ELEMENTARY PREPARATION OF BOOKS

OF ACCOUNTS
BASICS - JOURNAL, LEDGER AND TRAIL BALANCE

FINAL ACCOUNTS OF :
NON MANUFACTURING ENTITIES

TRADING ACCOUNT,
PROFIT & LOSS ACCOUNT
AND BALANCE SHEET WITH ADJUSTMENTS.

Dr. Subhash Chandra Soni

Ph.D. , M.Phil.(Accounting), MBA(Finance), M.Com (ABST), M.Com (Bus. Adm.), B.Com
INDEX
 Elementary Preparation of Books of Accounts
 BASIC CONCEPTS
 CLASSIFICATION OF ACCOUNTS

 JOURNAL

 LEDGER

 TRIAL BALANCE

 FINAL ACCOUNTS
 Income Statement
 Position Statement

 Format of Trading account, P&L account and Balance

Sheet
 Final account adjustments

 Numerical

 Recent amendment- format

BASIC CONCEPTS IN ACCOUNTS
ACCOUNTING PROCESS:
 Transaction (Financial nature)
 Recording ---- 'Journal'
 Classification ---- 'ledger'
 Summarisation ---- Trial Balance trading & profit & loss a/c & balance
sheet.
 Analysis & interpretation ---- Ratio Analysis, Cash flow statement,
fund flow statement
Accounting - It is an art of recording, classifying,
summarizing, analysis & interpretation of financial
data which are in monetary form in a significant
manner & communicating the result to the end
users.
 Capital- Amount invested by the OWNER IN BUSINESS IN MONEY FORM OR
ASSET FORM IS KNOWN AS CAPITAL. It is the liability of business towards
owners because in accounting business & owner are treated separately.

 Liability- The amount which the firm has to pay/ obligation to pay to outsiders. It is
further divided into:
A) Long term liability-Those liabilities which arc to be repaid after a longer period
of time, say generally after one year, are known as long term liabilities.
B) Short term liability/current liability- Those liabilities which are to be repaid
within a short period of time, say generally within one year are known as short
term liabilities. cg. Short term loans, creditors, bills payable, bank overdraft.

 Assets: Assets are valuable properties owned by business through which a it is able
to get either cash or benefit in near future-Assets are further classified into :-
A) Fixed assets- Those assets which are held for a longer duration of time,
held by a firm for a longer duration smoothly & efficiently & generally are not
meant for resale. They are further categorized into:-
 Tangible fixed asset- which have some physical existence Eg.- land&
building, Plant & Machinery, Motor vehicle, furniture
 Intangible fixed asset- which do not have some physical existence. Eg -
goodwill, patents, trademark, copy right etc.
B) Current assets- Those assets which are held by a firm for shorter duration
are generally meant for resale or for converting into cash. Eg. Cash in
hand, cash at bank, stock of goods, debtors, bills receivable etc.
 Debtors- These are those persons to whom goods are sold on credit by business
and from whom amount is receivable. They are current assets.

 Creditor - These are those persons to whom goods are purchased on credit and to
whom money is payable. They are current liabilities.

 Goods – Are the articles in which the business deals in which are either purchased
or manufacture for the purpose of selling them in market. They are current assets.

 Stock – Value of goods left unsold in the business at any point of time is known as
stock. If it is measured at the beginning of the year, it is known as opening stock and
if it is measured at the end of the year it is known as closing stock.

 Purchases- The term purchases are used only for purchases of goods. Purchase
can be either for cash known as cash purchases or for credit known as credit
purchases.

 Sales: The term 'sales' is used only for sale of goods. Sales can be either for cash
known as cash sales or for credit known as credit sales.

 Purchase Return-Those goods which were previously purchased but due to some
defect or for any other reason, these are returned back to the creditor is known as
purchase return. It is also known as 'return outward‘
 Sales Return-Those goods which were previously sold but due to some defect
or for any other reason, these are returned back by the customer or debtor is
known as sales return. It is also known as 'return inward'.

 Proprietor- Proprietor means the owner of the business who makes investment
& bears all the risk

 Drawings-The amount withdrawn by the owner from business in cash or assets

for his personal use is own as drawings. It reduces capital.

 Bad Debts- Amount irrecoverable from a debtor when he is declared insolvent

by the court of law is known as bad debts. It is a loss for business.

 Bad Debts Recovered: It is an amount which was previously declared as bad

debts but is recovered now. It is an income for business.

 Bills Receivable- It is a legal instrument which is generally received from

debtors against which money is recoverable on a certain future date, It is our
current asset.

 Bills Payable- It is a legal instrument which is generally issued to a creditor

against which money is payable on a certain future date. It is our current liability.
CLASSIFICATION OF ACCOUNTS:
I- MODERN CLASSIFICATION
I- MODERN CLASSIFICATION:
 The modern approach, classifies accounts into five categories of accounts:
1) Assets Accounts 2) Liabilities Accounts 3)Capital Accounts 4)Revenue Accounts 5)Expenses
Accounts

1. Assets Accounts:
 These accounts are accounts of assets and properties such as land and building, plant and machinery, furniture, patents,
inventory, etc.
 Rule of Debit and Credit: Increase in assets are debits; decreases are credits.

2. Liabilities Accounts:
 These accounts are accounts of lenders, creditors for goods, creditors for expenses, etc.
 Rule of Debit and Credit: Increases in liabilities are credits; decreases are debits.

3. Capital Accounts:
 They refer to the accounts of the proprietor / partners who invested money in the business.
 Rule of Debit and Credit: Increases in owner’s capital are credits; decreases are debits.

4. Revenue Accounts:
 These are accounts of incomes and gains. Examples are: sales, interest received, discount received, royalty received, etc.
 Rule of Debit and Credit: Increases in revenues or income are credits; decrease are debits.

5. Expense Accounts:
 The accounts which show the amount spent or even lost in carrying on business. Examples are: purchases account, wages paid,
depreciation, rent account, loss by fire account, etc.
 Rule of Debit and Credit: Increases in expenses are debits; decreases are credits.
II- TRADITIONAL CLASSIFICATION:
PERSONAL ACCOUNTS IMPERSONAL ACCOUNTS (REAL AND NOMINAL)

1-Personal Account:
 Keeping the record of the supplier & customer in the books of accounts is known
as personal a/c.
 Rule of personal a/c
“Debit the receiver ,
Credit the giver”

2-Real Account :-
 Real account deals with the assets.
 Rule of Real a/c
“Debit what comes in
Credit what goes out”

3-Nominal Account :
 It deals with losses, expenses, income & profit.
 Rule of Nominal a/c
Debit all losses & expenses,
Credit all incomes & gains.”
JOURNAL:
Journal is a book of account where all the business
transactions are recorded in a chronological order. It
serves as a memory for posting ledger. In a journal, each
transaction is recorded with details of its debit & credit aspect
with narration.
There are 5 columns in a journal : Date, particulars, Ledger folio, Amount debit & Amount
credit.
 (i) Date: It indicate date of transaction.
 (ii) Particulars: It indicate the details of the transaction followed by narration.
 (iii) Ledger folio: It indicate the page number where the relevant account will be
found in the ledger.

Date Particulars L.F Debit (amount) Credit (amount)

PRACTICAL PROBLEM 1
Pass the Journal Entry of the following:-
1) Started business with cash Rs. 50000

2) Purchased goods from Mohan worth Rs. 20000

3) Sold Goods for Rs. 25000

4) Paid to Mohan by cheque Rs 19500 in full

settlement.
5) Paid salary to clerk Rs. 2000

6) Sold goods to Ravi for cash Rs 10000

PRACTICAL PROBLEM 2
Enter the following transactions of Mahendra &Co. in
Journal:
2014
March 1 Started business with cash Rs. 40,000
March 2 Purchased goods from Mohan Rs. 20,000
March 4 Sold goods to Sohan for Cash Rs. 25,000
March 7 Deposited in Punjab National Bank Rs.
3,000
March 8 Sold goods to Vikram Rs.15,000
March 25 Sold goods to Chetan for Rs.15,000
 LEDGER

Ledger: -It is the most important book of accounts. It is also called as

PRINCIPLE BOOK OF ACCOUNTS. It is maintained in ‘T’ form, which is
divided into two sides. The left hand side is debit & right hand side is
credit. There are 4 columns in each side which include Date, Particulars,
L.F. & Amount. In ledger, various accounts are maintained under different
classified heads, so as to provide each & every accounting information
relating to the financial year.
 Example:- Cash A/c, Bank A/c , Capital A/c
 Posting to ledger from Journal :
 In a journal all transactions are recorded with debit & credit aspect of
each transaction i.e. an account which is debited in journal, means that
transaction should be posted to the debit side of that account in ledger.
Similarly a account which is credited means that transaction will be
recorded on the credit side of that account in ledger.
 Dr. --------A/C Cr.
Date Particulars L. Amount Date Particular L.F Amount
Cr.F
TRIAL BALANCE
Trial Balance is a statement, prepared with the debit and credit balances of ledger
account to test the arithmetical accuracy of the books. All the organisations after
completion of posting from Journal to subsidiary books and hence to the Ledger,
want to verify the accuracy of the book of accounts. For this, a statement is
prepared wherein the balances of all the accounts in the ledger are incorporated.
The statement so prepared is called ''Trial Balance''.

 OBJECTIVE OF PREPARING THE TRIAL BALANCE:

 The trial balance helps to establish arithmetical accuracy of the books.
 Financial statements are normally prepared on the basis of agreed trial
balance, otherwise the work may be cumbersome.
 The trial balance serves as a summary of ledger.

Trial Balance
as on................

S. No. Name of Account L.F Debit Credit

(Total or Balance) Rs. (Total or Balance) Rs.
FINAL ACCOUNT
Every businessman wishes to know the profit or
loss of his business after a certain period and also
the state of affairs to judge whether his business is
financially sound or weak.

It is provided by two statements:

 Income Statement (i.e. Trading a/c and P&L a/c) : It

disclose profit and loss derived during a certain
period.

 Position Statement (i.e. Balance Sheet ): It present the

financial position of the business on a certain date.
Trading Account for the year ending 31st March, ……….
Particulars Amount Particulars Amount
Rs. Rs.
To Opening Stock Rs. - Rs.
To Purchases - By Sales -
Less: Purchases Returns - - Less: Sales Returns - -
By Closing Stock -
To Direct Expenses: *By Profit and Loss a/c
Wages - (If gross loss)
Carriage and Cartage -
Manufacturing Expenses -
Coal, Water and Gas -
Factory Lighting -
Fuel and Power -
Motive Power -
Carriage and Freight -
Wages and Salaries -
Octroi -
Factory, Rent and Taxes -
Excise Duty -
*To Profit and Loss a/c (If gross -
profit)
…………… ………….
 Profit and Loss Account for the year ending 31st March, ………
Dr. Cr.

Particulars Rs. Particulars Rs.

To Gross Loss (If any ) - By Gross Profit (if any) -
To Advertisement - By Interest received -
To Traveller’s Salaries - By Discount received -
To Expenses & Commission - By Commission received -
To Salesman’s Salaries, - By Rent received from Tenant -
Expenses & Commission - By Income from Investment -
To Bad debts - By Miscellaneous Receipts -
To Godown Rent - By Apprenticeship Premium -
To Export Expenses - By Dividend on Shares -
To Packing Charges - By Interest on Debentures -
To Carriage outwards - By Income from any -
To Insurance - Other source -
To Agent’s Commission - By Net loss transferred to capital a/c
To Upkeep of Motor Lorries - (If Net Loss) -
To Rent, Rates & Taxes -
To Heating and Lighting -
To Office Salaries and Wages -
To Printing & Stationary -
To Postage and Telegrams -
To Telephone Charges -
To Legal Charges -
To Audit Fee -
To Insurance -
To Upkeep of Motor Car -
To General Expenses -
To Depreciation -
To Repairs and maintenance -
To Interest on Capital -
To Interest on Loans -
To Discount allowed -
To Loss by Fire (Not covered by insur.) -
To Cashier Defalcations -
To Net Profit transferred to capital a/c
(If Net Profit) -
- -
 Balance Sheet as on 31st March, 2007

Liabilities Amount Assets Amount

Bills Payable Cash in Hand
Sundry Creditors Investments
Bank Overdraft Bills Receivable
Loan Sundry Debtors
Capital Stock in hand
(as on 1.4.2006) Loose Tools
Add: Net Profit Horses and Carts
Less: Drawings Motor Car
Furniture
buildings
FINAL ACCOUNT ADJUSTMENTS:
 Outstanding Expenses: Expenses due but not paid.
Example- Salary of last two month not paid yet.
 B/S liability side
 + Dr side of Trading or P&L a/c

 Prepaid Expenses: Expense paid in advance.

Example- Salary of April’18 paid in March’18 as advance.
 B/S Asset Side
 - Dr side of Trading or P&L a/c

 Accrued Income: Income due but not received.

Example- Interest on Investment due but not received.
 B/S Asset Side
 + Cr side of P&L a/c

 Unearned Income: Income not earned yet but received in advance.

Example- Commission received in advance and goods not sold yet.
 B/S Liability side
 - Cr side of P&L a/c
 Depreciation :
 - Concern Fixed Asset in B/S Asset side
 Dr side of P&L a/c

 Interest on Capital :
 + Capital in B/S Liability side
 Dr side of P&L a/c

 Interest on Drawings:
 - Capital in B/S Liability side
 Cr side of P&L a/c

 Closing Stock:
 B/S Asset side
 Cr side of Trading a/c
 Drawings(goods):
 - Capital in B/S Liability side
 - Purchases Dr side of Trading a/c

 Bad debts (Further)

 -Debtors in B/S Asset side
 +Bad debts in P&L Dr side

 Provision for bad & doubtful debts (New PBDD):

 -Debtors in B/S Asset side
 +Bad debts in P&L Dr side

 Provision for discount on Debtors

 -Debtors in B/S Asset side
 P&L Dr side

 Reserve for discount on Creditors

 -Creditor in B/S Liability side
 P&L Cr side
 Approval goods
 -Debtor in B/S Asset side
 - Sales in trading a/c Cr side
 + Closing stock in trading a/c Cr side
 + Stock in B/S asset side

 Managers Commission:
 B/S Liability side as O/S Mgr Com.
 Dr side of P&L a/c
 Before charging such commission
Mgr Com.= NP (before Mgr Com)*rate/100
 After charging such commission
Mgr Com.= NP (before Mgr Com)*rate/100+rate

 Bill discounted but yet not matured:

Shown as contingent liability as foot note to B/S.
Ques. The following balances were ascertained from the account books of Gopal on 31st
December, 2007.

Rs. Rs.
Capital Account - 50,000
Opening Stock 10,000 -
Discount 500 -
Goodwill 10,000 -
Provision for doubtful debts - 3,000
B/R and B/P 3,000 2,000
Cash in Hand 1,000 -
Wages 9,000 -
Purchases & Sales 80,000 1,20,000
Returns 2,000 3,000
Carriage Inwards 2,000 -
Factory Rent 1,500 -
Commission - 2,000
Machinery 20,000 -
Furniture 6,000 -
Debtors & Creditors 30,000 2,000
Insurance Premium 1,800 -
Salary – 11 months 4,400 -
Loan to Ram on 1-7-2007 at 12% p.a interest 10,000 -
Trademark 8,800 -
2,00,000 2,00,000

Taking into consideration the following adjustments, prepare Trading and Profit and Loss
Account for the year ending 31st December, 2007 and a balance sheet on that date:

1. Closing Stock Rs. 30,000.

2. Goods costing Rs. 1,800 was sent to a customer on 31st December, 2007 on sale or
approval which was recorded as sales for RS. 2,000 by mistake.
3. Charge depreciation @ 10% p.a on machinery and furniture.
4. Interest on Capital @ 10% p.a is payable.
5. Write off further bad debts for Rs. 500 and increase the provision for doubtful debts by
Rs. 1,500.
6. A bill for Rs. 2,000 was discounted on 20th December, 2007 the due date of which is 23rd
January, 2008.
7. ¼ part of the commission relates to the next year.
Solution:

Trading and Profit and Loss Account

for the year ending 31st december, 2007.

Rs. Rs.
To Opening Stock 10,000 By Sales 1,20,000
To Purchases 80,000 Less: Goods sent on
Less: Returns 3,000 77,000 approval 2,000
To Wages 9,000 1,18,000
To Carriage inwards 2,000 Less: Returns 2,000 1,16,000
To Factory Rent 1,500 By Closing Stock 30,000
To Gross Profit c/d 48,300 Add: Cost of Goods
Sent on approval 1,800 31,800
1,47,800 1,47,800
To Discount 500 By Gross Profit b/d 48,300
To Bad debts 500 By Commission 2,000
Add: New Provision 4,000 Less: Unearned 500 1,500
4,500 By Interest accrued (for 6 600
months)
Less: Old Provision 3,000 1,500
To Insurance premium 1,800
To Salaries 4,400
Add: Outstanding 400 4,800
To Depreciation:
On Machinery 2,000
On Furniture 600 2,600
To Interest on Capital 5,000
To Net Profit transferred 34,200
to Capital a/c
50,400 50,400
 Balance Sheet as at 31st December, 2007.

Rs. Rs.
B/P 2,000 Cash in Hand 1,000
Creditors 20,000 B/R 3,000
Outstanding Salary 400 Debtors 30,000
Un-earned Commission 500 Less: Sale on approval 2,000
Capital 50,000 28,000
Add: Interest on Capital 5,000 Less: Further Bad Debts 500
Add: Net Profit 34,200 89,200 27,500
Less: Provision for Bad 4,000 23,500
Debts
Loan to Ram 10,000
Add: Interest accrued 600 10,600
Stock in hand 30,000
Add: Stock with 1,800 31,800
customer
Trade Mark 8,800
Furniture 6,000
Less: Depreciation 600 5,400
Machinery 20,000
Less: Depreciation 2,000 18,000
Goodwill 10,000
1,12,100 1,12,100
 Q2. The following balance have been from the accounts books of Prateek on 31st March,2010:

Rs. Rs.
Opening stock 34,000 Bad debts provision 3,000
Purchases 3,70,000 Stable expenses 5,000
Sales 5,50,000 B/P 12,000
Selling expenses 30,000 Bank loan 20,000
Capital 2,50,000 B/R 18,000
Creditors 60,000 Carriage & Horse 7,000
Returns inwards 4,000 Fire Insurance Premium 2,000
Fuel &Power :Factory 16,000 Returns Outward 2,000
Salaries & wages 47,000 Debtors 87,000
Interest on bank loan 2,000 Machinery 1,00,000
Commission received 3,000 Building 1,40,000
Bad debts 2,000 Drawings 30,000
Cash in hand 6,000
Other information:

1. On 31st March, 2010 the stock was Rs. 49,400.

2. Credit purchases of Rs. 1,000 and credit sales of Rs. 3,000 were not recorede in account
books.
3. Prepaid fire insurance premium Rs. 500, outstanding interest on bank loan Rs.400, and
accured commission Rs. 1,000.
4. The provision for bad debts o debtors is to be kept at 5%.
5. Charge depreciation on buildings at 5% p.a. and on machinery at 10% p.a.

Prepare Trading Account, Profit and Loss Account for the year ending 31st March, 2010 and a
Balance sheet as on that date.
Solution: Trading and Profit & Loss Account for the year ending 31st December, 2007.

Rs. Rs. Rs. Rs.

To Opening Stock 34,000 By Sales 5,50,000
To Purchases 3,70,000 Add: Additional Sales 3,000
Add: Additional 1,000 5,53,000
Purchases
3,71,000 Less: Returns 4,000 5,49,000
Less: Returns 2,000 3,69,000 By Closing Stock 49,400
To Factory Fuel 16,000
and Power
To Gross Profit c/d 1,79,400
5,98,400 5,98,400
To Selling 30,000 By Gross Profit b/d 1,79,400
Expenses
To Salaries & 47,000 By Commission 3,000
Wages
To Interest 2,000 Add: Accrued 1,000 4,000
Add: Outstanding 400 2,400
To Stable Expenses 5,000
To Insurance 2,000
Less: Prepaid 500 1,500
To Bad debts 2,000
Add: New 4,500
Provision
6,500
Less: Old 3,000 3,500
Provision
To Depreciation:
On Building 7,000
On Machinery 10,000 17,000
To Manager’s 7,000
Commission
Rs.(10 *
77,000/110)
To Net Profit 70,000
transfered to
Capital a/c
1,83,400 1,83,400
 Balance Sheet
As at 31st December, 2007

Rs. Rs. Rs. Rs.

B/P 12,000 Cash in Hand 6,000
Creditors 60,000 B/R 18,000
Add: 1,000 61,000 Debtors 87,000
Additional for
Purchases
Outstanding 400 Add: 3,000
Interest Additional for
Sales
Outstanding 7,000 90,000
Manager’s
Commission
Less: 4,500 85,500
Provision
Bank Loan 20,000 Stock in 49,400
Trade
Capital 2,50,000 Accrued 1,000
Commission
Add: Net 70,000 Prepaid 500
Profit Insurance
3,20,000 Cartage & 7,000
Horses
Less: 30,000 2,90,000 Machinery 1,00,000
Drawings
Less: 10,000 90,000
Depreciation
Building 1,40,000
Less: 7,000 1,33,000
Depreciation
3,90,400 3,90,400
Statement of Profit and Loss for the year ended , 31March,….

31st March,……..
I. INCOME Rs.
SaleslessReturns
Total
II. EXPENSES
PurchaseslessReturns
Increase in Stock
Wages
Carriage Inwards
Salaries
Rent and Taxes
GeneralExpenses
InsurancePremium
Provision for Bad and Doubtful Debts
Depreciation:
On Land and Buildings
On Plant and Machinery
On Furniture

III. Profit
BeforeTax (I-II)
Less:Provision for Tax
IV. Profit After Tax
 B alance Sheet

31 st March, …….
I. EQUITY AND LAIBILITIE S
1. S hareholder ’s Funds
a. S hare Capital
A uthorized
Issued and Subscribed
L ess: Calls in Arrears
b. Reserves and surplus:
Securities Premium
G eneral reserve
L oss for the year
2. Current Liabilities
Sundry Creditors
O utstanding Expenses:
Wages
Salaries
Rates and T axes
II. ASSETS
1. Non - Current Assets
a. Tangible fixed Assets:
Land and Buildings
L ess: Depreciation
P lant and Machinery
Less: Depreciation
F urniture
L ess: Depreciation
2. C urrent Assets
S toc k
D ebtors
L ess: Provision for Bad & Doubtful Debts
Bills Receivable
Unexpired Insurance Premium
C ash at Bank
C ash - in - Hand
Total