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KVS (RAIPUR REGION) Brings for its students STUDY MODULE For

CLASS-XI - Accountancy (2015-16) Under the leadership of Ms.P.B.S.Usha Deputy Commissioner (Chief Patron)

Mr. Girish Chand Principal, KV-Nabarangpur (Patron) Content Formation by: Sh. G. Shrivastav, Sh. A. K. Maurya, PGT-Commerce, KV-1, Raipur (IST shift) PGT- Commerce KV, NTPC Korba.

Sh. R.K. Thakur Sh. Bikash Anand PGT- Commerce, KV-No.2, Raipur. PGT-Commerce, KV, Bhawanipatna

Sh. Rakesh Chawala Ms. M.D.P. Mukherjee PGT-Commerce, KV, Koraput PGT-Commerce KV, Bilaspur

Sh.V. Jaiswal, PGT-Commerce, Mr. M.K. Bhardwaj, PGT-commerce, KV, Durg PGT-commerce, KV, Durg

KVS RAIPUR REGION1 | P a g e

STUDY MODULE CLASS-XI - Accountancy

Points deserve your attention while taking examination :-

*Use proper format with correct heading.*Write the narration for every transaction.*Write the amount in proper sequence (i.e. once digit number below once and so on).*Close particular cell after every entry.*Show the working notes clearly.* Always do a numerical question from a fresh page, try to complete an account/ statement on a single page*Don’t draw the margin line, just fold the answer sheet from both the sides (left and right).*Put the question number clearly on the middle of the page and highlight it by underlining.*Solve all the parts of the question together.* do your calculations in a separate rough column or on the last one or two pages of the answer-sheet*Utilise the early 15 minutes to read the question paper carefully. Plan and organise your answers in mind. Try to ascertain the level of difficulty of various questions and decide the sequence in which the paper is to be attempted. Also try to analyse and break a long question in small parts for easy understanding. *Do not spend more than requisite time on a particular question.*Use your watch to keep track of time so as to finish the paper well in time and do a quick revision before the exam ends.*Write your answers from 2nd page as far as possible. Avoid writing on front page or back side of the front page .i.e.1st page of answer book.Points deserve your attention to learn Accountancy better:-

*Learn the rules of debit and credit as per both modern and traditional approach and try to form the journal entries by applying them instead of cramming the journal entries and also “how to do posting in ledger”.* Learn to draw formats of various accounts and statements with proper headings.*Learn and understand the terms like fixed assets, current assets, liquid assets, current liabilities, fictitious assets, capital and revenue receipts/payments, reserves/accumulated profits and losses, debt, equity, capital employed, cost of goods sold, working capital, operating and non-operating expenses and incomes, cash equivalents, operating, investing, financing activities, major headings of balance sheet, etc. *Learn to write precise narrations explaining the journal entries correctly.*Learn “how to prepare working notes showing explanatory calculations for main values with appropriate statements.”*Solve Latest CBSE sample papers available at CBSE’s website (cbse.nic.in) CBSE question papers asked in 2014 & 2015. These papers must be done in examination like conditions i.e. Within a time limit of three hours.* Learn and solve this Study Module.

Theoretical Frame Work2 | P a g e

INTRODUCTION TO ACCOUNTING

Content mapping

Accounting- concept, objectives, advantages and limitations, types of accounting information; users of accounting information and their needs.

Basic accounting terms: business transaction, account, capital, drawings, liabilities (non - current and current); assets (non-current and current) fixed assets (tangible and intangible assets), receipts (capital and revenue), expenditure (capital, revenue and deferred), expense, income, profits, gains and losses,purchases, purchases returns, sales, sales returns, goods, stock, inventory, trade receivables (debtors and bills receivable), trade payables (creditors and bills payable), cost, vouchers, discount - trade and cash._____________________________________

Accounting: ‘‘Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.’’

Objectives of Accounting:

1. To provide useful information to various interested parties.2. To Maintain systematic and complete Records of Business Transactions3. To Calculate Profit and Loss4. To ascertain the financial position of the business.

Interested Users of Information:

There are number of users interested in knowing about the financial soundness and the profitability of the business.

Users Classification Information the user want

Internal Owner return on their investment, financial health of their company/business

Management to evaluate the performance, to take various decisions

External Investors and potential Investors safety and growth of their investments, future of the business

Creditors Assessing the financial capability, ability of the business to pay its

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debts

Lenders Repaying capacity, credit worthiness

Tax Authorities assessment of due taxes, true and fair disclosure of accounting information

Employees Profitability to claim higher wages and bonus, whether their dues (PF, ESI etc.) deposited regularly.

Others Customers, Researchers etc. may seek different information for different reasons.

Qualitative Characteristics of Accounting Information :

Accounting information is useful for interested users only if it possess the following characteristics :

1. Reliability: Means the information must be based on facts and be verified through source documents by anyone. It must be free from bias.

2. Relevance: To be relevant, information must be available in time and must influence the decisions of users by helping them form prediction about the outcomes.

3. Understandability: The information should be presented in such a manner that users can understand it well.

4. Comparability: The information should be disclosed in such a manner that it can be compared with previous years’ figures of business itself and other firm’s data.

Limitations of Accounting :

The accounting information suffers from the following limitations:

1. Based on historical data2. Biasness3. Qualitative information not shown4. Ignores price level changes

BASIC ACCOUNTING TERMS :

Transaction : An economic activity that affects financial position of the business and can be measured in terms of money e.g. sale of goods, paying for expenses etc.

Voucher : The documentary evidence in support of a transaction is known as voucher. For example, if we buy goods for cash we get cash memo, if we buy on credit we get an invoice, when we make a payment we get a receipt and so on.

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Capital : Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner.

Assets : Assets are economic resources of an enterprise useful in its operations. Assets can be broadly classified into two types :

1. Fixed Assets are assets used for normal operations and held on a long-term basis, such as land, buildings, machinery, plant, furniture and fixtures etc.

2. Current Assets are assets held for a short-term and converted into cash within one year such as debtors, stock etc.

Liabilities : Liabilities are obligations or debts that an enterprise has to pay at some time in the future. Liabilities can be classified as :

1. Long-term liabilities are those that are usually payable after a period of one Year e.g. a long term loan from a financial institution.

2. Short-term liabilities are obligations that are payable within a period of one year, for example, creditors, bills payable, bank overdraft etc.

Sales : Sales are total revenues from goods sold or services provided to customers. Sales may be cash sales or credit sales.

Revenues : Revenue means the income from any source. It should be of regular nature. For example sales of goods/providing services to customer, commission, interest, dividends etc.

Expenses : Costs incurred by a business for earning revenue are known as expenses. For example rent, wages, salaries, interest etc.

Expenditure : Spending money or incurring a liability for acquiring assets, goods or services is called expenditure. The expenditure is classified as

1. Revenue expenditure : If the benefit of expenditure is received within a year it is called revenue expenditure e.g. rent, interest etc.

2. Capital expenditure : If any expenditure lasts for more than a year, it is treated capital expenditure such as purchase of machinery, furniture etc.

Profit : The excess of revenues over its related expenses during an accounting year is profit.Profit = Revenue - Expenses.

Gain : A non-recurring profit from events or transactions incidental to business such as sale of fixed assets, appreciation in the value of an asset etc.

Loss : The excess of expenses of a period over its related revenues its termed as loss. e.g., cash or goods lost by theft of fire etc. Loss = Expenses - Revenue

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Discount : Discount is the rebate given by the seller to the buyer. It can be classified as :

1. Trade discount : The purpose of this discount is to persuade the buyer to buy more goods. It is Offered at an agreed percentage of list price at the time of selling goods. This discount is not recorded in the account books as it is deducted in the invoice/cash memo.

2. Cash discount : The objective of providing cash discount is to encourage the debtors to pay the dues promptly. This discount is recorded in the account books.

Goods : The products in which the business deal in. The items that are purchased for the purpose of resale not for use in the business are called goods.

Drawings: It the owner withdraw money and/ or goods from the business for personal use it is known as drawings.

Purchases: The term Purchases is used only for the goods procured by a business for resale. In case of trading concerns it is purchase of final goods and in manufacturing concern this is purchase of raw materials. Purchases may be cash purchases or credit purchases.

Closing Stock: It is the value of the goods lying unsold at the end of accounting year. Closing stock of one year becomes the opening stock of next year.

Debtors; Debtors are persons and/ or other entities to whom business has sold goods and services on credit and amount has not received yet. These are assets of the business.

Creditors: If the business buys goods/ services on credit and amount is still to be paid to the persons and/ or other entities, these are called creditors. These are liabilities for the business.

THEORY BASE OF ACCOUNTING

Content mapping:

Fundamental accounting assumptions: going concern, consistency and accrual. Accounting principles: accounting entity, money measurement, accounting period, full disclosure, materiality, prudence, cost Concept, matching concept and dual aspect. Accounting Standards and IFRS (International Financial Reporting Standards): concept and objectives Double entry system of accounting. Bases of accounting - cash basis and accrual basis.______________________________________

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Generally Accepted Accounting Principles (GAAP) ; It refers to the rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity and consistency in the preparation and the presentation of financial statements.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS :

1. Going Concern Assumption :

This concept assumes that an enterprise has an indefinite life or existence. It means that the intentions of the business are to continue for sufficiently longer period of time. It will not be dissolved or liquidated in the immediate future. If a machinery purchased is expected to last (to be used for) next 10 year, then the cost of machinery will be spread over the next 10 year for calculating net profit or loss of each year (Dep. Charged.)

The full cost of the machine would not be treated as expense in the year of purchase itself. Market value of the asset is irrelevant and is not recorded in the balance sheet, as these assets are not going to be sold in the near future.

Relevance :

(a) Distinction is made between a capital expenditure and revenue expenditure.(b) Classification of assets and liabilities into short term and long term respectively.(c) Depreciation charged on fixed assets or fixed assets appears in the balance Sheet at book value, without having reference to their market value.

2. Consistency Assumption :

a. It implies that accounting practices once selected and adopted, should be applied consistently year after year.

b. Same Accounting practices will be followed for similar items year after year. This will ensure a meaningful study of the performance of the business for a number of years.

c. When the accounting principles and practices are uniformly/consistently followed from year to year that the result obtained will be comparable.

Consistency assumption does not mean that particular practices once adopted cannot be changed. The only requirement is that when a change is desirable, it should be fully disclosed in the financial statements along with its effect on income statement and financial position (Balance Sheet) of the year in which that change is made.

This assumption is important when alternative accounting practices are equally acceptable. E.g. two methods of charging depreciation, written down value method and Straight line method are equally acceptable. If a firm adopts one method in the previous year and the other method in next year, the result will not be comparable.

3. Accrual Assumption :

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Accrual concept applies equally to revenue and expenses. As per this assumption, revenue is recognized when it is accrued/ earned, that is, when sale is complete or services are rendered. It is immaterial, whether the cash is received or not. E.g. if a credit sale for Rs. 15,000 of two month is made on 15th Feb. 2011, then the revenue earned is to be recorded on 15th Feb. 2011 not on the date of cash realized, i.e, after two months. Similarly, expenses are recognized in the accounting period in which they facilitate in earning the revenues, whether the cash is paid for them or not. E.g. if at the end of year the two month salary is due but not paid. Then the expenses of salary will be recorded in the current year in which salary is due, not in the next year in which it will be paid.

Relevance :

Earning of a revenue and consumption of a resource (expenses) can be accurately matched to a particular accounting period Accounting Principles

Accounting principles

1. Accounting Entity. / Business Entity :

An entity has a separate existence from its owner. According to this principle, business is treated as an entity, which is separate and distinct from its owner. Therefore business transactions are recorded; analyzed and financial statements are prepared from the business point of view and not of the owner.

i. The owner is treated as a creditor (liability) for his investment in the business, as if the firm has borrowed from its owner instead of the outside parties.

ii. Interest on capital is treated as expense like any other business expense.iii. His private expenses are treated as drawings leadings to reduction in capital.iv. This concept is applicable to all forms of business organizations – sole

proprietorship, partnership or a company.

2. Money Measurement Principle:

According to this principle, only those transactions that are measured in money or can be translated in term of money are recorded in the books of accounts of the enterprises.

i. Money means the currency of a country.ii. Money is a common measuring unit for recording and reporting business

transactions.

Example : purchases cost Rs. 15,000 will be recorded in the books of accounts but the good human relationship within organization will not be recorded.

Limitations :

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1. it ignores qualitative aspects e.g. efficient human resources (Assets), satisfied customers (Assets) and dishonest employee (liabilities)

2. Self-generated goodwill not recorded.3. Value of money (currency) is not stable.4. The facts which cannot be expressed in money cannot be recorded.5. To make accounting records simple, relevant, understandable and homogeneous, facts

are expressed in a common unit of measurement - money.

3. Accounting Period Principle :

According to this principle, the whole indefinite life of an enterprise is divided into part, known as accounting period.

Accounting period is defined as interval of time, at the end of which the profit and loss account and balance sheet are prepared. So the performance is measured at regular intervals and decision can be taken at the appropriate time. This interval may be quarterly, half-yearly and one year. Accounting period is usually a period of one year and that year may be financial year or calendar year.

Relevance :

1. As per income tax law, tax on income is calculated on annual basis from 1st April to 31st March (Financial Year)

2. Accounting period concept is responsible for the preparation of income statement on accrual basis as distinguished from cash basis of accounting.

4. Full Disclosure Principle:

According to this principle, apart from legal requirements all significant and material information related to the economic affairs of the entity should be completely disclosed in its financial statement and accompanying footnotes.

Disclosure of material information will result in better understanding of users, so, they take good and sound decision from the information. E.g. footnotes such as :

1. Contingent liabilities in respect to a claim of a very big amount against the business are pending in a court of law.

2. Change in the method of providing depreciation.3. Market value of investment.

Disclosure of all material facts is compulsory but is does not imply that even those figures which are irrelevant are to be included in financial statements

5. Materiality Principle :

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According to this principle, only those items or information should be disclosed that have material effect and relevant to the users. So, item having an insignificant effect or being irrelevant to user need not be disclosed separately, these may be merged with other item.

If the knowledge of any information may effect the decision of a user of account, is termed as material information.It should be noted that an item material for one enterprise may not be material for another enterprise. E.g. an item of expenses Rs. 60,000 is material for an enterprise having turnover of Rs. 1,50,000 but it is not material for an enterprise having turnover of Rs.100 crore.The nature of transaction should be taken into consideration for materiality of information. E.g. a difference of Rs. 200 in the valuation of stock may be immaterial but the difference of Rs. 50 in cash could be termed as material.

6. Prudence/ conservatism Principle :

According to this principle, profit in anticipation should not be recorded but loss in anticipation should immediately be recorded. The objective of this principle is profit of the enterprise in no case overstated.

When there are different equally acceptable alternative methods are available, the method which having least favourable immediate effect on profit should be adopted. e.g.

1. Valuation of stock at cost or realizable values whichever is lower.2. Provision for doubtful debts and Provision for discount on debtor is made.3. Ignore provision for discount on creditors.

7- Cost concept: The cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use. To illustrate, on June 2005, an old plant was purchased for Rs. 50 lakh by Shiva Enterprise, which is into the business of manufacturing detergent powder. An amount of Rs. 10,000 was spent on transporting the plant to the factory site. In addition, Rs. 15,000 was spent on repairs for bringing the plant into running position and Rs. 25,000 on its installation. The total amount at which the plant will be recorded in the books of account would be the sum of all these, i.e. Rs. 50,50,000. The concept of cost is historical in nature as it is something, which has been paid on the date of acquisition and does not change year after year. For example, if a building has been purchased by a firm for Rs. 2.5 crore, the purchase price will remain the same for all years to come, though its market value may change.

8. Matching concept: The process of ascertaining the amount of profit earned or the loss incurred during a particular period involves deduction of related expenses from the revenue earned during that period. The matching concept emphasises exactly on this aspect. It states that expenses incurred in an accounting period should be matched with revenues during that period. It follows from this that the revenue and expenses incurred to earn these revenues must belong to the same accounting period.

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As already stated, revenue is recognised when a sale is complete or service is rendered rather when cash is received. Similarly, an expense is recognized not when cash is paid but when an asset or service has been used to generate revenue. For example, expenses such as salaries, rent, insurance are recognized on the basis of period to which they relate and not when these are paid. Similarly, costs like depreciation of fixed asset is divided over the periods during which the asset is used.9. Dual aspect: Dual aspect is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the book of accounts. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places. In other words, at least two accounts will be involved in recording a transaction. This can be explained with the help of an example. Ram started business by investing in a sum of Rs. 50,00,000 The amount of money brought in by Ram will result in an increase in the assets (cash) of business by Rs. 50,00,000. At the same time, the owner’s equity or capital will also increase by an equal amount. It may be seen that the two items that got affected by this transaction are cash and capital account.

10. Revenue Recognition (Realisation) ConceptThe concept of revenue recognition requires that the revenue for a business transaction should be included in the accounting records only when it is realised. Here arises two questions in mind. First, is termed as revenue and the other, when the revenue is realised. Let us take the first one first. Revenue is the gross inflow of cash arising from (i) the sale of goods and services by an enterprise; and (ii) use by others of the enterprise’s resources yielding interest, royalties and dividends. Secondly, revenue is assumed to be realised when a legal right to receive it arises, i.e. the point of time when goods have been sold or service has been rendered. Thus, credit sales are treated as revenue on the day sales are made and not when money is received from the buyer. As for the income such as rent, commission, interest, etc. these are recognized on a time basis.

Accounting Standards: Accounting standards are written statements of uniform accounting rules and guidelines or practices for preparing the uniform and consistent financial statements and for other disclosures affecting the user of accounting information. However, the accounting standards cannot override the provision of applicable laws, customs, usages and business environment in the country. The Institute tries to persuade the accounting profession for adopting theaccounting standards, so that uniformity can be achieved in the presentation of financial statements. the Institute of Charted Accountants of India (ICAI) constituted an Accounting Standards Board (ASB) in April, 1977 for developing Accounting Standards. The main function of ASB is to identify areas in which uniformity in standards is required and develop draft standards after wide discussion with representative of the Government, public sector undertakings, industry and other organisations. ASB gives due consideration to the International Accounting Standards as India is a member of International Account Setting Body. ASB submits the draft of the standards to the Council of the ICAI, which finalises them and notifies them for use in the presentation of the financial statements. ASB also makes a periodic review of the accounting standards.

International Financial Reporting Standards (IFRSs);International Financial reporting Standards (IFRSs) are globally accepted accounting standards developed by International Accounting Standard Board (IASB). IFRS is a set of 11 | P a g e

accounting standards for reporting different types of business transactions and events in the financial statements. The objective is to facilitate international comparisons for true and fair valuation of a business enterprise. The qualitative characteristics associated with the preparation of financial statements are useful to the users of accounting information in making financial decisions.In an effort to narrow down the gap in the presentation of corporate financial statements, the Ministry of Corporate Affairs, Government of India has opted for the convergence of Indian Accounting Standards with IFRSs for bringing uniformity, comparability, transparency, rationalization and adaptability in the field of accounting.

Question bank:Q.1 What is meant by Accounting?Ans: Accounting is the art of recording, classifying, summarizing and communicating financial

information to users for correct decision making.Q.2 Give any two objectives of accounting?Ans: a) To keep the records of the business systematically.

b) To ascertain profit earned or loss suffered by the business during a specified period.Q.3 Give one point of distinction between Book-Keeping and Accounting.Ans: The main purpose of Book-Keeping is to maintain the systematic records of business

transaction. And the main objective of Accounting is ascertain the profit or loss and the financial position of the business.

Q.4 What is the end product of financial accounting?Ans: Financial Statements (i.e. Profit & Loss Account and Balance Sheet) and report which

provide information to different users of it for making decisions.Q.5 Who are the internal users of accounting?Ans: Persons, directly involved in managing and operating the business activities, are the

internal users of accounting. Example: partners, managers, officers.Q.6 Who are the external users of accounting?Ans: Persons, who are not involved directly in managing and operating the business

activities, are the internal users of accounting. Example: potential investors, creditors, lenders, employees unions, customers, government etc.

Q7 Write one limitation of accounting.Ans: Window dressing, i.e. accounts are manipulated by the accountant or management in

favour of business in such a way that they do not present correct financial position of the business.

Q.8 State the qualitative characteristics of accounting.Ans: Reliability, relevancy, understandability, comparability.Q.9 “Accounting information should be verifiable and free from personal bias.” Identify the

qualitative characteristic of accounting information denoted by this statement.Ans: Reliability.Q.10 What is meant by window dressing?Ans: It refers to the practice of manipulating accounts, so that financial statement may

disclose a more favourable position than the actual position. For example: purchase made in the year may not be recorded or closing stock may be over valued.

Q.11 Which value is involved in adopting the same method of depreciation year after year?Ans: Comparability.Q.12 What is voucher?Ans: A voucher is a document on the basis of which transactions are first recorded in the

books.Q.13 Define merchandise.12 | P a g e

Ans: Merchandise goods purchased for resale.Q.14 Distinguish between gain and profit.Ans: Profit is the excess of revenues over expenses during an accounting period. It is the

result of business transactions which are of regular nature. Gain arises from events or transactions which are incidental to business such as sale of a fixed assets or winning a lottery prize.

Q.15 Distinguish between revenue expenditure and capital expenditure.Ans: If the benefit of expenditure is exhausted within a year, it is treated as revenue

expenditure (also called expense). If the benefit of expenditure lasts for more than a year it is treated as capital expenditure.

Q.16 Distinguish between debtor and creditor.Ans: Debtors are the persons to whom the enterprise sales the goods or services on credit.

Creditors are the persons from whom the enterprise purchases the goods or services on credit.

Q.17 Mr. Ajay, who owed us Rs. 1,00,000 became insolvent and paid only 40% of this amount. What is the term used for the amount not received?

Ans: Bad Debts.Q.18 Give the two characteristics of accounting principles.Ans: a) Accounting principles are man made

b) Accounting principles are flexibleQ.19 What is money measurement principle?Ans: Only those transactions and events are recorded in accounting which can be expressed

in terms of money.Q.20 What is going concern principle?Ans: Business will continue for a long time and there is no intention to close down it in near

future. Q.21 Closing stock is valued at lower of cost or realizable value’. Which principle of

accounting is applied here?Ans: Principle of prudence or conservatism.Q.22 What is meant by GAAP?Ans: Generally Accepted Accounting Principles.Q.23 Mohan, the owner of a business receives an order for supply of goods worth Rs.

2,00,000. He has also received Rs. 25,000 against this order. Mohan wants to record it as sale. Is Mohan correct in doing so?

Ans: No. Under matching concept, revenue is recognized as earned only when cost incurred to earn that revenue is also recognized as expense in that period.

Q.24 Which of the following transactions will be recorded in the books of accounts?a) Credit purchaseb) Strike by employees.c) Goods worth Rs. 5,000 taken from the business and given by the proprietor to his friend as gift.d) Withdrawing of money by proprietor for his personal use.e) Interviewing the candidates for employment.f) Sale of household furniture for Rs. 20,000g) Payment of school fees of proprietor children from his personal account.h) Make promise to send the goods.i) Receiving an order to send the goods.j) Loss of goods by fire.

Ans: a, c, d and j.Q.25 State whether the following statements are true or false:13 | P a g e

a) Accounting is the language of business. Trueb) Accounting is helpful in raising loans. Truec) Accounting is not accepted as evidence in legal matters. Falsed) Management of an enterprise is internal user of its accounting information. Truee) Accounting makes a record of qualitative aspects of business. Falsef) Accounting is a service function. Trueg) Accounting involves only the recording of business transactions. Trueh) Accounts are prepared on the basis of historical costs. Truei) Only those transactions are recorded in accounting which can be expressed in terms of money Truej) Book-keeping starts where accounting ends. Falsek) Creditors are external users of accounting information. Truel) A creditor would use an entity’s financial report to determine where or not credit may be granted to the firm. Truem) Accounting may be affected by window dressing. True

Q.26 Choose the best alternate:A: In accounts recording is made of:a) Only financial transactions * b) Only non-financial transactionsc) Financial as well as non-financial transactions d) personal transactions of the proprietorB: Ghanshyam is a furniture dealer. Which one of the following will not be recorded in his books?a) purchase of Timber for Rs. 10,000 b) Sofa set worth Rs, 20,000 taken to his homec) Sale of house hold furniture for Rs. 20,000 * d) Dining table of Rs. 15,000 given as giftC: Which of the following transactions is not of financial character?a) Purchase of asset on credit b) Purchase of assets for cashc) withdrawing of money by proprietor for personal use d) strike by employees *D: Last step of accounting process is:a) Provide information to various parties who are interested in business enterprise *b) Record transactions in the books.c) To make summary in the form of financial statements.d) To classify the transactions under separate heads in the ledger.E: Internal users of accounting information are:a) Potential investors b) Creditorsc) Management * d) EmployeesF: External users of accounting information are:a) Researchers b) Governmentc) Potential Investors d) All of the above *G: External users of accounting information are not:a) Lenders b) Officers *c) Employees d) PublicH: Which of the following is not a limitation of accounting?a) Based on accounting conventions b) Evidence in Legal matter *c) Incomplete information d) Omission of qualitative information. I: Which of the following is not an objective of accounting?a) To provide information about the assets, liabilities and capital of the enterprise.b) To provide information about the private assets and liabilities of the proprietor. *c) To maintain records of the business.

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d) To provide the information regarding the profit and loss of the enterprise.J: If accounting information is based on facts and it is verifiable by documents it has the quality of ……………a) relevance b) reliability *c) understandability d) comparabilityK: Which of the following transaction is of a financial character and will be recorded in the business?a) Goods taken from the business by the proprietor for her personal use *b) Interviewing the candidates for employmentc) Sale of household furnitured) Received an order for sale of goodsL: Current Liability includesa) Bills payable b) Creditorsc) Outstanding expenses d) all the above *M: Trade discount is:a) Which is allowed at the time of receiving the paymentb) Which is allowed at the time of the sale of goods. *c) Which is allowed both at the time of receiving the payment and sale of goods.d) Allowed in all the aboveN: Consider the following items: 1. Prepaid Salary 2. Accrued Interest 3. Loan (short term) 4. Bank overdraftCurrent liability includes:a) 1,2,3,4, b) 2,3,4 c) 4,3,1 d) 3,4 *O: As per Income Tax, Accounting period is:a) from 1st January to 31st December b) from 1st April to 31st March *c) From 1st July to 30th June d) From Diwali to DiwaliP: Principle of conservatism takes into accounts:a) All future profits and losses b) All future profits not lossesc) All future losses not profits * d) Neither profits nor losses of future.Q: The owner of the firm records his medical expenses in the firm’s income statement. Indicate the principle that is violated.a) cost principle b) prudence c) full disclosure d) entity concept *R: Omission of paise and showing the round figures in financial statement is based on …………a) conservatism concept b) money measurement conceptc) materiality concept * d) consistency conceptS: Income is measured on the basis of:a) Matching concept * b) consistency conceptc) cost concept d) None of the aboveT: Due to which of the following, Contingent Liabilities are shown in the Balance Sheet:a) Dual Aspect Principle b) Principle of full disclosure *c) Principle of materiality d) Going concern conceptU: During the life-time of an entity accounting produce financial statements in accordance with which basic accounting concept:(a) Conservation (b) Matching (c) Accounting period * (d) None of the aboveV: When information about two different enterprises have been prepared presented in a similar manner the information exhibits the characteristic of:

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(a) Verifiability (b) Relevance (c) Reliability (d) None of the above *W: A concept that a business enterprise will not be sold or liquidated in the near future is known as:(a) Going concern * (b) Economic entity(c) Monetary unit (d) None of the aboveX : The primary qualities that make accounting information useful for decision-making are :(a) Relevance and freedom from bias (b) Reliability and comparability *(c) Comparability and consistency (d) None of the above

Q.27 Higher Order Thinking Skills (HOTS) Questions:a) What is the traditional function of Accounting?b) Is the basic objective of book-keeping to maintain systematic records or to ascertain net results of operations of financial transactions?c) Recording of financial transactions and preparing the financial statements are the only objectives of accounting. Do you agree?d) What is the first step of Accounting Process?e) Which is the last step of Accounting Process?f) On 1st Jan, 2014, Mr. Robert was appointed as Marketing Manager of the firm with a salary of Rs. 50,000 per month. State whether this event will be recorded in the books of accounts.g) The firm follows a practice of giving the figures of previous year along with the figure of current year. Now the Accountant of the firm wants to discontinue this practice. Do you justify this decision?h) Give two examples of transactions which are not recorded in accounting.i) A firm has received a large order to supply the goods. Will it be recorded in the books?

Ans: a) Recording of financial transactions.b) The basic objective of book-keeping is to maintain systematic records of financial transactions.c) No. Besides these two accounting has other objectives also such as providing useful information to various users.d) Recording of transactions in the books.e) Communicating the final results to the users who analyze them as per the individual requirement.f) No. The appointment will not be recorded.g) No. Comparability of current year figures with that of previous year is a qualitative characteristic of financial information. Firm should not discontinue this practice.h) i. Resignation by the employee. ii. Value of human resourcesi) No. Only the receipt of order has not resulted in any change in the financial position of the firm.

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Accounting Process

Recording of Transactions: Content mapping:Accounting equation: analysis of transactions using accounting equation. Rules of debit and credit: for assets, liabilities, capital, revenue and expenses. Origin of transactions- source documents/supporting vouchers (invoice, cash memo, pay in slip, cheque), debit note, credit note, preparation of accounting vouchers – cash (debit and credit) and non cash (transfer). Books of original entry: format and recording - Journal. Cash book: simple cash book, cash book with discount column and cash book with bank and discount columns, petty cash book. Other books: purchases book, sales book, purchases returns book, sales returns book and journal proper._______________________________________Accounting Equation:

Total Assets = Capital + Liabilities

1. Mohit has the following transactions, prepare accounting equation:

(i) Business started with cash 1,75,000(ii) Purchased goods from Rohit 50,000(iii) Sold goods on credit on Manish (costing Rs.17,500) 20,000(iv) Purchased furniture for office use 10,000(v) Cash paid to Rohit in full settlement 48,500(vi) Cash received from Manish 20,000(vii) Rent paid 1,000(viii) Cash withdrew for personal use 3,000

Soln:-

Transaction No. Assets = Liabilities + Capital Cash + Stock + Debtors + Furniture = Creditors + Capital

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(i) Business started with cash

1,75,000 0 0 0 0 1,75,000

New Equation(ii) Purchased goods from Rohit

1,75,000 0

050,000

00

00

050,000

1,75,000 0

New Equation(iii) Sold goods on credit to Manish(costing Rs.17,500)

1,75,000 0

50,000(17,500)

020000

00

50,000 0

1,75,000 2,500

New Equation(iv) Purchased furniture for office use

1,75,000 (10,000)

32,500 0

20,000 0

010,000

50,000 0

1,77,500 0

New Equation(v) Cash paid to Rohit in full settlement

1,65,000(48,500)

32,500 0

20,000 0

10,000 0

50,000(50,000)

1,77,500 1,500

New Equation(vi) Cash received from Manish

1,16,500 20,000

32,5000

20,000(20,000)

10,000 0

0 0

1,79,000 0

New Equation(vii) Rent paid

1,36,500 (1,000)

32,500 0

Nil0

10,0000

0 0

1,79,000 (1,000)

New Equation(viii) Cash withdrew for personal use

1,35,500 (3,000)

32,5000

00

10,0000

0 0

1,78,000 (3,000)

Final Equation 1,32,500 32,500 nil 10,000 0 1,75,000

Closing Capital = Closing Assets – Closing Liabilities

Profit = Closing Capital + Drawings – Additional Capital- Opening Capital

2. On 31st March 2015, the total assets and external liabilities were Rs.6,00,000 and Rs.18,000 respectively.

During the year, the proprietor had introduced capital of Rs.60,000 and withdrawn Rs.36,000 for personal use. He made a profit of Rs.60,000 during the year. Calculate the capital as on 1st April 2014 (Opening Capital)Soln:- Closing Capital = Closing Assets – Closing Liabilities

Closing Capital = 6,00,000 – 18,000 = 5,82,000

Profit = Closing Capital + Drawings – Additional Capital- Opening Capital

60,000 = 5,82,000 + 36,000 -60,000 – Opening Capital

Opening Capital = 5,82,000 + 36,000 -60,000 -60,000 = Rs. 4,98,000

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Capital as on 1st April 2014 (Opening Capital) = Rs. 4,98,000

Rules of Debit and Credit

Under Double Entry System of Book keeping each transaction has two aspects. One is receiving or incoming aspect- Debit aspect; another giving or outgoing aspect- Credit aspect.

i Increase in assets are debits; decreases are credits.ii Increase in liabilities are credits; decreases are debits.iii Increase in owner’s capital are credits; decreases are debits.iv Increase in expenses are debits; decreases are credits.v Increase in revenues or incomes are credits; decreases are

debits.OR

Personal Accounts - Debit the Receiver; Credit the Giver

Real Account - Debit what comes in; Credit what goes out

Nominal Account - Debit all expenses and losses; credit all incomes and gains.

Personal Account- related to persons- Ram’s Account, Annu’s account etc.; account of limited company, Outstanding Rent account etc.Real Account- related to tangible or intangible assets.- Land, building, stock, cash etc.

Nominal Account- related to expenses- losses, gains, revenue ,income- interest accountAccount

Account is a summarized record of transactions at one place relating a particular head. It records not only the account of transactions but also their effect and direction.

Name Of The Account

Date Particulars J.F Amount Date Particulars J.F Amount

JOURNAL

Journal is a book in which transactions are recorded in the order in which they occur. It is the book of original entry as transactions are initially recorded in it.

Date Particulars L.F. Dr.Amount Cr.Amt

Entries of specific transactions:-19 | P a g e

1. Bad Debts: Bad Debts A/c

To Debtor’s Personal A/c(Being the amount not received written off as bad debt)

2. Bad Debts Recovered: Cash or Bank A/c To Bad Debts Recovered A/c (Being bad debt recovered)

3. Cash withdrawn for personal Use:Drawings A/c To Cash A/c(Being the cash withdrawn for personal use)

4. Discount :(i) Trade Discount : Deduction from the sale value and sale is recorded in the books of

accounts at net amount.(ii) Cash Discount: It is allowed when payment is made.

Trade discount is allowed first , thereafter cash discount is allowed .

5. Goods taken for Personal Use:Drawings A/c

To Purchases A/c(Being the goods taken for personal use)

6. Goods Given as charity: Charity A/c To Purchases A/c(Being the goods given as charity )

7. Distribution of Goods as Free samples:Advertisement A/c Dr `To Purchases A/c

(Being the goods distributed as fee samples)8. Loss of Theft or Fire

Loss by theft or Fire A/c To Purchases A/c

(Being the loss of goods by theft or fire)9. Central Sales Tax ( CST)

Cash or Debtors A/cTo Sales A/cTo Central Sales tax A/c

(Being the sales made and Central Sales Tax collected)

Central sales Tax A/cTo Cash or Bank A/c

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(Being the Central Sales Tax collected and deposited in Government Account)10. Value Added Tax:

(i) When VAT is paid at the time of purchases:Purchases A/c DrVAT Paid A/c To Cash or Bank or Creditors A/c(Being the purchases made and VAT paid recorded)

(ii) When VAT is collected at the time of sales:Cash or Bank or Debtors A/c

To Sales A/cTo VAT Collected A/c

(Being the sales made and VAT collected recorded as liability)

(iii) When VAT is paid to the Government:(a) VAT Collected A/c

To VAT paid A/c (Being the balance in VAT paid A/c transferred to VAT collected A/c)

(b) VAT Collected A/c To Cash or Bank A/c (Being the balance in VAT Collected A/c after transfer of balance in VAT Paid A/c deposited)

11. Closing Stock:Closing Stock A/c Dr.

To Trading A/c(Being Closing Stock recorded)

12. Outstanding Expenses:Expenses A/c Dr

To Outstanding Expenses A/c(Being the outstanding expenses accounted)

13. Prepaid Expenses:Prepaid Expense A/c Dr

To Expense A/c(Being the amount transferred to Prepaid Expenses A/c for the period)

14. Depreciation:Depreciation A/c Dr

To Asset A/c (Being the depreciation on asset provided)

15. Accrued Income:Accrued Income A/c

To Income A/c (Being the income earned but not yet received)

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16. Income received in advance or Unearned Income:Income A/c

To Income received in advance(Being income received in advance)

17. Interest on Capital Interest on Capital A/c

To capital A/c (Being interest on capital allowed @ …%)

18. Interest on Drawings:Capital A/c Dr. To Interest on Capital A/c( Being the interest on drawings charged @ …%)

3. Journalise the following transactions in the books of Harpreet Bros:

(i) Goods worth Rs.50,000 and Cash Rs.20,000 were stolen by an employee.(ii) Goods costing Rs.10,000 were returned to Ram Bros as the goods were hazardous for health

of the consumers. Also give value affected in each of the above case. (KVS 2015)

Date Particulars L.F. Dr.Amount Cr.AmtLoss by theft or Fire A/c To Purchases A/c To Cash A/c (Being the loss of goods by theft or fire)

Ram Bros A/c Dr To Returns Outwards A/c(Being goods returned to Ram Bros)

70,000

10,000

50,00020,000

10,000

Value effected is- (i) Honesty (ii) Consumer Protection

LEDGER

It is the book of second or final entry. Entries are transferred from journal. Ledger is also called the principle book / book of final entry of accounting system. All the transactions recorded in the books of original entry are transferred to ledger. It contains a summarized form of all the accounts recorded at one place.The process of transferring the entries from the books of original entry (journal) to the ledger is called posting. Balancing of an account is the process of ascertaining the difference between the total of debits and total of credits appearing in an account, this difference is written on the side whose total is short.

Personal and real accounts are balanced and nominal accounts are closed by transferring it to trading and profit and loss account.

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4. Journalise the following transactions in the journal of Vimal and post them to the ledger and balance them2013 Amt (Rs.)Aug 1 Vimal started a business with cash 2,50,000Aug 2 Bought goods for cash 76,250Aug 7 Opened bank account with cash 1,25,000Aug 10 Sold goods for cash 1,00,000Aug 17 Bought goods from Jaya on credit 75,000Aug 25 Sold goods to Prateek on credit 62,500Aug 27 Purchased Plant & Machinery and payment is made by cheque 41,500Aug 30 Paid to Jaya 74,500 as full and final settlement

Journal

Date Particulars L.F. Dr.Amount Cr.Amt2013Aug 1 Cash A/c

Dr To Capital A/c(Being business started with cash)

2,50,0002,50,000

Aug 2 Purchases A/c Dr To Cash(Being goods purchased for cash)

76,250 76,250

Aug 7 Bank A/c Dr To Cash A/c (Being bank account opened)

1,25,0001,25,000

Aug 10 Cash A/c Dr To Sales A/c(Being goods sold for cash)

1,00,0001,00,000

Aug 17 Purchases A/c Dr To Jaya(Bought goods on credit)

75,00075,000

Aug 25 Prateek A/c Dr To Sales A/c(Being goods sold to Prateek on credit)

62,50062,500

Aug 27 Plant & Machinery A/c Dr To Bank A/c(Being plant & machinery purchased by cheque)

41,50041,500

Aug 30 Jaya Dr To Cash A/c To Discount A/c(Being the amount paid to Jaya as full settlement of her claim and discount received Rs.500)

75,000 74,500 500

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Ledger

Cash Account


2013Aug 1Aug 10

To Capital A/cTo Sales A/c

2,50,0001,00,000

3,50,000

2013Aug 2Aug 7Aug 30Aug 31

By Purchases A/cBy BankBy JayaBy Balance c/d

76,2501,25,0007450074250

3,50,000

Capital A/c


2013Aug 31 To Balance c/d 2,50,000

2,50,000

2013Aug 1

By Cash A/c 2,50,000

2,50,000

Purchases A/c


2013Aug 2Aug 17

To Cash A/cTo Jaya

76,25075,000

1,51,250

2013Aug 2

By Balance c/d 1,51,250

1,51,250

Bank A/c


2013Aug 7 To Cash 1,25,000

1,25,000

2013Aug 27Aug 31

By Plant & MachineryBy Balance c/d

41,50083,500

1,25,000

Sales A/c


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2013Aug 31 To Balance c/d 1,62,500

1,62,500

2013Aug 10Aug 25

By Cash A/cBy Prateek

1,00,000 62,500

1,62,500

Plant & Machinery A/c


2013Aug 31 To Bank A/c 41,500

41,500

2013Aug 31

By Balance c/d 41,500

41,500

Discount A/c


2013Aug 30 To Balance c/d 500

500

2013Aug 31

By Jaya 500

500

Cash Book

Types of Cash Book-

1) Single Column Cash Book2) Double Column Cash Book (Cash Book with Discount Column)3) Three Column Cash Book ( Cash Book with Bank and Discount Column)

i) Contra Entries- Means entries that are made on both sides of cash book. These are not posted in ledger. The letter ‘C’ is written in the L.F. column.ii) Cheques Received and deposited into Bank on same day. Bank is and debtor is creditor.iii) Cheques Received and deposited on different dates.

Cheque in hand A/c Dr. To Debtor

OR

(a) When cheque is received- Cash A/c Dr (b) When cheque is deposited - Bank A/c Dr To Debtor A/c To Cash A/c

iv) Cheque Received, Endorsed in Favour of a Creditor When cheque is received- Cash A/c Dr (b) When cheque is deposited - Creditor A/c Dr

To Debtor A/c To Cash A/c

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v) Cheque deposited into Bank Dishonoured- Debtor A/c Dr Bank A/c

Dr Cr

Date

Particulars

L.F.

DiscountAllowedRs.

CashRs.

BankRs.

Date

Particulars

L.F.

DiscountReceivedRs.

CashRs.

BankRs.

Petty Cash Book

Petty Cash Book is used for the purposes of recording the payment of petty cash expenses.

Two systems- Ordinary System, Imprest System

Receipts Payments

Date

Particulars

Cash Book

Total

Date

Particulars

VoucherNo.

Postage/telegram

Cartage

Printing & Stationery

Misc

Total

5. Record the following in the appropriate book of original entry

2013 Amt (Rs.) Jan 1 Cash in hand 12,400 Jan 1 Bank Overdraft 1,400 Jan 3 Deposited into bank 3,000 Jan 5 Received cheque from Sharma 5,400 Jan 6 Deposited Sharma’s cheque into bank Jan 31 Bank charges 65

Dr Three column cash book Cr

Date Particulars L.F.

DiscountAllowedRs.

CashRs.

BankRs.

Date Particulars L.F. DiscountReceivedRs.

CashRs.

BankRs.

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3Jan 1Jan 3Jan 6

Feb 1

Feb 1

To Balance b/dTo Cash A/cTo cheque in hand A/c(Sharma)

To Balance b/d

To Balance c/d

12,400----

12,400

9400

-30005400

8,400

6935

3Jan 1

Jan3

Jan31

Jan31

By Balance b/dBy Bank A/c

By Bank ChargesBy Balance c/d

C

C

--3000

--

9400

12,400

1400--

65

6935

8,400

SUBSIDIARY BOOKS

1. Purchase Book or Purchase Journal – Records all credit purchases of goods. Cash purchases and other purchase are not recorded in purchase journal or book. This book records net trade discount/ quantity discount.

6. Record the following in the appropriate book of original entryAug 04 Purchased from M/s Neema Electronics (Invoice no.3250). 20 mini size TV @Rs.2,000 per piece, 15 tape recorders@ Rs.12,500 per piece. Trade discount @20%.Aug 10 Bought from M/s Pawan Electronics(Invoice no.8260). 10 video cassettes @ Rs.150 per piece, 20 tape recorders @1,650 per piece. Trade discount@ 10%Aug 18 Purchased from M/s Northern Electronics (Invoice no.4256). 15 northern stereos @Rs.4000 per piece, 20 northern colour TV @Rs.14,500 per piece. Trade discount @12.5%.

Soln: Purchase Journal

Date Particulars Invoice No.

L.F Details Rs.

TotalAmt Rs.

2010Aug 04

Aug 10

Neema Electronics;20 Mini size [email protected] per piece15 Tape Recorders @Rs.12,500 per piece

(-) Trade discount @20%

Pawan Electronics;10 Video [email protected] per piece20 Tape recorders @Rs.1,650 per piece

3250

8260

400001,87,5002,27,500 45,500

150033000

1,82,000

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mailto:[email protected]

Aug 18

Aug 31

(-)Trade discount @10%

Northern Electronics15 Northern Stereos @Rs.4000 per piece20 Northern Colour TV @Rs.14,500 per piece

(-)Trade discount @12.5%

Purchases A/c Dr

4256

34500 3450

60,0002,90,0003,50,000 43,750

31,050

3,06,250

5,19,300

2. Sales Book or Sales Journal

Records all credit sales of goods. Does not record the cash sales of goods or any other asset. Also known as day book.

7 .Record the following in the appropriate book of original entry of M/s Koina supplier who sold on credit;

(i) Two water purifiers @Rs.2,100 each and five buckets @Rs.130 each to M/s Raman Traders (Invoice no. 178 dated 6th April 2010)

(ii) Five road side containers @Rs. 4,200 each to M/s Nutan enterprises (Invoice no.180 dated 9th April 2010)

(iii) 100 big buckets @Rs.850 each to M/s Raman traders (Invoice no.209, dated 28th April 2010).

The above stated transactions will be entered in a sales journal as follows;

Sales Journal

Date Particulars Invoice No.

L.F

Details Rs.

TotalAmt Rs.

2010Apr 06

Apr 09

Apr 28

Apr 30

Raman Traders2 Water Purifiers @ Rs.2100 each5 Buckets @Rs.130 each

(-) Trade discount @20%

Nutan Enterprises5 Road Side [email protected]

Raman Traders100 Big Buckets @Rs.850

Sales A/c Cr

178

180

209

4200 650 4850

21,000

85000

1,10,850

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3. Purchase Return or Return Outwards Book

Records purchase return of goods. It does not record the returns of goods purchased on cash. Entries are made on the basis of debit notes issued to the suppliers and credit notes received from the suppliers.

4. Sales Return or Return Inwards Book

Records sales return of goods. It does not record the returns of goods sold on cash basis. Entries are made on the basis of credit notes issued to the customers and debit notes issued by the customers.

5. Journal Proper

A book maintained to record transactions which do not find a place in special journals

(i.e. subsidiary books)

Following transactions are recorded:

a) Opening Entriesb) Closing Entriesc) Adjustment entriesd) Rectification entriese) Transfer entriesf) Other entries.

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Trial Balance

Trial balance is a statement, prepared with the debit and credit balances of leger accounts to test the arithmetical accuracy of the books. It shows the final position of all accounts and helps the preparation of financial statements. It is not an account. It is prepared for a particular period and all accounts are considered while preparing it.

Methods of preparing:1) Totals Method 2) Balance method 3) Total cum Balance method

Balance method is most commonly used. Trial balance is prepared by showing the balances of all ledger accounts.

8. The following trial balance has been prepared by an inexperienced accountant. Redraft it in the correct form:

Name of Accounts LF Debit Balance Rs. Credit Balance Rs.Cash in handMachineryPurchasesSundry debtorsCarriage inwardsCarriage outwardWagesRent & TaxesSundry CreditorsDiscount allowedReturns outwardsReturns inwardsCapitalDrawingsBank LoanInterest on LoanOpening StockSalesDiscount Received

Total

40002500066000240002000

180005000

2500

30000

100001500

1500

1,89,500

1000

155001000

10000

6000

26000130000

1,89,500

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Solution:

Name of Accounts LF Debit Balance Rs. Credit Balance Rs.

Cash in handMachineryPurchasesSundry debtorsCarriage inwardsCarriage outwardWagesRent & TaxesSundry CreditorsDiscount allowedReturns outwardsReturns inwardsCapitalDrawingsBank LoanInterest on LoanOpening StockSalesDiscount Received

Total

400025000660002400020001000180005000

1000

10000

6000

150026000

1,89,500

15500

2500

30000

10000

1300001500

1,89,500

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Preparation of Bank Reconciliation Statement, Ledger and Trial BalanceContent mapping:Bank reconciliation statement- concept, calculating bank balance at an accounting date: need and preparation. Corrected cash book balance. Ledger - format, posting from journal, cash book and other special purpose books, balancing of accounts. Trial balance: objectives and preparation {Scope: Trial balance with balance method only)____________________________________

Bank Reconciliation Statement

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Bank Reconciliation Statement is a statement, which is prepared mainly to reconcile the difference between the bank balance as shown by the cash book and bank pass book.

Reasons of Difference between Cash Book and Pass Book Balances:-

A. Difference due to timing- 1. Cheques issued by the Bank but not yet presented for payment.2. Cheques paid/ deposited into the bank but not yet collectedB. Transactions Recorded by the Bank 1. Direct Debits made by the Bank on behalf of the customer.2. Amounts Directly deposited in the bank account by the customer.3. Interest & Dividend collected by the bank.4. Direct payments made by the bank on behalf of the customers.5. Interest credited by the bank but not recorded in the cash book.6. Cheque deposited/ bills discounted dishonoured.C. Differences Caused by Errors

1. Errors committed I recording transactions by the firm2. Errors committed in recording transactions by the bank.

Bank Reconciliation Statement

Particulars Plus Rs. Minus Rs.Balance as per Cash/Pass Book XXX

Items to be added-

i) All the cheques issued but not yet presented for payment, amounts directly deposited in the bank account.

ii) All the credits given by bank such as interest on dividends collected, etc. and direct deposits in the bank are added.

Items to be deducted-

i) The cheques deposited but not yet collected.ii) All the items of charges such as interest on overdraft, payment by bank on standing

instructions and debited by the bank in the pass book but not entered in cash book, bills and cheques dishonoured etc.

iii) Adjustment for errors are made according to the principles of rectification of errors.iv) The net balance shown by the statement should be same as shown by the pass book.

1. Prepare a bank reconciliation statement from the following particulars on 31st March 2013:Amt (Rs.)

i) Cheques issued but not presented for payment 34,500ii) Cheques paid into bank but not yet collected 7,500iii) Interest credited by the bank but not entered in cash book 1,650iv) Bank Charges debited in the pass book but not entered in the cash book 105v) Credit balance as shown by pass book 1,06,590

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vi) Debit balance as shown by the cash book 78,045

Ans: Bank Reconciliation Statement

Particulars Plus Rs. Minus Rs.Balance as per Cash/Pass BookAdd:- Cheques issued but not presented for payment Interest credited in the pass bookLess: Cheques paid to the bank but not yet cleared Bank charges debited in pass bookFavorable balance as per Pass Book

78045 34500 1650

1,14195

7500 105106590

1,14,195

2. On 31st Dec 2013, the cash book of Rohan showed an overdraft of Rs.5,600. From the following particulars make out a bank reconciliation statement

i) Cheques drawn but not cashed before 31st December 2013 amounted to Rs.3946.ii) Cheques paid into bank but not credited before 31st dec 2013 amounted to Rs.4891.iii) A bill receivable for Rs.520 previously discounted with the bank had been dishonoured

and bank charges debited in the pass book amounted to Rs.55.iv) Debit is made in the pass book for Rs.120 on account of interest on overdraft.v) The bank has collected interest on investment and credited Rs.760 in the pass book.

Ans: Bank Reconciliation Statement As on 31st December 2013

Particulars Plus Rs. Minus Rs.Overdraft per Cash/Pass BookAdd:- Cheques drawn but not cashed Interest on investment collected & credited bankLess: Cheques paid to the bank but not credited till 31st Dec Bills receivable dishonoured previously discounted with the bank Bank charges debited in pass book Interest on overdraft debited as per Pass BookOverdraft balance as per Pass Book

3946 760

6480

11,186

5600

4891

520

55120

11,186

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Depreciation, Provisions and Reserves

Content mapping

Depreciation: concept need and factors affecting depreciation; methods of computation of depreciation: straight line method, written down value method (excluding change in method) accounting treatment of depreciation: by charging to asset account, by creating provision for depreciation/ accumulated depreciation account, treatment of disposal of asset. Provisions and reserves: concept, objectives and difference between provisions and reserves; types of reserves- revenue reserve, capital reserve, general reserve and specific reserves._________________________________________________________________________

“Depreciation is gradual and permanent decrease in the value of an asset from any cause.” – Carter

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Features of Depreciation:(1) It is decline in the book value of fixed assets.(2) It is a continuing process.(3) It includes loss of value due to efflux ion of time, usage or obsolescence.(4) It is an expired cost and must be deducted before calculating taxable profit.

Causes of Depreciation:(1) Wear and tear due to use or passage of time.(2) Obsolescence.(3) Expiration of legal rights.(4) Abnormal factors.

Need or Objectives of Depreciation:(1) To ascertain the true profit or loss.(2) For consideration of tax.(3) To ascertain the true and fair financial position.(4) Compliance with legal provisions.

Factors or Basis for providing Depreciation:(1) Cost of asset.(2) Estimated net residual value.(3) Depreciable cost.(4) Estimated useful life.

Methods of calculating Depreciation:(1) Straight line method (Fixed installment method):

This method is based on the assumption of equal usage of time over asset’s entire useful life. According to this method a fixed and equal amount is charged as depreciation in every accounting period during the life time of an asset. Depreciation amount can be calculated by the following formula:

Depreciation = cost of asset – estimated net residual value No. of years of expected life

(2) Written Down value method(Diminishing balance method):

In this method depreciation is charged on the book value of the asset. The amount of depreciation reduces year after year.

Method of recording depreciation:

(1) When depreciation is charged to asset account:(2) In this method depreciation is deducted from the asset value and charged (debited) to profit and

loss account. Journal entries for recording under this method are as follows.(a) For purchase of an assetAsset A/c Dr.

To Bank/ vendor A/C(With the cost of an asset including installation expenses, freight etc.)(b) Following entries are recorded at the end of each year

(i) Depreciation A/c Dr. To Asset A/c

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(With an amount of depreciation)(ii) Profit and loss A/c Dr.

To Depreciation A/c (With an amount of depreciation)

(3) When provision for depreciation/Accumulated depreciation account is maintained:Following journal entries are recorded at the end of each year.

(a) Depreciation A/c Dr To provision for depreciation A/c (With the amount of depreciation)

(b) Profit and loss A/c Dr To depreciation A/c (With the amount of depreciation)

Difference between Straight line method and written down value method:

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Q1. Soham purchased a machinery for Rs. 1,00,000 on 1st July, 2009. Another machine was purchased for Rs. 50,000 on 1st January, 2011.

Depreciation is charged at 10% p.a. by straight line method. Accounts are closed on 31st December each year. Pass the necessary Journal entries, show machinery A/c and Depreciation A/c for the year 2009, 2010, 2011.

(a) When Provision for depreciation a/c is not maintained.(b) When Provision for depreciation a/c is maintained.

Solution:(a) When Provision for depreciation a/c is not maintained.

In the Books of SohamJournal

Date Particulars L.F. Dr. (Rs.) Cr.(Rs.)

2009July 1

Dec 31

Dec 31

2010Dec 31

Dec 31

Machinery A/c Dr. To Bank A/c(Being machinery purchased for Rs. 1,00,000)

1,00,000

5,000

5,000

10,000

10,000

50,000

15,000

1,00,000

5,000

5,000

10,000

10,000

50,000

15,000

Depreciation A/c Dr. To Machinery A/c (Being depreciation charged to machinery A/c)

Profit and Loss A/c Dr To Depreciation A/c(Being depreciation amount transferred to Profit and Loss A/c)

Depreciation A/c Dr. To Machinery A/c(Being depreciation charged to machinery A/c)


Machinery A/c Dr.

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Basis Straight line method Written down value method

Charging depreciation

On original cost of an asset On book value of an asset

Amount of depreciation

Fixed year after year Declines year after year

Recognition by income tax law

Not recognized Recognized

Calculation Easy to calculate Difficult to calculate

2011Jan 1

Dec 31

Dec 31

To Bank A/c(Being machinery purchased ) 15,000

15,000Depreciation A/c Dr. To Machinery A/c(Being depreciation charged to machinery A/c)


Dr. Machinery A/c Cr.

Date Particulars J.F. Rs. Date Particulars J.F. Rs.

2009Jul 1

2010Jan 1

2011Jan 1Jan 1

2012Jan 1

To Bank A/c (M-I)

To Balance b/d

To Balance b/dTo Bank A/c( M-II)

To balance b/d

1,00,0002009Dec 31Dec 31

2010Dec 31Dec 31

2011Dec 31

Dec 31

By Depreciation A/cBy Balance c/d


By Depreciation A/c (M-I – 10,000 + M-II – 5,000)By balance c/d

5,00095,000

1,00,000 1,00,000

95,000 10,00085,000

95,000 95,000

85,00050,000 15,000

1,20,000

1,35,000 1,35,000

1,20,000

Dr. Depreciation A/c Cr.

Date Particulars J.F. Rs. Date Particulars J.F.

Rs.

2009Dec 31 To Machinery A/c 5,000

2009Dec 31 By Profit and loss A/c 5,000

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2010Jan 1

2011Jan 1

To Machinery A/c

To Machinery A/c

2010Dec 31

2011Dec 31

By Profit and loss A/c


5,000 5,000

10,000 10,000

10,000 10,000

15,000 15,000

15,000 15,000

(b) When Provision for depreciation A/c is maintained.In the Books of Soham

Journal

Date Particulars L.F. Dr. (Rs.) Cr.(Rs.)

2009July 1

Dec 31

Dec 31

2010Dec 31

Dec 31

2011Jan 1

Dec 31

Dec 31

Machinery A/c Dr.To Bank A/c(Being machinery purchased for Rs. 1,00,000)

1,00,000

5,000

5,000

10,000

10,000

50,000

15,000

15,000

1,00,000

5,000

5,000

10,000

10,000

50,000

15,000

15,000

Depreciation A/c Dr. To Provision for Depreciation A/c(Being depreciation charged to machinery A/c)


Depreciation A/c Dr. To Machinery A/c(Being depreciation charged to machinery A/c)


Machinery A/c Dr. To Bank A/c(Being machinery purchased for Rs. 1,00,000)

Depreciation A/c Dr. To Provision for Depreciation A/c(Being depreciation charged to machinery A/c)

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2009Jul 1

2010Jan 1

2011Jan 1Jan 1

2012Jan 1

To Bank A/c (M-I)

To Balance b/d

To Balance b/dTo Bank A/c( M-II)

To balance b/d

1,00,0002009Dec 31

2010Dec 31

2011Dec 31

By Balance c/d

By Balance c/d

By balance c/d

1,00,000

1,00,000 1,00,000

1,00,000 1,00,000

1,00,000 1,00,000

1,00,00050,000

1,50,000

1,50,000 1,50,000

1,50,000

Dr. Provision for Depreciation A/c Cr.


2009Dec 31

2010Dec 31

2011

To Balance c/d

To Balance c/d

5,0002009Dec 31

2010Jan 1Dec 31

2011Jan 1

By Depreciation A/c

By Balance b/dBy Depreciation A/c

By balance b/d

5,000

5,000 5,000

15,000 5,00010,000

15,000 15,000

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Jan 1 To Balance c/d Dec 31

2012 Jan 1

By Depreciation A/c (M-I Rs. 10,000 + M-II Rs. 5,000)

By balance b/d

30,000 15,000

15,000

30,000 30,000

30,000

Dr. Depreciation A/c Cr.

Date Particulars J.F.

Rs. Date Particulars J.F.

Rs.

2009Dec 31

2010 Dec 31

2011 Dec 31

To Provision for Depreciation A/c



5,000

2009Dec 31

2010 Dec 31

2011 Dec 31




5,000

5,000 5,000

10,000 10,000

10,000 10,000

15,000 15,000

15,000 15,000

Sale of an Asset(1) On the date of sale of an Asset

Cash / Bank A/c Dr.To Asset A/c

(Being an Asset sold)(2) If case of profit

Asset A/c Dr.To Profit and Loss A/c

(Being profit on sale of an asset transferred to profit and Loss A/c)(3) In case of loss

Profit and Loss A/c Dr.To Asset A/c

(Being loss on sale of an asset transferred to profit and Loss A/c)

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Q2. Rohan Ltd. purchased a Machinery on 1st May, 2009 for Rs. 60,000. On 1st July, 2010 it purchased another Machine for Rs. 20,000. On 31st March, 2011 it sold off the first machine purchased in 2009 for Rs. 39,000. Depreciation is provided at 20% on the original cost each year. Accounts are closed each year on 31st December. Show the Machinery account from 2009 to 2011.Dr. Machinery A/c Cr.


2009May 1

2010Jan 1Jul 1

2011Jan 1Mar 31

Mar 31

2012 Jan 1

To Bank A/c (M-I)

To Balance b/dTo Bank A/c(M-II)

To Balance b/dTo Bank A/c (M-III)To Profit and Loss A/c (profit on sale)

To balance b/d

60,0002009Dec 31Dec 31

2010Dec 31

Dec 31

2011Mar 31Mar 31 Dec 31

Dec 31


By Depreciation A/c (M-I Rs. 12,000 + M-II Rs. 2,000)By Balance c/d (M-I Rs. 40,000 + M-II Rs. 18,000)

By Bank A/c (Sale)By Depreciation A/c(M-I)By Depreciation A/c (M-II Rs. 4,000 + M-III Rs. 7,500)

By Balance c/d (M-II Rs. 14,000 + M-III Rs. 42,500)

8,00052,000

60,000 60,000

52,00020,000 14,000

58,000

72,000 72,000

58,00050,000

2,000

39,000

3,000

11,500

56,500

1,10,000 1,10,000

56,500

Working notes:Calculation of profit or loss on sale of machinery:Book value as on 1st January, 2011 Rs. 40,000Less: Depreciation (60,000*20/100*3/12) Rs. 3,000Book value as on 31st March, 2011 Rs. 37,000Less: sale of machinery Rs. 39,000Profit on sale of machine Rs. 2,000

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Q3.Suyashi Ltd. purchased on 1st January, 2009 a machinery for Rs. 36,000 and spent Rs. 4,000 on its installation. On 1st July, 2009 another machine purchased for Rs. 20,000. On 1st July, 2011, machine bought on 1st January, 2009 was sold for Rs. 12,000 and a new machine purchased for Rs. 64,000 on the same date. Depreciation is provided on 31st December @ 10% p.a. on the written down value method. Prepare machinery A/c from 2009 to 2011.

Solution:Dr. Machinery A/c Cr


2009Jan 1

July 1

2010Jan 1

2011Jan 1July 1

2012Jan 1

To Bank A/c (M-I)(36,000 + 4,000)To Bank A/c

To Balance b/d

To Balance b/dTo Bank A/c (M-III)

To balance b/d

40,00020,000

2009Dec 31

Dec 31

2010Dec 31

Dec 31

2011July 1July 1 July 1 Dec 31

Dec 31



By Bank A/c (Sale)By Depreciation A/c(M-I)by Profit and Loss A/c (profit on sale)By Depreciation A/c (M-II Rs. 1,710 + M-III Rs. 3,200)By Balance c/d (M-II Rs. 15,390 + M-III Rs. 60,800)

5,000

55,000

60,000 60,000

55,0005,500

49,500

55,000 55,000

49,50064,000

12,0001,620

18,780

4,910

76,190

1,10,000 1,10,000

76,190

Working notes:Calculation of Profit or loss on machine sold:Book value of machine sold as on 31st December, 2010 Rs. 32,400Less: Depreciation (32400*10/100*6/12) Rs. 1,62044 | P a g e

Book value of machine sold as on 1st July, 2011 Rs. 30,780Less: sale of machine Rs. 12,000Loss on sale of machine Rs. 18,780

Disposal of an Asset:Under this method a new account is opened named ‘Asset Disposal A/c’ at the time of sale of an asset. Following journal entries required for preparation of Asset Disposal A/c

(a) When provision for depreciation A/c is maintained.(1) Asset disposal A/c Dr.

To Asset A/c (With the original cost of asset being sold)

(2) Provision for depreciation A/c Dr. To Asset disposal A/c (Transfer of accumulated depreciation)

(3) Bank A/c Dr. To Asset disposal A/c (With the net sales proceeds)

(4) Asset disposal A/c Dr. To Profit and Loss A/c (For profit on sale of the asset)

(5) Profit and Loss A/c Dr. To Asset disposal A/c (For loss on sale of an asset)

(b) When provision for depreciation A/c is not maintainedIn this case replace entry no. 2 from above journal entries by passing following journal entry.

Depreciation A/c Dr.To Asset disposal A/c

Q4. On 1st April, 2008, Jasmeet Ltd. purchased a machine for Rs. 12,00,000. On 1st October, 2010, a part of machine purchased on 1st April, 2008 for Rs. 80,000 was sold for Rs. 45,000 and a new machine was purchased for Rs. 1,58,000 on the same date. Company provides depreciation @10% p.a. on written down value method. Prepare necessary ledger accounts

(a) When provision for depreciation A/c is not maintained.(b) When provision for depreciation A/c is maintained.

Solution.(a) When provision for depreciation A/c is not maintained.



2008Apr 1 To Bank A/c 12,00,000

2009Mar 31Mar 31


1,20,00010,80,000

12,00,000 12,00,000

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2009Apr 1

2010Apr 1Oct 1

2011 Apr 1

To Balance b/d

To Balance b/dTo Bank A/c

To balance b/d

2010Mar 31Mar 31

2010Oct 1Oct 1Oct 12011Mar 31Mar 31


By Bank A/c (Sale)By Profit and Loss A/c (Loss on sale) By Depreciation A/c


10,80,000 1,08,0009,72,000

10,80,000 10,80,000

9,72,0001,58,000

45,00016,560

3,240

98,6209,66,580

11,30,000 11,30,000

9,66,580

(b) When provision for depreciation A/c is maintained.


Date Particulars J.F. Rs. Date Particulars J.F.

Rs.

2008 Apr 1

2009Apr 1

2010Apr 1Oct 1

2011Apr 1

To Bank A/c

To Balance b/d

To Balance b/dTo Bank A/c

To balance b/d

12,00,000

2009 Mar 31

2010Mar 31

2010Oct 1 2011Mar 31

By Balance c/d

By Balance c/d

By Machine Disposal A/c

By Balance c/d

12,00,000

12,00,000 12,00,000

12,00,000

12,00,000

12,00,000 12,00,000

12,00,000 1,58,000

80,000

12,78,000

13,58,000 13,58,000

12,78,000

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Dr. Provision for Depreciation A/c Cr.


2009Mar 31

2010Mar 31

2010Oct 1

2011Mar 31

To Balance c/d

To Balance c/d

To Machinery disposal A/c (8,000 + 7,200 + 3,240)

To Balance c/d

1,20,0002009Mar 31

2009Apr 12010Mar 31

2011Apr 1Oct 12011Mar 31

2011Apr 1

By Depreciation A/c

By Balance b/d

By Depreciation A/c


By Depreciation A/c

By Balance b/d

1,20,000

1,20,000 1,20,000

2,28,000 1,20,000

1,08,000

2,28,000 2,28,000

18,440

3,11,420

2,28,0003,240

98,620

3,29,860 3,29,860

3,11,420

Dr. Machinery Disposal A/c Cr.


2010Oct 1 To Machinery A/c 80,000

2010Oct 1 Oct 1Oct 1

By Provision for Dep. A/cBy Bank a/c (sale)By Profit and loss A/c (Loss on sale)

18,440 4

5,000 16,

560

80,000 80,000

Working notes:Calculation of profit or loss on machine soldCost as on 1st April, 2008 Rs. 80, 000Less: dep. For 2008-09 Rs.8,000Book value as on 1stApril, 2009 Rs. 72,000

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Less: dep. For 2009-10 Rs.7,200Book value as on 1stApril, 2010 Rs. 64,800Less: dep. For 2010 (64,800*10/100*6/12) Rs.3,240 (April to October)Book value as on 1st October, 2010 Rs.61,560Less: sale of machine Rs.45,000Loss on sale of machine Rs.16,560

Calculation of depreciation on remaining machineOld machine (9,72,000 – 64,800 = 9,07,200*10/100) Rs. 90,720New machine (1,58,000*10/100*6/12) Rs. 7,900 (October to March)

Rs. 98,620

Q5. On January 1, 2008, a firm bought a machine for RS.90,000 and spend RS.6,000 on its installation and RS.4,000 on its carriage. It is decided to charge depreciation @ 10% on straight line method. Books are closed on December 31, each year. Show Machinery Account for the year 2008 to 2010

Solution

Dr. Machinery Account Cr.

Date Particulars J.F ? Date Particulars J.F ?

2008 2008

Jan. 1 To Bank A/c 90,000 Dec 31 By Depreciation A/c 10,000Jan. 1 To Cash a/c 6,000 Dec 31 By Balance c/d 90,000Jan. 1 To Cash a/c 4,000

1,00,000 1,00,0002009 2009Jan. 1 To Balance b/d 90,000 Dec 31 By Depreciation A/c 10,000

Dec 31 By Balance c/d 80,00090,000 90,000

2010 2010Jan 1 To Balance b/d 80,000 Dec 31 By Depreciation A/c 10,000

Dec 31 By Balance c/d 70,00080,000 80,000

Provision for Depreciation is shown on the liabilities side of Balance Sheet.

Q 9.Krishna lifestyle limited purchased a machine for RS. 1,25,000 including installation cost on January 1, 2008. On October 1, 2010, machine was sold for RS. 50,000. Depreciation was provided @ 20% p.a. on Fixed Installment method and accounts are closed on December 31 each year. Show the Machinery Account and Provision for Depreciation Account for the year 2008 to 2010.

Solution :

Machinery Account

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Date Particulars J.F Date Particulars J.F2008Jan. 1 To Bank A/c 1,25,000

2008Dec. 31 By Balance c/d 1,25,000

2009Jan. 1

To Balance b/d 1,25,000 2009Dec. 31


2010Jan. 1

To Balance b/d 1,25,000 2010Oct. 1

Oct. 1Oct. 1

By Provision forDep. A/cBy Bank A/cBy Profit & Loss A/c

68,750

50,0006,250

1,25,000 1,25,000

Provision for depreciation a/c

Important Point : Total Depreciation is charged on Machine : 25,000+25,000+18,750 = 68,750

Q 10. On the basis of information given in Q 9, show the Machinery Account and Provision for Depreciation is provided @ 20% p.a. on written Down Value Method.Solution :

Machinery Account

Date Particulars J.F Date Particulars J.F

2008Jan. 1 To Bank A/c 1,25,000

2008Dec.31 By Balance c/d 1,25,000

2009Jan. 1



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Date Particulars J.F Rs. Date Particulars J.F Rs.

2008 2008

Dec.31 To Balance c/d 25,000 Dec.31 By Depreciation A/c 25,0002009 2009Dec.31 To Balance c/d 50,000 Jan. 1 By Balance b/d 25,000

Dec.31 By Depreciation 25,000A/c

50,000 50,0002010 2010Oct. 1 To Machinery 68,750 Jan. 1 By Balance b/d 50,000

A/c Oct. 1 By Depreciation A/c 18,750

68,750 68,750

2010Jan. 1


Oct. 1Oct. 1

By Provisionfor Dep. A/cBy Bank A/cBy Profit & LossA/c

57,000

50,00018,000

1,25,000 1,25,000

Provision for depreciation

Important Point: Total

Depreciation is charged on Machine : 25000+20,000+12,000 = 57,000

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Date Particulars J.F Date Particulars J.F

2008Dec.31

To Balance c/d 25,000 2008Dec. 31

By Depreciation A/c 25,000

2009Dec.31

To Balance c/d 45,0002009Jan. 1Dec. 31


25,00020,000

45,000 45,0002010Oct. 01 To Machinery

A/c

57,000 2010Jan. 1

Oct. 1


45,00012,000

57,000 57,000

Provisions and ReservesProvisionsProvision is an amount set aside by charging (debited) it in the profit and loss account, to provide for known liability the amount which can not be determined accurately because they are not yet incurred. For example; Provision for Depreciation, Provision for Bad and doubtful debts etc.ReservesReserves are the amount set aside out of profits. It is an appropriation of profits to strengthen the financial position of the business. For example, General reserve, Capital reserve etc. Types of Reserves

(a) General reserve – It is the amount set aside out of profits for no specific purpose. It is available for strengthen the financial position or expansion of business.

(b) Specific reserve – This is created for specific purpose and can be utilized only for that purpose.(c) Secret reserve – It is a reserve the existence or the amount of which is not disclosed in the

balance sheet. It is also known as hidden reserve.

Distinguish between Reserves and Provisions

Basis Reserves ProvisionsNature It is an appropriation of profit It is charge of profitPurpose It is created to strengthen the

financial position of businessIt is created to meet known liability for which the amount is not determined.

Effect on taxable profit

It reduces the taxable profit. It has no effect on taxable profit

Distribution of dividend

It can not be used for dividend distribution.

It can be used for dividend distribution.

Difference between revenue reserve and capital reserveBasis of difference

Revenue reserve Capital reserve

Source of creation These reserves created from revenue profits

These reserves created from capital profits

Usage These reserves can be used to give dividend to shareholders

These reserves cannot be used for giving dividend to members.

Purpose These reserves are created for meeting unforeseen losses

It is used for writing off the capital losses.

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ACCOUNTING FOR BILLS OF EXCHANGEContent mapping

Bills of exchange and promissory note: definition, features, parties, specimen andDistinction. Important terms : term of bill, due date, days of grace, date of maturity, discounting of bill, endorsement of bill, bill sent for collection, dishonour of bill, noting of bill , retirement and renewal of a bill. Accounting treatment of bill transactions__________________________________________________________________________________

A Bill of Exchange and Promissory Note both are legal Instruments which facilitate the credit sale of goods by assuring the seller that the amount will be recovered after a certain period. Both of these are legal instruments under the Negotiable Instruments Act, 1881.

BILL OF EXCHANGE DEFINITION

“A Bill of Exchange is an instrument in writing containing an unconditional order signed by the maker, directly a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument” Section 5 of the Negotiable Instrument Act, 1881.

Features of Bills of Exchange

{i} Bill of Exchange is a written order.{ii} It is drawn and signed by the maker, i.e., drawer of the bill.{iii} It is an unconditional order to a person, i.e., drawee , to pay the specified amount. the drawee must accept it to make it a valuable document.{iv} The specifies amount is payable to the person named in the bill or to his order or to the bearer.{v} It specifies the date by which the amount should be paid.{vi} It is accepted by the drawee.

Parties to a bill of exchange:{i} Drawer: Drawer is the person who makes or writes the Bill of Exchange. He is a person who has granted credit to the person on whom the Bill of Exchange is drawn.{ii} Drawee: Drawee is the person on whom the Bill of Exchange is drawn, for his acceptance. He is a person to whom credit has been granted by the drawer of the Bill of Exchange. {iii} Payee: payee is the person named in the Bill of Exchange to whom the amount is to be paid. Payee may be the drawee himself or a third person.

Types of Bills of Exchange: {i} Trade Bill: A Bill of Exchange drawn and accepted for a trade transaction, is called Trade Bill.{ii} Accommodation Bill: A Bill of Exchange drawn and accepted for mutual help, is called Accommodation Bill.Advantages of Bills of Exchange:

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{i} Purchase and Sales of Goods on Credit: Goods can be sold and purchased on credit without difficulty with the Bill of Exchange as it is an unconditional promise to pay.{ii} Discounting Facility: Bills of Exchange can be discounted with a bank so that the enterprise allowing the credit can receive the amount immediately without the debtor having to pay before time.{iii} Easy to Recover the Amount: If a Bill of Exchange is dishonoured, it is easier to recover the amount legally than in the case of an ordinary debt.{iv} Endorsement: A Bill of Exchange can be endorsed to other parties; thus it serves almost the same purpose as cash.{v} Certainty as to Payment: Date of payment being certain; the enterprise which has to pay and that which has to receive the amount can thus plan cash management.{vi} No Reminder to Debtor: The recovery of the dept is possible without having to reminder the debtor.{vii} Convenient Mean of Trade Remittance: Bill of Exchange is a convenient mean of making and receiving payment as the amount is transacted through bank.{viii} Valid Evidence : Bill of Exchange is a written acknowledgement of debt duly signed and stamped. It is a legal document under the negotiable Instruments Act, 1881. “Promissory Note”

“A Promissory Note is an instrument in writing(not being a bank note or currency note) containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to order of a certain person or to the bearer of the instrument”

Features of a Promissory Note;

{i} Promissory Note is an unconditional written undertaking to pay the specified amount.{ii} It is drawn and signed by the maker, i.e., promisor.{iii} It specifies the name of the payee, i.e., to whom payment is to be made.{iv} Specified amount is payable to the specified person or to his order or to the bearer.{v} Date of payment is specified.Parties to a Promissory Note:

{i} Maker: Maker is the person who makes the promise to pay the amount. It is a person who has availed the credit.{ii} Payee: Payee is the person to whom payment is to be made. It is a person who has granted the credit.

DISTINCTION BETWEEN BILL OF EXCHANGE AND PROMISSORY NOTE

Basis Bill of Exchange Promissory Note1. Drawer Creditor is the Drawer. Debtor is the Drawer.2. Order and Promises It is an order to pay. It is promise to pay.3. Acceptance It needs acceptance by

drawee.It does not need acceptance by drawee.

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4. Parties It has three parties namely -Drawer, Drawee and payee.

It has two parties namely –Promisor and Payee.

5. Liability Liability of the drawer arises only if acceptor doesn’t pay.

Promisor has the primary liability to pay.

6. Noting and Protesting In case of dishonour, it is better to get it noted for non-payment

In this case nothing is necessary.

7. Copies In case of foreign bills, three copies are made but otherwise only one copy is prepared.

Only one copy is prepared whether it is foreign or local.

8. Stamp Bill payable on demand need not to be stamped but otherwise stamps would be necessary.

It has to be stamped in any case.

Important Terms1. Term of a Bill: Period intervening between the date on which a bill is drawn and that on which it becomes due is called Term of the bill. If a bill is drawn after sight, the term of the bill begins to run from the date of “sighting”, i.e., when the bill accepted. When the bill is drawn ‘after date’, the term of the bill begins to run from the date of drawing the bill.2. Due Dates: Due dates is the date on which the payment of the bill is due for payment.3. Days of Grace: Days of Grace are three extra days added to the period of bill. It is a custom to add the days of grace.4. Date of Maturity: The date which comes after adding three days to the due date of a bill, is called Date of Maturity.5. Bill at Sight or Demand: Bill at sight (or instrument payable demand) means the instruments in which no time for payment is mentioned. A cheque is always payable on demand when no time for payment is specified or it is expressed to be payable on demand.6. Discounting of a Bill: A bill may be presented to a bank deducts its charges against it. It is known as ‘Discounting of a Bill’ The bank deducts its charges (Discounting Charge) from the bill amount and disburses the balance amount.7. Endorsement of Bill: Endorsement means transfer of Bill of Exchange or Promissory Note to another person. The person receiving the Bill of Exchange or Promissory Note becomes authorized to receive the payment. The person who transfer the Bill of Exchange or Promissory Note in favour of other person is called endorser. The person to whom the Bill of Exchange or Promissory Note is endorsed is called the endorsee.8. Bill sent for Collection: A bill received may be retained till the date of maturity .but, it may be deposited with the bank, with instructions that the bill be retained till maturity and realized on its due date. It is known as ‘Bill Sent for Collection’.9. Dishonour of a Bill: Dishonour means that the bill is not paid by the Drawee on its due date. It arises when the acceptor refuses or is unable to pay the amount of the bill, i.e., Bill of Exchange, Promissory Note or cheque, (say because of insolvency).10. Nothing of a bill: Bill when sent through a notary public and is dishonoured, Notary public makes a noting of dishonour. It is known as ‘Noting of a Bill’.

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11. Notary Public: Notary Public is an officer appointed by the Central or Sate Government to exercise the power and functions relating to nothing and protesting of negotiable instruments for dishonour.12. Noting Charges: Noting Charges is the fee paid to the Notary Public for noting and protesting the Bill of Exchange of its dishonour.14 Retirement of a Bill: When the Drawee pays the bill before its due dates, it is called Retirement of a Bill. The holders allow him a rebate of certain amount calculated at a certain rate per cent per annum, from the date of retirement to the date of maturity.15. Renewal of a Bill: When the acceptor of a bill is not in a position to meet the bill on its due date, he may, with the consent of the holder accept a fresh bill in place of the old bill (after cancelling the old bill), it is called Renewal of a bill. The fresh bill may include interest for the extended period or it may be paid separately, stamp duty and other incidental expenses incurred by the holder.16. Holder: The Holder of a negotiable instrument, i.e., Bill of Exchange, Promissory Note or cheque, is a person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties.

* (HOTS) Questions

Q.1 Promissory Note requires the acceptance. Comment.

Ans. A Promissory Note does not require acceptance because it is a valuable instrument. A Bill Receivable requires acceptance.

Q.2 A bill given to a creditor is called Bill Payable. Why?

Ans. A bill given to a creditor is called bill payable because the debtor commits to pay by the creditor

Q.3 A has drawn a bill no B. B accepts the same. Can B endorse the bill to C?

Ans. B cannot endorse the bill to C because he is a Drawee. Only A, the Drawer, can do so.

Q. 4 Do you think that a cancellation entry is not required when a bill is renewed?

Ans. When the bill is renewed, entries are passed for cancellation of the old bill and then for recording the new bill.

Q.5 Cancelling an old bill and drawing a new bill is called Renewal of a Bill. Is this true or false?

Ans. It is true. When the acceptor of a bill fails to make the payment on due date, a new bill may be drawn on him after cancellation of the old bill. It is known as Renewal of a Bill.

Q.6 At the time of renewal of a bill, the interest Account is debited in the books of the Drawee. Is this true or false?

Ans. Yes, at the time of renewal of a bill, the interest Account is debited in the books of a drawee because it represents an expenses for the Drawee.

55 | P a g e

Q.7 A bill of Rs. 5,000 is discounted with the banker for Rs. 4,750. The bill is dishonoured at maturity. The drawee pays 60% of his acceptance. What is the amount of Bad Debts?

Ans. Bad Debts = rs.2,000, i.e., 40% of rs.5,000

Q.8 Refusal by the acceptor to pay the bill on the maturity date is called the Retirement of the Bill. Comment.

Ans. Refusal by the acceptor to make payment of the bill on the maturity date is not Retirement of the Bill but is Dishonour of the Bill.

Q.9 Find the due date of a Bill of Exchange dated 9th December,2007, payable after 45 days.

Ans. 25th January 2008, because 26th January, 2008 is a public holiday.

Reason: If the date falls on a day which is a public holiday or a gazetted holiday, the maturity date of the bill shall be preceding business day.

Q.9 What is mean by Renewal of a Bill?

Ans. Renewal of Bill of Exchange means substituting the Old Bill with New Bill.

* SHORT ANSWER TYPE QUESTIONS

Q.1 Define the Bill of Exchange.

Ans. Bill of Exchange an instrument in writing containing an unconditional order signed by the maker, directly a certain person to pay a certain sum of money only to, or to the order of , a certain person or to the bearer of the instrument.

Q.2 Define Promissory Note.

Ans. A Promissory Note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.

Q.3 Give one special Feature of promissory note.

Ans. No acceptance is required for promissory note.

Q.4 Distinguish between a Bill of Exchange and a Promissory Note. (Two Points)

Ans.(i) In the case of Bill of Exchange, creditor is the drawer while in the case of Promissory Note debtor is the drawer. (ii) Bill of Exchange contains an order to pay while Promissory Note contains a promise to pay.Q.5 Who are the Parties of Bill of Exchange?

Ans. Bill of Exchange has three parties namely Drawer, Drawee and Payee.

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Q.6 Who are the Parties to a Promissory Note?

Ans. Promissory Note has two parties namely the Promissory and Payee

Q.7 What are Trade Bills?

Ans. When the Bills of Exchange are drawn and accepted for a genuine trade transaction, these are called Trade bills.

Q.8 Explain the Discounting a Bill of Exchange.

Ans. Discounting a Bill of Exchange means taking the amount from bank against the bill before its due date. The bank charges interest for the remaining period of the bill.

Q.9 What are the different options available to the receiver of a Bill of Exchange?

Ans. (i) Retain the Bill till maturity, (ii) Discounting the Bill with the Bank (iii) Endorse the Bill in favour of a creditor, and(iv) Send the Bill for Collection.Q.10 What is meant by Retiring a Bill under Rebates?

Ans. Retiring a Bill means that the Drawee pays the Bill before its Due Date.

OBJECTIVE TYPE QUESTION (MCQ)1. Choose the correct alternative:(i) A Bill of Exchange has …….. Parties(a) two (b) three (c) four.(ii) The party which is ordered to pay the amount is known as……….(a) drawer. (b) payee. (c) drawee.(iii) Three days are added for ascertaining the date of maturity. These are known as days of…….(a) maturity. (b) grace. (c) payment.(iv) A Bill of Exchange cannot be………(a) endorsed. (b) crossed. (c) accepted.(v) A Bill of Exchange is Renewed generally at the request of the……..(a) drawer. (b) bank. (c) drawee.(vi) A Promissory Note is made by the……(a) seller. (b) purchaser. (c) endorsee

(vii) if Ram’s acceptance which was endorsed by us in favour of Saleem is dishonoured, then the amount will be debited in our books to (a) Saleem. (b) Ram. (c) Bills Receivable Account.(viii) A 4 months bill drawn on 1st January, 2012 will mature for payment on (a) 3rd may, 2012. (b) 4th may, 2012. (c) 5th may, 2012.(ix) The Bills Receivable Book is part of

57 | P a g e

(a) the journal. (b) the ledger. (c) the profit.(x) The Rebate on a Bill shows that (a) It has been paid before the date of maturity.(b) It has been paid after the date of maturity.(C) It has been Dishonoured2. State whether the following statements are True or False

(i) Bill of Exchange is a legal evidence of debt. True

(ii) Promissory Note must be accepted by the Drawee. False

(iii) Days of Grace are not allowed when the bill is payable on demand. True

(iv) The creditor is the person on whom the bill is drawn. False

(v) Discount on bills is a loss for the Drawer and a gain for the Drawee. False

(vi) A bill is generally discounted on the due dates. False

(vii) A bill can be endorsed by the Drawer to his creditor in full or a part settlement of dues .True

(viii) There are only two parties in case of a Bill of Exchange. False

ACCOUNTING TREATMENT OF BILL TRANSACTIONSA. On the Due Date bill is Honoured –The accounting treatment under this heading is based on the assumption that bill is duly honoured at maturity of the bill. The drawer can treat the bill in the following ways:

Case - I Bill is retained by the drawer till date of maturity:

Transaction In the books of DRAWER In the books of DRAWEE1. When Goodsare sold oncredit

Drawee A/c Dr. To Sales A/c(Being goods Sold on credit)

Purchases A/c Dr.To Drawer A/c (Being goods purchased from Drawer)

2. When Billis Drawn

Bills Receivable A/c Dr.To Drawee A/c(Being acceptance received from drawee)

Drawer A/c Dr. To Bills Payable A/c(Being acceptance given to drawer)

3. When Bill isHonored on Date of Maturity

Cash/Bank A/c Dr.To Bills Receivable A/c(Being payment of bill received from Drawee)

Bills Payable A/c Dr. To cash/Bank A/c(Being payment of bill made to drawer)

58 | P a g e

Case II : When the bill is discounted from the Bank by the DrawerTransaction In the books of Drawer In the books of Drawee

1. When the billis discountedfrom Bank

Bank A/c Dr.Discounting Charges A/c Dr. To Bills Receivables A/c(Being bill discounted for the Bank)

No Entry

2. When the billis honored ondate of maturity No Entry

Bills Payable A/c Dr.To Cash/Bank A/c(Being the payment of bill made)

Case III : When bill is endorsed in favour of a creditor

Transaction In the books of Drawer/ Endorser In the books of Drawee1. When billis endorsed

Endorsee A/c Dr.To Bills Receivable A/c(Being bill receivable endorsed)

No Entry

2. When bill ishonored ondate of maturity

No EntryBills Payable A/c Dr.To Cash/Bank A/c(Being the payment of bill made)

Transaction In the Books of Endorse1. When bill isendorsed

Bills Receivable A/c Dr.To Endorser(Being bill received from debtor through endorsement)

2. When bill ishonoured on dateof maturity

Cash/Bank A/c Dr.To Bills Receivable(Being Bill realised on date of maturity)

Case - IV When Bill is sent to the Bank for collection

Transaction In the books of Drawer In the books of Drawee1. When billis sentcollectionto Bank

Bills sent for Collection A/c Dr. To Bills Receivable A/c(Being bill sent for collection) No Entry

2. When theamount is realised on date of maturity

Bank A/c Dr. To Bill sent for collection A/c(Being the bill sent for collection realised on maturity)

Bill Payable A/c Dr. To Cash/Bank A/c(Being bill paid on date maturity)

Example 159 | P a g e

Darshan sold goods for Rs 40,000 to Varun on 8.1.2006 and drew upon him a bill of exchange payable after two months. Varun accepted the bill and returned the same to Darshan. On the due date the bill was met by Varun. Record the necessary Journal entries in the books of Darshan and Varun in the following circumstances.

When the bill was retained by Darshan till the date of its maturity. When Darshan immediately discounted the bill @ 6% p.a. with his bank. When the bill was endorsed immediately by Darshan in favour of his creditor Suresh. When three days before its maturity, the bill was sent by Darshan to his bank for collection.

Case (i): When the bill was retained by Darshan till the date of its maturity.

Books of Darshan

Journal

Date Particulars L.F.Debit

AmountRs

CreditAmount

Rs2006

Jan.08 Varun Dr. 40,000To Sales A/c 40,000

(Goods sold to Varun)

Jan.08 Bills Receivable A/c Dr. 40,000To Varun 40,000

(Varun's acceptance received)

Mar.11 Cash A/c Dr. 40,000To Bills Receivable A/c 40,000

(Bill met on due date)

Books of Varun

Journal


AmountRs

CreditAmount

Rs2006

Jan.08 Purchases A/c Dr. 40,000To Darshan 40,000

(Goods bought from Darshan)

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Jan.08 Darshan Dr. 40,000To Bills Payable A/c 40,000

(Bill of two months accepted for Darshan)

Mar.11 Bills Payable A/c Dr. 40,000To Cash A/c 40,000

(Varun cleared his acceptance on the due date)

Case (ii): When Darshan immediately discounted the bill @ 6% p.a. with the bank

Books of Darshan

Journal


AmountRs

CreditAmount

Rs2006

Jan.08 Varun Dr. 40,000To Sales A/c 40,000




Jan.08 Bank A/c Dr. 39,600Discount A/c Dr. 400

To Bills Receivable A/c 40,000(Bill discounted with bank @ 6 p.a.)

Books of Varun

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Journal


AmountRs

Credit Amount Rs

2006

Jan.08 Purchases A/c Dr. 40,000

To Darshan 40,000


Jan.08 Darshan Dr. 40,000

To Bills Payable A/c 40,000

(Bill of two months accepted for Darshan)

Mar.11 Bills Payable A/c Dr. 40,000

To Bank A/c 40,000(Varun cleared his acceptance on thedue date)

Case (iii): When the bill was endorsed immediately by Darshan in favour of his creditor Suresh

Books of Darshan

Journal


AmountRs

CreditAmount

Rs

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2006Jan.08 Varun Dr. 40,000

To Sales A/c 40,000(Goods sold to Varun)



Jan.08 Suresh Dr. 40,000To Bills Receivable A/c 40,000

(Varun's acceptance endorsed in favour of Suresh)

Books of Varun

Journal


Amount Rs

Credit Amount

Rs2006

Jan.08 Purchases A/c Dr. 40,000To Darshan 40,000



(Darshan’s bill accepted payable after two months)

Mar.11 Bills Payable A/c Dr. 40,000To Cash A/c 40,000

(Amount of bill paid on maturity to the holder of the bill)

Case (iv): When three days before its maturity, the bill, as sent by Darshan to his bank for Collection

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Books of Darshan

Journal


AmountRs

CreditAmount

Rs2006

Jan.08 Varun A/c Dr. 40,000To Sales A/c 40,000


Jan.08 Bills Receivable A/c Dr. 40,000To Varun A/c 40,000

(Varun's acceptance received for two months)

Mar.08 Bill Sent for Collection A/c Dr. 40,000To Bills Receivable A/c 40,000

(Bill sent to bank for collection)

Mar.11 Bank A/c Dr. 40,000To Bill Sent for Collection A/c 40,000

(Bill amount met on maturity)

Books of Varun

Journal


AmountRs

CreditAmount

Rs2006

Jan.08 Purchases A/c Dr. 40,000

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To Darshan 40,000(Goods bought from Darshan)


(Darshan’s bill accepted payable after two months)

Mar.11 Bills Payable A/c Dr. 40,000To Bank A/c 40,000

(Amount of bill paid to bank on maturity)

Example 2.

A sold good to B on April 1, 2014 for Rs. 20,000 on credit and drew upon him a bill for the same amount payble after 3 months. B accepted the bill and returned into to A. On the due date bill was dishonoured.Pass Journal entries in the books of A and B if Case I :Bill is retained by A till the date of maturity.,Case II :Bill is discounted by A from his bank on 4th April, 2014 @ 6% per annum.Case III :Bill is endorsed in favour of C on April, 4th, 2014.Case IV :Bill is sent to bank for collection on July 1, 2014.Solution :

In the books of A (Drawer)Journal

Date Particulars L.F. Dr. Cr.Rs. Rs.

2014April, 1 B Dr. 20,000

To Sales A/c 20,000(Being goods sold to Bon credit)

April, 1 Bills Receivable A/c Dr. 20,000 To B A/c 20,000(Being bill received from B)Case-I : When bill is retained by A

July, 4 B A/c Dr. 20,000To Bills Receivable A/c 20,000(Being bill received from B

65 | P a g e

dishonoured)Case - II : When bill is discountedfrom the Bank

April, 4 Bank A/c Dr. 19,700Discounting charges A/c Dr. 300To Bills Receivable A/c 20,000(Being bill discounted from thebank ; discounting charges are

= 2000 ×6

× 3

=300100 12

July, 4 B A/c Dr. 20,000To Bank A/c 20,000(Being bill discounted from,dishonoured on date of maturity)Case - III : When bill is endorsedin favour of ‘C’

April, 4 C A/c Dr. 20,000To Bills Receivable A/c 20,000(Being bill endorsed in favour of C)

July, 4 B A/c Dr. 20,000 To C A/c 20,000(Being bill received from B andendorsed to C dishonoured onmaturity date)Case - IV : When bill is sent forcollection

July, 1 Bill sent for Collection A/c Dr. 20,000To Bills Receivable A/c 20,000(Being bill received from B sentfor collection)

July, 4 B A/c Dr. 20,000To Bills Sent for Collection A/c 20,000(Being bill sent for collection to bank,dishonoured on date of maturity)

In the Books of B (DRAWEE)(In All Cases)


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2014April, 1 Purchases a/c Dr. 20,000

To A a/c 20,000(Being goods purchased on credit)

April,1 A a/c Dr. 20,000To Bills Payble a/c 20,000(Being acceptance given to A)

July, 4 Bills Payable a/c Dr. 20,000To A a/c 20,000(Being bill Payable toA dishonoured on date ofmaturity)

Example 3.

A sold goods to B on May 1st, 2014 for ` 30,000 on credit and drew upon him a bill for the same amount payable after 2 months. B accepted the bill and returned it to A. On date of maturity, B fails to make payment of bill. Noting charges amounted to ` 100.Pan Journal Entries in the books of A and B if.Case 1 : A retains the bill till the date of maturity and also paid the noting charges.Case 2 : A discounts the bill from his bank on 4th June @ 12% per annum. Notingcharges has been paid by bank.Case 3 : A endorses the bill n favour of C on June 1. C paid the noting charges.Case 4 : A sent the bill to his bank for collection on July 1. Bank paid the notingcharges.Solution :

In the Books of A (DRAWER)Date Particulars L.F. Dr. Cr.

Rs. Rs.

2014May, 1 B A/c Dr. 30,000

To Sales A/c 30,000(Being goods sold to B on Credit)

May, 1 30,000Bills Receivables A/c Dr.To B A/c 30,000(Being acceptance receivedfrom B)Case 1 : When A retains the bill

July, 4 B A/c Dr. 30,100To Bills Receivable A/c 30,000To Cash A/c 100

67 | P a g e

(Being bill dishonoured and notingcharges paid by A)

Case 2 : When bill is discountedfrom the bank

June, 4 Bank A/c Dr. 29,700Discounting charges A/c Dr. 300To Bills Receivable A/c(Being bill discounted from 30,000the bank, discounting chargesamounted to

` =3000×12

×1

= ` 300)100 12

July, 4 B A/c Dr. 30,100To Bank A/c 30,100(Being bill discounted from bankdishonoured and noting chargespaid by bank)

Case 3 : When bill is endorsed in favour of CJune, 1 C A/c Dr. 30,000

To Bills Receivable A/c 30,000(Being bill sent to bank forcollection)

July 4 B A/c Dr. 30,100To C A/c 30,100(Being bill received fromB and endorsed to C dishonouredon maturity )Case 4 : When bill is sent forCollection

July, 1 Bill Sent for Collection A/c Dr. 30,000To Bills Receivable A/c 30,000(Being bill sent to bankfor collection)

July, 4 B A/c Dr. 30,100

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To Bills sent forCollection A/c 30,000To Bank A/c 100(Being bill received from Bdishonoured on maturity)

In the Book of B (DRAWEE)(In all Cases)


2011May, 1 Purchases A/c Dr. 30,000

To A a/c 30,000(Being goods purchased from A)

May, 1 A a/c Dr. 30,000To Bills Payable A/c 30,000(Being acceptance given to A)

July, 4 Bills Payable A/c Dr. 30,000Noting Charges A/c Dr. 100To A a/c 30,100(Being bill dishonoured andnoting charges debited)

C . Renewal of a Bill

Transaction In the Books of In the Books ofDrawer Drawee

Cancelling the Drawee Dr. Bills Payable A/c Dr.Original Bill To Bills Receivable A/c To Drawer

(Being the cancellation of bill (Being the bill payablereceivable) cancelled)

Recording Drawee Dr. Interest A/c Dr.Interest for To Interest A/c To Drawerextended Period (Being interest charged for (Being interest payable for

extended period) extended period)Past Payment Cash or Bank A/c Dr. Drawer Dr.

69 | P a g e

Received/ made To Drawee To Cash Bank A/c(Being the part payment (Being the part paymentreceived) made).

New Bill Drawn / Bills Receivable A/c Dr. Drawer Dr.Accepted To Drawee To Bills Payable A/c

(Being a new bill drown) (Being a new bill accepted.)

Example 4.On 1st April, 2014 Anil accepts a bill drawn by Sunil for 2 months for Rs. 15000, in payment of a debt. On the date of maturity bill was dishonoured and Sunil had to pay Rs. 150 as noting charges. On 4th June 2014, Anil requested to Sunil to draw a new bill for the amount due. Sunil agreed to draw a new bill for 73 days but he charged interest @ 15% per annum in cash. This bill is duly met on its maturity.Pass Journal entries in the books of both the parties.Solution :

In the books of Sunil JournalDate Particulars L.F. Dr. Cr.

Rs. Rs.

2014April, 1 Bills Receivable A/c Dr. 15,000

To Anil A/c 15,000(Being acceptance received)

June, 4 15,150Anil A/c Dr.To Bills Receivable A/c 15000To Cash A/c 150(Being bill dishonoured and notingcharges paid)

June, 4 Anil A/c Dr. 454.50To Interest A/c 454.50(Being interest charged

= (15150 × 15

× 73

)100 365

June, 4 Cash A/c Dr. 454.50To Anil A/c 454.50(Being interest received in cash)

June, 4 Bills Receivable A/c Dr. 15,1,50To Anil A/c 15,1,50(Being a new bill drown M Anil andacceptance received)

Aug., 19 Bank A/c Dr. 15,1,50To Bills Receivable A/c 15,1,50

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(Being amount received onmaturity of bill)

In the Books of Anil (DRAWEE)Journal


2011April, 1 Sunil A/c Dr. 15,000

To Bills Payable A/c 15,000(Being acceptance gave)

June, 4 15,000Bills Payable A/c Dr.Noting Charges A/c Dr. 150To Sunil A/c 15,150(Being bill dishonoured andnoting charges due)

June, 4 454.50Interest A/c Dr.To Sunil A/c 454.50(Being interest payable to Sunil)

June, 4 Sunil A/c Dr. 454.50To Cash A/c 454.50(Being interest paid in cash)

June, 4 Sunil A/c Dr. 15,150To Bills Payable A/c 15,150(Being acceptance of new bill given)

Aug. 19 Bills Payable A/c Dr. 15,150To Bank A/c 15,150(Being bill accepted, paid onmaturity)

Example 5.P sold goods to Q for ` 10,000 on January 1, 2014 and on the same day draws a bill on Q for the same

amount for 3 months. Q accept it and returns it to P, who discounts it on 10th January, 2014 with his bank

for ` 9850. The acceptance is dishonoured on the due date and the noting charges were paid by bank being 71 | P a g e

` 50.

On 4th April, Q paid ` 2,050 (including noting charges) in cash and accepted a new bill at 3 months for the

amount due to P together with interest @ 12% per annum.

Make Journal Entries in the books of P and Q to record these transactions.

Solution :Journal of P


2014Jan., 1 Q A/c Dr 10,000

To Sales A/c 10,000(Being goods sold to Q)

Jan., 1 Bills Receivable A/c Dr. 10,000To Q A/c 10,000(Being acceptance received)

Jan., 10 Bank A/c Dr. 9,850Discounting Charges A/c Dr. 150To Bills Receivable A/c 10,000(Being bill discounted from Bank)

April, 4 Q A/c Dr. 10,050

To Bank A/c 10,050

(Being bill discounted from bank

dishonoured and noting charges

paid by bank)

April, 4 Cash A/c Dr. 2050

To Q A/c 2050

(Being part payment received in cash)

April, 5 Q A/c Dr. 240

To Interest A/c 240

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(Being interest charged

= ( 8000 × 12

× 3

)

100 12

April, 4 Bills Receivable A/c Dr. 8240

To Q A/c 8240

(Being a new bill drawn on

Q together with interest)

Journal of Q (DRAWEE)


2014Jan., 1 Purchases A/c Dr. 10,000

To P A/c 10,000(Being goods purchased on credit)

Jan., 1 P A/c Dr. 10,000To Bills Payable A/c 10,000(Being acceptance given to P)

April, 4 Bills Payable A/c Dr. 10,000Noting Charges A/c Dr. 50To P A/c 10,050(Being bill dishonoured and notingcharges due)

April, 4P A/c Dr. 2,050

To Cash A/c 2,050

(Being part payment made

in cash)

April, 4 Interest A/c Dr. 240

To P A/c 240

(Being interest payable on outstanding

73 | P a g e

amount for 3 months)

April, 4 P A/c Dr. 8,240


(Being acceptance given to P)

D. Retiring a bill under Rebate:

Transaction In the Books of In the Books of

Drawer Drawee

When Drawee Cash/Bank A/c Dr. Bills Payable A/c Dr.

retires the bill Rebate A/c Dr. To Cash/Bank A/c

before date of To Bill Receivable A/c To Rebate A/c

Maturity (Being the amount received (Being the amount paid

before date of maturity and before date of maturity and

rebate allowed. rebate received.)

Points to Remember:-

1. In the books of Drawer, Rebate Account is DEBITED because it is a

loss for Drawer.2. In the books of Drawee, Rebate Account is CREDITED because it is a

gain for Drawee.

Example 6.Mukesh sold goods to Jitender on July 1, 2014 for ` 30,000 and drew a bill for the some amount for 3months. Jitender accepted the bill and returned it to Mukesh. Jitender retired his acceptance on 4th August, 2014 under rebate of 8% per annum Give Journal entries in the books of Mukesh and Jitender.

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Solution :In the books of MUKESH

Journal


2014July, 1 Jitender A/c Dr. 30,000

To Sales A/c 30,000(Being goods sold on credit)

July, 1 Bill Receivable A/c Dr. 30,000To Jitender A/c 30,000(Being acceptance received)

Aug., 4 Cash A/c Dr. 29,600Rebate A/c Dr. 400To Bills Receivable A/c 30,000(Being amount received on billbefore maturity and rebate allowed,

Rebate =3000×2

×8

= 400)12 100

In the books of JITENDERJournal

Date Particulars L.F. Dr. Cr.

Rs. Rs.

July, 1 Purchases A/c Dr. 30,000

To Mukesh A/c 30,000

(Being goods purchased on credit)

July, 1 Mukesh A/c Dr. 30,000


(Being acceptance given to

Mukesh)Aug., 4 Bill Payable A/c Dr. 30,000

To Cash A/c 29,60075 | P a g e

To Rebate A/c 400(Being acceptance retired with rebate)

E. Insolvency of Acceptor :Transaction In the books of Drawer In the books of Drawee

When Drawee Entry for dishonour of bill Bills Payable A/c Dr.

is Insolvent shall be passed (depending To Drawer

up on the case) (Being bill dishonoured)

When nothing Bad Debts A/c Dr. Drawer Dr.

could be To Drawee

Recovered (Being amount of Bill To Deficiency A/c

written off as bed debts) Or

To P &L A/c

(Being the amount of bill

written off.)When Amount Cash/Bank A/c Dr. Drawer Dr.

is Received Bad Debts A/c Dr. To Cash A/ cPartially To Drawee To Deficiency A/c

Or(Being the amount received partially and

To P & L A/c.

(Being the amount payablethe remaining amount written off due to

Insolvency of drawer.)Settled by payment of......% only.

Example 7. Ashok sold goods Rs.14,000 to Bishan on October 30, 2005 and drew three bills for Rs.2,000, Rs.4,000 & Rs.8,000 payable after two, three, and four months respectively. The first bill was kept by Ashok with him till maturity. He endorsed the second bill in favour of his creditor Chetan. The third bill was discounted on December 03, 2005 at 12% p.a. The first and second bills were duly met on maturity but the third bill was dishonoured and the bank paid Rs.50 as noting charges. On March 03, 2006 Bishan paid Rs.4,000 and noting charges in cash and accepted a new bill at two months after date for the balance plus interest Rs.100. The new bill was met on maturity by Bishan.

You are required to give the journal entries in the books of both Ashok ans Bishan and prepare Bishan’s account in Ashok’s books and Ashok’s account in Bishan’s books.

76 | P a g e

Solution:

Books of AshokJournal

Date Particulars L.F. Debit CreditAmount Amount

Rs. Rs.2005Oct. 30 Bishan’s A/c Dr. 14,000

To Sales A/c 14,000(sold goods to Bishan on credit)

Oct. 30 Bills Receivable A/c Dr. 14,000To Bishan’s A/c 14,000(Received three acceptances from Bishan.First for Rs. 2,000 payable after two months,second for Rs. 4,000 payable after three monthsand the third for Rs. 8,000 payable afterfour months)

Bill of Exchange 311

Oct. 30 Chetan’s A/c Dr. 4,000To Bills receivable A/c 4,000(Endorsed second bills in favour ofcreditor Chetan)

Apr. 03 Bank A/c Dr. 7,760Discount A/c 240To Bill receivable A/c 8,000(Third bill discounted at 12% p.a.)

2006Apr.02 Bank A/c Dr. 2,000

Bills receivable A/c 2,000(Bishan met his first acceptance on due date)

Mar. 03 Bishan A/c Dr. 8,050To Bank A/c 8,050(Bishan dishonoured his third acceptanceand bank paid Rs.50 as noting charges)

Mar. 03 Cash A/c Dr. 4,050To Bishan’s A/c 4,050(Cash received from Bishan)

Mar. 03 Bishan’s A/c Dr. 100To Interest A/c 100(Interest charged from Bishan for theextended period)

Mar. 03 Bills Receivable A/c Dr. 4,100To Bishan’s A/c 4,100(Received new acceptance from Bishan for

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two months)May 12 Bank A/c Dr. 4,100

To bills Receivable A/c 4,100(Bishan met his new acceptance on maturity)

Bishan’s AccountDr. Cr.Date Particulars J. F. AmountDate Particulars J.F. Amount

Rs. Rs.2005 2005

Oct. 30 Sales 14,000Oct. 30 Bills 14,0002006 2006

Mar. 03 Bank 8,050Mar. 03 Cash 4,050Mar. 09 Interest 100Mar. 03 Bills Receivable 4,100

22,150 22,150

Books of BishanJournal

Date Particulars L.F. Debit CreditAmount Amount

Rs. Rs.2005Jan. 30 Purchases A/c Dr. 14,000

To Ashok’s A/c 14,000(Purchases goods on credit from Ashok)

Jan.30 Ashok’s A/c Dr. 14,000To Bills Payable A/c 14,000(Accepted three drafts of Ashok, the first forRs. 2,000 payable after 2 months, second forRs. 4,000 Payable after 3 months and the thirdfor Rs. 8,000 Payable after 4 months)

2006Jan. 02 Bills Payable A/c Dr. 2,000

To Bank A/c 2,000(Met first acceptance for Rs. 2,000 infavour of Ashok.)

Feb.02 Bill Payable A/c Dr. 4,000To Bank A/c 4,000(Met second acceptance for Rs. 4,000 infavour of Ashok on maturity)

Mar. 03 Bill Payable A/c Dr. 8,050Noting charges A/c Dr. 50To Ashok A/c 8,050(Third acceptance in favour of Ashokdishonoured and noting charges Rs. 50)

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Mar. 09 Ashok’s A/c Dr. 4,050To Cash A/c 4,050(Paid to Ashok Rs. 4,000 plus noting charges)

Mar. 09 100Interest A/c Dr.To Ashok’s A/c 100(Interest allowed to Ashok)

Mar. 09 Ashok’s A/c Dr. 4,100To Bills Payable A/c 4,100(New draft of Ashok for two months accepted)

May 12 Bills Payable A/c Dr. 4,100To Bank A/c 4,100

(Met new acceptance for Rs. 4,100 in favour of Ashok on maturity)

Ashok’s AccountDr. Cr.Date Particulars J. F. AmountDate Particulars J.F. Amount

Rs. Rs.2005 2005Oct. 30 Bills payable 14,000Oct. 30 Purchases 14,0002006 2006Mar. 03 Cash 4,050Mar. 03 Bills Payable 8,000

Noting charges 50Mar. 09 Bills Payable 4,100Mar. 09 Interest 100

22,150 22,150

Self-practice :

Test Your Understanding – IWrite ‘True’ or ‘False’ against each statement regarding a bill of exchange:

(i) A bill of exchange must be accepted by the payee.(ii) A bill of exchange is drawn by the creditor.(iii) A bill of exchange is drawn for all cash transaction.(iv) A bill payable on demand is called Time bill;(v) The person to whom payment is to be made in a bill or exchange is called payee.(vi) A negotiable instrument does not require the signature of its maker.(vii) The hundi Payable at sight is called Darshani hundi.(viii) A negotiable instrument is not freely transferable.(ix) Stamping of promissory note is not mandatory.(x) The time of payment of a negotiable instrument need not be certain.Test Your Understanding – IIFill in the blanks with suitable word(s)(i) The person to whom the amount mentioned in the promissory note is payable is known as

_____________.

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(ii) Transfer of a negotiable instrument to another person by signing on it, is known as _____________.

(iii) In a promissory note, the person who makes the promise to pay is called as ____________.(iv) A person who endorses the promissory note in favour of another is known as____________.

Test your understanding-I

False (ii) True (iii) False (iv) False (v) True

False (vii) True (viii) False (ix) False (x)False

Test Your Understanding II;

(i)Promise (ii) Endorsement(iii) Promisors (iv) Endorser

1. When calculating Date of Maturity the following points must be considered:

1. In case of “Bill at sight” or “Bill on demand” 3 days of grace are NOT allowed.

When the period is stated in months the date of maturity shall be calculated in terms of calendar months ignoring the no. of days in a month

(1) When the term of bill is mentioned in no of days, then

Date of drawing the bill is not included.

Date of payment is included in determining date of maturity.

(2) If date of maturity falls on a day which is public holiday, the maturity date of the bill

shall be “PRECEDING DAY’.

(3) If maturity date is on an emergent holiday declared under the Negotiable Instrument

Act. 1881, the next working day immediately after the holy day will be considered as

the date of maturity.

2-- Noting Charges :

1. Noting charges are not an expense for the drawer.

2. It is always debited as ‘Noting chargers in the books of drawee.

3. Noting charges are recovered by drawer from drawee. 4. Nothing of the bill is NOT required when the bill is CANCELLED with the consent of both the

parties, especially at the time of RENEWAL of Bill.

5. Noting charges are paid only when noting of the bill is necessary at the time of dishonour of

bill.

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Rectification of ErrorsContent mapping:Errors: types-errors of omission, commission, principles, and compensating; their effect on Trial Balance.Detection and rectification of errors; preparation of suspense account________________________________________________

Introduction81 | P a g e

A trial balance is a statement showing the balances, or total of debits and credits, of all the accounts in the ledger with a view to verify the arithmetical accuracy of posting into the ledger accounts. Verify that the sum of the debit balances equal the sum of credit balances of trail balance. If they do not tally, it indicates that there are some errors.Meaning of Rectification of Errors;Correcting the errors of accounting by passing journal entry is known as rectification of error.Objectives of Rectification of Errors1. To Make the arithmetical accuracy of the ledger accounts.2. To locate errors and rectify.Error affecting or disclosed by trial balance 1. Errors of additions and subtractions: -Wrong totaling and balancing of ledger, totaling of trial wrong totaling of trial balance.2. Posting at the wrong side of an account: - Instead of debiting amounts by mistake are written in credit. 3. Entering incorrect amount:-Incorrect copying, Transposing figure (Writing 56 in place of 65), sliding figure (8000 in place of 800), doubling the wrong figure and duplicate posting.4. Errors of omission:-Not posted in subsidiary accounts, accounts are not opened in the ledger.5. Wrong posting in the trial balance:-Instead of writing debit side accounts has posted in credit side. Errors not affecting by trail balance (Limitations of trail balance)1. Errors of omission:-Transactions not recorded in books. For example:- goods return to supplier not recorded.

2. Errors of principle:-Disobey of accounting principles, (salary paid to manager) manager’s accounts are debited.

3. Compensating errors: - Sales of goods to Rani for Rs.100 debited to Rina's account with Rs.10 and Rs.100 cash received for Ajay was credited to Ajay with Rs.10.4. Incorrect account in the original book: - Instead of B .Singh’s account recorded in B. Sinha’s account affected by writer.5. Posting to wrong account: -Instead of writing in purchases book, Witten in sales book.

1. Errors of omission: - Forget to write the transaction in books.Example:1. Goods worth Rs.5,000 returned by a customer was not recorded in the books.2. Goods worth Rs.3,000 sold to Anil was not recorded in the books.

Solution:Journal Entry

1. Return Inward A/C Dr. To Customer’s A/C(Being goods returned was not passed in the books , now recorded.

5,0005,000

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2. Customer’s A/C Dr. To Sales A/C(Being goods sold was not passed in the books , now recorded.

3,0003,000

2. Errors of commission: - Under casting and Over casting in books.Example:1. Purchase book was under cast by Rs.5,0002. Sales book was over cast by Rs.2,000

Journal Entry ( By Raising Suspense Account)1. Purchase A/C Dr.

To Suspense A/C(Being under casting of purchase book now rectified)

5,0005,000

2. Sales A/C Dr. To suspense A/C(Being Over casting of sales book now rectified.

2,0002,000

3. Errors of Principles: - Mistake in posting such as instead of sale ,furniture account is credited,Wages is paid and posted in salary account.Example:

1. Purchase of Building was passed in purchase book amounting Rs.10,0002. Wages paid for extension of building was debited to wages account amounting Rs.6000

Journal Entry1. Building A/C Dr.

To Purchase A/C(Being purchase of building wrongly debited in purchase account ,is now rectified)

10,00010,000

2. Building A/ C Dr. To wages A/C(Being payment of wages for extension of building wrongly debited in wages account, is now rectified)

6,0006,000

4. Compensating errors : - Mistake in posting such as posting at wrong side of account. Example:

1. Salary paid amounting Rs.500 was credited to salary account. 2. Rent paid amounting Rs.600 was credited to rent account as 60.

Solution:Journal Entry ( By Raising Suspense Account)

1. Salary A/C Dr. To suspense A/C(Being payment of salary account wrongly credited ,is now rectified)

1,0001,000

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2. Rent A/C Dr. To suspense A/C(Being payment of account wrongly credited , is now rectified)

660660

Suspense account;When Trial balance does not agree, the difference of amount will be transferred into suspense account. Treatment of Suspense account:-When mistakes are detected and rectified, Suspense account will be closed. Balance of suspense account will be transferred in to Balance sheet.Point to be remembered:(Debit balance of suspense account will be at assets side. Credit balance will be at liabilities side of balance sheet) Example :Pass journal entry for following cases assuming the use of suspense account

1. Under casting in sales day book by Rs.5,0002. Goods returned By Amit costing Rs.2,000 was not recorded in the books 3. Salary paid Rs.1500 was debited in wages account.4. Interest due on investment Rs.2, 500 was not recorded in the books.

Journal Entry1. Suspense A/C Dr.

To Sales A/C( Being under casting of sales book ,is now rectified)

5,0005,000

2. Returned inward A/C Dr. To Amit(Being omission of return inward book , is now rectified)

2,0002,000

3. Salary A/C Dr. To wages A/C(Being payment of salary account wrongly debited in wages account ,is now rectified)

1,5001,500

4. Accrued interest A/C Dr. To Interest A/C(Being Interest due on investment is now recorded .)

2,5002,500

PRACTICE THEORETICAL QUESTIONS1. How Trial Balance help in Locating Error?

Ans. When a trial balance does not tally (that is, the totals of debit and credit columns are not equal), we know that at least one error has occurred. The error may have occurred at one of those stages in the accounting process:

1. Totalling of subsidiary books

2. Posting of journal entries in the ledger84 | P a g e

3. Calculating account balances

4. Carrying account balances to the trial balances

5. Totalling the trial balance columns

If may be noted that the accounting accuracy is not ensured even if the totals of debit and credit balance are equal because some errors do not affect equality of debits and credits. For examples, the book keeper may debit a correct amount in the wrong account while making the journal entry or in posting a journal to the ledger.

2. What are the different types of errors that are usually committed in recording business transaction?

Ans:

1. Errors of omission− When an entry gets omitted during recording in the book of original entry or during posting the transaction, then error of omission is committed. There are two types of errors of omission, viz.:

A Partial omission−When a transaction is correctly recorded in one side of account but is not recorded in the other side of the account. For example, goods sold to Mahesh recorded in sales but omitted to be recorded in Mahesh’s account. It affects the trial balance.

B Complete omission− When a transaction gets completely omitted to be recorded in the books, then it is the case of complete omission . For example, transaction related to purchase of goods from Rakesh is not recorded in the purchases book. Such omissions doesnot affect the trial balance.

2. Errors of principle−These refer to those errors that are committed when recording of transactions in the book of the original entry is done against the accounting principle. These errors affect the trial balance.

1) These errors are committed when proper distinction is not made between revenue income or expenditure and capital income or expenditure. These are of two types:

2) When revenue transactions are treated as capital transactions When capital transactions are treated as revenue transactions. For example, repairs made to machinery, recorded in machinery account.

3 Errors of commission−These refer to those errors that are committed when transactions are recorded with wrong amounts, wrong balancing, wrong posting and/or wrong carrying forwarded is done.

These are of two types:

1. Trial balance does not agree85 | P a g e

When trial balance does not agree, then there exist one-sided errors that affect only one account and thereby are easily detectable. These one-sided errors exist due to the following reasons:

i. Wrong casting of subsidiary book Posting wrong amount in ledger Posting on the wrong side of account Wrong balancing of account

2. Trial balance agrees

i. When the trial balance agrees, then it should not be taken for granted that there are no errors, as the tallied trial balance just ensures the absence of arithmetical errors. These errors are not easily detectable; as these do not affect the trial balance. These errors arise due to: Recording wrong amount in the original book

ii. Posting amount in the wrong account but in the correct side

6. Compensating errors−When effects of one error are cancelled by the effects of another error of an equal amount, then compensating errors are committed. For example, Mr. A’s account was credited by Rs 2,000 instead of 200 and Mr. B’s account was credited by Rs 200 instead of 2,000. In this case, the error in Mr. A’s account will be compensated by the error in Mr. B’s account.

3. What do you mean by Suspense Account?

Ans. The account in which the difference of trial balance is placed temporarily till the errors are located and rectified.

4. In case of errors of partial omission, will the trial balance agree? Why?

Ans. No, the trial balance will not agree because a trial balance will agree only if both aspects of a transaction are posted into ledger account with correct amount.

5. What is meant by error of commission?

Ans. Error of commission are those errors which arise due to wrong recording, wrong posting, wrong carrying forward, wrong casting, wrong balancing, etc.

6. Give two examples of error of commission?

Ans. a) Recording purchases of goods for Rs.5,000 as Rs.50,000.

b) Cash balance of Rs.1,000 carried forward as Rs.10,000.

7. What is meant by compensating error?

Ans. Compensating Error is the error the effect of which is nullified by another error of equal amount.

8. What is One-Sided Error?

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Ans. One-Sided Error are those error which have occurred in one side “Debit or Credit” of an account because of which Trial Balance will not agree.

9. What Two-Sided Error?

Ans. Two-Sided Error are those errors that have been committed on both sides, i.e., debit and credit. Although errors has been committed yet the Trial Balance will agree.

10. Give two examples of One-Sided Error.

Ans. a) Depreciation on computers not posted to Depreciation A/c.

b) Purchase of stationary of Rs.500 posted twice to Stationary A/c.

11. Give two examples of Two-Sided Error.

Ans. a) Machinery purchased recorded in the Purchases Book.

b) Old furniture sold recorded as sales of goods.

11.Give one example of Compensating Error?

Ans. a)Sales of Rs. 10,000 recorded as Rs.1,000

b)Purchases of Rs.10,000 recorded as Rs1,000

12.Give two examples of errors which are not disclosed by a trial balance in spite of it being agreed.

Ans. a)Errors of Principle: Example- Recording of machinery purchased as purchases

b) Errors of complete omission: Example-Goods purchase from Sita ram of Rs.5,000 but recorded in the books of accounts.

13.What is meant by Rectifying Entry?

Ans. Rectifying Entry means an entry passed to correct the error omitted.

14. Name the error committed by violating the rule of accounting.

Ans. Error of Principle.

15. Salary of Rs 2,100 Paid was posted as Rs 2,000 in Salary A/c and Advertisement of Rs.7,700 was posted as Rs 7,800 . Identify the type of Error?

Ans. Error of Commission or Error of Posting.

Numerical questions:

Question 1:

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Rectify the following errors and ascertain the amount of difference in trial balance by preparing suspense account:

(a) Credit sales to Mohan Rs 7,000 were posted as Rs 9,000.

(b) Credit purchases from Rohan Rs 9,000 were posted as Rs 6,000.

(c) Goods returned to Rakesh Rs 4,000 were posted as Rs 5,000.

(d) Goods returned from Mahesh Rs 1,000 were posted as Rs 3,000.

(e) Cash sales Rs 2,000 were posted as Rs 200.

No. Particulars L.F.Debit

Amount Rs

Credit Amount

Rs

(a) Suspense A/c Dr. 2,000

To Mohan 2,000

(Sold goods to Mohan Rs 7,000 wrongly posted as Rs 9,000,

now rectified)

(b) Suspense A/c Dr. 3,000

To Rohan 3,000

(Purchased goods from Rohan Rs 9,000 wrongly posted as Rs 6,000, now rectified)

(c) Suspense A/c Dr. 1,000

To Rakesh 1,000

(Goods returned to Rakesh Rs 4,000 wrongly posted as Rs 5,000, now rectified)

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(d) Mahesh Dr. 2,000

To Suspense A/c 2,000

(Goods returned from Mahesh Rs 1,000 wrongly posted as 3,000,

now rectified)

(e) Suspense A/c Dr. 1,800

To Sales A/c 1,800

(Goods sold for cash Rs 2,000 wrongly posted as Rs 200,now rectified)

Suspense Account

Dr. Cr.

S. No. Particulars J.F.

Amount

Rs S. No. ParticularsJ.F.

Amount

Rs

(a) Mohan 2,000 (d) Mahesh 2,000

(b) Rohan 3,000

(c) Rakesh 1,000

(e) Sales 1,800 Balance c/d 5,800

7,800 7,800

Note it has been assumed that all the errors mentioned in this question are errors of partial omission.

Question 2:

Rectify the following errors assuming that suspense account was opened.

Ascertain the difference in trial balance.

(a) Credit sales to Mohan Rs 7,000 were recorded in Purchase Book. However, Mohan’s account was correctly debited.

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(b)

Credit purchases from RohanRs 9,000 were recorded in sales book. However, Rohan’s account was correctly credited.

(c) Goods returned to RakeshRs 4,000 were recorded in sales return book.

However, Rakesh’s account was correctly debited.

(d)

Goods returned from Mahesh Rs 1,000 were recorded through purchases

return book. However, Mahesh’s account was correctly credited.

(e)

Goods returned to NareshRs 2,000 were recorded through purchases book.

However, Naresh’s account was correctly debited.

Journal

S. No. Particulars L.F.Debit

Amount Rs

Credit Amoun

t Rs

(a) Suspense A/c Dr.14,00

0

To Sales A/c 7,000

To Purchases A/c 7,000

(Goods sold to Mohan wrongly recorded in Purchases Book;

however, Mohan's Account was correctly debited, now rectified)

(b) Purchases A/c Dr. 9,000

Sales A/c Dr. 9,000

To Suspense A/c18,00

0

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(Purchased goods from Rohan wrongly recorded in Sales Book.

However, Rohan's Account was correctly credited, now rectified)

(c) Suspense A/c Dr. 8,000

To Purchases Return A/c 4,000

To Sales Return A/c 4,000

(Goods returned to RakeshRs 4,000 wrongly entered in

Sales Return Book; however, Rakesh's Account was correctly

debited, now rectified)

(d) Sales Return A/c Dr. 1,000

Purchases Return A/c Dr. 1,000

To Suspense A/c 2,000

(Goods Returned from Mahesh wrongly entered in

Purchases Return Book; however, Mahesh's Account was

correctly credited, now rectified)

(e) Suspense A/c Dr. 4,000

To Purchases Return A/c 2,000

To Purchases A/c 2,000

(Goods returned to Naresh wrongly entered in Purchases

Book; however, correctly debited to Naresh's Account,

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now rectified)

Suspense Account

Dr. Cr.

S. No. Particulars J.F.

Amount

Rs S. No. Particulars J.F.

Amount

Rs

(a) Sales 7,000 (b) Purchases 9,000

Purchases 7,000 Sales 9,000

(c) Purchases Return 4,000 (d) Sales Return 1,000

Sales Return 4,000 Purchases Return 1,000

(e) Purchases Return 2,000

Purchases 2,000 Balance c/d 6,000

26,000 26,000

Numerical questions for practice:

Q.1 Pass journal entries for following cases: 1. Interest paid amounting Rs.600 was credited to interest account as Rs. 60. 2. Salary paid to employee Rs.5,000 was debited to his personal account.3. Goods purchased from AB limited costing Rs.8,000 not recorded in books.4. Machinery sold for Rs.6,000 was wrongly credited in Furniture account.

Q.2 Rectify the following errors and ascertain the amount of difference in trial balance by preparing suspense account :(a)Credit sales to Mohan Rs. 7,000 were not posted.(b)Credit purchases from RohanRs. 9,000 were not posted.(c)Goods returned to RakeshRs. 4,000 were not posted.

92 | P a g e

(d)Goods returned from Mahesh Rs. 1,000 were not posted.(e)Cash paid to Ganesh Rs. 3,000 was not posted.(f)Cash sales Rs. 2,000 were not posted.

Q3. Trial balance of Kohli did not agree and showed an excess debit of Rs. 16,300. He put the difference to a suspense account and discovered the following errors:

(a)Cash received from Rajat Rs. 5,000 was posted to the debit of Kamal as Rs. 6,000.

(b)Salaries paid to an employee Rs. 2,000 were debited to his personal account as Rs. 1200.(c)Goods withdrawn by proprietor for personal use Rs. 1,000 were credited to sales account as Rs. 1,600.(d)Depreciation provided on machinery Rs. 3,000 was posted to Machinery account as Rs. 300.(e)Sale of old car for Rs. 10,000 was credited to sales account as Rs. 6,000. Rectify the errors and prepare suspense account.

Financial Statements of Sole Proprietorship: From Complete and Incomplete Records

Content mapping: Financial statements: objective and importance. Trading and profit and loss account: gross profit, operating profit and net profit. Balance sheet: need, grouping, marshalling of assets and liabilities. Adjustments in preparation of financial statements : with respect to closing stock, outstanding expenses, prepaid expenses, accrued income, income received in advance, depreciation, bad debts,

93 | P a g e

provision for doubtful debts, provision for discount on debtors, abnormal loss, goods taken for personal use,goods distributed as free samples and manager’s commission.

Preparation of Trading and Profit and Loss account and Balance Sheet of sole proprietorship.

Incomplete records: uses and limitations. Ascertainment of profit/loss by statement of affairs method.

___________________________________________________________________

financial statements : The statements which helps to ascertain the performance (i.e. gross profits, operating profits & net profits) for an accounting period and to depict the financial position/ soundness/ status of a business firm on a particular period of time.The financial statements contain two statements: (1) Income Statement: To show performance of a business firm by matching between all the expenses, losses and revenues, incomes & gains of the particular accounting period.(2) Position Statement: To show financial strength of a business firm in terms of the value of assets & liabilities.Trading Account and Profit & Loss Account is a part of Income Statement and the name of position statement is called Balance Sheet.Trading Account: The trading account ascertains the result from basic operational activities of the business. The basic operational activities involve the manufacturing, purchasing and selling of goods. It is prepared to ascertain whether the selling of goods and/ or rendering of services to customers have proved profitable for the business or not. A purchase is one of the main constituents of expenses in business organisation. Besides purchases, remaining expenses are ‘direct expenses’. Direct expenses means all expenses which are directly connected with the manufacturing, purchases of goods & bringing to the point of sale (i.e. carriage inwards, freight inwards, wages, factory lighting, coal, water & fuel, royalty on production, etc.). Similarly, sales constitute the main item of revenue for the business.The excess of sales over purchases & direct expenses is called ‘gross profits’. If the amount of purchases & direct expenses is more than the sales revenue, is called ‘gross loss’.Gross Profit = Sales –Cost of goods soldThe gross profit or gross loss is transferred to Profit & Loss Account.

Profit and Loss Account:The profit & loss account ascertains the result of the overall performance of a business organisation in terms of operating profit and net profit. It will start with the gross profit or gross loss derived from the trading account. The other constituents are indirect expenses and indirect incomes/gains for an accounting period of a business organisation. Operating profit: Operating profit is the excess of operating revenue over operating expenses. While calculating operating profit, the incomes & expenses of a purely financial nature and loss by fire etc. are not taken into account:Operating Profit = Net Profit + Non-Operating Expenses - Non-Operating Income OR

94 | P a g e

Operating Profit = Gross Profit + Operating Income – Operating Expenses OROperating Profit = Sales Revenue – Operating Cost OR

Operating Cost = Cost of Goods Sold + Operating Expenses Operating Expenses = Office & Administration and Selling & Distribution Expenses

Net Profit: Net Profit is that profit which is earned after deducting all operating expenses as well as all non-operating expenses from the gross profit and other incomes.Balance Sheet:The Balance sheet is a statement prepared for showing the financial position of the business summarising its assets and liabilities at a given date. It is prepared at the end of accounting period after the trading and profit & loss have been prepared. It is called balance sheet because it is a statement of balances of ledgers accounts that have not been transferred to trading and profit & loss account and are to be carried forward to the next year with the help of an opening entry made in the journal at the beginning of the next year.Grouping and Marshalling of Assets & Liabilities:Grouping: The items of the balance sheet are presenting in the particular group having similar nature is called grouping of assets and liabilities. (i.e. all the assets which are to be used not more than one year, must be shown under the head of ‘Current Assets’ such as cash in hand, cash in hand, debtors etc.)Marshalling: In the balance sheet, the assets & liabilities are arranged either in the order liquidity or permanence is called ‘marshalling’. In case of ‘permanence’, the most permanent asset or liability is put on the top in the balance sheet and thereafter the assets are arranged in their reducing level of permanence.

Trading and Profit & Loss Account(for the year ended March 31st 20……)

Expenses/Losses Amount in Revenues/ Gain Amount in

Opening stockPurchasesWagesCarriage inwardsFreight inwardsCartageGross profit b/d

Gross loss (if derived)Rent/rates & taxesSalariesRepairs & RenewalBad debtsInterest paidCarriage outwardsNet Profit(transferred to capital A/c)

xxxxxxxxxxxxxxxxxxxxxxxxxxxx

SalesClosing stockGross loss(if it is derived)

Gross profit c/dCommissionDiscount Received

xxxxxxxxxxx

XXX XXXxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxxx

XXX XXX

Balance Sheet(As on/at March 31st 20……)

Liabilities Amount in Assets Amount in

Capital xxxx Building xxxx95 | P a g e

xxxx+/- Net profit/loss xxxBank LoanCreditorsBank overdraft

xxxxxxxxx

MachineryFurnitureDebtorsCash in hand

xxxxxxxxxxxx

XXX XXX

Question 01: Prepare a Trading Account of M/s Anal from the following information related to 2014-15.Opening stock 50,000; Purchases 1,10,000; Return inwards 5,000; Sales 3,00,000; Return outwards 7,000; Factory rent 30,000 and Wages 40,000.Sol.: Trading Account (For the year ended March 31st 2015)

Particulars Amount in Particulars Amount in

Opening StockPurchases 1,10,000Less: Return outwards (7,000)Factory RentWagesGross Profit (transferred to profit& loss account) c/d

50,000

1,03,00030,00040,00072,000

Sales 3,00,000Less: Return inwards (5,000)

2,95,000

2,95,000 2,95,000

Question 02: Following balances are abstracted from the books of a trader ascertain gross profit, operating profit and net profit for the year ended March 31st 2015.Sales 75,250; Purchases 32,250; Opening stock 7,600; Sales return 1,250; Purchases return 250; Rent 300; Stationary & printing 250; Salaries 3,000; Misc. Expenses 200; Travelling expenses 500; Advertisement 1,800; Commission paid 150; Office expenses 1,600; Wages 2,600; Profit on sale of Investment 500; Depreciation 800; Dividend on investment 2,500; Loss on sale of old furniture 300.Closing stock (March 31st 2015) valued at 8,000.

Sol.: Trading and Profit & Loss Account(For the year ended March 31st 2015)


Opening stockPurchases 32,250Less: Return outwards (250)Wages

7,600

32,0002,600

39,800

Sales 75,250Less: Return inwards (1,250)Closing stock

74,0008,000

82,000 82,000

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Gross profit b/d

Rent/rates & taxesSalariesStationary & printingMisc. ExpensesTravelling expenseAdvertisementsCommission paidOffice expensesDepreciationOperating Profit c/d

Loss on sale of old furnitureNet Profit(transferred to capital A/c)

Gross profit c/d

Operating profits b/dProfit on sale of investmentDividend on investment

3003,000

250200500

1,800150

1,600800

31,200

39,800

39,800 39,800300

33,90031,200

5002,500

34,200 34,200

Question 03: Prepare Trading and Profit & Loss Account and Balance Sheet of M/s Royal Traders from the following Trail Balance as on March 31st 2015.

Name of Accounts L.F. Debit Amount

Credit Amount

StockCashBankCarriage on purchasesPurchasesDrawingsWagesMachineryDebtorsPostageSundry ExpensesRentFurniture

20,0005,000

10,0001,500

1,90,000

9,00055,000

1,00,000

27,000300

1,7004,500

35,000

SalesCreditorsBills PayableCapital

2,45,00010,0004,000

2,00,000

4,59,000

4,59,000

Closing stock valued on March 31st 2015 at 8,000.

Sol.: Trading and Profit & Loss Account(For the year ended March 31st 2015)


Opening stockPurchasesCarriage on purchasesWages

20,0001,90,000

1,50055,000

SalesClosing stockGross Loss b/d

2,45,0008,000

13,500

2,53,000 2,53,000

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Gross Loss c/dRent/rates & taxesPostageSundry Expenses

Net Loss(transferred to capital A/c)

13,5004,500

3001,700

20,000

34,200 34,200Balance Sheet

(As on/at March 31st 2015)Liabilities Amount in Assets Amount in

Capital2,00,000

Less: Drawings (9,000)+/- Net profit/loss

(20,000)Bills PayableCreditorsBank overdraft

1,71,000

4,00010,000

MachineryFurnitureDebtorsBankCash in handClosing stock

1,00,00035,00027,00010,000

5,0008,000

1,85,000 1,85,000

Financial Statements with adjustmentsAdjustments in preparation of Financial Statements with respect to Closing stock, outstanding expenses, prepaid expenses, accrued income, income received in advance, depreciation, bad debts, and provision for doubtful debts, provision for discount on debtors, manager's commission, abnormal loss, goods taken for personal use and goods distributed as free samples.

Adjustment AdjustmentEntry

Treatment in Trading,Profit & Loss Account

Treatment inBalance Sheet

Closing Stock Closing stock A/c Dr.To Trading A/c

Shown on the credit sideof trading account

Shown on the assets side

OutstandingExpenses

Expense A/c Dr.To O/s Expenses

Added to respectiveExpense on the debit side

Shown on the liabilitiesSide

Prepaid/ unexpiredexpense

Prepaid expense A/c Dr.To Expense A/c

Deducted from respectiveExpense on the debit side

Shown on the assetsSide

Accrued Income Accrued income A/c Dr.To Income A/c

Added to respectiveIncome on the credit side

Shown on the assets side

Income Receivedin advance

Income A/c Dr.To Received in advance

Deducted from respectiveIncome on the credit side


Depreciation Depreciation A/c Dr.To Asset A/c

Shown on the debit side Deducted from theRespective assets

Bad Debts Bad Debts A/c Dr.To Debtors

Shown on the debit side ofProfit & Loss A/c

Deducted from debtors

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On the assets sideProvision fordoubtful debts

Profit & Loss A/c Dr.To Provision A/c


Deducted from debtorsOn the assets side

Provision forDiscount on debtors



Deducted from debtorsOn the assets side

Provision formanager’s Commission




Goods taken asfree sample

Sample A/c Dr.To Purchase A/c

Deducted from purchases &Shown on debit side of P/L A/c

Goods taken forPersonal use

Drawing A/c Dr.To Purchases A/c

Deducted from purchases Deducted from Capital,on the liabilities side

Question 04: From the following Trial Balance extracted from the books of Vine, prepare Trading and Profit & Loss A/c for the year ending 31st March, 2015 and a Balance Sheet on that date.

Trial BalanceDr. Cr.

Furniture 640Loose Tools 6250Building 7500Capital 12500Bad Debts 125Sundry Debtors & Creditors 3800 2500Stock on April 1,2010 3460Purchase & Sales 5475 15450Bank Overdraft 2850Return Inward & Outward 200 125Stationery 250Interest 118Commission 375Cash in Hand 650Taxes & Insurance 1250General Expenses 782Salaries 3300

------------ ------------- 33800 33800

Adjustments: (a) The book value of Closing stock 2,200 and it has market value 2,000.(b) Furniture depreciated to 600.(c) Make a provision for doubtful debts on debtors @ 5%.(d) Commission received in advance 70 and Outstanding salaries 300.99 | P a g e

(e) Proprietor taken goods of 200 for domestic purpose.(f) Make a provision for Manager’s commission on net profit @ 10% p.a. before charging such commission.Sol.: Trading and Profit & Loss Account

(For the year ended March 31st 2015)Expenses/Losses Amount in Revenues/ Gain Amount in

Opening stockPurchases 5,475Less: Drawings 200Less: Return 125Gross Profit c/d

Bad debtsStationeryInterestTaxes & InsuranceGeneral expensesSalaries 3,300Add: Outstanding 300Depreciation on FurnitureProvision for doubtful debtsProvision for Manager’s Comm.Net Profit(Transferred to Capital A/c)

3,4605,150

8,640

Sales 15,450Less: Return 200Closing stock

Gross Profit b/dCommission 375Less: Received in Adv. 70

15,250

2,000

17,250 17,250125250118

1,250782

3,600

40190259

2,331

8,640305

8,945 8,945

Balance Sheet(As on/at March 31st 2015)

Liabilities Amount in Assets Amount in

Capital12,500

Less: Drawings (200)Add: Net profit 2,331CreditorsBank overdraftCommission received in Adv.Salary OutstandingProvision for Manager’s Comm.

14,631

2,5002,850

70300259

BuildingFurnitureDebtorsLoss toolsCash in handClosing stock

7,500600

3,6106,250

6502,000

20,610 20,610 # Calculation of manager’s commission on net profit, after charging such commissionIf on the above question, manager’s commission to be calculated 10% on net profit, after charging such commission: Balance of Profit & Loss A/c i.e. 2,590 X % of comm. i.e. 10

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Manager’s Commission = ------------------------------------------------ = 235100 + % of commission i.e. 110

ACCOUNTS FROM INCOMPLETE RECORDS:

Under this system of accounting, the cash book and personal accounts of debtors and creditors are maintained, real and nominal accounts are not maintained. Since both the aspects of transactions are not recorded, the system is known as accounts for incomplete records or Single entry system of accounting.

FEATURES OF ACCOUNTS FROM INCOMPLETE RECORDS:

(i) It is suitable for small- size business . (ii) Only cash book and personal accounts are prepared, real and nominal accounts are not prepared . (iii) Dependence on original vouchers. Difference between Double Entry System and Single Entry System

S.N. Basis Double Entry System Single Entry System1 Aspects Both aspects of the transaction Both aspects of the transaction are

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are recorded. not recorded.2 Accounts Under this system All

personal ,real and nominal accounts are prepared

Under this system Only cash book and personal accounts are prepared, real and nominal accounts are not prepared

3 Trial balance Under this system Trial balance is prepared to verify the accuracy of the books of accounts.

Under this system Trial balance can not be prepared due to incomplete system of accounting

4 Suitability It is suitable for all the business. It is suitable only for small business.

Ascertaining profit under the single Entry systemIt can be ascertained by the following two methods:

(I) Statement of affairs methods(Net worth methods) and (ii) Conversion Methods.

Statement of affairs methods (Net worth methods)

A statement of affairs is a statement of assets and liabilities. Difference between the amount of the two sides is taken as capital. Under Single entry system , it is necessary to prepare Statement of affair at the end of the year , and also in the beginning of the year.

Assets = Liabilities + Capital Capital = Assets - Liabilities

Profit = Capital at the end + Drawings – Additional capital introduced – capital at the beginning

Statement of profit or loss

Particulars Rs.Capital at the endAdd: Drawings during the year

Less: Additional capital introduced during the year

Less: Capital in the beginningProfit or Loss for the year

----------------------(--------)--------(-------)----------

STATEMENT OF AFFAIRS

AS ON ……………………… ………………………………

Liabilities (Rs.) Assets (Rs.)

Sundry Creditors XXX Cash in hand XXX

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Bank OverdraftCapital(Balancing figure)

XXXXXX

Cash at bankSundry debtorsBills ReceivableStock in tradeFurniturePlant & Machinery

XXXXXXXXXXXXXXXXXX

XXX XXX

Practical QuestionsQ.N. 1: Adarsh maintains books on single entry system. He gives you the following information.

Rs.

Capital on 1st April, 2014 50,800

Capital on 1st April, 2015 60,000

Drawings made during the year 2014-15 10,500

Additional capital introduced on 1st july 2014 8,800

You are required to calculate the profit or loss made by Adarsh.

Solution:


For the year ended 31st March 2015

Particulars Rs.Capital at the end(31st march, 2015 )Add: Drawings during the year 2014-15

Less: Additional capital introduced during the year 2014-15

Less: Capital in the beginning(1st April, 2014)Profit or Loss for the year

60,00010,50070,500(8,800)61,700(50,800)10,900

Q.N.2: A k Maurya keeps his books under single entry system . His assets and liabilities were as under :

31st March 2014 31st March 2015Cash 3000 1500

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Sundry debtorsStockPlant & machinerySundry creditorsBills Payable

41,00036,00063,00018,000--------

47,00035,00083,00017,000 6,500

During the year 2014-15 , He introduced Rs 15000 as new capital . He withdrew Rs. 4200 every month for his household exps. Ascertain his profit for the year ended 31st March 2015.

Solution: STATEMENT OF AFFAIRS

AS ON 1ST APRIL 2014


Sundry CreditorsCapital(Balancing figure)

18,0001,25,000

Cash in handSundry debtorsStock in tradePlant & Machinery

300041,00036,00063,000

1,43,000 1,43000 STATEMENT OF AFFAIRS

AS ON 31ST MARCH 2015


Sundry CreditorsBills payableCapital(Balancing figure)

17,000 6,5001,43,000

Cash in handSundry debtorsStock in tradePlant & Machinery

1500 47,000 35,000 83,000

1,66,500 1,66,500



Particulars Rs.Capital at the end(31st March, 2015 )Add: Drawings during the year 2014-15 (4200 x12=50,400)

Less: Additional capital introduced during the year 2014-15

Less: Capital in the beginning(1st April, 2014)Profit or Loss for the year

1,43,000 50,400 1,93,400 (15,000) 1,78,400(1,25,000) 53400

Q.N.3: Alisha provisional retail store had not kept proper books of account . From the details given you are required to ascertain the profit or loss for the year ended as on 31st March 2015 and also to prepare its statement of affairs as at that date.

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31st March 2014 31st March 2015Cash in handSundry debtorsStock in tradeFixtures &fittingsSundry creditorsBills Payable Motor vanBills ReceivableBank balance

30011,50016,000 3,00015,400 6,000 2,00014,000---------

150017,00025,000 8,00017,000 8,500 5,00015,500 4,000

Drawings during the year amounted to Rs. 5400. Depreciate Fixtures &fittings by 10%. Rs. 1000 is irrecoverable from debtors. Provide 5% for doubtful debts .

Solution:


AS ON 1ST APRIL 2014


Sundry CreditorsBills PayableCapital(Balancing figure)

15,400 6,000 25,400

Cash in handSundry debtorsStock in tradeFixtures &fittingsMotor vanBills Receivable

30011,50016,000 3,000 2,00014,000

46,800 46,800




Sundry CreditorsBills payableCapital(Balancing figure)

17,000 8,500 50,500

Cash in handSundry debtorsStock in tradeFixtures &fittingsMotor vanBills ReceivableBank balance

1500 17,000 25,000 8,000 5,000 15,500 4,000

76000 76,000 Statement of profit or Loss


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Particulars Rs.Capital at the end(31st March, 2015 )Add: Drawings during the year 2014-15

Less: Capital in the beginning(1st April, 2014)Profit before adjustmentLess: Depreciate Fixtures &fittings Rs. 800 Bad debts Rs.1,000 Prov. For doubtful debts Rs. 800

Net Profit for the year

50,500 5,400 55,900(25,400) 30,500

(2,600)27,900

FINAL STATEMENT OF AFFAIRS



Sundry CreditorsBills payableCapital 25,400Less: Drawings 5,400 20,000Add: net profit 27,900

17,000 8,500

47,900

Cash in handSundry debtors 17000Less: Bad debts (1000) 16000Less: Prov. Bad debts (800)

Stock in tradeFixtures &fittings 8000Less: Dep. (800)Motor vanBills ReceivableBank balance

1,500 15,200

25,000 7,200

5,00015,500 4,000

73,400 73,400

FINANCIAL STATEMENTS OF NOT – FOR – PROFIT ORGANIZATIONS

Content mapping

Not-for-profit organizations: concept. Receipts and Payments Account: features and preparation. Income and Expenditure Account: features, preparation of income and expenditure accountAnd balance sheet from the given receipts and payments account with additional information______________________________________________________________

The organizations formed for not to earn profit but for providing services to its members and public are known as NOT – FOR – PROFIT ORGANIZATIONS. These include Clubs, hospitals, libraries, schools, charitable trusts, religious institute etc. The main motive of these organizations is to provide services.

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As the main motive of these organizations is not to earn profit, they do not prepare ‘Trading and Profit & Loss Account’. They prepare ‘Income & Expenditure Account’ to know the profit or loss during the specific period. They prepare ‘Balance Sheet’ also to know the financial position of the organization at particular point of time.

The main features (or characteristics) of Not for Profit organizations are:

1. Service motive2. These organizations are set up in the form of charitable trusts or societies, and subscribers of

these organizations are called members.3. An NPO is having separate legal entity from its members. It is not affected by admission or

death or insolvency of any member.4. The management is in the hands of elected members of the organization.5. Major source of income are: (a) subscription (b) donations (c) financial assistance from

government (d) income from investors.6. Surplus (profit) is not shared among members. It is added to the capital fund of the

organization.7. These organizations have to prepare proper accounts for proper utilization of funds. Financial

records are prepared every year.Accounting Records of Not-for-Profit Organizations

Most of their transactions are in cash or through the bank. These institutions are required by law to keep proper accounting records and keep proper control over the utilization of their funds. This is why they usually keep a cash book in which all receipts and payments are duly recorded. They also maintain a ledger containing the accounts of all incomes, expenses, assets and liabilities which facilitates the preparation of financial statements at the end of the accounting period. In addition, they are required to maintain a stock register to keep complete record of all fixed assets and the consumables. They do not maintain any capital account. Instead they maintain capital fund which is also called general fund that goes on accumulating due to surpluses generated, life membership fee, donation, legacies, etc. received from year to year.

Financial Statements:

NPOs are not required to make Trading and Profit & Loss Account but it is necessary to know whether the income during the year was sufficient to meet the expenses or not. Not only that they have to provide the necessary financial information to members, donors, and contributors and also to the Registrar of Societies. For this purpose, they have to prepare their final accounts at the end of the accounting period and the general principles of accounting are fully applicable in their preparation on as stated earlier, the final accounts of a ‘not-for-profit organization’ consist of the following:

(i) Receipt and Payment Account

(ii) Income and Expenditure Account, and

(iii) Balance Sheet.

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The Receipt and Payment Account is the summary of cash and bank transactions which helps the preparation of Income and Expenditure Account and the Balance Sheet. Besides, it is a legal requirement as the Receipts and Payments Account has also to be submitted to the Registrar of Societies along with the Income and Expenditure Account, and the Balance Sheet. Income and Expenditure Account is akin to Profit and Loss Account.

Receipt and Payment Account

It is prepared at the end of the accounting year on the basis of cash receipts and cash payments recorded in the cash book. It simply is a summary of cash and bank transactions under various heads.

Salient Features of receipt and payment account:

1. It is a summary of the cash book. Its form is identical with that of simple cash book (without discount and bank columns) with debit and credit sides. Receipts are recorded on the debit side while payments are entered on the credit side.2. It shows the total amounts of all receipts and payments irrespective of the period to which they pertain.3. It includes all receipts and payments whether they are of capital nature or of revenue nature.4. No distinction is made in receipts/payments made in cash or through bank.5. No non-cash items such as depreciation outstanding expenses accrued income, etc. are shown in this account.6. It begins with opening balance of cash in hand and cash at bank (or bank overdraft) and closes with the year end balance of cash in hand/ cash at bank or bank overdraft.

Income and Expenditure Account

It is the summary of income and expenditure for the accounting year. It is just like a profit and loss account prepared on accrual basis in case of the business organizations. It includes only revenue items and the balance at the end represents surplus or deficit. The Income and Expenditure Account serves the same purpose as the profit and loss account of a business organization does. All the revenue items relating to the current period are shown in this account.

Distinction between Income and Expenditure Account and Receipt and Payment Account

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Subscriptions: Subscription is a membership fee paid by the member on annual basis. This is the main source of income of such organizations. Subscription paid by the members is shown as receipt in the Receipt and Payment Account and as income in the Income and Expenditure Account.

Donations: It is a sort of gift in cash or property received from some person or organization. It appears on the receipts side of the Receipts and Payments Account. Donation can be for specific purposes or for general purposes.

(i) Specific Donations: If donation received is to be utilised to achieve specified purpose, it is called Specific Donation. The specific purpose can be an extension of the existing building, construction of new computer laboratory, creation of a book bank, etc. Such donation is to be capitalized and shown on the liabilities side of the Balance Sheet irrespective of the fact whether the amount is big or small. The intention is to utilise the amount for the specified purpose only.

(ii) General Donations: Such donations are to be utilised to promote the general purpose of the organization. These are treated as revenue receipts as it is a regular source of income hence, it is taken to the income side of the Income and Expenditure Account of the current year.

Legacies: It is the amount received as per the will of a deceased person. It appears on the receipts side of the Receipt and Payment Account and is directly added to capital fund/general fund in the balance

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sheet, because it is not of recurring nature. However, legacies of a small amount may be treated as income and shown on the income side of the Income and Expenditure Account.

Life Membership Fees: Some members prefer to pay lump sum amount as life membership fee instead of paying periodic subscription. Such amount is treated as capital receipt and credited directly to the capital/general fund.

Entrance Fees: Entrance fee also known as admission fee is paid only once by the member at the time of becoming a member. In case of organizations like clubs and some charitable institutions, is limited and the amount of entrance fees is quite high. Hence, it is treated as non-recurring item and credited directly to capital/general fund. However, for some organizations like educational institutions, the entrance fees is a regular income and the amount involved may also be small. In their case, it is customary to treat this item as a revenue receipt. However, if there is specific instruction, it is advisable to treat the entire amount as capital receipt and the relevant amount should be directly added to capital/general fund.

Sale of old asset: Receipts from the sale of an old asset appear in the Receipts and Payments Account of the year in which it is sold. But any gain or loss on the sale of asset is taken to the Income and Expenditure Account of the year. For example, if an item furniture with a book value of Rs. 800 is sold for Rs. 700, this amount of Rs. 700 will be shown as receipt in Receipts and Payments Account and Rs. 100 on the expenditure side of the Income and Expenditure

Account as a loss on sale of old asset and while showing furniture in the balance sheet Rs. 800 will be deducted from its total book value.

Sale of Periodicals: It is an item of recurring nature and shown as the income side of the Income and Expenditure Account.

Sale of Sports Materials: Sale of sports materials (used materials like old balls, bats, nets, etc) is the regular feature with any Sports Club. It is usually shown as an income in the Income and Expenditure Account.

Payments of Honorarium: It is the amount paid to the person who is not the regular employee of the institution. Payment to an artist for giving performance at the club is an example of honorarium. This payment of honorarium is shown on the expenditure side of the Income and Expenditure Account.

Endowment Fund: It is a fund arising from a bequest or gift, the income of which is devoted for a specific purpose. Hence, it is a capital receipt and shown on the Liabilities side of the Balance Sheet as an item of a specific purpose fund.

Government Grant: Schools, colleges, public hospitals, etc. depend upon government grant for their activities. The recurring grants in the form of maintenance grant is treated as revenue receipt (i.e. income of the current year)

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and credited to Income and Expenditure account. However, grants such as building grant are treated as capital receipt and transferred to the building fund account. It may be noted that some Not-for-Profit organizations receive cash

subsidy from the government or government agencies. This subsidy is also treated as revenue income for the year in which it is received.

Special Funds: The Not-for-Profit Organizations office create special funds for certain purposes / activities such as 'prize funds', 'match fund' and 'sports fund', etc. Such funds are invested in securities and the income earned on such investments is added to the respective fund, not credited to Income and Expenditure Account. Similarly, the expenses incurred on such specific purposes are also deducted from the special fund. For example, a club may maintain a special fund for sports activities. In such a situation, the interest income on sports fund investments is added to the sports fund and all expenses on sports deducted therefrom. The special funds are shown in balance sheet. However, if, after adjustment of income and expenses the balance in specific or Special fund is negative, it is transferred to the debit side of the Income and Expenditure Account or adjusted as per prescribed directions.

Fund based accounting system: It is accounting system in which a fund is created for completing some special purpose. All the incomes related to this purpose are credited (added) and all the related expenses are debited (subtracted) from this fund. This system of accounting is known as fund based accounting. For example a match fund can be created for completing a tournament. All the incomes related to tournament will be added, while all the expenses related to tournament will be subtracted from match fund.

Subscription

Q.1 As per Receipt and Payment Account for the year ended on March 31, 2014, the subscriptions received were Rs. 2,50,000. Additional Information given is as follows:

1. Subscriptions Outstanding on 1.4.2013 Rs. 50,000 2. Subscriptions Outstanding on 31.3.2014 Rs.35,0003. Subs. Received in Advance as on 1.4.2013 Rs.25,0004. Subs. Received in Advance as on 31.3.2014 Rs.30,000Ascertain the amount of income from subscriptions for the year 2013–14 and show how relevant items of subscriptions appear in opening and closing balance sheets.

(Ans: Rs. 2,30,000)

Q.2 Extracts of Receipt and Payment Account for the year ended March 31, 2014 are given below:

Receipt Subscriptions (Rs.)2012-13 2,5002013-14 26,7502014-15 1,000Total 30,250

Additional Information:

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Total number of members: 230. Annual membership fee: Rs. 125.Subscriptions outstanding on April 1, 2013: Rs. 2,750.

Prepare a statement showing all relevant items of subs. viz., income, advance, outstandings, etc. (Ans: Rs. 28750)

Q.3 From the following extract of Receipt and Payment Account and the additional information given below, compute the amount of income from subscriptions and show as how they would appear in the Income and Expenditure Account for the year ending March 31, 2015 and the Balance Sheet on that date:

Subscriptions:2013-14 7,0002014-15 30,0002015-16 5,000

Total 42,000Additional Information: Rs.1. Subscriptions outstanding March 31, 2014 8,5002. Total Subscriptions outstanding March 31, 2015 18,5003. Subscriptions received in advance as on March 31, 2014 4,000 (Ans: Rs. 51,000)

Q.4 Calculate the amount of subscriptions to be shown in Income & Expenditure Account for the year ending 31.03.2013, from the following particulars of a Baba Charitable Trust.

31.3.2012 31.03.2013Outstanding subscription 36,000 45,000Subscription received in advance 2,700 5,200

Total subscription received during the year ending 31.03.2013 Rs. 2,70,000. Also show the relevant items in the balance sheet as at 31.03.2008 and 31.03.2009. (Ans: Rs. 2,76,500)

Q.5 From the following Receipts & Payments Account show subscription to be shown in Income and Expenditure Account for the year ending 31.03.2013 and 31.03.2014.

Receipt and Payment Account (an extract) Particulars Amount Particulars Amount To Subscription:

For 2013-14 18,000For 2014-15 1,80,000

For 2015-16 9,000 2,07,000 The charitable trust has 1,000 member each paying 200 as annual subscription. Outstanding subscription as on 31.03.2015 was Rs. 27,000. (Ans: Outstanding subscription for 2014-15 is Rs. 20,000)

Q.6 Ramkrishna Club received Rs. 8,000 as subscriptions during the year 2013-14. This amount included Rs. 400 which were outstanding as at 31st March 2013 and Rs. 400 received for the

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year 2014-15. The subscription due but not received on 31st March, 2014 were Rs. 500. Calculate the amount of subscriptions to be credited to Income and Expenditure Account for the year ended 31st March, 2014. (Ans: Rs. 7,700)

FUND BASED ACCOUNTING

Q.1 Show how you would deal with the following items in the final account of a Club:

Details Debit Amount(Rs.) Credit Amount (Rs.)Prize Fund 80,000Prize Fund Investments 80,000Income from Prize Fund Investments 8,000Prizes awarded 6,000

Q.2 (a) Show the following information in financial statements of a ‘ Not-for-Profit’ Organization:

Details Amount (Rs.)Match Expenses 16,000Match Fund 8,000Donation for Match Fund 5,000Sale of Match tickets 7,000

(b) What will be the effect, if match expenses go up by Rs. 6,000 other things remaining the same?

Q.3 (a) Show the following information in financial statements of a ‘ Not-for-Profit’ Organization:

Details Amount (Rs.)Tournament Fund Expenses 18,000Tournament Fund 8,000Donation for Tournament Fund 2,500Sale of Tournament tickets 4,000

(b) What will be the effect, if tournament expenses go up by Rs. 20,000 other things remaining the same?

Q.4 Show the treatment of following transactions while preparing final Account of a Non-Profit Organization for the year ended 31st March 2015:

Tournament fund = Rs. 50,000Interest accrued on Tournament fund Investment = Rs. 3,000Tournament Expenses 20,000Tournament fund investment = Rs. 30,000Tournament fund receipts = Rs. 7,500 (Ans: Tournament Fund = Rs. 40,500)

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Q.5 Show the treatment of following transactions while preparing final Account of a Non-Profit Organization for the year ended 31st March 2015:

Tournament fund as on 1 April 2014 was Rs. 50,000. Tournament expensed incurred Rs. 20,000. Donations received for tournament fund during the year was Rs. 7,500. 9% Tournament Fund Investment as at 31st March 2014 was RS. 37,500. Interest received on tournament fund investment was Rs. 2,500. (Ans: Tournament Fund. = 40,875)

Q.6 In the following alternative cases, how will you deal with them while preparing final Accounts of a Non-Profit Organization for the year ended 31st March, 2015?

(i)Tournament expenses = Rs. 30,000(ii) Tournament fund = Rs. 50,000. Tournament Expenses = Rs. 30,000(iii) Tournament Fund = Rs. 50,000. Tournament Expenses = Rs. 30,000. Receipt from tournament = Rs. 20,000.(iv) Tournament Fund = Rs. 50,000. Match Expenses = Rs. 30,000

Calculation of Material consumed

Q.1 From the following information compute the amount charged through Income and Expenditure Account for the year ended 31st March 2015:

(a) Amount paid for medicines during the year Rs. 8,000Stock of medicine in hand on 31st March, 2015 Rs. 2,000 (Ans: Rs. 6,000)

(b) Amount paid for medicines Rs. 8,000Stock of medicine on 1st April, 2014 Rs. 1,000Stock of medicine on 31st March, 2015 Rs. 2,000 (Ans: Rs. 7,000)

(c) Stock of medicine on 1st April, 2014 Rs. 6,000Creditors for medicines on 1st April, 2014 Rs. 2,500Advances for medicines on 1st April, 2014 Rs. 500Amount paid during the year Rs. 8,000Stock of medicine on 31st March, 2015 Rs. 1,000 (Ans: Rs. 6,000)

(d) Stock of medicine on 1st April, 2014 Rs. 6,000Creditors for medicines on 1st April, 2014 Rs. 2,500Advances for medicines on carried forward from 2014-15 Rs. 500Amount paid during the year Rs. 8,000Stock of medicine on 31st March, 2015 Rs. 800Creditors for medicines on 31st March 2015 Rs. 1,500Advance for medicines paid during 2014-15 Rs. 1,200 (Ans: Rs.

6,500)

Q.2 From the following information compute the amount charged through Income and Expenditure Account for the year ended 31st March 2015:

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(a) Amount paid for stationery during the year Rs. 24,000Stock of stationery in hand on 31st March, 2015 Rs. 6,000 (Ans: Rs. 18,000)

(b) Amount paid for stationery Rs. 24,000Stock of stationery on 1st April, 2014 Rs. 3,000Stock of stationery on 31st March, 2015 Rs. 6,000 (Ans: Rs. 21,000)

(c) Stock of stationery on 1st April, 2014 Rs. 3,000Creditors for stationery on 1st April, 2014 Rs. 7,500Advances for stationery on 1st April, 2014 Rs. 1,500Amount paid during the year Rs.24,000Stock of stationery on 31st March, 2015 Rs. 3,000 (Ans: Rs. 18,000)

(d) Stock of stationery on 1st April, 2014 Rs. 3,000Creditors for stationery on 1st April, 2014 Rs. 7,500Advances for stationery on carried forward from 2014-15 Rs. 1,500Amount paid during the year Rs. 24,000Stock of stationery on 31st March, 2015 Rs. 2,400Creditors for stationery on 31st March 2015 Rs. 4,500Advance for stationery paid during 2014-15 Rs. 3,600 (Ans: Rs.

19,500)

Q.3 Extract of a Receipt and Payment Account for the year ended on March 31, 2014:

Payments:Stationery Rs. 23,000Additional Information:Details April 1, 2005 March 31, 2014 Stock of stationery 4,000 3,000Creditors for stationery 9,000 2,500 (Ans: Rs. 17,500)

Q.4 Find out the cost of medicines consumed during 2014-15 from the following information:

Details Amount (Rs.)Payment for purchase of medicines 3,70,000Additional InformationDetail 01.04.2014 31.03.2015 Creditors for medicines purchased: 25,000 17,000Stock of Medicines: 62,000 54,000Advance to suppliers of medicines: 11,500 18,200 (Ans: Rs. 3,63,300)

Long Answer Type Questions:

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Q.1. From the following particulars relating to Golden Point Club, prepare a Receipts and Payments account for the year ending 31st March 2000

(Ans: Total of Receipt and Payment A/c = Rs. 25,000, Closing balance of Bank = Rs. 6,600)

Q.2 From the following particulars of Faridabad Sports Club, prepare the Income and Expenditure Account for the year ending 31st December 2002:

(Excess of Income Over Expenditure = 22,000)

Q.3 From the under mentioned Receipts and Payments Account for the year ending 31st December 2002 of Nagi’s Club, prepare an Income and Expenditure Acocunt for the same period:

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(Excess of Income Over Expenditure = 7075)

Q.4 From the following Receipt and Payment Account of a club, prepare Income and Expenditure Account for the year ended December 31, 2014 and the Balance Sheet as on that date.

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(01.04.2002)

Q.5 Shiv-eNarain Education Trust provides the information in regard to Receipt and Payment Account and Income and Expenditure Account for the year ended March 31st 2015:

(Ans: Total of Opening Balance Sheet : Rs. 254,000 & Total of Closing Balance Sheet ; Rs. 3,14,980)

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Q.6 Prepare Income and Expenditure Account and Balance Sheet for the year ended March 31st 2015 from the following information:

(Ans: Surplus : Rs. 3,24,800; Total of Cl. B/S : 15,87,600; Capital Fund O/B = 12,49,400; Total of Op. B/S : 12,57,000)

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Q.7 From the following information of Azad Hind Fauz Club, New Delhi, prepare Income and Expenditure Account for the year 31st March 2015 and Balance Sheet as at 31st March 2015:

Receipt and Payment Account

(For the year ended 31st March, 2004)

Balance Sheet

(As as 01st April 2014)

Additional Information:

1. Subscription due but not received for the year 2014-15 on 31.03.2015 were Rs. 1,200.2. Subscription received in advance as on 31.03.2015 amounted to Rs. 890.3. Subscription for the year 2014-15 were still in arrears.4. Medicines remaining unused in the Godown amounted to Rs. 15,000.5. Miscellaneous Expenses due for 2014-15 amounted to Rs. 5006. Investment were made in 5% Govt. Securities on 01.10.2014.7. Donations were to be capitalized

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8. Depreciation @ 1q0% was to be charged on Computers, printers and Fax Machines

Computers in accounting

Content Mapping:-Introduction to computer and accounting information system {AIS}: Introduction to computers (elements, capabilities, limitations of computer system). Introduction to operating software, utility software and application software. Introduction to accounting information system (AIS) as a part of MIS. Automation of accounting process: meaning Stages in automation: (a) Accounting process in a computerized environment; comparison between manual accounting process and computerized accounting process, (b) Sourcing of accounting software; kinds of software: readymade software; customized software and tailor-made software; generic considerations before sourcing accounting software (c) creation of account groups and hierarchy (d) generation of reports - trial balance, profit andLoss account and balance sheet.___________________________________________________________

Computer – is an electronic device which performs various functions and operated through the set of instructions. Components of a Computer 1. Input Devices: Such as Keyboard, Mouse etc. 2. CPU: It has three components – The control unit, memory unit and the logical unit. 3. Output Devices: Such As Monitor, Printer. 4. Hardware & Software

The System Software such as MS DOS, Windows 7 etc.- are a set of programs which control the operations & help processing. The Application software such as MS Word, Tally etc. enables the user to perform useful specific functions. Management Information System (MIS): Is an information system that provides the needed information to the managers to manage the organization effectively. It combines the three resources viz; technology, information & people for the efficient management of an enterprise. Accounting Information System (AIS): Is an information system based on the accounting database of an organization, helping in storage, processing, summarizing & reporting information about an organization. It has 3 elements viz: Computerized Accounting, Information and System. Advantages of Computerized AIS : 1. High Speed: of recording, storage, processing & retrieval of information. 2. Accuracy: As all the calculations etc. are done by the computer it has accuracy. 3. Reliability: The information is reliable. 4. Real Time User Interface: AIS enables direct & simultaneous interaction between user & the machine.

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Limitations of Computerized AIS : 1. Staff Opposition: As it reduces the no of employees, staff usually opposes it. 2. High Development Costs: Development requires qualified engineering staff & training also, so its a costly affair. 3. Security Considerations: Cyber crime & hacking etc. are becoming very common these days, therefore security is always a concern. 4. High Costs makes it suitable only for medium & large sized firms & not for small firms. Role of Computers in Accounting Owing to Globalization the business operations are becoming large scale & complex. The need therefore arose to record, compile, summarize & present the accounting information to the large number of interested users with greater speed, accuracy & utility. Thus accounting is the only appropriate solution to these needs. Computerized accounting serves this purpose by using both the AIS & MIS very effectively by combining the following: 1. Customer Relationship Management (CRM) 2. Debtors Management 3. Inventory Management 4. Supply Chain Management 5. Payroll Accounting 6. Enterprise Resource Planning (ERP) 7. Enterprise Performance Management (EPM) 8. Computerized preparation of Financial Statements 9. Tax Planning & Management 10. Sales & Marketing Management

Database & Database Management System Database is data bank storing voluminous information about the entities within an organization and also the entities interacting with the organization. Database Management System is the electronic data processing of information stored in the database. DBMS is “a set of programs that controls and manages creation, utilization and maintenance of database of a business organization.”

Components of Database System:

Data Hardware Software Users

Advantages of DBMS : 1. Reduced Data Redundancy 2. Protection of information 3. Greater Consistency 4. Reduced Costs 5. Back-up & Recovery facility

Limitations of DBMS: 1. High setting up costs 2. Lack of Expertise Knowledge 3. Security Problems

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4. Hardware & Software costs due to fast obsolescence.

Accounting software: it can be classified as 1. Ready made Software.2. Customized Software.3.Tailor made software.

1. Readymade Software; Readymade Software are the software that are available that are available off the shelf. They are not developed for specific users but for the users in general.2. Customized Software; Customized soft wares are the soft wares that are readymade soft wares which are amended to meet the needs of the user.3.Tailor made software; Tailor made soft wares are developed for a particular user. It means it is user specific.

Comparison between Customized & Readymade Software Packages;

Basis Readymade Software Customized SoftwareTime It saves time as it

readymadeIt takes time for development

Cost It is cost effective as money is not to be spent on its development

It is costlier

After Sales Service Is promptly available because of well developed professionals as well as market

Has to depend on the programmer who has developed the package specially for the needs of the firm

Ready Availability It is readily available in the market

It is not readily available as it is tailor made to the firms need.

Basis of Difference Manual Accounting Process

Computerized Accounting

Recording The Business transaction are recorded first of all either in the journal or in the subsidiary book by accounts clerk

A software named “Tally Accounting” is feeded in the computer. Thereafter business transactions are recorded by the computer operator

Classifying The recorded transactions are post by the accounts clerk

The recorded data is stored in the computer and it is processed by the software

Summarizing After ledger posting, Trial Balance is prepared to

Transactions once recorded are stored in the database.

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ensure that ledger posting is correct

The information is processed to yield Trial Balance and Final Accounts.

Existence of Partial Errors Since the accounting process is performed by the accounts clerk who may commit one sided errors hence trial balance will not tally

Since recorded transactions are stored in the database and further process is performed and completed by the software so partial error can never take place.

Use of Internal check Since the complete work of accounting performed by several clerks so error and fraud may take place unless internal check technique is used in the organization

Since computer is a machine so while performing accounting work it does not show any short of business. Hence internal check is not required here.

Need of opening entry After the close of accounting year, final accounts are prepared. Next year, opening entries are passed in the journal.

No opening entry is passed here. The process of closing of accounts is performed by the software itself and opening balances of accounts for next year are automatically stored in database.

Structured Query Language:

It is a 4th generation Computer Programming language which greatly facilitates the writing of a program or application by the programmer in one tenth of time taken in older & third generation language like COBOL.

VALUE BASED QUESTION;Q. Mr. Paul uses his office computer for his personal use. Is he right in his conduct?Ans. Mr. Paul does not follow ethical value as he should not use office computer for personal use.Q. Mr. Rohit an Accountant of a company uses his office computer for checking of accuracy of accounts regularly. Which values are affected?Ans. Honesty and Sincerity.

Questions;Q1. Which of the following is not an operating software?A.MS Dos B. Windows XP C. MS WordAns. B. Windows XPQ2. Which of the following is not an input device?Scanner B. Keyboards C. MonitorsAns. C. MonitorsQ3. Which of the following is an output device?

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Scanner B. Printer C. Smart card readerAns. B. PrinterQ4. Which of the following is secondary storage device?RAM B.ROM. C. Pen driveAns. C. Pen driveQ5. What is DBMS?Ans. Database management system is the electronic data processing of information stored in the database . DBMS is a set of programs that controls and manages creation, utilization and maintenance of database of a business organization

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· web viewwhen cheque is received- cash a/c dr (b) when cheque is deposited - creditor a/c dr to...

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