit side of cash book was undercast by ` 700, (c) Amount received by bank through RTGS amounting to ` 2,00,000, omitted in the, cash book., (d) Two cheques issued for ` 1,800 and ` 2,000 on 29th March 2018. Only the second, cheque is presented for payment., (e) Insurance premium on car for ` 1,000 paid by the bank as per standing instruction, not recorded in the cash book., (Answer: Balance as per bank statement ` 1,99,000), , 7., , From the following information, prepare bank reconciliation statement as on 31st, December, 2017 to find out the balance as per bank statement., Particulars, (i) Bank overdraft as per cash book, (ii) Cheques deposited but not yet credited, (iii) Cheque issued but not yet presented for payment, (iv) Rent collected by the bank as per standing instruction, (v) Interest on overdraft debited by bank, (vi) Amount wrongly debited by bank, (vii) Cheque issued on 30th December 2017 dishonoured by the bank, (viii) A customer’s cheque deposited in the bank dishonoured by bank not, recorded in the cash book, , `, 20,000, 4,000, 1,000, 500, 2,000, 300, 5,000, 2,000, , (Answer: Overdraft as per bank statement ` 21,800), , 8., , Prepare bank reconciliation statement from the following data., Credit balance as per cash book, , `, 5,000, , Cheques issued, but not yet presented for payment, , 3,000, , Cheques deposited but not yet credited, , 4,000, , Particulars, , Interest on overdraft charged by the bank, not yet entered in the cash book, , 120, , Dividend collected by the bank not shown in the cash book, , 760, , Interest charged by bank recorded twice in the cash book, , 300, , Bills of exchange discounted with the bank, dishonoured, , 520, , Bank charges debited by the bank on dishonour of the bill, , 55, , (Answer: Overdraft as per bank statement ` 5,635), 237
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www.tntextbooks.in, , 9., , From the following particulars of Veera traders, prepare a bank reconciliation statement, as on 31st December, 2017., a) Credit balance as per bank statement ` 6,000, b) Amount received by bank through NEFT for ` 3,500, entered twice in the cash book., c) Cheque dishonoured amounting to ` 2,500, not entered in cash book., (Answer: Balance as per cash book ` 12,000), , 10. Prepare bank reconciliation statement from the following data and find out the balance, as per cash book as on 31st March, 2018., `, , Particulars, (i), , Bank balance as per bank statement, , 15,000, , (ii), , Cheques issued but not yet presented for payment, , 2,500, , (iii) Bank charges not recorded in the cash book, , 250, , (iv) Interest charged by bank not recorded in the cash book, , 500, , (v), , Bank paid insurance premium as per standing instruction but not recorded, in the cash book, , (vi) Cheques deposited but not yet credited, , 300, 900, , (Answer: Balance as per cash book ` 14,450), 11. Ascertain the cash book balance from the following particulars as on 31st December,, 2017:, (i), , Credit balance as per bank statement ` 2,500, , (ii) Bank charges of `60 have not been entered in the cash book, (iii) Cheque deposited on 28th December 2017 for ` 1,000 was not yet credited by the, bank, (iv) Cheque issued on 24th December 2017 for ` 700, not yet presented for payment, (v), , A dividend of ` 400 collected by the bank directly but not entered in the cash book, , (vi) A cheque of ` 600 had been dishonoured, but no entry was made in the cash book, (vii) Interest on term loan ` 1,200 debited by bank but not accounted in cash book, (viii) No entry had been made in the cash book for a trade subscription of ` 500 paid, vide banker’s order on 23rd December 2014, (Answer: Balance as per cash book ` 4,760), , 238
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www.tntextbooks.in, , 12. From the following particulars of Raja traders, prepare a bank reconciliation statement as, on 31st January, 2018., (a) Balance as per bank statement ` 5,000, (b) Cheques amounting to ` 800 had been recorded in the cash book as having been, deposited into the bank on 25th January 2018, but were entered in the bank statement, on 2nd February 2018., (c) Amount received by bank through NEFT amounting to ` 3,000, omitted in the cash, book., (d) Two cheques issued for ` 3,000 and ` 2,000 on 29th March 2018. Only the first cheque, is presented for payment., (e) Insurance premium on motor vehicles for `1,000 paid by the bank as per standing, instruction not recorded in the cash book., (f) Credit side of cash book was undercast by ` 700, (g) Subsidy received directly by the bank from the state government amounting to, ` 10,000, not entered in cash book., (Answer: Overdraft as per cash book ` 7,500), 13. From the following particulars of Simon traders, prepare a bank reconciliation statement, as on 31st March, 2018., (a) Debit balance as per bank statement `2,500, (b) Cheques deposited amounting to ` 10,000, not yet credited by bank., (c) Payment through net banking for `2,000, omitted in the cash book, (Answer: Balance as per cash book ` 9,500), 14. From the following particulars, ascertain the cash book balance as on 31st December,, 2016., (i), , Overdraft balance as per bank statement `1,26,640, , (ii) Interest on overdraft entered in the bank statement, but not yet recorded in cash, book ` 3,200, (iii) Bank charges entered in bank statement, but not found in cash book `600, (iv) Cheques issued, but not yet presented for payment ` 23,360, (v), , Cheques deposited into the bank but not yet credited ` 43,400, , (vi) Interest on investment collected by the bank ` 24,000, (Answer: Overdraft as per cash book ` 1,26,800), , 239
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www.tntextbooks.in, , 15. From the following particulars of John traders, prepare a bank reconciliation statement, as on 31st March, 2018., (a) Bank overdraft as per bank statement ` 4,000, (b) Cheques amounting to `2,000 had been recorded in the cash book as having been, deposited into the bank on 26th March 2018, but were entered in the bank statement, on 4th April 2018., (c) Amount received by bank through cash deposit machine amounting to ` 5,000,, omitted in the cash book., (d) Amount of ` 3,000 wrongly debited to John traders account by the bank, for which, no details are available., (e) Bills for collection credited by the bank till 29th March 2017 amounting to ` 4,000,, but no advice received by John traders., (f) Electricity charges made through net banking for ` 900 was wrongly entered in cash, column of the cash book instead of bank column., (g) Cash sales wrongly recorded in the bank column of the cash book for ` 4,000., (Answer: Overdraft as per cash book ` 3,100), 16. Prepare bank reconciliation statement from the following data., Particulars, , `, , Bank overdraft as per bank statement, , 6,500, , Cheques issued, but not yet presented for payment, , 8,750, , Cheques deposited but not yet credited by the bank, , 500, , Business customer directly deposited into cash deposit machine, , 3,500, , Bank charges not entered in the cash book, , 200, , Bank paid rent as per standing instruction, , 1,980, , (Answer: Overdraft as per cash book ` 16,070), , 240
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www.tntextbooks.in, , 17. Prepare bank reconciliation statement as on 31st March, 2017 from the following extracts, of cash book and bank statement., Dr., , Cr., , &DVKERRN %DQNFROXPQRQO\, , Date, , Amount `, , Particulars, , Date, , Particulars, , Amount `, , 2017, , 2017, , 9,000 Mar, , 4 By Drawings, , 1,700, , 3 To Ram, , 2,200, , 8 By Sumi, , 3,300, , 9 To Prem, , 1,500, , 12 By Salary, , 2,800, , 16 To Pavithra, , 3,400, , 16 By Kayal, , 1,700, , 23 To Devi, , 2,600, , 18 By Pooja, , 4,200, , 27 To Mani, , 1,100, , 26 By Sam, , 2,000, , 28 By Raheem, , 1,100, , 30 By Rent, , 1,100, , March 1 To Balance b/d, , 350, , 30 To Shankar, , 30 By Balance c/d, 20,150, , 2,250, 20,150, , Bank statement, , Date, , Particulars, , Dr., Withdrawals, `, , Cr., Deposits, `, , Balance, Dr./Cr., , 2017, March, , 9000 Cr., , 1 By balance b/d, , 8,300 Cr., , 700, , 4 To cheque- drawings, , 2,200, , 5 By cheque- Ram, , 7,200 Cr., , 3,300, , 9 To cheque – Sumi, , 1,500, , 11 By cheque- Prem, , 10,500 Cr., , 8,700 Cr., , 12 To cheque – Salary, , 2,800, , 5,900 Cr., , 17 To cheque – Kayal, , 1,700, , 4,200 Cr., , 20 By cheque- Devi, 30 By interest received, 15, , 30 To bank charges, , 241, , 2,600, , 6,800 Cr., , 900, , 7,700 Cr., 7,685 Cr.
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www.tntextbooks.in, , 18. A trader received his bank statement on 31st December, 2017 which showed an overdraft, balance of ` 12,000. On the same day, his cash book showed a debit balance of `2,000., Analyse the following transactions. Choose the possible causes and prepare a bank, reconciliation statement to show the causes of differences., (a) Cheque deposited for ` 2,000 on 21st December, 2017. Bank credited the same on, 26th December, 2017., (b) Cheque issued for payment on 26th December, 2017 amounting to ` 2,500, not yet, presented until 31st, December, 2017., (c) Bank charges amounting to ` 200 not yet entered in the cash book., (d) Online payment for ` 1,500 entered twice in the cash book., (e) Cheque deposited amounting to ` 1,000, but omitted in the cash book. The same, cheque was dishonoured by bank, but not yet entered in cash book., (f) Cheque deposited, not yet credited by bank amounting to ` 17,800., Student activity, Think: Ram enterprises received a bank statement on 31st March, 2018, which showed a, credit balance of ` 13,500. On the same date, the balance as per cash book was ` 11,000., Think of minimum five possible causes of difference [with amount] between these two, balances., , 242
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www.tntextbooks.in, , 7KH%DQN5HFRQFLOLDWLRQ*DPH, , Roll your dice to start. Advance three steps if you land on green. Go back one step if you land, on orange., Interest on, , Final balance, as per bank, , 55, , 54, , statement, , bank, overdraft, , 52, , 51, , 50, , 47, , 48, , 49, , charged, Income, , 43, , directly, received by, , 45, , 46, , bank, Wrong debit, 42, , 41, , 40, , 39, , 38, , 37, , in bank, statement, , Bill, , Bank, , receivable, 29, , collected, , 31, , 32, , directly by, , charges, levied by, , 34, , bank, , bank, Wrong debit, 28, , 27, , 35, , in the cash, , Wrong credit, 25, , 24, , 23, , book, , in the cash, book, , Locker rent, 15, , 16, , 17, , 18, , levied by, , 20, , 21, , bank, , 14, , Cheque, , Expenses, , directly, , (E.g., , deposited in, , 12, , 11, , 10, , 9, , bank by a, , bills) directly, , customer, , paid by bank, , Favourable, , Cheque, , Cheque, , balance as, , issued but, , deposited, , per cash, book, , Telephone, , 2, , 3, , not presented, to bank, , 243, , 5, , but not, cleared, , 7
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www.tntextbooks.in, , Magesh, an enthusiastic young entrepreneur, started a business on 1st, December, 2017. He opened a current account with a nationalised bank for his, business transaction. In the same bank, he maintains his personal savings bank, account too. He did not find time to maintain his cash book. So he appointed a person called, Dinesh to take care of bank transactions. But that person was inexperienced., On 1st December, 2017, the opening balance as per cash book and bank record was the same., On 2nd December, Magesh issued a cheque for ` 2,000 to a supplier, but the same was entered, in the credit side of the cash book as ` 200., On 3rd, December, Magesh issued his savings bank account cheque for his personal expenses, amounting to ` 2,500, but Dinesh assumed this as current account cheque and the same was, entered in the cash book as drawings., Dinesh was asked to deposit cash of `1,000 in cash deposit machine in order to make a payment, to one of the business’ supplier. He credited the same in the bank column of the cash book., On 15th December, one of his customers made online payment to Magesh’s current account,, amounting to ` 1,000. There was no entry in the cash book for this., Dinesh received his salary in cash for ` 5,000. He credited this amount in the bank column of, cash book., Bank made payment on 23rd December, amounting to ` 2,500, as per standing instruction. But,, there is no entry in the cash book for the same., On 31st, December 2017, Magesh received a bank statement from his bank, which showed a, credit balance of `19,700. He instructed Dinesh to check the statement with the cash book. On, comparing both, Dinesh found that the cash book showed a balance of `14,500. He was puzzled., He needs your help to reconcile the balances., , 7RH[SORUHIXUWKHU, , •, •, •, , Are there ways to reduce the number of entries in the bank reconciliation statement? If so,, what is to be done?, “Ten years from now, there will not be any need to prepare bank reconciliation statement”, - Do you agree? Why? Or why not?, Can the concept of reconciliation be used other than banking transactions?, , 244
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www.tntextbooks.in, , Reference, 1., , M C Shukla, T S Grewal and S C Gupta, Advanced Accounts, 19th ed., 2017, S.Chand Publishing, New Delhi., , 2., , R L Gupta and V K Gupta, Financial Accounting, 11th ed., 2014, Sultan Chand and Sons, New Delhi., , 3., , S P Jain and K L Narang, Advanced Accountancy Vol – I, 2016, Kalyani Publishers, New Delhi., , 4., , Dalston L Cecil and Jenitra L Merwin, Financial Accounting, 3rd ed., 2017, Learntech Press, Trichy., , 5., , Fundamentals of Accounting, 2017, The Institute of Chartered Accountants of India, New Delhi., , 245
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www.tntextbooks.in, , Accountancy – Class XI, List of Authors and Reviewers, Domain Experts, , Authors, , 1. Dr. L. Cesis Dastan,, Associate Professor of Commerce, Presidency College, (Autonomous), Chennai., , 1. Dr. P. Ponramu,, Assistant Professor of Commerce, Government Arts College,, Melur, Madurai Dt., , 2. Dr. A. Krishnan,, Associate Professor of Commerce, Presidency College, (Autonomous), Chennai., , 2. Mr. V. Ulaganathan,, P.G. Assistant in Commerce, Government Model Hr. Sec., School, Saidapet, Chennai., , 3. Dr. L. Jenitra,, Vice Principal and Associate Professor of Commerce,, Holy Cross College (Autonomous), Tiruchirapalli., , 3. Mr. V. Murali, P.G. Assistant in Commerce, Government Hr. Sec. School,, Vedanthangal., , 4. Prof. M.P. Vellore,, Practising Cost Accountant and Head (Retd.)-Department of, Commerce,, St. Joseph’s College (Atutonomous), Tiruchirapalli., , 4. Dr. S. Kumar, P.G. Assistant in Commerce, SKV Hr. Sec. School,, Kurinjipadi., 5. Mr. V. Rajkumar, P.G.T in Commerce, Hindu Senior Sec. School,, Triplicane, Chennai., , Reviewers, 1. Dr. N. Vasudevan,, Assistant Professor of Commerce, Ramakrishna Mission, Vivekananda College (Autonomous), Chennai., , 6. Mr. A. Sibi Chakaravarthy, P.G. Assistant in Commerce, Manjammal Girls Hr. Sec., School, Tirunelveli., , 2. Mrs. Jayanthi Ramesh,, Trainer, Cambridge International Examination, Chennai., , 7. Mrs. A. Elizabeth Rani,, P.G. Assistant in Commerce, Rosary Matric Hr. Sec. School,, Chennai., , 3. Mr. P. Jayakumar,, Assistant Professor of Commerce, St. Thomas College of Arts, and Science, Chennai., , 8. Mr. A.K. Saravanan, P.G. Assistant in Commerce, SBOA Matriculation Hr. Sec., School, Nagamalai Pudhukottai, Madurai., , 4. Dr. A. Sarojini,, P.G. Assistant in Commerce, Government Hr. Sec. School,, Kadambathur Thiruvallur Dt., , Academic Coordinator, P. Nantha,, Senior Lecturer, SCERT, Chennai, , Art and Design Team, Chief Co-ordinator and Creative Head, Srinivasan Natarajan, Illustration, 1. M. Muniaswamy, Art Master, Govt. Hr. Sec. School, Arumbakkam,, Chennai., 2. D. Durai, Art Master, Bishop Heber Hr. Sec School, Trichy., Art Teachers,, Government of Tamil Nadu., Students, Government College of Fine Arts,, Chennai & Kumbakonam., Layout, , This book has been printed on 80 G.S.M., Elegant Maplitho paper., , V2 Innovations, Chennai, In-House, , Printed by offset at:, , QC - Rajesh Thangapan, - Asker Ali, Tamil Kumaran, Co-ordination, Ramesh Munisamy, , 254
