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Accounts 2nd Term Theory
Accounts 2nd Term Theory
ACADEMY CLASSES
ACCOUNTANCY & BUSINESS STUDIES By-Legacy Gupta
Term -2 theory
A bill of exchange is a binding agreement by one party to pay a fixed amount of cash to another party as
of a predetermined date or on demand
The specified amount is payable to the person whose name is mentioned in the bill or to his order or to the bearer.
Legal Document- It is a legal document, and if the drawee fails to make the payment, it will be easier for the drawer
to recover the amount legally.
Discounting Facility- In cases where the drawer is in immediate need of money, the bill can be converted into cash by
discounting it from a bank by paying some nominal charges.
Endorsement Possible- This bill of exchange can be exchanged from one individual to another for the adjustment of
the debt.
Mode of credit - The buyer can buy the goods on credit and pay after the period of credit with the help of bill of
exchange.
Promissory Note
the meaning of promissory note is ‘an instrument in writing (not being a banknote 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. However, according to the Reserve Bank of India Act, a promissory
note payable to bearer is illegal. Therefore, a promissory note cannot be made payable to the bearer.’
S. Basis of
Bills of Exchange Promissory Note
No. difference
1. Drawer The Drawer is the creditor. The Drawer is the debtor
It has three parties namely
It has two parties namely:
The drawer
2. No. of Parties The Maker
The drawee
The Payee
The Payee
Due Date It is the date on which the payment of the bill is due.
Days of Grace These are the three extra days added to the period of bill.
Date of Maturity The date which comes after adding three days of grace to the period of bill.
Discounting of Bill It means encashment of bill before the date of its maturity.
The bank deducts its charges from the bill.
Endorsement of Bill Endorsement means the transfer of bill or promissory note to another
person.
It is transferred on account of the settlement of debts and dues.
Bill Sent for When a bill is sent to the bank for collection with instruction, that it
Collection will be retained till the maturity date.
Bill will be realised on its due date. It is known as ‘Bill sent for
collection’.
Dishonour of Bill When payment is not made by the acceptor of the bill on its due date. It
is known as ‘Dishonor of Bill’.
Non-payment may be due to insufficient balance or insolvency.
Noting of a Bill On dishonour of a bill, when this fact is brought to the notice of a Notary
Public, it is termed as ‘Noting of a bill’.
Notary public charges to record or take a noting of dishonour.
Noting Charges It is the fee paid to the Notary Public for noting of dishonour of a bill.
When the Period of Bill is Given in In this case, the maturity date is calculated according to calendar
Months months.
Ignoring the number of days in a month.
3 days of the Grace period are added.
For example: – if a bill dated 4th May, 2017 is payable 3 months after date:-
= Then the maturity date will be 4th August 2017 + 3 Days of Grace = 7th
August 2017.
When the Period of Bill is Given in The maturity date will be calculated in days,
Days
This excludes the date of transaction but includes the date of payment.
3 days of the Grace period are added in this case also.
For example: -if a bill dated 5th June 2017 is payable after 65 days,
then the maturity date will be:-
When Maturity Date Falls on a National If the due date of the bill is on the national holiday
Holiday
Then the maturity day of the bill shall be the preceding business day.
Example:-If due date of the bill falls on 26th January (Republic Day), Why
then its due date will be 25th January.
need
If the due date is 15th August (Independence Day), then the due date Final
will be 14th August.
When the Maturity Date Has Been If the due date of the bill is declared as an emergency holiday,
DeclaredDate
Maturity as Emergency
in Case of Holiday
‘bill at Sight’ or ThenThe
thebill
due at date
sightofbecomes due be
the bill shall for after
payment,
1 dayas
from the date of
‘instrument Payable on Demand’. soon as it is presented for payment.
maturity.
Example:-
In caseifof ‘Instrument
the payable
due date of a bill ison demand’,
25th July Noit is declared as an
and
time for holiday,
emergency paymentthen
is mentioned.
the due date will be 26th July.
Such Bills are not entitled to the Days of Grace.
` Accounts?
To run a successful
Maturity Date in Case of ‘bill After Date’. In the case of ‘Bill after date,’ the time for business, it is essential
payment is mentioned. to keep a record of
Three Days of Grace is allowed on such a bill. reports, analytics,
information; as well as
Maturity Date in Case of ‘bill After Sight’. In case of ‘Bill after Sight, payable at a fixed debts, assets, liabilities,
period ‘after sight’. and profits, which is the
The period begins from the date of accepting reason why accounting
the bill. is important for keeping
Three Days of Grace is allowed on such a bill. track of the business
activities
The following are the main objectives of final accounts: -
1. To determine gross profit and net profit of the business during the year.
2. To present the true financial position of the business on a given date.
3. To make effective control on financial activities of the business.
4. To make a summary presentation of all the financial transactions.
5. To communicate the operating results and financial position of the users.
6. To help in making a different financial decision to the users of accounting information.
CAPITAL EXPENDITURE - I T IS THE EXPENDITURE WHERE AMOUNT SPENT TO PURCHASE ASSETS WHICH
WILL INCREASE THE EARNING CAPACITY OF THE BUSINESS , benefit of
expenditure is received for more than one year. For example – purchase of machinery. Capital Expenditures are
shown in the balance sheet as assets.
Machinery ,building
Revenue expenditure – Revenue expenditure are those in which amount spend by organization to meet its
regular obligations such as salaries, rent, interest, other expenses. This will not increase the earning capacity if
the business however its helps in maintaining its earning capacity.
SALARY ,DEPRECIATION
(a) Only that portion of the expenditure should be charged to the profit and loss account which has facilitated the enterprise
to earn revenue during current year
(b) Remaining amount of expenditure should be carried forward to the next year and shown on the assets side of the balance
sheet.
Capital Receipt
Capital receipts are those irregular receipts that don’t affect profit or loss of the business; it either increases the liabilities (raising of loans)
or reduces the fixed assets (sale of fixed assets), so they will be shown in the balance sheet.
Capital receipts are not made available for distribution as profit to the owner.
Revenue Receipt
Revenue receipts are received in the normal and regular course of business like Receipts from sale of goods and rendering services to
customers. Income from non-operating business activities like income from investment i.e. interest and dividend received and rent received,
Commission and other fees received for non-operating business etc. These receipts increases profit and are shown on the credit side of the
Order of Liquidity
1. The assets are arranged in the order of their permanence i.e., the least liquid asset (e.g., goodwill) is shown first
and the most liquid asset (e.g., Cash-in-hand) is shown last.
2. The urgent payment to be made (e.g., short-term creditors) is shown last.
Meaning of Adjustment entries: Those entries which need to be passed at the end of the accounting year to show the
accurate profit or loss and fair financial position of the business.
Need of Adjustment: There are number of transactions that may not find the place in the Trial Balance due to any reason
such as Closing Stock (because it is valued at the end of the year), Manager’s Commission based on Net profits (because
its calculation requires preparation of Income Statement first). These transactions can only be taken into account by
passing Adjustment entries so that their impact on the profitability and financial position can be shown.
Closing Stock: the closing stock represents the cost of unsold goods lying in the stores at the end of the accounting
period.
Outstanding Expenses: When expenses of an accounting period remain unpaid at the end of an accounting period, they
are termed as outstanding expenses.
As they relate to the earning of revenue during the current accounting year, it is logical that they should be duly charged
against the revenue for computation of the correct amount of profit or loss.
Prepaid Expenses: At the end of the accounting year, it is found that the benefits of some expenses have not yet been
fully received; a portion of its benefit would be received in the next accounting year. This portion of expenses, is carried
forward to the next year and is termed as prepaid expenses.
Accrued Income: It may sometime happen that certain items of income such as a interest on loan, commission, rent, etc.
are earned during the current accounting year but have not been actually received by the end of the same year. Such
incomes are known as accrued income. .
Income Received in Advance: Sometimes, a certain income is received but the whole amount of it does not belong to
the current period. The portion of the income which belongs to the next accounting period is termed as income received in
advance or an Unearned Income.
Depreciation: It is the decline in the value of assets on account of wear and tear and passage of time. It is treated as a
business expense and is debited to profit and loss account.
This, in effect, amounts to writing-off a portion of the cost of an asset which has been used in the business for the purpose
of earning profits.
Bad Debts : The debtors from whom amounts cannot be recovered are treated in the books of accounts as bad and are
termed as bad debts.
Further Bad Debts : These Bad debts is a loss that occurred after reparation of Trial Balance. Further bad debts be
added in the bad debts already appearing in the Profit and Loss Ae and Debtors would be reduced with the same amount.
Provision for Bad Debts : In the balance sheet, debtors appears on the assets side of the Balance Sheet, which is their
estimated realisable value during next year. It is quite possible that the whole of the amount may not be realized in future.
However it is not possible to accurately know the amount of such bad debts.
Hence, a reasonable estimate of such loss is provided in the book. Such provision is called provision for bad debts.
Provision for doubtful debts is shown as a deduction from the debtors on the asset side of the balance sheet.
Provision for discount on Debtors : Discount is allowed to customers to encourage them to make prompt payment. The
discount likely to be allowed to customers in an accounting year can be estimated and provided for by creating a provision
for Discount on debtors.
Provision for discount on debtors is made on good debtors which are arrived at by deducting further bad debts and
provision for bad debts out of Debtors shown in the Balance sheet.
Key Points:
1. If closing stock is shown in Trial Balance then it will be shown in balance sheet only. It is assumed that
purchases amount already gets adjusted in trial balance.
2. Salary and wages will be shown in profit and loss A/c debit side (assuming that salary is prominent) while wages
and salary will be shown in trading A/c debit side, (wages are prominent).
3. Freight, carriage, cartage will be shown in Dr. side of trading A/c. if inward word attached with these then it also
debited to trading A/c, if outward word attached with these item then it will be debited to profit and loss account.
4. Any expenses related to factory are debited to trading account like factory lighting, factory rent if factory word is
not given then lighting and rent will be debited to profit and loss account.
5. Trade expenses always debited to profit and loss A/c not as name indicate trading A/c.
6. Packaging material: cost of packaging material used in product are direct expenses as it refers to small
containers which form part sold, it will debited to trading A/c.
7. Packing: the packing refers to the big containers that are used for transporting the goods and regarded as
indirect expenses and debited to profit and loss account.
8. Adjusted purchases mean the amount of purchases is adjusted by way of adding opening stock and reduced by
the amount of closing stock, e.g., purchases Rs. 1,00,000; opening stock Rs. 12,000, closing stock Rs. 8,000.
Calculate adjusted purchases.
Adjusted purchases = purchases + opening stock - closing stock
= Rs. 1,00,000 + Rs. 12,000 - Rs. 8,000 = Rs. 1,04,000
When adjusted purchases is given in trail balance, then there is no need of debiting opening stock and crediting
closing stock in trading A/c.
In this case closing stock will be shown in balance sheet only.
Introduction: Some small size business entities do not follow the double entry system of maintaining the accounting
records instead they maintains books of accounts under the system Accounting from incomplete records. The system in
which no set rules of double entry system are followed is called Accounts from incomplete records. Sometimes, it is also
termed as ‘Single Entry System’.
Under this system only the following accounts are maintained:
Cash book
The Personal A/C
Some Real A/C according to need
Both the aspects of only certain transactions are recorded e.g. cash received from debtors or cash paid to creditors.
One aspect of some transactions are recorded e.g. cash paid for purchase of goods.
Some events are not recorded at all e.g. depreciation charged on fixed assets.
Points to Remember
Accounting Principles and Accounting Standards are not followed properly under this system.
Original vouchers provide the basis for preparing the accounts.
This method is highly flexible because it can be adjusted according to the needs of the organisation.
Profit or loss is ascertained by either ‘Statement of Affairs method’ or ‘Conversion into Double Entry System
Method.’
1. Simple Method: It is an easy and simple method as under this method one does not require any special
knowledge of the accounting principles for recording of transactions.
2. Less Expensive: As under this method only few accounts are prepared, therefore business firm does not require
more staff for recording the transactions.
3. Flexible Method: This method is highly flexible because it can be adjusted according to the needs of the
organisation.
4. Suitable for Small Concerns: This method is most suitable for small business concerns which have mostly cash
transactions and very few Assets & Liabilities.
5. Easy to calculate profit or loss: It is easier to calculate profit or loss under this method.
1. Incomplete method: This method is an incomplete method of maintaining the accounting records as both the
aspects, debit and credit, of every transaction is not recorded.
2. Arithmetical Accuracy cannot be checked: Under this system, no real and nominal accounts are maintained. So
a trial balance cannot be prepared to check the arithmetical accuracy of the books of accounts.
3. True Profit or Loss cannot be ascertained: As under this system all the accounts are not prepared like Nominal
Account which is the base for calculating actual profit is not prepared. So the profit ascertained under this method
is not reliable.
4. True financial position of the business cannot be Judged: Since real accounts are not maintained, it is not
possible to prepare a balance sheet showing the true financial position of the business.
5. No recognition in the assessment of Income Tax & Sales Tax: The system fails to reveal the true profit and
sales of a business. As such, the accounts maintained under this system are not accepted by Tax authorities.
6. Preparation of Trial Balance not Possible: This method does not record both the aspect of a transaction. So trial
balance is not possible as all debit and credit items was not there.
A computerised accounting system is software programmes designed to store all the firm’s
accounting transactions
1. Bio-data of various applicants when the computer is used for recruitment of staff.
2. Marks obtained by various students in various subjects when the computer is used to prepare
results.
6. Connectivity: the manner in which a particular computer system is connected to others (say through
telephone lines, microwave transmission satellite link etc.) is called element of connectivity.
1. High Speed: Computers are known for their lightening speed of operations and requires less time in
comparison to human beings in performing a task. Most of modern computers perform millions of
operations in one second.
2. Accuracy: Computers are extremely accurate. Their operations are error free and as such the
information obtained from it is highly reliable. But sometimes errors occur due to bad programming or in
accurate data feeding. In computer terminology, it refers is called Garbage in, garbage out (GIGO).
3. Reliability: Its reliability refers to the ability with which computer remains functional to serve the user.
Unlike human beings these are immune to tiredness, boredom or fatigue, and can perform jobs of
repetitive nature any number of times.
4. Versatility: It refers to the ability of computers to perform a variety of tasks. It can switch over from one
programme to another. The same computer can be used for accounting work, stock control, sales
analysis and even for playing games by the use of different softwares.
5. Storage: Memory or Storage capacity of a computer is so large that it can store any volume of
information or data. Such data can be stored in it on magnetic discs, floppy discs, punched cards or
microfilms etc. The information stored can be recalled at any time and also correction can be done
within no time.
1. Lack of Common sense: Since computer works according to the stored programms, it is simply lack of
common sense.
2. Zero I.Q.: Computers are dumb devices with zero Intelligence Quotient (IQ). They can’t visualize and
think what exactly to do under a particular situation unless they are programmed to tackle that situation.
3. Lack of Feeling: Computers lack feelings like human beings because they are machines. No computer
passes the equivalent of a human heart and soul.
4. Lack of Decision-making: Decision making is a complex process involving information, knowledge,
intelligence, wisdom & ability to judge, Computers cannot make decisions of their own.