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cchethuc
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Accounting. - October 12th, 2009

Basics of Accounting
In this section, we will familiarize ourselves with the basics of Accounting. The main topics covered in this section include—Need for Accounting, Accounting Principles, Basic Terms used in Accounting and finally preparation of the various books of accounts viz. Journal, Ledger, Trial Balance, Trading and Profit and Loss Account and Balance Sheet.
Accounting Concepts
Every business organization whether big or small carries out a number of transactions, such as sale of its products, purchase of raw materials etc. in its daily routine. One cannot memorize each and every transaction taking place in business. These have to be recorded somewhere. The books which almost every business organization maintains for recording transactions are the Books of Accounts.
The usual format of any account is the T-form , which is as follows :
Dr. Cr.
Particulars Amount Particulars Amount
.

Left Side, is called as Debit Side, Right side, called as Credit Side,
Thus, a simple Cash Account showing inflow and outflow of cash will be as shown below:
Dr. Cash Account Cr.
Particulars (inflow) Amount Particulars (outflow) Amount
Cash sales
. 6,000 Purchase of goods

. 6,000
When you record a transaction on the Debit side, it is said that you have `debited` the account. Similarly, when you record a transaction on the Credit side, it is said that you have `credited` the account.
The Need For Accounting
Let us suppose you have a small book store. You have sold some books to your customer, say, X, who has given you the full amount in return. This is a transaction that took place between you and X. Now, suppose you deposit all the money received from X in the bank. This is another transaction, between you and the bank. You can very easily remember these transactions and need not write them anywhere.
But, what if there were a large number of customers, say 100 or even more and most of them have not given you the full amount due ? This is what really happens in a business. In such a case, you will have to memorize all the details regarding each and every customer i.e. details of the amount received from them, the amount due from them etc. which is nearly impossible for anybody.
So, what you can do is to prepare an account of each and every customer in order to record the details of the transactions with them. This means you have to prepare a large number of accounts i.e one account for each customer.
For example, suppose you have sold books worth Rs.100 to X and books worth Rs.1000 to Y. X has given you only Rs.50 and Y has given you Rs.750. To remember the balance due from X and Y, you can record these transactions by preparing X's Account, Y's Account as well as your own Cash Account. The 3 accounts will be as follows:
Dr.
X's Account Cr.
Particulars (Incoming) Amount Particulars (Outgoing) Amount
Books 100

________________________________________100
__________________________________________________ ______________________________ Cash
Balance due 50
50
________________________________________100
__________________________________________________ ______________________________
Table1
Dr. Y's Account Cr.
Particulars (Incoming) Amount Particulars (Outgoing) Amount
Books 1000

________________________________________1,000
__________________________________________________ ______________________________ Cash
Balance due 750
250
________________________________________1,000
__________________________________________________ ______________________________
Table2
X has received books worth Rs.100, that is why books have been written on the left side i.e. incoming side. X has given only Rs.50 for books and the balance is due from him which he has to give later. So these are written on the right side i.e. outgoing side, as shown in Table1. Similarly, the account for Y is shown in Table2.
Dr. Cash Account Cr.
Particulars (Incoming) Amount Particulars (Outgoing) Amount
Cash Sales(X)
Cash Sales(Y)
. 50
750
________________________________________ Other expenditures

________________________________________
Table3
The same logic applies for Cash Account. The amounts received from X and Y are written on the left side whereas, cash expenses are written on the right side, as these are outflows.
The real problem will arise when one has to prepare a very large number of accounts, considering the discount given to customers, the commission given to salesmen and such other things.
Moreover, there are not just customers with whom you have to have everyday transactions. There are the suppliers of raw materials, people who have given you loan etc. with whom you have to transact everyday. This means you have to prepare a separate account for each of these persons as well, and if this is so, you will end up with an interminable list of accounts which will be really difficult to maintain. The situation will be complicated further if your knowledge of accounting concepts is not quite adequate.
Accounting is the art of recording, classifying and summarizing transactions and interpreting the results thereof.
To understanding accounting properly, it is necessary to know first, the different types of Accounts.
Classification of Accounts

Personal Accounts
These are the accounts which relate to persons, such as Customers Account, Suppliers Account etc. Personal accounts include both real accounts (Human beings) and artificial persons (Bank, Company etc)
Impersonal Accounts
Accounts which are not personal are called impersonal accounts. These can be further sub-divided into two categories : Real Accounts and Nominal Accounts.
Real Accounts
These can be tangible (i.e. can be touched and seen) or intangible (i.e. cannot be touched and seen). As a result they are further divided into:
1. Tangible Real Accounts. These accounts relate to things that can be touched, felt, measured etc. such as Cash Account.
2. Intangible Real Accounts. These accounts relate to things that cannot be touched but can be measured in terms of money, such as a Patents Account
Nominal Accounts
These accounts deal with expenses and losses, incomes and gains. They explain the nature of the transactions i.e. whether the particular transaction will result in an expense/loss or in an income/gain.

Rules of Debit (Dr.) and Credit (Cr.)
1. Personal Account
Debit the receiver
Credit the giver
2. Impersonal Account (Real Account/Assets Account)
Debit what comes in
Credit what goes out
3. Nominal Account
Debit all expenses and losses
Credit all incomes and gains

Accounting Principles

Accounting principles are the general rules which are used as guidelines in accounting and as the basis of practice. These principles can be classified into two categories :
1. Accounting Concepts
2. Accounting Conventions
Accounting Concepts
1. Separate Entity Concept
Every business is a separate entity from the proprietor. Business and owners are distinct.
2. Dual aspect Concept: Every business
Every business transation has two aspects – Debit. For example “Cash Received from Mr. Samtha Rs. 5000” has two aspects “Cash” – Real account and “Mr.Samtha” – Personal Account.
3. Going Concern Concept
It is assumed that the business will exist for an indefinite period of time and transactions are recorded from this point of view.
4. Money Measurement Concept
Those transactions and events are recorded in accounting only when they can be expressed in terms of money. Accounting records only financial character of the business
5. Cost Concept
All transactions are to be recorded in the books of accounts at their Cost Price when purchased, not on Market Price.
6. Matching Concept
At the end of the financial year all costs (expenses) of the organisation are to be matched against the revenues of the organization of the current year. Increments made by the business during a period can be measured only when the revenue earned during a period is compared with the expenses incurred for earning that revenue.
7. Accounting Period Concept
Uniformity in accounting period should be maintained in order to provide for intra firm comparison. Performance of one year can be compared with other only when uniformity in accounting period is maintained.
8. Accrual concept / Realisation Concept.
Transaction should be recorded on due basis. Expenses / Incomes are recognised and recorded on accrual basis. Actual receipt/payment is irrelevant for recognizing income/expense.
Accounting Conventions
1. Materiality
An accountant should disclose all the material facts and should ignore insignificant details. Accounting records should consist only of such events as are significant from the point of view of income determination.
2. Consistency
Accounting procedures or practices should remain the same(consistent) from one year to another.
3. Conservatism
An accountant should be conservative and prudent. Profits are not to be expected and provision should be made to encounter losses. Valuing stock at Cost Price or Market Price whichever is lower, and creating provision for doubtful debts are the examples of applications of the principle of conservatism.
Basic Terms Used In Accounts
1. Entry
Recording of a transaction in any book of accounting is called an Entry.
2. Proprietor(Owner)
The person who invests his money in the business and bears all the risks connected with the business is called the proprietor.
3. Capital
It means the amount invested by the proprietor in the business. For the business, capital is a liability towards the owner. It is an owner`s account i.e. a personal account.
4. Assets
Economic resources owned by an entity which may or may not have realizable value. An expenditure will be classified as an asset when the benefit from which is yet to be enjoyed.
5. Liabilities
The amount which the business owes and has to return to the outsiders is termed Liabilities.
6. Debtor
A person who owes money to the business mostly on account of credit sales of goods
For example, when goods are sold to a person on credit that person pays the price in future. He is called a debtor because he owes the amount to the organisation.
7. Creditor
Any person who gives credit is a creditor. The proprietor gives money to the business so he is a creditor to the business. A creditor is a person to whom money is owed by the business organisation.
8. Revenue or Income
It is the income of a recurring or non recurring nature from any source related/not related to business.
9. Expense
It is the amount spent in order to produce and sell the goods and services which generate the revenue. For example, payment of salaries to bring some benefit to the business. Expenses can be of the following types :
o Revenue Expenditure or Expenses
When the benefit of an expense is not likely to be available for one year or less, it is treated as revenue.
For example, salaries, wages, power and fuel, maintenance expenses of assets etc.
o Capital Expenditure
When the benefit of an expenditure is not exhausted in the year in which it was incurred but is available over a number of years, it is considered as Capital Expenditure. An example is the expenditure incurred for purchase of fixed assets.
o Deferred Revenue Expense
When the benefit of a revenue expenditure continues for more than one year, it is treated as Deferred Revenue Expense. Such expenditure is not written off in one year but over a period of 2 or 3 years.

For example, expenditure incurred on heavy advertisement.
Revenue Expenditure is a Nominal Account, since it is a current expenditure. Whereas capital expenditure is a Real Account, since it is used for buying fixed assets.
10. Purchases
The term purchase is used only for the purchase of goods. Goods are those things which are purchased for resale or for producing the finished products which also are meant to be sold.
Goods purchased for cash are called Cash Purchases whereas goods purchased on credit are called Credit Purchases. `Purchases` includes both cash and credit purchase of goods.
11. Sales
The term sale is used for the sale of goods only. When goods are sold for cash, they are Cash Sales but if they are sold on credit it is referred to as Credit Sales. `Sales` include both cash and credit sales.
12. Stock
The term Stock refers to goods lying unsold on a particular date. Stock is valued on the cost or market price whichever is less. It may be an opening or a closing stock.
Opening stock means goods lying unsold in the beginning of the accounting year.
Closing Stock means goods lying unsold at the end of the accounting period.
13. Losses
Loss is something against which the business receives no benefit.
For example, loss by theft, loss by fire etc.
14. Drawings
It is the amount of money taken away by the proprietor for his personal use.
15. Discount
When customers are allowed any deduction or allowance from an amount due, that is called Discount. Discount payable is an expense of the organisation where discount received is an income. Discount can be trade discount or cash discount.
o Trade Discount
When some discount is allowed in the prices of goods on the basis of sales of the items, it is called Trade Discount. Trade discounts are not recorded in the books of accounts.
o Cash Discount
When debtors are allowed some discount in the prices of the goods for quick payment, it is called Cash Discount
16. Solvent
A person who is in a position to pay his debts as they become due.
17. Insolvent
A person who is not in a position to pay his debts as they become due.
18. Bad Debts
When debtors fail to pay their dues either partially or completely and all hope of recovering the amount is lost, the amount owed by such debtors is termed as bad debts and it is a loss to the business.
19. Reserve for Bad Debts/Provision for bad debts
A reserve from the profits of the business is created for bad and doubtful debts. It is created to meet any anticipated loss on account of bad debts.
20. Wages
It is the remuneration paid to the labourers in a factory.
21. Salary
It is the remuneration paid to the employees working in the administrative building.
22. Profit
After paying all the possible expenses relating to the business viz. wages, salaries, rent, interest etc. the surplus amount that is left is called the profit. It is a gain and hence is a Nominal Account.
23. Brokerage/Commission
This is an expense of the business. It is a Nominal Account.
Having defined the basic terms used in accounting, let us now understand how transactions are actually recorded in the books of accounts. The following section explains `Journal', which is commonly referred to as the primary book of accounts.
Journal
Usually in a business, transactions are to be debited and credited are recorded carefully in a systematic manner. The book in which the accounts are recorded in a systematic manner is called a Journal.
The Journal is the primary book of accounts which contains transactions recorded in a chronological (day-to-day) order.
Recording transactions in a Journal is known as journalising the transactions.
Format of a Journal
Date Particulars L.F Debit (Rs) Credit (Rs)

As is clear from the format of a Journal, it contains 5 columns . These are explained below :
1. The first column is for Date, wherein the date of the transaction is written.
2. The second column is for the Particulars of the transaction, wherein the names of the accounts involved in the transactions are written in a logical manner.

First the account to be debited is written with the words `Dr.` following it.
In the next line, after leaving a little space, the name of the account to be credited is written preceded by the word `To`

In the next line, the explanation of the entry together with details is written in brackets. This is called Narration.
3. In the third column, L.F means Ledger Folio. It is the number of the page in the Ledger where the respective account will be entered.
4. The fourth column is named Debit (Rs.). In this column the amounts to be debited to various accounts is entered.
5. The fifth column i.e. Credit (Rs.) is meant for entering the amounts to be credited to various accounts.
The following example will clarify the various columns of a Journal.
Example-1
Jay starts a business with a capital of Rs 50,000 on 1st Jan, 2001. This means that his company has Rs 50,000 cash, which is cash brought into the business. `Cash` is an asset. So Cash Account is a `Real Account`. The rule of Dr. and Cr. for a Real Account is :
Debit what comes in
Credit what goes out
Since cash is coming in, it will be debited i.e. Cash Account will be debited.
Now, the second account involved in the example is the `Capital Account` (i.e. Jay's Capital Account). Capital account is a Personal account. The rules of Dr. and Cr. for Personal Accounts are :
Debit the receiver
Credit the giver
As the business is a separate entity (separate entity concept) and Jay is investing money in the business, Jay is the giver and the company is the receiver. So, in order to keep an account of his capital, Jay has to prepare his own account. Also that account is called Jay's Capital Account or simply Capital Account. Capital Account is a personal Account. So the Capital account is being credited in accordance to the rule : credit the giver. So, the journal entry for this example will be:
Date Particulars L.F Dr. Cr.
1st Jan '99 Cash Account Dr.
To Capital Account
(Being the amount invested by Jay in the business as Capital) 50,000
50,000
Let us take another example.


Example-2
The following transactions took place in the business on a particular date :
1. A salary of Rs 5000 is paid.
2. Goods of Rs 500 purchased in cash.
3. Goods worth Rs 1000 purchased on credit from Rahul.
4. Sold goods to Ankur for Rs 4000.
Journalise the above transactions.
1. The accounts involved in this transaction are:
a. Salary Account : Salary is an expense for the business. So, Salary Account is a nomimal account. Rule of Dr. and Cr. for Nominal Account is :
Debit all expenses and losses.
Credit all incomes and gains.
So, Salary Account should be debited
Salary Account Dr.
b. Cash Account : Cash is an asset. So, Cash Account is a Real Account. The rule for Real Account is :
Debit what comes in
Credit what goes out
Since cash is going out of the business in the form of salary, Cash Account should be credited.
Cash Account Cr.
The journal entry for this transaction is:
Salary Account Dr.
To Cash Account
2. The accounts involved in this transaction are:
a. Purchases Account : Goods are Purchased.
Purchase of goods is an expense, so Purchases Account is a Nominal Account. The rule for Nominal Account is :
Debit all expenses and losses
Credit all incomes and gains
Thus, we have to Debit Purchases Account.
Purchases Account Dr.
Note that it is only in the case of goods relating to business that we Debit the Purchases Account. Purchase of anything other than goods in which the business deals is not debited to Purchase Account but to the respective accounts. For example, in case of purchase of furniture, we do not debit the Purchases Account but will debit the Furniture Account.
b. Cash Account : The second account being involved is the Cash Account. Since goods are purchased for cash, cash is going out of the business. Cash Account being a Real Account, the rules for Real Account apply :
Debit what comes in
Credit what goes out
So, Cash Account should be credited. The journal entry for this transaction will be:
Purchase Account Dr.
To Cash Account
3. The Accounts involved in this transaction are :
a. Purchases Account : Purchase is an expense. So Purchase Account should be debited (following the rules of Nominal Account)
b. Rahul`s Account : Goods are purchased on credit from Rahul. Since Rahul is a person, Rahul`s account is a personal account. Also Rahul has given the goods. Therefore, following the rules of Personal Account,
Debit the receiver
Credit the giver
Rahul`s Account should be credited.
The journal entry for this transaction will be :
Purchase Account Dr.
To Rahul`s Account
4. The Accounts involved in this transaction are :
a. Sales Account : Goods are sold to Ankur.
Sale of goods is income to the business. Being a source of income, Sales Account is a Nominal Account. The Rule for nominal Account is :
Debit all expenses/losses
Credit all incomes/gains
Therefore, Sales Account should be credited.
As in the case of Purchases Account, all the sales regarding goods, whether for cash or for credit are credited to Sales Account.
b. Ankur's Account : Ankur received the goods. Ankur's account is a personal account and Ankur is the receiver of goods. So, Ankur Account should be debited following the rule,
Debit the receiver
Credit the giver

The journal entry will be:
Ankur'sAccount Dr.
To Sales Account
Let us write the Journal Entries in the proper format :
Journal Entries
Date Particulars L.F Debit (Rs) Credit (Rs)
1


2


3



4 Salary Account Dr.
To Cash Account
(being salary paid worth
Rs 5000)
________________________________________
Purchases Account Dr.
To Cash Account
(being goods purchased for cash)
________________________________________
Purchases Account Dr.
To Rahul's Account
(being goods purchased on credit from Rahul)
________________________________________
Ankur's Account Dr.
To Sales Account
(being goods sold to Ankur) 5,000



500

1,000




4,000
5,000


500




1,000




4,000
Let us take one more example.
Example-3
Journalise the following transactions that took place in the books of S&D Co. Ltd. for the month of July'2001:
July 1 Dev started business with cash Rs 70,000 .
July 2 He paid into bank Rs 20,000.
July 3 Purchased furniture for Rs 4000, machinery for Rs 10,000 and typewriter for Rs 5000 in cash.
July 5 Bought books (Books-1) for cash worth Rs 15,000.
Details : 15 books @ Rs 1000 each Purchase Voucher No. 001[JUL-01]
July 6 Sold books for cash Rs 5000.
Details : 5 Books @ Rs 1000 Sale Voucher No.001
July 7 Purchased books on credit from S & Co for Rs 8000 (Book-2)
Details : 80 Books @ Rs 100 Purchase Voucher No. 002
July 8 Income earned from Investments Rs 8000.
July 9 Paid Electric charges by cheque Rs 2000.
July 10 Paid office rent in cash Rs 5000.
July11 Books worth Rs 1000 were found defective and returned to S& Co. The balance due to S & Co was paid by cheque in full settlement.
Details : 10 Books @ Rs 100
July12 Sold Books on Credit to M/s. R & C0 for Rs 12,750
Details : 8 Books(Book-1) @ Rs 1125 : Rs 9000
25 Books(Book-2) @ Rs 150 : Rs 3750
Sale Voucher No. 002
July 13 Sold Books to Ramesh on Credit for Rs 2400.
Details : 16 Books(Book-2) @ Rs 150 : Rs 2400
Sale Voucher No. 003.
July 14 Cash received from M/s R & Co. Rs 12,700, discount allowed to them Rs 50.
July 15 Cash deposited in Bank Rs 12,700.
July 16 Drew out of bank for personal use Rs 6000.
July 17 Bought goods worth Rs 3500 from Ram and sold them at Rs 4000 to Shyam.
Details : Purchase 100 Books(Book-3) @ Rs 35 : 3500
Purchase Voucher No. 003
Sale
100 Books(Book-3) @ Rs 40 : 4000
Sale Voucher No.004
July 18 Books returned by Shyam worth Rs 1000 were sent back to Ram.
Details : Books returned to company by Shyam.
25 Books(Book-3) @ Rs 40 : 1000
Books returned by Company to Ram
25 Books(Book-3) @ Rs35 : 875
July 19 Dividend received on shares Rs 7000.
July 20 Ramesh paid by cheque Rs 2200; the cheque was deposited in the bank.
July 21 Purchased goods from ABC Ltd Rs 4000 on credit
Details : 40 Books(Book-4) @ Rs 100
Purchase Voucher No. 004.
July 22 Paid office expenses in Cash Rs 2000
July 23 Paid salaries to staff Rs 4000.
July 24 Cash received from Salesman Rs 3000 for goods sold by him, after deducting conveyance expense Rs 200
Details : 30 books (book-4) @ Rs 100 : 3000
July 25 Payment made to ABC Ltd. by cheque and they allowed discount Rs 100.
July 27 Rs 200 due from Ramesh are bad debts

Explanation for Journal Entries
S.No. Account Name Account Type Rule Explanation
1. a.) Capital Account


b.) Cash Account P


R Cr. the giver


Dr. what comes in Dev has invested his money in the business i.e. he is the giver, Credit his account. Capital Account is the owner's account.
Cash is coming into the business. So Debit it.
2. a.) Bank Account

b.) Cash Account P

R Dr. the receiver

Cr. what goes out Money is deposited in bank, i.e. money is received by bank. So Debit it.
Cash is deposited so Credit it.
3. (i)



(ii)


(iii) a.) Furniture Account

b.) Cash Account

a.) Machinery Account

b.) Cash Account
a.) Type Writer Account
b.) Cash Account R

R

R

R
R
R Dr. what comes in

Cr. what goes out

Dr. what comes in

Cr. what goes out
Dr. what comes in
Cr. what goes out Furniture is purchased. So Debit it.
Furniture being purchased for cash. Cash goes out. So Credit it.
Machinery being purchased. So Debit it.
Cash goes out. So Credit it.
Typewriter is purchased, Debit it.
Cash goes out, Credit it.
4. a.) Purchase Account

b.) Cash Account N

R Dr. all expenses/losses

Cr. what goes out Purchase of goods loans. is an expense. So Debit it.
Cash goes out. So Credit it.
5. a.) Cash Account

b.) Sales Account R

N Dr. what comes in

Cr. all incomes/gains Cash is coming in on account of sale of goods. So Debit it.
Sale of goods is gains an income for the balance. Credit it.
6. a.) Purchase Account

b.) S&Co. Account N

P Dr. all expenses/losses

Cr. the giver Purchase being an /losses Expenditure, Debit it.
Goods given by S&Co on credit.
7. a.) Election Charges Account

b.) Bank Account N

P Dr. all expenses/losses

Cr. the giver Electric charge being an expense. So debit it.
Charges paid through cheque.
8. a.) Office Rent Account
b.) Cash Account N
R Dr. all expenses/losses
Cr. what goes out Office Rent is an Expense.
Rent paid through cash, cash goes out.
9. a.) S&Co. Account

b.) Purchase Return Account
c.) Bank Account P

N

P Dr. the receiver

Cr. all incomes/gains

Cr. the giver Cheque given to S&Co. on account of goods purchased from them.
Goods purchased being returned. Reduction of expenses.
Amount paid by the bank(cheque)
10. a.) M/s R&Co. Account

b.) Sales Account P

N Dr. the receiver

Cr. all incomes/gains M/s R&Co received the goods on account of Credit Sales.
Sale of goods is an income.
11. a.) Ramesh Account
b.) Sales Account P
N Dr. the receiver
Cr. all incomes/gains Ramesh received the goods.
Sale of goods is gains an income.
12. a.) Cash Account
b.) Discount Allowed Account
c.) M/s R&Co. Account R
N

P Dr. what comes in
Dr. all expenses/losses

Cr. the giver Cash received from M/s R&Co.
Discount given to the customer is an expense.
Cash given by M/s R&Co.
13. a.) Bank Account
b.) Cash Account P
R Dr. the receiver
Cr. what goes out Cash deposited in bank
Cash goes out.
14. a.) Drawing Account

b.) Bank Account P

P Dr. the receiver

Cr. the giver Money withdrawn for personal use.
Money withdrawn form bank.
15. a.) Purchase Account

b.) Ram Account
a.) Shyam Account
b.) Sales Account N

P
P
N Dr. all expenses/losses

Cr. the giver
Dr. the receiver
Cr. all incomes/gains Money spent on purchasing goods is an expense.
Goods purchased from Ram
Goods sold to Shyam.
Sale of goods is an income.
16. (i)


(ii) a.) Sales Return Account

b.) Shyam Account
a.) Ram Account

b.) Purchase Return Account N

P
P

N Dr. all expenses/losses

Cr. the giver
Dr. the receiver

Cr. all incomes/gains Decrease in income due to return of goods.
Shyam returned the goods.
Goods retrned by Shyam returned to Ram.
Increase in income due to purchase return.
17. a.) Bank Account

b.) Ramesh Account P

P Dr. the receiver

Cr. the giver Cheque paid by Ramesh deposited in bank.
Cheque given by Ramesh.
18. a.) Purchase Account
b.) ABC Ltd. Account N
P Dr. all expenses/losses
Cr. the giver Purchase of goods - expense.
Goods purchased from ABC Ltd.
19. a.) Office Expenses
b.) Cash Account N
R Dr. all expenses/losses
Cr. what goes out Payment of office expenses.
Cash goes out.
20. a.) Salary Account
b.) Cash Account N
R Dr. all expenses/losses
Cr. what goes out Payment of Salaries.
Cash goes out.
21. a.) Cash Account
b.) Conveyance Account
c.) Sales Account R
N
N Dr. what comes in
Dr. all expenses/losses
Cr. all incomes/gains Cash received from Salesman.
Conveyance Expense
Sale of goods is an income.
22. a.) ABC Ltd. Account
b.) Bank Account
c.) Discount Account P
P
N Dr. the receiver
Cr. the giver
Cr. all incomes/gains ABC Ltd. received cheque.
Payment through bank.
Discount given by ABC Ltd., gain to the business.
23. a.) Bad debts Account

b.)Ramesh Account N

P Dr. all expenses/losses

Cr. the giver Bad debts are loss to the business.
Ramesh failed to give the amount due from him.

Journal Entries
Date Particulars L.F Debit (Rs) Credit (Rs)
1st July`01


2nd July`01


3rd July`01





5th July' 01

6th July`01

7th July`01

8th July`01


9th July`01


10th July`01

11th July`01

12th July`01

13th July`01

14th July`01



15th July`01

16th July`01

17th July`01

17th July`01

18th July`01

18th July`01

19th July`01

20th July`01

21st July`01

22nd July`01


23rd July`01

24th July`01


25th July`01


27th July`01 Cash Account Dr.
To Capital Account
(being amount invested by Dev in business as capital)
________________________________________
Bank Account Dr.
To Cash Account
(being the amount deposited in bank)
________________________________________
Furniture Account Dr.
To Cash Account
(being furniture purchased for cash)

Machinery Account Dr.
To Cash Account
(being machinery purchased for cash)
Type WriterAccount Dr.
To Cash Account
(being type writer purchased for cash)
________________________________________
Purchases Account Dr.
To Cash Account
(being goods purchased for cash)
________________________________________
Cash Account Dr.
To Sales Account
(being goods sold for cash)
________________________________________
Purchases Account Dr.
To S&Co. Account
(being goods purchased from S&Co on credit)
________________________________________
Cash Account Dr.
To Investment Account
(being income earned from investment)
________________________________________
Electric Charges Account Dr.
To Bank Account
(being electric charges paid by cheque)
________________________________________
Office Rent Account Dr.
To Cash Account
(being office rent paid in cash)
________________________________________
S&Co. Account Dr.
To Purchase Return A.C
To Bank Account
(being the goods worth Rs 1000 returned to S&Co and balance being paid by cheque)
________________________________________
M/s R&Co. Account Dr.
To Sales Account
(being goods sold M/s R & Co on credit)
________________________________________
Ramesh Account Dr.
To Sales Account
(being goods sold to Ramesh )
________________________________________
Cash Account Dr.
Discount Allowed Dr.
Account
To M/s R&Co. Account
(being cash received from M/s R&Co.in full settlement after allowing them discount)
________________________________________
Bank Account Dr.
To Cash Account
(being cash deposited in bank)
________________________________________

Drawings Account Dr.
To Bank Account
(being amount drawn from the bank for personal use)
________________________________________
Purchases Account Dr.
To Ram Account
(being goods purchased from Ram)
________________________________________
Shyam Account Dr.
To Sales Account
(being goods sold to Shyam on credit)
________________________________________
Sales Return Account Dr.
To Shyam Account
(being goods returned by Shyam)
________________________________________
Ram Account Dr.
To Purchase Return Account
(being goods returned to Ram)
________________________________________
Cash Account Dr.
To Dividend Account
(being dividend received on shares)
________________________________________
Bank Account Dr.
To Ramesh Account
(being cheque received from Ramesh and deposited in Bank)
________________________________________
Purchases Account Dr.
To ABC Ltd.Account
(being goods purchased from ABC Ltd. on credit)
________________________________________
Office Expenses Account Dr.
To Cash Account
(being office expenses paid in cash)
________________________________________
Salary Account Dr.
To Cash Account
(being salary paid to staff)
________________________________________
Cash Account Dr.
Conveyance Account Dr.
To Sales Account
(being cash received from Salesman after deducting conveyance expense)
________________________________________
ABC Ltd. Account Dr.
To Bank Account
To Discount Received Account
(being amount paid by cheque to ABC Ltd.who allowed discount of Rs 100)
________________________________________
Bad debts Account Dr.
To Ramesh Account
(being bad debts written off) 70,000




20,000

4,000




10,000

5,000

15,000

5,000

8,000

8,000

2,000

5,000

8,000


12,750

2,400

12,700
50


12,700

6,000

3,500

4,000

1,000

875

7,000

2,200

4,000


2,000

4,000

2,800
200


4,000


200

70,000



20,000




4,000



10,000

5,000

15,000

5,000

8,000

8,000

2,000

5,000

1,000
7,000


12,750

2,400

12,750



12,700

6,000

3,500

4,000

1,000

875

7,000

2,200

4,000


2,000

4,000


3,000


3,900
100


200

As you have seen, in a Journal each transaction is dealt separately. A Journal tells us the amounts to be `debited` and `credited` and also the accounts involved.
Since transactions are recorded in the Journal in the chronological order, i.e. on day-to-day basis, it may be possible that transactions relating to one account appear in different pages. But to know the exact position of an account, it is required that all the transactions relating to that account should be grouped together and shown under the particular account head.
For example, there may be a number of separate entries regarding purchases, sales, etc. in a Journal. If we want to know exactly how much purchases and sales took place during a particular period, then we have to look through all the pages of the Journal and it might be possible that we skip one or more entries regarding purchases and sales. So, it is always better to classify and group the entries relating to purchases at one place, that is, under `Purchases Account`, entries relating to sales under `Sales Account` and those relating to salaries under `Salary Account` etc. In this way it will really become easy to just look at any account and know the particulars of that account. This task is accomplished with the help of the Ledger, which is explained in the following section.
Ledger
The book which contains accounts is known as the Ledger. Transactions relating to a particular account for a given period are brought together and finally they are recorded at one place in a Ledger.
For example, cash transactions like Cash Sales, Cash Purchases, Cash Expenses etc. are put in one place in the Ledger under the Cash Account.
Transactions relating to different persons whether customers or suppliers, are recorded separately in their respective accounts in the Ledger. A Ledger is the most important book of accounts as it provides necessary information regarding various accounts.
Each Ledger account is divided into two equal parts :
a. Debit side
b. Credit side
The left-hand side is known as the Debit side and the right hand side as the Credit side. On each side there are columns for Date, Particulars, Journal Folio and Amount. The format of a Ledger Account is as follows :
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
Debit Entries Credit Entries
Transferring the entries from Journal to respective Ledger Accounts is known as Posting of entries.
How entries are posted in Ledger Accounts?
Each debit and credit entry is transferred from the Journal to their respective accounts in the Ledger. For example, consider the following journal entry:
Furniture Account Dr. 1000
To Cash Account 1000
(being furniture purchased for cash)
:
In the Furniture Account on the Dr. side, write `Cash Account` preceded by the word `To` inside the Particulars column. Write the amount under the Amount column.
Dr. Furniture Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
To Cash Account 1000
Similarly, in Cash Account on the Cr. side, write `Furniture Account` preceded by the word `By` inside the Particulars column. Write the amount under the Amount column.
Dr. Cash Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
By Furniture Account 1000

In every account, the total of both the sides should be same i.e. the total of Dr. should always be equal to the total of Cr.
Balance c/d and Balance b/d
Balance c/d (Balance carried down)
Balance carried down is usually the balancing figure in any account. Before closing an account both the sides (Dr. and Cr.) of that account should tally. The amount that is added to make the shorter side of any account equal to the other side is called balance carried down. It is in fact the closing balance of any account. To understand the concept of balance carried down, let us consider the Furniture Account and the Cash Account of the previous example. The two accounts have been reproduced as follows :
Dr. Furniture Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
To Cash Account


To Balance b/d 1,000
________________________________________1,000
__________________________________________________ ______________________________1,000 By Balance c/d 1,000
________________________________________1,000
__________________________________________________ ______________________________

Dr.
Cash Account
Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
To Balance c/d 1,000
________________________________________1,000
__________________________________________________ ______________________________ By Furniture Account



By Balance b/d 1,000
________________________________________1,000
__________________________________________________ ______________________________1,000
We have now understood the various aspects of preparing a Ledger. Let us now proceed to prepare a Ledger for all the accounts we dealt with in the example 3.


Accounts for Example-3
Dr. Capital Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
31st July To Balance c/d 70,000
________________________________________70,000
__________________________________________________ ______________________________ 1st July


1st August By Cash Account


By Balance b/d 70,000
________________________________________70,000
__________________________________________________ ______________________________70,000
Dr. Furniture Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
3rd July



1st August To Cash Account



To Balance b/d 4,000
________________________________________4,000
__________________________________________________ ______________________________4,000 31st July By Balance c/d
4,000
________________________________________4,000
__________________________________________________ ______________________________
Dr. Machinery Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
3rd July



1st August To Cash Account



To Balance b/d 10,000
________________________________________10,000
__________________________________________________ ______________________________10,000 31st July By Balance c/d
10,000
________________________________________10,000
__________________________________________________ ______________________________


Dr.

Type Writer Account

Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
3rd July


1st August To Cash Account


To Balance b/d 5,000
________________________________________5,000
__________________________________________________ ______________________________5,000 31st July By Balance c/d 5,000
________________________________________5,000
__________________________________________________ ______________________________

Dr.
Electric Charges Account
Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
9th July


1st August To Bank Account


To Balance b/d 2,000
________________________________________2,000
__________________________________________________ ______________________________2,000 31st July By Balance c/d


2,000
________________________________________2,000
__________________________________________________ ______________________________





Dr.



Office Rent Account



Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
10th July



1st August To Cash Account


To Balance b/d 5,000
________________________________________5,000
__________________________________________________ ______________________________5,000 31st July By Balance c/d


5,000
________________________________________5,000
__________________________________________________ ______________________________
Dr. Salary Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
23rd July



1st August To Cash Account


To Balance b/d 4,000
________________________________________4,000
__________________________________________________ ______________________________4,000 31st July By Balance c/d


4,000
________________________________________4,000
__________________________________________________ ______________________________
Dr. Conveyance Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
24th July



1st August To Sales Account


To Balance b/d 200
________________________________________200
__________________________________________________ ______________________________200 31st July By Balance c/d


200
________________________________________200
__________________________________________________ ______________________________
Dr. Bad Debts Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
27th July


1st August To Ramesh Account


To Balance b/d 200
________________________________________200
__________________________________________________ ______________________________200 31st July By Balance c/d


200
________________________________________200
__________________________________________________ ______________________________


Dr.
Purchases Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
5th July
7th July
17th July
21st July


1st August To Cash Account
To S&Co. Account
To Ram Account
To ABC Ltd. Account


To Balance b/d 15,000
8,000
3,500
4,000
________________________________________30,500
________________________________________
30,500 31st July By Balance c/d


30,500


________________________________________30,500
________________________________________





Dr.




Purchase Return Account




Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
31st July To Balance c/d 1,875

________________________________________1,875
__________________________________________________ ______________________________ 11th July
18th July


1st August By S & Co.
By Ram


To Balance b/d 1,000
875
________________________________________1,875
__________________________________________________ ______________________________1,875


Dr.

Sales Account

Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
31st July


To Balance c/d 27,150



________________________________________27,150
________________________________________ 6th July
12th July

13th July
17th July
24th July
24th July

1st August By Cash Account
By M/s R&Co
Account
By Ramesh Account
By Shyam Account
By Cash Account
By Conveyance
Account

To Balance b/d 5,000
12,750

2,400
4,000
2,800
200
________________________________________27,150
________________________________________27,150
Dr. S&Co. Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
11th July

11th July

To Purchase Return A.c
To Bank Account 1,000
7,000
________________________________________8,000
__________________________________________________ ______________________________ 7th July By Purchases A.C 8,000

________________________________________8,000
__________________________________________________ ______________________________
Dr. Sales Return Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
18th July



1st August To Shyam Account



To Balance b/d 1,000
________________________________________1,000
__________________________________________________ ______________________________1,000 31st July By Balance c/d 1,000
________________________________________1,000
________________________________________
Dr. Cash Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
1st July
6th July
8th July

14th July

19th July
24th July





1st August To Capital Account
To Sales Account
To Investment
Account
To M/s R & Co
Account
To Dividend Account
To Sales Account





To Balance b/d 70,000
5,000
8,000

12,700

7,000
2,800




________________________________________1,05,500
________________________________________27,800 2nd July
3rd July
3rd July

3rd July

5th July

10th July

15th July
22nd July

23rd July
31st July By Bank Account
By Furniture Account
By Machinery
Account
By Type writer
Account
By Purchases
Account
By Office Rent
Account
By Bank Account
By OfficeExpenses
Account
By Salary Account
By Balance c/d 20,000
4,000
10,000

5,000

15,000

5,000

12,700
2,000

4,000
27,800
________________________________________1,05,500
________________________________________
Dr. Bank Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2nd July
15th July
20th July




1th August To Cash Account
To Cash Account
To Ramesh Account




To Balance b/d 20,000
12,700
2,200


________________________________________34,900
__________________________________________________ ______________________________16,000 9th July
11th July
16th July
25th July
31st July By Electric Charges Account
By S&Co Account
By Drawings Account
By ABC Ltd. Account
By Balance c/d 2,000

7,000
6,000
3,900
16,000
________________________________________34,900
__________________________________________________ ______________________________
Dr. M/s R&Co. Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
12th July To Sales Account 12,750

________________________________________12,750
__________________________________________________ ______________________________ 14th July
14th July By Cash Account
By Discount Allowed Account 12,700
50
________________________________________12,750
__________________________________________________ ______________________________

Ramesh Account
Date Particulars J.F. Amount Date Particulars J.F. Amount
13th July To Sales Account 2,400

________________________________________2,400
________________________________________ 20th July
27th July
By Bank Account
By Bad Debts Account 2,200
200
________________________________________2,400
________________________________________
Dr. Shyam Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
17th July



1st August To Sales Account



To Balance b/d 4,000

________________________________________4,000
________________________________________3,000 18th July

31st July By Sales Return Account
By Balance c/d 1,000
3,000
________________________________________4,000
__________________________________________________ ______________________________
Dr. Ram's Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
18th July
31st July To Purchase return
To Balance c/d 875
2,625
________________________________________3,500
________________________________________ 17th July


1st August By Purchases


To Balance b/d 3,500

________________________________________3,500
________________________________________2,625
Dr. ABC Ltd. Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
25th July
25th July To Bank Account
To Discount Received Account 3,900
100
________________________________________4,000
________________________________________ 21st July By Purchases Account 4,000
________________________________________4,000
__________________________________________________ ______________________________
Dr. Drawing Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
16th July



1st August To Bank Account


To Balance b/d 6,000
________________________________________6,000
__________________________________________________ ______________________________6,000 31st July By Balance c/d 6,000
________________________________________6,000
__________________________________________________ ______________________________
Dr. Discount Allowed Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
14th July

1st August To M/s R&Co Account

To Balance b/d 50
________________________________________ 50
________________________________________ 50 31st July By Balance c/d 50
________________________________________ 50
________________________________________
Dr. Discount Received Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
31st July To Balance b/d 100
________________________________________ 100
__________________________________________________ ______________________________ 25th July


1st August By ABC Ltd. Account


By Balance b/d 100
________________________________________ 100
__________________________________________________ ______________________________ 100
Dr. Office Expenses Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
22nd July



1st August To Cash Account



To Balance b/d 2,000
________________________________________2,000
__________________________________________________ ______________________________2,000 31st July By Balance c/d 2,000
________________________________________2,000
__________________________________________________ ______________________________



Dr.


Investment Account


Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
31st July To Balance c/d 8,000

________________________________________8,000
__________________________________________________ ______________________________ 8th July



1st August By Cash



To Balance b/d 8,000
________________________________________8,000
__________________________________________________ ______________________________8,000

Dr.
Dividend Account
Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
31st July To Balance c/d 7,000
________________________________________7,000
__________________________________________________ ______________________________ 19th July


1st August By Cash


To Balance b/d 7,000
________________________________________7,000
__________________________________________________ ______________________________7,000
Trial Balance

The statement which is prepared to show separately the debit and the credit balances of the Ledger accounts on a particular date is known as the Trial Balance. Trial balance is prepared to check the arithmetical accuracy of recording the transactions.
It is a summary of the entire Ledger. It has two columns, one for Debit balances and another for Credit balances. The totals of the two columns must match. If the totals of the two columns do not match then there may be :
a. Some error in arithmetic calculations or,
b. you may have transferred the wrong amount or,
c. You may have forgotten to include an account altogether.
So Trial Balance helps you in finding out the possible errors at an early stage before preparing Final Accounts.

Format of Trial Balance
Trial Balance (as on.....)
Particulars Debit Amount (Rs.) Credit Amount (Rs.)


Why both sides (Dr. and Cr.) of a Trial Balance should match?
Trial Balance helps in locating errors in accounting work. It is based on the concept of Double Entry System. According to this system every transaction has two aspects and both the aspects are recorded. For example, on purchase of furniture, either the cash balance will reduce or a liability to the supplier will arise i.e. for every debit there is a corresponding credit and vice versa. So, the Debit side of a Trial Balance must match the Credit side.
Let us prepare the Trial Balance for S&D company of example 3, for the month of July:
Trial Balance (as on 31st July 2001)
Particulars Debit Amount (Rs.) Credit Amount (Rs.)
Capital Account
Furniture Account
Machinery Account
Type Writer Account
Electric Charges Account
Office Rent Account
Office Expenses Account
Salary Account
Conveyance Account
Bad Debts Account
Purchases Account
Purchases Return Account
Sales Account
Sales Return Account
Cash Account
Bank Account
Ram Account
Shyam Account
Dividend
Drawing Account
Investment
Discount Allowed Account
Discount Received Account

Total
4,000
10,000
5,000
2,000
5,000
2,000
4,000
200
200
30,500


1000
27,800
16,000

3,000

6,000

50

________________________________________1,16,750
________________________________________ 70,000





1875
27,150

2,625
7,000
8,000
100
________________________________________1,16,750
________________________________________
Final Accounts
After preparing Trial Balance and being sure that books of Accounts are written in proper form and are arithmetically accurate, the owner of the business would like to know about the ultimate results of operating the business, that is,
1. How much profits were earned or losses were incurred during a particular period (generally one year)?.
2. What is the status of the business, that is, the position of various assets and liabilities at the end of a particular period (generally one year)?.
To ascertain the profit earned or loss incurred during an accounting year, a Profit and Loss Account ( P & L A/c) is prepared which is also known as `Income Statement`. To ascertain the financial position of the business as on the last date of the accounting year, the `Balance Sheet` is prepared which is also known as the `position statement`.These two financial statements viz. Profit and Loss Account and Balance Sheet are termed as `Final Accounts`.
Before preparing Profit and Loss Account one more account called Trading Account is prepared. Usually, Trading Account is combined with the Profit and Loss Account and they are together termed as the `Income Statement`.
Trading Account
Trading Account is prepared to find out the Gross Profit/Gross Loss for the accounting period. This Gross Profit/Loss is then used to find out the Net Profit/Loss for that period.
Trading Account deals with the manufacturing expenses i.e expenses at the factory level. For example, purchase of raw material, wages, carriage inwards etc. All these expenses together with the opening stock (if any) are written on the debit side and all the sales together with the closing stock are written on the credit side of the Trading Account. The balancing figure is Gross Profit or Gross Loss, as the case may be.
Debit Side of Trading Account
Debit side of Trading Account consists of the following items :
1. Opening Stock
This item is usually the first item. In the first year of a business there will be no opening stock. Opening stock may be the opening stock of :
1. Finished Goods
2. Raw Materials
3. Work in progress (unfinished goods)
2. Purchases
This refers to goods purchased for resale or purchase of raw materials and includes both cash and credit purchases. Purchases here are Net Purchases (i.e. Total Purchases-Purchase Return).
Goods taken away by the owners of the business for personal use should also be deducted from the total purchases.
3. Carriage of Freight Inwards
It is the cost of bringing the materials to the factory and making them available for use.
4. Manufacturing Wages
These are the wages paid to the workers in factory.
5. Power and Fuel
It is the cost of running the machines in the factory.
6. Factory Lighting
Cost of electricity consumed for providing power for running the factory.
7. Factory Rent and Rates
Rent paid for factory premises, municipal taxes, charges for water etc.
Credit side of Trading Account
1. Sales
It is the Total Sales made during the year. If some goods have been returned by the cusomers then it should be deducted from the Total Sales i.e. only Net Sales(Total Sales- Sales Return) will come on the credit side of the Trading Account.
2. Closing Stock
It refers to the: Finished Goods Raw Materials and Work-in-progress
Dr. Trading Account for the year ended....
Cr Particulars Amount Particulars Amount
....
To Gross Profit .
By Gross Loss

Gross Profit/Loss
If the total of credit side is more than the total of debit side, then the difference between the two sides is the Gross Profit. The Gross Profit will come on the debit side as it is the balancing figure.
Similarly, if the total of debit side is more than that of credit side, the balance i.e. Gross Loss will come on the credit side.
Having discussed the various items shown in the Trading Account, let us understand how atrading Account is prepared. For that consider the following example.
The following are the items from the Trial balance of an industrial firm :
Opening stock : Raw Materials 40,000
Finished Goods 70,000
Purchases 1,80,000
Sales 3,50,000
Returns : Purchases 5,000
Sales 3,000
Wages 65,000
Factory Expenses 45,000
Freight : Inwards 10,000
Outwards 15,000
At the end of the concerned period, the stock-in-hand was:
Raw Materials 35,000
Work-in-progress 10,000
Finished Goods 55,000
Prepare Trading Account of the firm.
Dr. Trading Account Cr.
Particulars Amt. Particulars Amt
To Opening stock
Raw Material : 40,000
Finished Goods : 70,000
________________________________________
To Purchases 1,80,000-5000
To Wages
To Factory Expenses
To Freight Inwards
To Gross Profit


1,10,000
1,75,000
65,000
45,000
10,000
42,000
________________________________________4,47,000
________________________________________ By Sales (3,50,000 - 3000)
By Closing stock
Raw Material : 35,000
Work-in-progress : 10,000
Finished goods : 55,000
________________________________________ 3,47,000



1,00,000



________________________________________4,47,000
________________________________________
Profit and Loss Account
Profit and Loss Account is prepared to calculate the Net Profit or Net Loss of the business for a given accounting period.
Profit and Loss Account is a Nominal Account, therefore following the rule of Nominal Account (`Debit all Expenses/Losses and Credit all Incomes/Gains`). Profit and Loss Account is debited with all the indirect expenses or losses which have not been included in the Trading Account. Whereas all the Incomes and gains are credited to it. Let us examine the various items that are debited or credited to the Profit and Loss Account

Indirect Expenses and losses
Indirect Expenses include all Administrative, Selling and Distribution expenses such as- Salaries, Rent and Taxes, Postage, Stationery, Insurance, Depreciation, Interest paid, Office Lighting, Advertising, Packing, Carriage Outwards etc.
Losses include— Loss by fire, Loss by theft etc and other unavoidable losses.
Incomes and gains
Incomes may include— Discount received from suppliers, Income from investments, Dividend on shares, Commission etc.
Gains include any profit made on Sale of old assets, Miscellaneous revenue etc.
The Gross Profit from the Trading Account is credited to the Profit and Loss Account whereas the Gross Loss is debited to it. The Balancing figure of Profit and Loss Account can be Net Profit or Net Loss. If the total of credit side (incomes) is more than the total of debit side (expenses), that is, if incomes are in excess of expenses then there is Net Profit. On the other hand if debit side (expenses) is more than the credit side (incomes) then there is Net loss.
Net Profit/Loss is transferred and adjusted against the Capital Account in the Balance Sheet. Net Profit is added to the Capital Account whereas Net Loss is deducted from the Capital Account in the Balance sheet. Once the Trading and Profit and Loss accounts are prepared we can proceed to prepare the Balance Sheet which shows the position of various assets and liabilities as on a particular date.

Balance Sheet

Balance sheet is prepared only after the preparation of the Trading and Profit and Loss Account. It is prepared to ascertain the financial position of the business i.e. to know what the business owes and what it owns on a certain date. A Balance sheet is not an account but only a statement of assets and liabilities. On the left hand side, the liabilities of the business are shown whereas, on the right hand side the assets of the business are shown. The two sides of the Balance Sheet (i.e. Assets and Liabilities) must have the same totals. If it is not, then there is some error in the accounts. A Balance Sheet is prepared as on a particular date and not for a period.

The Form of Balance Sheet
Balance Sheet as on....
Liabilities Assets
Owner's funds
Fixed or Long Term Liabilities
Current or Short Term Liabilities Fixed Assets
Investments
Current Assets


Example-4
From the following Trial Balance, prepare a Trading & a P&L A/c for the year ending 31st Dec, 1998 and a Balance Sheet as on that date.
S.Drs
Stock (1-1-98)
Land & Building
Capital
Rent
Cash in hand
Cash at bank
Wages
S.Crs.
B/R
Interest
Bad debits
Repairs
T.Sales (ABC)
B/P
Furniture & fixtures
Depreciation
Rates & Taxes
Salaries
Drawings
Purchases
Office expenses
Plant & Mach
Total 15,000
50,000
1,00,000

16,000
40,000
30,000

20,000
2000
5000
3000


15,000
10,000
8000
20,000
20,000
1,00,000
25,000
57,000
________________________________________5,36,000
________________________________________


2,50,000
6000


70,000




1,70,000
40,000



________________________________________5,36,000
________________________________________

Dr.

Trading Account
Cr.
Particulars Amount Particulars Amount
Opening Stock
Wages
Purchases
Gross Profit
50,000
30,000
1,00,000
90,000
________________________________________2,70,000
________________________________________ Sales
Closing Stock 1,70,000
1,00,000

________________________________________2,70,000
________________________________________
Dr. Profit and Loss Account for the year ending.... Cr.
Particulars Amount Particulars Amount
To Interest
To Bad Debts
To Repairs
To Depreciation
To Rates & Taxes
To Salaries
To Office expenses
To Net Profit 2,000
5,000
3,000
10,000
8,000
20,000
25,000
23,000
________________________________________96,000
________________________________________ By Gross Profit
By Rent 90,000
6,000





________________________________________96,000
________________________________________




Dr. Balance Sheet as on.... Cr.
Liabilities Amount Assets Amount
Capital 2,50,000
Add Net Profit 23000
________________________________________
2,73,000
-Drawings 20,000
________________________________________Sundry Creditors
Bills Payable



2,53,000

70,000
40,000
________________________________________3,63,000
________________________________________ Sundry Debtors
Land & Building
Cash in Hand
Cash at Bank
Bills Receivable
Furniture & Fixture
Plant &Machinery
Closing Stock 15,000
1,00,000
16,000
40,000
20,000
15,000
57,000
1,00,000
________________________________________3,63,000
________________________________________
We took up the various books of accounts and learned how they are prepared manually. However, there are certain drawbacks in manual accounting. One has to be extremely cautious while recording and posting entries since every accounting transaction has dual impact. Missing out any aspect of a transaction will lead to differences in the figures shown by various accounts, which can further lead to troubles.This is the main drawback of manual accounting.



Problems on Journal entries.

1) Pass journal entries in the books of MIB.
1.1.2005 Anu commenced business with a capital of Rs. 50,000
2.1.2005 Bought goods for cash Rs. 7,000
3.1.2005 Deposited in HDFC bank to open a current account Rs. 10,000
4.1.2005 Sold goods for cash Rs. 2,000 and on credit to Ram Rs. 4,000
4.1.2005 Paid Rs. 800 as delivery charges on the above.
5.1.2005 Bought goods for cash Rs. 4,000 from KK and Rs. 6,000 on credit from Big B
5.1.2005 Paid PC Parcel Service for the above Rs. 300
6.1.2005 Bought furniture for cash Rs. 20,000 from Miss. Namrath
7.1.2005 Returned goods purchased for cash Rs. 200 and from Big B Rs. 500
Signed Accommodation bills for Rs. 10,000 with Gopi
9.1.2005 Discounted the above bill @ 12 % for ½ month with HDFC bank
10.1.2005 Sold goods costing Rs. 4000 at Rs. 5000 to Bhargav on sale on approval basis
13.1.2005 Introduced further capital Rs. 10,000
14.1.2005 Withdrew from HDFC Rs. 3,000
14.1.2005 Goods returned by Ram Rs. 300 and others Rs. 100
15.1.2005 Purchased an old car for official use Rs. 3,000 and spent Rs. 2,000 on reconditioning
16.1.2005 Paid salary to employees Sri, Radhi, Empty and Jana - Rs. 750 each by cheque
17.1.2005 Settled Big B’s account at a cash discount of 5%
18.1.2005 Electric charges paid out of bank a/c Rs. 345
19.1.2005 Ram settled his account and allowed him a cash discount of 6 %
20.1.2005 Paid fire insurance premium Rs. 750 to Sarath insurance co.
21.1.2005 Paid for accommodation bill
22.1.2005 HDFC bank charges Rs. 40 for services
23.1.2005 HDFC bank allowed interest on balance Rs. 25
24.1.2005 Gopi failed to honour his acceptance.
25.1.2005 Paid Rs. 19,500 in full settlement to Namrath
27.1.2005 Repairs to car Rs. 300 and petrol expenses Rs. 750
28.1.2005 Bhargav approved 80 % of sales and rest were rejected
29.1.2005 Bhargav settled his account by paying 98 % net.

2) Show journal entries in respect of the following transactions in the books of Murali.
a. Started business with cash Rs. 15,000, goods worth Rs. 8,000, office equipment worth Rs. 7,000 and his private car worth Rs. 12,000 which will henceforth be used solely for business purposes
b. Bought furniture worth Rs. 4,000 of which those worth Rs. 1,000 are for office purpose and balance for stock
c. Purchased 3 motor cars worth Rs. 15,000 each from SV associates for stock
d. Purchased 2 motor cars worth Rs. 8,000 each from Sherif for stock.
e. Purchased for cash 1 motor car worth Rs. 7,000 for private use
f. Returned motor cars worth Rs. 15,000 from stock and that worth Rs. 8,000 from business use to SV and Sherif
g. Sold old office equipments for Rs. 4,000 (Cost Rs. 7,000; Book value Rs. 5,000)
h. Sold household furniture for Rs. 2,000 and paid in to Business Bank A/C
i. Paid Landlord Rs. 1,200 for rent. ( ½ of the premises used for Murali’s residence)
j. Sold some office equipments for Rs. 1,300 (Proceeds being received as Rs. 700 by cheque and balance in cash) and the cheque was paid into private bank A/C

3) Journalise the following transactions in the books of Remo & Co.
a. Started business with cash Rs. 25,000, goods worth Rs. 20,000, Machinery worth Rs. 30,000 and Private investments in 10% Govt. Securities Rs. 10,000 (Face Value Rs. 12,000)
b. Bought furniture worth Rs. 20,000 of which those worth Rs. 10,000 are for interior decoration and balance for resale
c. Purchased 4 Sewing machines worth Rs. 10,000 each from Aswin for resale
d. Purchased one Welding machine worth Rs. 20,000 for business use from Sona.
e. Purchased for cash 1 motor car worth Rs. 7,000 for private use
f. Sold 2 sewing machines for Rs. 12,000 each at a trade discount of 10 % of MRP
g. Sold welding machine for Rs. 13,000 (depreciation up to the date of sale Rs. 2,000)
h. Sold household furniture for Rs. 2,000 and paid in to Business Bank A/C
i. Purchased goods Rs. 45,000 on credit from Neha.
j. Of the goods purchased Rs. 5,000 was used for advertisement, Rs. 3,000 was taken for private use; Rs. 1,000 was given to employees on Diwali as bonus and Gift to Mrs. Heena Rs. 600 (His wife Mrs. Heena rendering part-time services in office)
k. Collected six months interest on investments.
l. Depreciation on Machinery Rs. 5,000
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Jitendra Mazee
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Re: Accounting. - April 19th, 2016

Quote:
Originally Posted by cchethuc View Post
Basics of Accounting
In this section, we will familiarize ourselves with the basics of Accounting. The main topics covered in this section include—Need for Accounting, Accounting Principles, Basic Terms used in Accounting and finally preparation of the various books of accounts viz. Journal, Ledger, Trial Balance, Trading and Profit and Loss Account and Balance Sheet.
Accounting Concepts
Every business organization whether big or small carries out a number of transactions, such as sale of its products, purchase of raw materials etc. in its daily routine. One cannot memorize each and every transaction taking place in business. These have to be recorded somewhere. The books which almost every business organization maintains for recording transactions are the Books of Accounts.
The usual format of any account is the T-form , which is as follows :
Dr. Cr.
Particulars Amount Particulars Amount
.

Left Side, is called as Debit Side, Right side, called as Credit Side,
Thus, a simple Cash Account showing inflow and outflow of cash will be as shown below:
Dr. Cash Account Cr.
Particulars (inflow) Amount Particulars (outflow) Amount
Cash sales
. 6,000 Purchase of goods

. 6,000
When you record a transaction on the Debit side, it is said that you have `debited` the account. Similarly, when you record a transaction on the Credit side, it is said that you have `credited` the account.
The Need For Accounting
Let us suppose you have a small book store. You have sold some books to your customer, say, X, who has given you the full amount in return. This is a transaction that took place between you and X. Now, suppose you deposit all the money received from X in the bank. This is another transaction, between you and the bank. You can very easily remember these transactions and need not write them anywhere.
But, what if there were a large number of customers, say 100 or even more and most of them have not given you the full amount due ? This is what really happens in a business. In such a case, you will have to memorize all the details regarding each and every customer i.e. details of the amount received from them, the amount due from them etc. which is nearly impossible for anybody.
So, what you can do is to prepare an account of each and every customer in order to record the details of the transactions with them. This means you have to prepare a large number of accounts i.e one account for each customer.
For example, suppose you have sold books worth Rs.100 to X and books worth Rs.1000 to Y. X has given you only Rs.50 and Y has given you Rs.750. To remember the balance due from X and Y, you can record these transactions by preparing X's Account, Y's Account as well as your own Cash Account. The 3 accounts will be as follows:
Dr.
X's Account Cr.
Particulars (Incoming) Amount Particulars (Outgoing) Amount
Books 100

________________________________________100
__________________________________________________ ______________________________ Cash
Balance due 50
50
________________________________________100
__________________________________________________ ______________________________
Table1
Dr. Y's Account Cr.
Particulars (Incoming) Amount Particulars (Outgoing) Amount
Books 1000

________________________________________1,000
__________________________________________________ ______________________________ Cash
Balance due 750
250
________________________________________1,000
__________________________________________________ ______________________________
Table2
X has received books worth Rs.100, that is why books have been written on the left side i.e. incoming side. X has given only Rs.50 for books and the balance is due from him which he has to give later. So these are written on the right side i.e. outgoing side, as shown in Table1. Similarly, the account for Y is shown in Table2.
Dr. Cash Account Cr.
Particulars (Incoming) Amount Particulars (Outgoing) Amount
Cash Sales(X)
Cash Sales(Y)
. 50
750
________________________________________ Other expenditures

________________________________________
Table3
The same logic applies for Cash Account. The amounts received from X and Y are written on the left side whereas, cash expenses are written on the right side, as these are outflows.
The real problem will arise when one has to prepare a very large number of accounts, considering the discount given to customers, the commission given to salesmen and such other things.
Moreover, there are not just customers with whom you have to have everyday transactions. There are the suppliers of raw materials, people who have given you loan etc. with whom you have to transact everyday. This means you have to prepare a separate account for each of these persons as well, and if this is so, you will end up with an interminable list of accounts which will be really difficult to maintain. The situation will be complicated further if your knowledge of accounting concepts is not quite adequate.
Accounting is the art of recording, classifying and summarizing transactions and interpreting the results thereof.
To understanding accounting properly, it is necessary to know first, the different types of Accounts.
Classification of Accounts

Personal Accounts
These are the accounts which relate to persons, such as Customers Account, Suppliers Account etc. Personal accounts include both real accounts (Human beings) and artificial persons (Bank, Company etc)
Impersonal Accounts
Accounts which are not personal are called impersonal accounts. These can be further sub-divided into two categories : Real Accounts and Nominal Accounts.
Real Accounts
These can be tangible (i.e. can be touched and seen) or intangible (i.e. cannot be touched and seen). As a result they are further divided into:
1. Tangible Real Accounts. These accounts relate to things that can be touched, felt, measured etc. such as Cash Account.
2. Intangible Real Accounts. These accounts relate to things that cannot be touched but can be measured in terms of money, such as a Patents Account
Nominal Accounts
These accounts deal with expenses and losses, incomes and gains. They explain the nature of the transactions i.e. whether the particular transaction will result in an expense/loss or in an income/gain.

Rules of Debit (Dr.) and Credit (Cr.)
1. Personal Account
Debit the receiver
Credit the giver
2. Impersonal Account (Real Account/Assets Account)
Debit what comes in
Credit what goes out
3. Nominal Account
Debit all expenses and losses
Credit all incomes and gains

Accounting Principles

Accounting principles are the general rules which are used as guidelines in accounting and as the basis of practice. These principles can be classified into two categories :
1. Accounting Concepts
2. Accounting Conventions
Accounting Concepts
1. Separate Entity Concept
Every business is a separate entity from the proprietor. Business and owners are distinct.
2. Dual aspect Concept: Every business
Every business transation has two aspects – Debit. For example “Cash Received from Mr. Samtha Rs. 5000” has two aspects “Cash” – Real account and “Mr.Samtha” – Personal Account.
3. Going Concern Concept
It is assumed that the business will exist for an indefinite period of time and transactions are recorded from this point of view.
4. Money Measurement Concept
Those transactions and events are recorded in accounting only when they can be expressed in terms of money. Accounting records only financial character of the business
5. Cost Concept
All transactions are to be recorded in the books of accounts at their Cost Price when purchased, not on Market Price.
6. Matching Concept
At the end of the financial year all costs (expenses) of the organisation are to be matched against the revenues of the organization of the current year. Increments made by the business during a period can be measured only when the revenue earned during a period is compared with the expenses incurred for earning that revenue.
7. Accounting Period Concept
Uniformity in accounting period should be maintained in order to provide for intra firm comparison. Performance of one year can be compared with other only when uniformity in accounting period is maintained.
8. Accrual concept / Realisation Concept.
Transaction should be recorded on due basis. Expenses / Incomes are recognised and recorded on accrual basis. Actual receipt/payment is irrelevant for recognizing income/expense.
Accounting Conventions
1. Materiality
An accountant should disclose all the material facts and should ignore insignificant details. Accounting records should consist only of such events as are significant from the point of view of income determination.
2. Consistency
Accounting procedures or practices should remain the same(consistent) from one year to another.
3. Conservatism
An accountant should be conservative and prudent. Profits are not to be expected and provision should be made to encounter losses. Valuing stock at Cost Price or Market Price whichever is lower, and creating provision for doubtful debts are the examples of applications of the principle of conservatism.
Basic Terms Used In Accounts
1. Entry
Recording of a transaction in any book of accounting is called an Entry.
2. Proprietor(Owner)
The person who invests his money in the business and bears all the risks connected with the business is called the proprietor.
3. Capital
It means the amount invested by the proprietor in the business. For the business, capital is a liability towards the owner. It is an owner`s account i.e. a personal account.
4. Assets
Economic resources owned by an entity which may or may not have realizable value. An expenditure will be classified as an asset when the benefit from which is yet to be enjoyed.
5. Liabilities
The amount which the business owes and has to return to the outsiders is termed Liabilities.
6. Debtor
A person who owes money to the business mostly on account of credit sales of goods
For example, when goods are sold to a person on credit that person pays the price in future. He is called a debtor because he owes the amount to the organisation.
7. Creditor
Any person who gives credit is a creditor. The proprietor gives money to the business so he is a creditor to the business. A creditor is a person to whom money is owed by the business organisation.
8. Revenue or Income
It is the income of a recurring or non recurring nature from any source related/not related to business.
9. Expense
It is the amount spent in order to produce and sell the goods and services which generate the revenue. For example, payment of salaries to bring some benefit to the business. Expenses can be of the following types :
o Revenue Expenditure or Expenses
When the benefit of an expense is not likely to be available for one year or less, it is treated as revenue.
For example, salaries, wages, power and fuel, maintenance expenses of assets etc.
o Capital Expenditure
When the benefit of an expenditure is not exhausted in the year in which it was incurred but is available over a number of years, it is considered as Capital Expenditure. An example is the expenditure incurred for purchase of fixed assets.
o Deferred Revenue Expense
When the benefit of a revenue expenditure continues for more than one year, it is treated as Deferred Revenue Expense. Such expenditure is not written off in one year but over a period of 2 or 3 years.

For example, expenditure incurred on heavy advertisement.
Revenue Expenditure is a Nominal Account, since it is a current expenditure. Whereas capital expenditure is a Real Account, since it is used for buying fixed assets.
10. Purchases
The term purchase is used only for the purchase of goods. Goods are those things which are purchased for resale or for producing the finished products which also are meant to be sold.
Goods purchased for cash are called Cash Purchases whereas goods purchased on credit are called Credit Purchases. `Purchases` includes both cash and credit purchase of goods.
11. Sales
The term sale is used for the sale of goods only. When goods are sold for cash, they are Cash Sales but if they are sold on credit it is referred to as Credit Sales. `Sales` include both cash and credit sales.
12. Stock
The term Stock refers to goods lying unsold on a particular date. Stock is valued on the cost or market price whichever is less. It may be an opening or a closing stock.
Opening stock means goods lying unsold in the beginning of the accounting year.
Closing Stock means goods lying unsold at the end of the accounting period.
13. Losses
Loss is something against which the business receives no benefit.
For example, loss by theft, loss by fire etc.
14. Drawings
It is the amount of money taken away by the proprietor for his personal use.
15. Discount
When customers are allowed any deduction or allowance from an amount due, that is called Discount. Discount payable is an expense of the organisation where discount received is an income. Discount can be trade discount or cash discount.
o Trade Discount
When some discount is allowed in the prices of goods on the basis of sales of the items, it is called Trade Discount. Trade discounts are not recorded in the books of accounts.
o Cash Discount
When debtors are allowed some discount in the prices of the goods for quick payment, it is called Cash Discount
16. Solvent
A person who is in a position to pay his debts as they become due.
17. Insolvent
A person who is not in a position to pay his debts as they become due.
18. Bad Debts
When debtors fail to pay their dues either partially or completely and all hope of recovering the amount is lost, the amount owed by such debtors is termed as bad debts and it is a loss to the business.
19. Reserve for Bad Debts/Provision for bad debts
A reserve from the profits of the business is created for bad and doubtful debts. It is created to meet any anticipated loss on account of bad debts.
20. Wages
It is the remuneration paid to the labourers in a factory.
21. Salary
It is the remuneration paid to the employees working in the administrative building.
22. Profit
After paying all the possible expenses relating to the business viz. wages, salaries, rent, interest etc. the surplus amount that is left is called the profit. It is a gain and hence is a Nominal Account.
23. Brokerage/Commission
This is an expense of the business. It is a Nominal Account.
Having defined the basic terms used in accounting, let us now understand how transactions are actually recorded in the books of accounts. The following section explains `Journal', which is commonly referred to as the primary book of accounts.
Journal
Usually in a business, transactions are to be debited and credited are recorded carefully in a systematic manner. The book in which the accounts are recorded in a systematic manner is called a Journal.
The Journal is the primary book of accounts which contains transactions recorded in a chronological (day-to-day) order.
Recording transactions in a Journal is known as journalising the transactions.
Format of a Journal
Date Particulars L.F Debit (Rs) Credit (Rs)

As is clear from the format of a Journal, it contains 5 columns . These are explained below :
1. The first column is for Date, wherein the date of the transaction is written.
2. The second column is for the Particulars of the transaction, wherein the names of the accounts involved in the transactions are written in a logical manner.

First the account to be debited is written with the words `Dr.` following it.
In the next line, after leaving a little space, the name of the account to be credited is written preceded by the word `To`

In the next line, the explanation of the entry together with details is written in brackets. This is called Narration.
3. In the third column, L.F means Ledger Folio. It is the number of the page in the Ledger where the respective account will be entered.
4. The fourth column is named Debit (Rs.). In this column the amounts to be debited to various accounts is entered.
5. The fifth column i.e. Credit (Rs.) is meant for entering the amounts to be credited to various accounts.
The following example will clarify the various columns of a Journal.
Example-1
Jay starts a business with a capital of Rs 50,000 on 1st Jan, 2001. This means that his company has Rs 50,000 cash, which is cash brought into the business. `Cash` is an asset. So Cash Account is a `Real Account`. The rule of Dr. and Cr. for a Real Account is :
Debit what comes in
Credit what goes out
Since cash is coming in, it will be debited i.e. Cash Account will be debited.
Now, the second account involved in the example is the `Capital Account` (i.e. Jay's Capital Account). Capital account is a Personal account. The rules of Dr. and Cr. for Personal Accounts are :
Debit the receiver
Credit the giver
As the business is a separate entity (separate entity concept) and Jay is investing money in the business, Jay is the giver and the company is the receiver. So, in order to keep an account of his capital, Jay has to prepare his own account. Also that account is called Jay's Capital Account or simply Capital Account. Capital Account is a personal Account. So the Capital account is being credited in accordance to the rule : credit the giver. So, the journal entry for this example will be:
Date Particulars L.F Dr. Cr.
1st Jan '99 Cash Account Dr.
To Capital Account
(Being the amount invested by Jay in the business as Capital) 50,000
50,000
Let us take another example.


Example-2
The following transactions took place in the business on a particular date :
1. A salary of Rs 5000 is paid.
2. Goods of Rs 500 purchased in cash.
3. Goods worth Rs 1000 purchased on credit from Rahul.
4. Sold goods to Ankur for Rs 4000.
Journalise the above transactions.
1. The accounts involved in this transaction are:
a. Salary Account : Salary is an expense for the business. So, Salary Account is a nomimal account. Rule of Dr. and Cr. for Nominal Account is :
Debit all expenses and losses.
Credit all incomes and gains.
So, Salary Account should be debited
Salary Account Dr.
b. Cash Account : Cash is an asset. So, Cash Account is a Real Account. The rule for Real Account is :
Debit what comes in
Credit what goes out
Since cash is going out of the business in the form of salary, Cash Account should be credited.
Cash Account Cr.
The journal entry for this transaction is:
Salary Account Dr.
To Cash Account
2. The accounts involved in this transaction are:
a. Purchases Account : Goods are Purchased.
Purchase of goods is an expense, so Purchases Account is a Nominal Account. The rule for Nominal Account is :
Debit all expenses and losses
Credit all incomes and gains
Thus, we have to Debit Purchases Account.
Purchases Account Dr.
Note that it is only in the case of goods relating to business that we Debit the Purchases Account. Purchase of anything other than goods in which the business deals is not debited to Purchase Account but to the respective accounts. For example, in case of purchase of furniture, we do not debit the Purchases Account but will debit the Furniture Account.
b. Cash Account : The second account being involved is the Cash Account. Since goods are purchased for cash, cash is going out of the business. Cash Account being a Real Account, the rules for Real Account apply :
Debit what comes in
Credit what goes out
So, Cash Account should be credited. The journal entry for this transaction will be:
Purchase Account Dr.
To Cash Account
3. The Accounts involved in this transaction are :
a. Purchases Account : Purchase is an expense. So Purchase Account should be debited (following the rules of Nominal Account)
b. Rahul`s Account : Goods are purchased on credit from Rahul. Since Rahul is a person, Rahul`s account is a personal account. Also Rahul has given the goods. Therefore, following the rules of Personal Account,
Debit the receiver
Credit the giver
Rahul`s Account should be credited.
The journal entry for this transaction will be :
Purchase Account Dr.
To Rahul`s Account
4. The Accounts involved in this transaction are :
a. Sales Account : Goods are sold to Ankur.
Sale of goods is income to the business. Being a source of income, Sales Account is a Nominal Account. The Rule for nominal Account is :
Debit all expenses/losses
Credit all incomes/gains
Therefore, Sales Account should be credited.
As in the case of Purchases Account, all the sales regarding goods, whether for cash or for credit are credited to Sales Account.
b. Ankur's Account : Ankur received the goods. Ankur's account is a personal account and Ankur is the receiver of goods. So, Ankur Account should be debited following the rule,
Debit the receiver
Credit the giver

The journal entry will be:
Ankur'sAccount Dr.
To Sales Account
Let us write the Journal Entries in the proper format :
Journal Entries
Date Particulars L.F Debit (Rs) Credit (Rs)
1


2


3



4 Salary Account Dr.
To Cash Account
(being salary paid worth
Rs 5000)
________________________________________
Purchases Account Dr.
To Cash Account
(being goods purchased for cash)
________________________________________
Purchases Account Dr.
To Rahul's Account
(being goods purchased on credit from Rahul)
________________________________________
Ankur's Account Dr.
To Sales Account
(being goods sold to Ankur) 5,000



500

1,000




4,000
5,000


500




1,000




4,000
Let us take one more example.
Example-3
Journalise the following transactions that took place in the books of S&D Co. Ltd. for the month of July'2001:
July 1 Dev started business with cash Rs 70,000 .
July 2 He paid into bank Rs 20,000.
July 3 Purchased furniture for Rs 4000, machinery for Rs 10,000 and typewriter for Rs 5000 in cash.
July 5 Bought books (Books-1) for cash worth Rs 15,000.
Details : 15 books @ Rs 1000 each Purchase Voucher No. 001[JUL-01]
July 6 Sold books for cash Rs 5000.
Details : 5 Books @ Rs 1000 Sale Voucher No.001
July 7 Purchased books on credit from S & Co for Rs 8000 (Book-2)
Details : 80 Books @ Rs 100 Purchase Voucher No. 002
July 8 Income earned from Investments Rs 8000.
July 9 Paid Electric charges by cheque Rs 2000.
July 10 Paid office rent in cash Rs 5000.
July11 Books worth Rs 1000 were found defective and returned to S& Co. The balance due to S & Co was paid by cheque in full settlement.
Details : 10 Books @ Rs 100
July12 Sold Books on Credit to M/s. R & C0 for Rs 12,750
Details : 8 Books(Book-1) @ Rs 1125 : Rs 9000
25 Books(Book-2) @ Rs 150 : Rs 3750
Sale Voucher No. 002
July 13 Sold Books to Ramesh on Credit for Rs 2400.
Details : 16 Books(Book-2) @ Rs 150 : Rs 2400
Sale Voucher No. 003.
July 14 Cash received from M/s R & Co. Rs 12,700, discount allowed to them Rs 50.
July 15 Cash deposited in Bank Rs 12,700.
July 16 Drew out of bank for personal use Rs 6000.
July 17 Bought goods worth Rs 3500 from Ram and sold them at Rs 4000 to Shyam.
Details : Purchase 100 Books(Book-3) @ Rs 35 : 3500
Purchase Voucher No. 003
Sale
100 Books(Book-3) @ Rs 40 : 4000
Sale Voucher No.004
July 18 Books returned by Shyam worth Rs 1000 were sent back to Ram.
Details : Books returned to company by Shyam.
25 Books(Book-3) @ Rs 40 : 1000
Books returned by Company to Ram
25 Books(Book-3) @ Rs35 : 875
July 19 Dividend received on shares Rs 7000.
July 20 Ramesh paid by cheque Rs 2200; the cheque was deposited in the bank.
July 21 Purchased goods from ABC Ltd Rs 4000 on credit
Details : 40 Books(Book-4) @ Rs 100
Purchase Voucher No. 004.
July 22 Paid office expenses in Cash Rs 2000
July 23 Paid salaries to staff Rs 4000.
July 24 Cash received from Salesman Rs 3000 for goods sold by him, after deducting conveyance expense Rs 200
Details : 30 books (book-4) @ Rs 100 : 3000
July 25 Payment made to ABC Ltd. by cheque and they allowed discount Rs 100.
July 27 Rs 200 due from Ramesh are bad debts

Explanation for Journal Entries
S.No. Account Name Account Type Rule Explanation
1. a.) Capital Account


b.) Cash Account P


R Cr. the giver


Dr. what comes in Dev has invested his money in the business i.e. he is the giver, Credit his account. Capital Account is the owner's account.
Cash is coming into the business. So Debit it.
2. a.) Bank Account

b.) Cash Account P

R Dr. the receiver

Cr. what goes out Money is deposited in bank, i.e. money is received by bank. So Debit it.
Cash is deposited so Credit it.
3. (i)



(ii)


(iii) a.) Furniture Account

b.) Cash Account

a.) Machinery Account

b.) Cash Account
a.) Type Writer Account
b.) Cash Account R

R

R

R
R
R Dr. what comes in

Cr. what goes out

Dr. what comes in

Cr. what goes out
Dr. what comes in
Cr. what goes out Furniture is purchased. So Debit it.
Furniture being purchased for cash. Cash goes out. So Credit it.
Machinery being purchased. So Debit it.
Cash goes out. So Credit it.
Typewriter is purchased, Debit it.
Cash goes out, Credit it.
4. a.) Purchase Account

b.) Cash Account N

R Dr. all expenses/losses

Cr. what goes out Purchase of goods loans. is an expense. So Debit it.
Cash goes out. So Credit it.
5. a.) Cash Account

b.) Sales Account R

N Dr. what comes in

Cr. all incomes/gains Cash is coming in on account of sale of goods. So Debit it.
Sale of goods is gains an income for the balance. Credit it.
6. a.) Purchase Account

b.) S&Co. Account N

P Dr. all expenses/losses

Cr. the giver Purchase being an /losses Expenditure, Debit it.
Goods given by S&Co on credit.
7. a.) Election Charges Account

b.) Bank Account N

P Dr. all expenses/losses

Cr. the giver Electric charge being an expense. So debit it.
Charges paid through cheque.
8. a.) Office Rent Account
b.) Cash Account N
R Dr. all expenses/losses
Cr. what goes out Office Rent is an Expense.
Rent paid through cash, cash goes out.
9. a.) S&Co. Account

b.) Purchase Return Account
c.) Bank Account P

N

P Dr. the receiver

Cr. all incomes/gains

Cr. the giver Cheque given to S&Co. on account of goods purchased from them.
Goods purchased being returned. Reduction of expenses.
Amount paid by the bank(cheque)
10. a.) M/s R&Co. Account

b.) Sales Account P

N Dr. the receiver

Cr. all incomes/gains M/s R&Co received the goods on account of Credit Sales.
Sale of goods is an income.
11. a.) Ramesh Account
b.) Sales Account P
N Dr. the receiver
Cr. all incomes/gains Ramesh received the goods.
Sale of goods is gains an income.
12. a.) Cash Account
b.) Discount Allowed Account
c.) M/s R&Co. Account R
N

P Dr. what comes in
Dr. all expenses/losses

Cr. the giver Cash received from M/s R&Co.
Discount given to the customer is an expense.
Cash given by M/s R&Co.
13. a.) Bank Account
b.) Cash Account P
R Dr. the receiver
Cr. what goes out Cash deposited in bank
Cash goes out.
14. a.) Drawing Account

b.) Bank Account P

P Dr. the receiver

Cr. the giver Money withdrawn for personal use.
Money withdrawn form bank.
15. a.) Purchase Account

b.) Ram Account
a.) Shyam Account
b.) Sales Account N

P
P
N Dr. all expenses/losses

Cr. the giver
Dr. the receiver
Cr. all incomes/gains Money spent on purchasing goods is an expense.
Goods purchased from Ram
Goods sold to Shyam.
Sale of goods is an income.
16. (i)


(ii) a.) Sales Return Account

b.) Shyam Account
a.) Ram Account

b.) Purchase Return Account N

P
P

N Dr. all expenses/losses

Cr. the giver
Dr. the receiver

Cr. all incomes/gains Decrease in income due to return of goods.
Shyam returned the goods.
Goods retrned by Shyam returned to Ram.
Increase in income due to purchase return.
17. a.) Bank Account

b.) Ramesh Account P

P Dr. the receiver

Cr. the giver Cheque paid by Ramesh deposited in bank.
Cheque given by Ramesh.
18. a.) Purchase Account
b.) ABC Ltd. Account N
P Dr. all expenses/losses
Cr. the giver Purchase of goods - expense.
Goods purchased from ABC Ltd.
19. a.) Office Expenses
b.) Cash Account N
R Dr. all expenses/losses
Cr. what goes out Payment of office expenses.
Cash goes out.
20. a.) Salary Account
b.) Cash Account N
R Dr. all expenses/losses
Cr. what goes out Payment of Salaries.
Cash goes out.
21. a.) Cash Account
b.) Conveyance Account
c.) Sales Account R
N
N Dr. what comes in
Dr. all expenses/losses
Cr. all incomes/gains Cash received from Salesman.
Conveyance Expense
Sale of goods is an income.
22. a.) ABC Ltd. Account
b.) Bank Account
c.) Discount Account P
P
N Dr. the receiver
Cr. the giver
Cr. all incomes/gains ABC Ltd. received cheque.
Payment through bank.
Discount given by ABC Ltd., gain to the business.
23. a.) Bad debts Account

b.)Ramesh Account N

P Dr. all expenses/losses

Cr. the giver Bad debts are loss to the business.
Ramesh failed to give the amount due from him.

Journal Entries
Date Particulars L.F Debit (Rs) Credit (Rs)
1st July`01


2nd July`01


3rd July`01





5th July' 01

6th July`01

7th July`01

8th July`01


9th July`01


10th July`01

11th July`01

12th July`01

13th July`01

14th July`01



15th July`01

16th July`01

17th July`01

17th July`01

18th July`01

18th July`01

19th July`01

20th July`01

21st July`01

22nd July`01


23rd July`01

24th July`01


25th July`01


27th July`01 Cash Account Dr.
To Capital Account
(being amount invested by Dev in business as capital)
________________________________________
Bank Account Dr.
To Cash Account
(being the amount deposited in bank)
________________________________________
Furniture Account Dr.
To Cash Account
(being furniture purchased for cash)

Machinery Account Dr.
To Cash Account
(being machinery purchased for cash)
Type WriterAccount Dr.
To Cash Account
(being type writer purchased for cash)
________________________________________
Purchases Account Dr.
To Cash Account
(being goods purchased for cash)
________________________________________
Cash Account Dr.
To Sales Account
(being goods sold for cash)
________________________________________
Purchases Account Dr.
To S&Co. Account
(being goods purchased from S&Co on credit)
________________________________________
Cash Account Dr.
To Investment Account
(being income earned from investment)
________________________________________
Electric Charges Account Dr.
To Bank Account
(being electric charges paid by cheque)
________________________________________
Office Rent Account Dr.
To Cash Account
(being office rent paid in cash)
________________________________________
S&Co. Account Dr.
To Purchase Return A.C
To Bank Account
(being the goods worth Rs 1000 returned to S&Co and balance being paid by cheque)
________________________________________
M/s R&Co. Account Dr.
To Sales Account
(being goods sold M/s R & Co on credit)
________________________________________
Ramesh Account Dr.
To Sales Account
(being goods sold to Ramesh )
________________________________________
Cash Account Dr.
Discount Allowed Dr.
Account
To M/s R&Co. Account
(being cash received from M/s R&Co.in full settlement after allowing them discount)
________________________________________
Bank Account Dr.
To Cash Account
(being cash deposited in bank)
________________________________________

Drawings Account Dr.
To Bank Account
(being amount drawn from the bank for personal use)
________________________________________
Purchases Account Dr.
To Ram Account
(being goods purchased from Ram)
________________________________________
Shyam Account Dr.
To Sales Account
(being goods sold to Shyam on credit)
________________________________________
Sales Return Account Dr.
To Shyam Account
(being goods returned by Shyam)
________________________________________
Ram Account Dr.
To Purchase Return Account
(being goods returned to Ram)
________________________________________
Cash Account Dr.
To Dividend Account
(being dividend received on shares)
________________________________________
Bank Account Dr.
To Ramesh Account
(being cheque received from Ramesh and deposited in Bank)
________________________________________
Purchases Account Dr.
To ABC Ltd.Account
(being goods purchased from ABC Ltd. on credit)
________________________________________
Office Expenses Account Dr.
To Cash Account
(being office expenses paid in cash)
________________________________________
Salary Account Dr.
To Cash Account
(being salary paid to staff)
________________________________________
Cash Account Dr.
Conveyance Account Dr.
To Sales Account
(being cash received from Salesman after deducting conveyance expense)
________________________________________
ABC Ltd. Account Dr.
To Bank Account
To Discount Received Account
(being amount paid by cheque to ABC Ltd.who allowed discount of Rs 100)
________________________________________
Bad debts Account Dr.
To Ramesh Account
(being bad debts written off) 70,000




20,000

4,000




10,000

5,000

15,000

5,000

8,000

8,000

2,000

5,000

8,000


12,750

2,400

12,700
50


12,700

6,000

3,500

4,000

1,000

875

7,000

2,200

4,000


2,000

4,000

2,800
200


4,000


200

70,000



20,000




4,000



10,000

5,000

15,000

5,000

8,000

8,000

2,000

5,000

1,000
7,000


12,750

2,400

12,750



12,700

6,000

3,500

4,000

1,000

875

7,000

2,200

4,000


2,000

4,000


3,000


3,900
100


200

As you have seen, in a Journal each transaction is dealt separately. A Journal tells us the amounts to be `debited` and `credited` and also the accounts involved.
Since transactions are recorded in the Journal in the chronological order, i.e. on day-to-day basis, it may be possible that transactions relating to one account appear in different pages. But to know the exact position of an account, it is required that all the transactions relating to that account should be grouped together and shown under the particular account head.
For example, there may be a number of separate entries regarding purchases, sales, etc. in a Journal. If we want to know exactly how much purchases and sales took place during a particular period, then we have to look through all the pages of the Journal and it might be possible that we skip one or more entries regarding purchases and sales. So, it is always better to classify and group the entries relating to purchases at one place, that is, under `Purchases Account`, entries relating to sales under `Sales Account` and those relating to salaries under `Salary Account` etc. In this way it will really become easy to just look at any account and know the particulars of that account. This task is accomplished with the help of the Ledger, which is explained in the following section.
Ledger
The book which contains accounts is known as the Ledger. Transactions relating to a particular account for a given period are brought together and finally they are recorded at one place in a Ledger.
For example, cash transactions like Cash Sales, Cash Purchases, Cash Expenses etc. are put in one place in the Ledger under the Cash Account.
Transactions relating to different persons whether customers or suppliers, are recorded separately in their respective accounts in the Ledger. A Ledger is the most important book of accounts as it provides necessary information regarding various accounts.
Each Ledger account is divided into two equal parts :
a. Debit side
b. Credit side
The left-hand side is known as the Debit side and the right hand side as the Credit side. On each side there are columns for Date, Particulars, Journal Folio and Amount. The format of a Ledger Account is as follows :
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
Debit Entries Credit Entries
Transferring the entries from Journal to respective Ledger Accounts is known as Posting of entries.
How entries are posted in Ledger Accounts?
Each debit and credit entry is transferred from the Journal to their respective accounts in the Ledger. For example, consider the following journal entry:
Furniture Account Dr. 1000
To Cash Account 1000
(being furniture purchased for cash)
:
In the Furniture Account on the Dr. side, write `Cash Account` preceded by the word `To` inside the Particulars column. Write the amount under the Amount column.
Dr. Furniture Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
To Cash Account 1000
Similarly, in Cash Account on the Cr. side, write `Furniture Account` preceded by the word `By` inside the Particulars column. Write the amount under the Amount column.
Dr. Cash Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
By Furniture Account 1000

In every account, the total of both the sides should be same i.e. the total of Dr. should always be equal to the total of Cr.
Balance c/d and Balance b/d
Balance c/d (Balance carried down)
Balance carried down is usually the balancing figure in any account. Before closing an account both the sides (Dr. and Cr.) of that account should tally. The amount that is added to make the shorter side of any account equal to the other side is called balance carried down. It is in fact the closing balance of any account. To understand the concept of balance carried down, let us consider the Furniture Account and the Cash Account of the previous example. The two accounts have been reproduced as follows :
Dr. Furniture Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
To Cash Account


To Balance b/d 1,000
________________________________________1,000
__________________________________________________ ______________________________1,000 By Balance c/d 1,000
________________________________________1,000
__________________________________________________ ______________________________

Dr.
Cash Account
Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
To Balance c/d 1,000
________________________________________1,000
__________________________________________________ ______________________________ By Furniture Account



By Balance b/d 1,000
________________________________________1,000
__________________________________________________ ______________________________1,000
We have now understood the various aspects of preparing a Ledger. Let us now proceed to prepare a Ledger for all the accounts we dealt with in the example 3.


Accounts for Example-3
Dr. Capital Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
31st July To Balance c/d 70,000
________________________________________70,000
__________________________________________________ ______________________________ 1st July


1st August By Cash Account


By Balance b/d 70,000
________________________________________70,000
__________________________________________________ ______________________________70,000
Dr. Furniture Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
3rd July



1st August To Cash Account



To Balance b/d 4,000
________________________________________4,000
__________________________________________________ ______________________________4,000 31st July By Balance c/d
4,000
________________________________________4,000
__________________________________________________ ______________________________
Dr. Machinery Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
3rd July



1st August To Cash Account



To Balance b/d 10,000
________________________________________10,000
__________________________________________________ ______________________________10,000 31st July By Balance c/d
10,000
________________________________________10,000
__________________________________________________ ______________________________


Dr.

Type Writer Account

Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
3rd July


1st August To Cash Account


To Balance b/d 5,000
________________________________________5,000
__________________________________________________ ______________________________5,000 31st July By Balance c/d 5,000
________________________________________5,000
__________________________________________________ ______________________________

Dr.
Electric Charges Account
Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
9th July


1st August To Bank Account


To Balance b/d 2,000
________________________________________2,000
__________________________________________________ ______________________________2,000 31st July By Balance c/d


2,000
________________________________________2,000
__________________________________________________ ______________________________





Dr.



Office Rent Account



Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
10th July



1st August To Cash Account


To Balance b/d 5,000
________________________________________5,000
__________________________________________________ ______________________________5,000 31st July By Balance c/d


5,000
________________________________________5,000
__________________________________________________ ______________________________
Dr. Salary Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
23rd July



1st August To Cash Account


To Balance b/d 4,000
________________________________________4,000
__________________________________________________ ______________________________4,000 31st July By Balance c/d


4,000
________________________________________4,000
__________________________________________________ ______________________________
Dr. Conveyance Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
24th July



1st August To Sales Account


To Balance b/d 200
________________________________________200
__________________________________________________ ______________________________200 31st July By Balance c/d


200
________________________________________200
__________________________________________________ ______________________________
Dr. Bad Debts Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
27th July


1st August To Ramesh Account


To Balance b/d 200
________________________________________200
__________________________________________________ ______________________________200 31st July By Balance c/d


200
________________________________________200
__________________________________________________ ______________________________


Dr.
Purchases Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
5th July
7th July
17th July
21st July


1st August To Cash Account
To S&Co. Account
To Ram Account
To ABC Ltd. Account


To Balance b/d 15,000
8,000
3,500
4,000
________________________________________30,500
________________________________________
30,500 31st July By Balance c/d


30,500


________________________________________30,500
________________________________________





Dr.




Purchase Return Account




Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
31st July To Balance c/d 1,875

________________________________________1,875
__________________________________________________ ______________________________ 11th July
18th July


1st August By S & Co.
By Ram


To Balance b/d 1,000
875
________________________________________1,875
__________________________________________________ ______________________________1,875


Dr.

Sales Account

Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
31st July


To Balance c/d 27,150



________________________________________27,150
________________________________________ 6th July
12th July

13th July
17th July
24th July
24th July

1st August By Cash Account
By M/s R&Co
Account
By Ramesh Account
By Shyam Account
By Cash Account
By Conveyance
Account

To Balance b/d 5,000
12,750

2,400
4,000
2,800
200
________________________________________27,150
________________________________________27,150
Dr. S&Co. Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
11th July

11th July

To Purchase Return A.c
To Bank Account 1,000
7,000
________________________________________8,000
__________________________________________________ ______________________________ 7th July By Purchases A.C 8,000

________________________________________8,000
__________________________________________________ ______________________________
Dr. Sales Return Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
18th July



1st August To Shyam Account



To Balance b/d 1,000
________________________________________1,000
__________________________________________________ ______________________________1,000 31st July By Balance c/d 1,000
________________________________________1,000
________________________________________
Dr. Cash Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
1st July
6th July
8th July

14th July

19th July
24th July





1st August To Capital Account
To Sales Account
To Investment
Account
To M/s R & Co
Account
To Dividend Account
To Sales Account





To Balance b/d 70,000
5,000
8,000

12,700

7,000
2,800




________________________________________1,05,500
________________________________________27,800 2nd July
3rd July
3rd July

3rd July

5th July

10th July

15th July
22nd July

23rd July
31st July By Bank Account
By Furniture Account
By Machinery
Account
By Type writer
Account
By Purchases
Account
By Office Rent
Account
By Bank Account
By OfficeExpenses
Account
By Salary Account
By Balance c/d 20,000
4,000
10,000

5,000

15,000

5,000

12,700
2,000

4,000
27,800
________________________________________1,05,500
________________________________________
Dr. Bank Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2nd July
15th July
20th July




1th August To Cash Account
To Cash Account
To Ramesh Account




To Balance b/d 20,000
12,700
2,200


________________________________________34,900
__________________________________________________ ______________________________16,000 9th July
11th July
16th July
25th July
31st July By Electric Charges Account
By S&Co Account
By Drawings Account
By ABC Ltd. Account
By Balance c/d 2,000

7,000
6,000
3,900
16,000
________________________________________34,900
__________________________________________________ ______________________________
Dr. M/s R&Co. Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
12th July To Sales Account 12,750

________________________________________12,750
__________________________________________________ ______________________________ 14th July
14th July By Cash Account
By Discount Allowed Account 12,700
50
________________________________________12,750
__________________________________________________ ______________________________

Ramesh Account
Date Particulars J.F. Amount Date Particulars J.F. Amount
13th July To Sales Account 2,400

________________________________________2,400
________________________________________ 20th July
27th July
By Bank Account
By Bad Debts Account 2,200
200
________________________________________2,400
________________________________________
Dr. Shyam Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
17th July



1st August To Sales Account



To Balance b/d 4,000

________________________________________4,000
________________________________________3,000 18th July

31st July By Sales Return Account
By Balance c/d 1,000
3,000
________________________________________4,000
__________________________________________________ ______________________________
Dr. Ram's Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
18th July
31st July To Purchase return
To Balance c/d 875
2,625
________________________________________3,500
________________________________________ 17th July


1st August By Purchases


To Balance b/d 3,500

________________________________________3,500
________________________________________2,625
Dr. ABC Ltd. Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
25th July
25th July To Bank Account
To Discount Received Account 3,900
100
________________________________________4,000
________________________________________ 21st July By Purchases Account 4,000
________________________________________4,000
__________________________________________________ ______________________________
Dr. Drawing Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
16th July



1st August To Bank Account


To Balance b/d 6,000
________________________________________6,000
__________________________________________________ ______________________________6,000 31st July By Balance c/d 6,000
________________________________________6,000
__________________________________________________ ______________________________
Dr. Discount Allowed Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
14th July

1st August To M/s R&Co Account

To Balance b/d 50
________________________________________ 50
________________________________________ 50 31st July By Balance c/d 50
________________________________________ 50
________________________________________
Dr. Discount Received Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
31st July To Balance b/d 100
________________________________________ 100
__________________________________________________ ______________________________ 25th July


1st August By ABC Ltd. Account


By Balance b/d 100
________________________________________ 100
__________________________________________________ ______________________________ 100
Dr. Office Expenses Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
22nd July



1st August To Cash Account



To Balance b/d 2,000
________________________________________2,000
__________________________________________________ ______________________________2,000 31st July By Balance c/d 2,000
________________________________________2,000
__________________________________________________ ______________________________



Dr.


Investment Account


Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
31st July To Balance c/d 8,000

________________________________________8,000
__________________________________________________ ______________________________ 8th July



1st August By Cash



To Balance b/d 8,000
________________________________________8,000
__________________________________________________ ______________________________8,000

Dr.
Dividend Account
Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
31st July To Balance c/d 7,000
________________________________________7,000
__________________________________________________ ______________________________ 19th July


1st August By Cash


To Balance b/d 7,000
________________________________________7,000
__________________________________________________ ______________________________7,000
Trial Balance

The statement which is prepared to show separately the debit and the credit balances of the Ledger accounts on a particular date is known as the Trial Balance. Trial balance is prepared to check the arithmetical accuracy of recording the transactions.
It is a summary of the entire Ledger. It has two columns, one for Debit balances and another for Credit balances. The totals of the two columns must match. If the totals of the two columns do not match then there may be :
a. Some error in arithmetic calculations or,
b. you may have transferred the wrong amount or,
c. You may have forgotten to include an account altogether.
So Trial Balance helps you in finding out the possible errors at an early stage before preparing Final Accounts.

Format of Trial Balance
Trial Balance (as on.....)
Particulars Debit Amount (Rs.) Credit Amount (Rs.)


Why both sides (Dr. and Cr.) of a Trial Balance should match?
Trial Balance helps in locating errors in accounting work. It is based on the concept of Double Entry System. According to this system every transaction has two aspects and both the aspects are recorded. For example, on purchase of furniture, either the cash balance will reduce or a liability to the supplier will arise i.e. for every debit there is a corresponding credit and vice versa. So, the Debit side of a Trial Balance must match the Credit side.
Let us prepare the Trial Balance for S&D company of example 3, for the month of July:
Trial Balance (as on 31st July 2001)
Particulars Debit Amount (Rs.) Credit Amount (Rs.)
Capital Account
Furniture Account
Machinery Account
Type Writer Account
Electric Charges Account
Office Rent Account
Office Expenses Account
Salary Account
Conveyance Account
Bad Debts Account
Purchases Account
Purchases Return Account
Sales Account
Sales Return Account
Cash Account
Bank Account
Ram Account
Shyam Account
Dividend
Drawing Account
Investment
Discount Allowed Account
Discount Received Account

Total
4,000
10,000
5,000
2,000
5,000
2,000
4,000
200
200
30,500


1000
27,800
16,000

3,000

6,000

50

________________________________________1,16,750
________________________________________ 70,000





1875
27,150

2,625
7,000
8,000
100
________________________________________1,16,750
________________________________________
Final Accounts
After preparing Trial Balance and being sure that books of Accounts are written in proper form and are arithmetically accurate, the owner of the business would like to know about the ultimate results of operating the business, that is,
1. How much profits were earned or losses were incurred during a particular period (generally one year)?.
2. What is the status of the business, that is, the position of various assets and liabilities at the end of a particular period (generally one year)?.
To ascertain the profit earned or loss incurred during an accounting year, a Profit and Loss Account ( P & L A/c) is prepared which is also known as `Income Statement`. To ascertain the financial position of the business as on the last date of the accounting year, the `Balance Sheet` is prepared which is also known as the `position statement`.These two financial statements viz. Profit and Loss Account and Balance Sheet are termed as `Final Accounts`.
Before preparing Profit and Loss Account one more account called Trading Account is prepared. Usually, Trading Account is combined with the Profit and Loss Account and they are together termed as the `Income Statement`.
Trading Account
Trading Account is prepared to find out the Gross Profit/Gross Loss for the accounting period. This Gross Profit/Loss is then used to find out the Net Profit/Loss for that period.
Trading Account deals with the manufacturing expenses i.e expenses at the factory level. For example, purchase of raw material, wages, carriage inwards etc. All these expenses together with the opening stock (if any) are written on the debit side and all the sales together with the closing stock are written on the credit side of the Trading Account. The balancing figure is Gross Profit or Gross Loss, as the case may be.
Debit Side of Trading Account
Debit side of Trading Account consists of the following items :
1. Opening Stock
This item is usually the first item. In the first year of a business there will be no opening stock. Opening stock may be the opening stock of :
1. Finished Goods
2. Raw Materials
3. Work in progress (unfinished goods)
2. Purchases
This refers to goods purchased for resale or purchase of raw materials and includes both cash and credit purchases. Purchases here are Net Purchases (i.e. Total Purchases-Purchase Return).
Goods taken away by the owners of the business for personal use should also be deducted from the total purchases.
3. Carriage of Freight Inwards
It is the cost of bringing the materials to the factory and making them available for use.
4. Manufacturing Wages
These are the wages paid to the workers in factory.
5. Power and Fuel
It is the cost of running the machines in the factory.
6. Factory Lighting
Cost of electricity consumed for providing power for running the factory.
7. Factory Rent and Rates
Rent paid for factory premises, municipal taxes, charges for water etc.
Credit side of Trading Account
1. Sales
It is the Total Sales made during the year. If some goods have been returned by the cusomers then it should be deducted from the Total Sales i.e. only Net Sales(Total Sales- Sales Return) will come on the credit side of the Trading Account.
2. Closing Stock
It refers to the: Finished Goods Raw Materials and Work-in-progress
Dr. Trading Account for the year ended....
Cr Particulars Amount Particulars Amount
....
To Gross Profit .
By Gross Loss

Gross Profit/Loss
If the total of credit side is more than the total of debit side, then the difference between the two sides is the Gross Profit. The Gross Profit will come on the debit side as it is the balancing figure.
Similarly, if the total of debit side is more than that of credit side, the balance i.e. Gross Loss will come on the credit side.
Having discussed the various items shown in the Trading Account, let us understand how atrading Account is prepared. For that consider the following example.
The following are the items from the Trial balance of an industrial firm :
Opening stock : Raw Materials 40,000
Finished Goods 70,000
Purchases 1,80,000
Sales 3,50,000
Returns : Purchases 5,000
Sales 3,000
Wages 65,000
Factory Expenses 45,000
Freight : Inwards 10,000
Outwards 15,000
At the end of the concerned period, the stock-in-hand was:
Raw Materials 35,000
Work-in-progress 10,000
Finished Goods 55,000
Prepare Trading Account of the firm.
Dr. Trading Account Cr.
Particulars Amt. Particulars Amt
To Opening stock
Raw Material : 40,000
Finished Goods : 70,000
________________________________________
To Purchases 1,80,000-5000
To Wages
To Factory Expenses
To Freight Inwards
To Gross Profit


1,10,000
1,75,000
65,000
45,000
10,000
42,000
________________________________________4,47,000
________________________________________ By Sales (3,50,000 - 3000)
By Closing stock
Raw Material : 35,000
Work-in-progress : 10,000
Finished goods : 55,000
________________________________________ 3,47,000



1,00,000



________________________________________4,47,000
________________________________________
Profit and Loss Account
Profit and Loss Account is prepared to calculate the Net Profit or Net Loss of the business for a given accounting period.
Profit and Loss Account is a Nominal Account, therefore following the rule of Nominal Account (`Debit all Expenses/Losses and Credit all Incomes/Gains`). Profit and Loss Account is debited with all the indirect expenses or losses which have not been included in the Trading Account. Whereas all the Incomes and gains are credited to it. Let us examine the various items that are debited or credited to the Profit and Loss Account

Indirect Expenses and losses
Indirect Expenses include all Administrative, Selling and Distribution expenses such as- Salaries, Rent and Taxes, Postage, Stationery, Insurance, Depreciation, Interest paid, Office Lighting, Advertising, Packing, Carriage Outwards etc.
Losses include— Loss by fire, Loss by theft etc and other unavoidable losses.
Incomes and gains
Incomes may include— Discount received from suppliers, Income from investments, Dividend on shares, Commission etc.
Gains include any profit made on Sale of old assets, Miscellaneous revenue etc.
The Gross Profit from the Trading Account is credited to the Profit and Loss Account whereas the Gross Loss is debited to it. The Balancing figure of Profit and Loss Account can be Net Profit or Net Loss. If the total of credit side (incomes) is more than the total of debit side (expenses), that is, if incomes are in excess of expenses then there is Net Profit. On the other hand if debit side (expenses) is more than the credit side (incomes) then there is Net loss.
Net Profit/Loss is transferred and adjusted against the Capital Account in the Balance Sheet. Net Profit is added to the Capital Account whereas Net Loss is deducted from the Capital Account in the Balance sheet. Once the Trading and Profit and Loss accounts are prepared we can proceed to prepare the Balance Sheet which shows the position of various assets and liabilities as on a particular date.

Balance Sheet

Balance sheet is prepared only after the preparation of the Trading and Profit and Loss Account. It is prepared to ascertain the financial position of the business i.e. to know what the business owes and what it owns on a certain date. A Balance sheet is not an account but only a statement of assets and liabilities. On the left hand side, the liabilities of the business are shown whereas, on the right hand side the assets of the business are shown. The two sides of the Balance Sheet (i.e. Assets and Liabilities) must have the same totals. If it is not, then there is some error in the accounts. A Balance Sheet is prepared as on a particular date and not for a period.

The Form of Balance Sheet
Balance Sheet as on....
Liabilities Assets
Owner's funds
Fixed or Long Term Liabilities
Current or Short Term Liabilities Fixed Assets
Investments
Current Assets


Example-4
From the following Trial Balance, prepare a Trading & a P&L A/c for the year ending 31st Dec, 1998 and a Balance Sheet as on that date.
S.Drs
Stock (1-1-98)
Land & Building
Capital
Rent
Cash in hand
Cash at bank
Wages
S.Crs.
B/R
Interest
Bad debits
Repairs
T.Sales (ABC)
B/P
Furniture & fixtures
Depreciation
Rates & Taxes
Salaries
Drawings
Purchases
Office expenses
Plant & Mach
Total 15,000
50,000
1,00,000

16,000
40,000
30,000

20,000
2000
5000
3000


15,000
10,000
8000
20,000
20,000
1,00,000
25,000
57,000
________________________________________5,36,000
________________________________________


2,50,000
6000


70,000




1,70,000
40,000



________________________________________5,36,000
________________________________________

Dr.

Trading Account
Cr.
Particulars Amount Particulars Amount
Opening Stock
Wages
Purchases
Gross Profit
50,000
30,000
1,00,000
90,000
________________________________________2,70,000
________________________________________ Sales
Closing Stock 1,70,000
1,00,000

________________________________________2,70,000
________________________________________
Dr. Profit and Loss Account for the year ending.... Cr.
Particulars Amount Particulars Amount
To Interest
To Bad Debts
To Repairs
To Depreciation
To Rates & Taxes
To Salaries
To Office expenses
To Net Profit 2,000
5,000
3,000
10,000
8,000
20,000
25,000
23,000
________________________________________96,000
________________________________________ By Gross Profit
By Rent 90,000
6,000





________________________________________96,000
________________________________________




Dr. Balance Sheet as on.... Cr.
Liabilities Amount Assets Amount
Capital 2,50,000
Add Net Profit 23000
________________________________________
2,73,000
-Drawings 20,000
________________________________________Sundry Creditors
Bills Payable



2,53,000

70,000
40,000
________________________________________3,63,000
________________________________________ Sundry Debtors
Land & Building
Cash in Hand
Cash at Bank
Bills Receivable
Furniture & Fixture
Plant &Machinery
Closing Stock 15,000
1,00,000
16,000
40,000
20,000
15,000
57,000
1,00,000
________________________________________3,63,000
________________________________________
We took up the various books of accounts and learned how they are prepared manually. However, there are certain drawbacks in manual accounting. One has to be extremely cautious while recording and posting entries since every accounting transaction has dual impact. Missing out any aspect of a transaction will lead to differences in the figures shown by various accounts, which can further lead to troubles.This is the main drawback of manual accounting.



Problems on Journal entries.

1) Pass journal entries in the books of MIB.
1.1.2005 Anu commenced business with a capital of Rs. 50,000
2.1.2005 Bought goods for cash Rs. 7,000
3.1.2005 Deposited in HDFC bank to open a current account Rs. 10,000
4.1.2005 Sold goods for cash Rs. 2,000 and on credit to Ram Rs. 4,000
4.1.2005 Paid Rs. 800 as delivery charges on the above.
5.1.2005 Bought goods for cash Rs. 4,000 from KK and Rs. 6,000 on credit from Big B
5.1.2005 Paid PC Parcel Service for the above Rs. 300
6.1.2005 Bought furniture for cash Rs. 20,000 from Miss. Namrath
7.1.2005 Returned goods purchased for cash Rs. 200 and from Big B Rs. 500
Signed Accommodation bills for Rs. 10,000 with Gopi
9.1.2005 Discounted the above bill @ 12 % for ½ month with HDFC bank
10.1.2005 Sold goods costing Rs. 4000 at Rs. 5000 to Bhargav on sale on approval basis
13.1.2005 Introduced further capital Rs. 10,000
14.1.2005 Withdrew from HDFC Rs. 3,000
14.1.2005 Goods returned by Ram Rs. 300 and others Rs. 100
15.1.2005 Purchased an old car for official use Rs. 3,000 and spent Rs. 2,000 on reconditioning
16.1.2005 Paid salary to employees Sri, Radhi, Empty and Jana - Rs. 750 each by cheque
17.1.2005 Settled Big B’s account at a cash discount of 5%
18.1.2005 Electric charges paid out of bank a/c Rs. 345
19.1.2005 Ram settled his account and allowed him a cash discount of 6 %
20.1.2005 Paid fire insurance premium Rs. 750 to Sarath insurance co.
21.1.2005 Paid for accommodation bill
22.1.2005 HDFC bank charges Rs. 40 for services
23.1.2005 HDFC bank allowed interest on balance Rs. 25
24.1.2005 Gopi failed to honour his acceptance.
25.1.2005 Paid Rs. 19,500 in full settlement to Namrath
27.1.2005 Repairs to car Rs. 300 and petrol expenses Rs. 750
28.1.2005 Bhargav approved 80 % of sales and rest were rejected
29.1.2005 Bhargav settled his account by paying 98 % net.

2) Show journal entries in respect of the following transactions in the books of Murali.
a. Started business with cash Rs. 15,000, goods worth Rs. 8,000, office equipment worth Rs. 7,000 and his private car worth Rs. 12,000 which will henceforth be used solely for business purposes
b. Bought furniture worth Rs. 4,000 of which those worth Rs. 1,000 are for office purpose and balance for stock
c. Purchased 3 motor cars worth Rs. 15,000 each from SV associates for stock
d. Purchased 2 motor cars worth Rs. 8,000 each from Sherif for stock.
e. Purchased for cash 1 motor car worth Rs. 7,000 for private use
f. Returned motor cars worth Rs. 15,000 from stock and that worth Rs. 8,000 from business use to SV and Sherif
g. Sold old office equipments for Rs. 4,000 (Cost Rs. 7,000; Book value Rs. 5,000)
h. Sold household furniture for Rs. 2,000 and paid in to Business Bank A/C
i. Paid Landlord Rs. 1,200 for rent. ( ½ of the premises used for Murali’s residence)
j. Sold some office equipments for Rs. 1,300 (Proceeds being received as Rs. 700 by cheque and balance in cash) and the cheque was paid into private bank A/C

3) Journalise the following transactions in the books of Remo & Co.
a. Started business with cash Rs. 25,000, goods worth Rs. 20,000, Machinery worth Rs. 30,000 and Private investments in 10% Govt. Securities Rs. 10,000 (Face Value Rs. 12,000)
b. Bought furniture worth Rs. 20,000 of which those worth Rs. 10,000 are for interior decoration and balance for resale
c. Purchased 4 Sewing machines worth Rs. 10,000 each from Aswin for resale
d. Purchased one Welding machine worth Rs. 20,000 for business use from Sona.
e. Purchased for cash 1 motor car worth Rs. 7,000 for private use
f. Sold 2 sewing machines for Rs. 12,000 each at a trade discount of 10 % of MRP
g. Sold welding machine for Rs. 13,000 (depreciation up to the date of sale Rs. 2,000)
h. Sold household furniture for Rs. 2,000 and paid in to Business Bank A/C
i. Purchased goods Rs. 45,000 on credit from Neha.
j. Of the goods purchased Rs. 5,000 was used for advertisement, Rs. 3,000 was taken for private use; Rs. 1,000 was given to employees on Diwali as bonus and Gift to Mrs. Heena Rs. 600 (His wife Mrs. Heena rendering part-time services in office)
k. Collected six months interest on investments.
l. Depreciation on Machinery Rs. 5,000
Wow friend! You did a superb job and your article is really very nice and explaining the basics of accounting very well. BTW, i am also uploading a document which would describes the accounting and its basic in more detail.
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