Accounti NG Syste M

Uni t 2 Accounti ng Theory and Practi ces MBA 1ST SE M
Doubl e entry Syste m

ACCOUNTI NG SYSTE M
Syst e ms of accounti ng refer t o t he t wo syst e ms of recor di ng t he fi nancial transacti ons i n
t he books of account s. These t wo syst e ms are t he si ngl e entry syst e m and t he doubl e or
dual entry syst e m. Let us learn about bot h i n brief.
Si ngl e Ent ry Syste m

Thi s syst e m is also known as pure entry syst em. It does not foll ow the traditi onal dual
recor di ng for mat. Inst ead, i n a si ngl e entry syst em, onl y a Cash Book will be mai nt ai ned.
Al l cash transacti ons wi ll be recor ded i n t he Cash Book. No ot her Ledgers fi nd a pl ace i n
t his syst e m. All transacti ons of personal nat ure are si mpl y recor ded i n a rough book.
As you can noti ce, t his met hod is not ver y sci entific. So it is rarel y used i n t he moder n days.
We use t he si ngl e entry syst e m onl y t o prepare fi nal account s from recor ds t hat are
i nco mpl et e for some reason. So me ot her salient feat ures of t he si ngl e entry syst e m are,
 Si nce onl y one cash book is kept, personal and busi ness transacti ons will be
recor ded t oget her
 Real and No mi nal account s will be i gnored by thi s syst e m
 Pr ofit or Loss can be ascert ai ned but we cannot represent t he fi nanci al positi on of
t he or gani zati on
 No trial bal ance is prepared, so arit hmeti cal accuracy of account s cannot be verified.
Doubl e Ent ry System

Thi s is t he more traditi onal and conventi onal syste mfor recor di ng transacti ons i n fi nanci al
accounti ng. Thi s is a scientific met hod whi ch has some rul es and pri nci ples whi ch must be
foll owed. The basi c essence of t he doubl e entry syst e mis t hat ever y transacti on will affect
t wo account s. Thi s is kno wn as t he debit and credit rul e – ever y credit entry, t here must be
a correspondi ng debit entry.
The doubl e entry syst em i s t he one wi del y used and recogni zed i n t he accounti ng worl d.
So me salient feat ures of t his syst e m are,
 Al l t hree t ypes of account s are mai nt ai ned in t his syst e m – real, no mi nal and
personal
 The arit hmeti c accuracy of t he fi nanci al recor ds are verified by preparing t he tri al
bal ance
 The syst e m does not have many modifi cati ons.

 It all ows for t he preparati on of t he bal ance sheet whi ch will refl ect the fi nanci al
positi on of t he or gani zati on
 Easy t o det ect frauds and errors i n t his doubl e entry syst e m
Di fferences bet ween si ngl e entry and dual entry syste ms

Si ngl e Ent ry Syste m Doubl e Ent ry System
It is fairl y si mpl e and unco mpli cat ed i n nat ure. It is a more sci entific and co mpl ex appr oach t o
accounti ng.
It is an i nco mpl et e recordi ng of transacti ons It is a co mpl et e recor d of t he transacti ons
In t his syst e m, it is difficult t o i dentify errors Much easi er t o spot errors or det ect fraud under
and possi bl e frauds t his syst e m.
Onl y t wo t ypes of account s are kept – personal Al l t hree t ypes of account s have t o be
and cash mai nt ai ned – Personal, No mi nal and Real
Thi s syst e mis not suitabl e for tax pur poses Syst e m all ows for easy det er mi nati on of taxes
Does not all ow for an ascert ai nment of t he By usi ng t his syst e mt he fi nanci al positi on of t he
fi nanci al positi on of t he organi zati on at t he end or gani zati on can be det er mi ned wit h accuracy
of t he accounti ng peri od.
TYPES OF ACCOUNTI NG
Types of Accounti ng
1. Fi nanci al Accounti ng
Fi nanci al Accounti ng ma y be defi ned as t he process of recor di ng, cl assifyi ng,
su mmari zi ng, anal yzing and i nt erpreti ng t he fi nanci al transacti ons and
co mmuni cati ng t he results t hereof t o t he persons Int erest ed i n such i nfor mati on.
2. Ma nage me nt Accounti ng
Ma nage ment accounti ng refers t o manageri al pr ocesses and t echnol ogi es t hat are
focused on addi ng val ue t o organi zati ons by attaini ng t he effecti ve use of resources,
i n dyna mi c and co mpetiti ve cont ext s. Hence, Manage ment Accounti ng is a
di sti ncti ve for m of resource manage ment whi ch facilitat es manage ment’s ‘deci si on
ma ki ng’ by pr oduci ng inf or mati on for managers wit hi n an or gani zati on.
3. Cost Accounti ng
Cost Accounti ng is defi ned as "t he pr ocess of accounti ng for cost whi ch begi ns wit h
t he recor di ng of i nco me and expendit ure or t he bases on whi ch t hey are cal cul at ed
and ends wit h t he preparati on of peri odi cal state ment s and reports for ascert ai ni ng
and controlli ng costs. "
4. Res ponsi bility Accounti ng

Res ponsi bilit y Accounting is one of t he i mport ant t ools of Manage ment Accounti ng
i n whi ch perfor mance of each unit is j udged on t he basis of responsi bilit y &
account abilit y defi ned. Thi s bri ng s a sense of responsi bilit y & co mmi tme nt on t he
part of different i ndi vi dual s &i ncrease effici ency of each of t he m.
5. Hu man Resource Accounti ng

“ The pr ocess of i dentifyi ng and measuri ng dat a about hu man resour ces and
co mmuni cati ng t his i nfor mati on t o i nt erest ed parties ”Traditi onall y recogni zed 5’
m’ s- Man , Mat eri al ,Money, Machi ne and Manage ment -are essenti al for
devel op ment and gr owt h of moder n econo my. Man (i. e. non- manageri al wor k
forces and st aff) and Manage ment ( manageri al Personal) are coll ecti vel y known as
hu man resources Therefore hu man bei ngs are consi dered central t o achi eve ment of
pr oducti vit y. well above t he technol ogy and money.
THE CONCEPTS OF ACCOUNT, DEBI T AND CREDI T,

TYPES OF ACCOUNTS
Accounts & Cl assificati on of Accounts
The busi ness transacti ons are recor ded i n accounts. An account is an i ndivi dual recor d of a
person, fir m, or t hi ng, an ite m of i nco me or an expense. An account is prepared for each
t ype of asset, liabilit y, owner(s) equit y, revenue and expense.
Cl assificati on of Accounts
(1) Personal Account s:
Personal account s rel at e t o persons, debt ors or credit ors. Exa mpl e woul d be; t he account
of Ra m & Co., a credit cust omer or t he account of Jhaveri & Co., a suppli er of goods. The
capit al account is t he account of t he pr opri etor and, t herefore, it is also personal but
adj ust ment on account of profits and l osses are ma de i n it. Thi s account is furt her cl assifi ed
i nt o t hree cat egori es
(a) Nat ural personal accounts:
The t er m nat ural persons means persons who are t he creati on of God. For exa mpl e
pr opri et or’s account or t he account of say, Naresh a cust omer or suppli er It rel at es t o
transacti ons of hu man bei ngs li ke Ra m et c.
( b) Artifici al (legal) personal account:
For busi ness pur pose, busi ness entities are treat ed t o have separat e entit y. They are
recogni zed as persons in t he eye of la w for deali ng wit h ot her persons. For exa mpl e:
Gover n ment, Co mpani es (pri vat e or li mit ed), Clubs, Co- operati ve soci eties et c.
(c) Represent ati ve personal accounts:
These are not i n t he name of any person or Organi zati on but are represent ed as personal
account s. For exa mpl e: out st andi ng liabilit y account or prepai d account , capit al account,
dra wi ngs account. These are account s whi ch represent a cert ai n person or group of persons.
In books, t he na mes of t he parties will appear. Si nce t hese account s are many i n nu mber
but are of t he sa me nature, t hey are added and put under a co mmon title. For exa mpl e,
sal ary is outst andi ng t owar ds 15 e mpl oyees; t he a mount may be shown agai nst one na me
‘ Sal ary Out st andi ng’ representi ng all t he 15 e mpl oyees. Int erest out st andi ng, rent
recei vabl e is ot her such exa mpl es.
(2) I mpersonal Accounts:
Account s whi ch are not personal such as machiner y account, cash account, rent account
et c. These can be furt her sub- di vi ded as foll ows:
(a) Real Accounts:
Account s whi ch rel at e to assets of t he fir m but not debt. For exa mpl e, account s regar di ng
land, buil di ng, i nvest ment, fi xed deposits et c., are real account s. Cash i n hand and Cash at
t he bank account s are also real. Real account s may be of t he foll owi ng types:
i. Tangi bl e Real Accounts: These are accounts of such t hi ngs as are tangi bl e i. e.
can be seen, t ouched or felt physi call y. Exa mpl es – l and, buil di ng, furnit ure, cash
et c. ( Not e: pl ease not e t hat bank account is a personal account and is not a real
account because bank account is t he account of so me banki ng co mpany whi ch is an
artifici al person).
ii. Int angi bl e Real Accounts: These account s represent such t hi ngs as cannot be
t ouched but can be measured i n ter ms of money. Exa mpl e are, good will, trade mar ks,
pat ent ri ghts et c.
( b) No mi nal Accounts:
No mi nal account s are opened i n t he books t o expl ai n t he expenses and i nco mes. For
exa mpl e, i n a busi ness- sal ary is pai d t o t he e mpl oyees, rent is pai d t o t he landl or d, wages
Account s whi ch rel at e to expenses, l osses, gai ns, revenue, et c. Li ke sal ary account, i nt erest
pai d account, commi ssion recei ved account. The net result Of all t he no mi nal account s is
refl ect ed as profit or l oss whi ch is transferred t o t he Capit al account.
Rul e Of Debit & Credit i n bri ef
(1) Personal account is gover ned by t he foll owi ng two r ul es:
o De bit t he recei ver

o Cr edit t he gi ver
(2) Real account is gover ned by t he foll owi ng t wo rul es:
 De bit what co mes i n

 Cr edit what goes out
(3) No mi nal account is gover ned by t he foll owi ng two r ul es:
o De bit all expenses and losses

o Cr edit all i nco mes and gai ns.
Si gnifi cance of Debi t and Credit
(a) Debit i n Personal Accounts
(i) If t he account is ne w, debit i mpli es t hat t he person whose account is bei ng debit ed
has beco me debt or of t he busi ness.
(ii) If t he account is already t here and t he person whose account is bei ng debit ed is
already a debt or of t he busi ness, t he ne w debit impli es t hat t he su m due fromt hat person
has i ncreased.
(iii) If t he account of a person who is a credit or of t he busi ness is debited, t he debit

i mpli es t hat t he a mount due t o t hat person has decreased by t he a mount of debit. It is
also concei vabl e t hat t he credit or may beco me a debt or aft er t he debit entry; it will
happen when t he a mount of t he debit exceeds the a mount for whi ch t he person was a
credit or i mmedi at el y before t he debit. di mi ni shed by t he a mount of t he credit entry. It
is also possi bl e t hat a debt or may beco me a credit or after t he credit.
( b) Credit i n Personal Accounts
(i) If t he account is ne w, credit i mpli es t hat t he person whose account is bei ng credit ed
has beco me credit or of the busi ness.
(ii) If t he account of a credit or of t he busi ness is credit ed, it will mean that t he a mount
whi ch is due t o t hat person has i ncreased by t he a mount of t he fresh credit. Credit i n t he
account of a debt or of the busi ness si gnifi es t hat t he a mount for whi ch the debt or was
liabl e t o t he busi ness has
(c) Debit i n Real Accounts:
A debit i n real account means t hat eit her t he val ue of t he asset whose account is bei ng
debit ed has i ncreased or t he busi ness has acquired mor e of t hat asset.
( d) Credit i n Real Accounts:
A credit i n t he real account i mpli es t hat eit her t he val ue of t he asset whose account is bei ng
credit ed has decreased or t he busi ness has disposed of a part or t he whol e of t he asset for
t he a mount of t he credit.
(e) Debit i n No mi nal Accounts:
A debit i n no mi nal account si gnifies t hat t here has been an expense or loss of t he a mount
of t he debit or some i nco me or profit has di mi nished by t he a mount of the debit.
(f) Credit i n No mi nal Accounts:
A credit i n a no mi nal account i mpli es t hat t here has been an i nco me or a profit of t he a mount
of credit or some expense or l oss has di mi nished by t he a mount of t he credit.
THE ACCOUNTI NG PROCESS: J OURNALS ( DOUBLE

ENTRY SYSTEM)
Journal: The wor d ‘Jour nal means’ a dail y recor d. Jour nal is deri ved from Fr ench wor d
‘Jour’ whi ch means a day. It is a book of ori gi nal or pri me entry written up fromt he vari ous
sources docu ment s. Every transacti on is recor ded i n t he first i nst ance and t hen it is post ed
t o t he ledger. The for m i n whi ch it is recor ded is called j our nal entry and recor di ng or
ent eri ng a transacti on i n t he j our nal is known as Jour nali zi ng.
Rul es of Journali zing: - The pr ocess of passi ng an entry i n a j our nal is call ed
Jour nali zi ng. The rul e for Jour nali zi ng is sa me as t hat of rul es of debit and credit. It is based
on t wo facts.
1.) Based on Accounti ng Equati on:-
a) Increases i n assets are debits, decreases are credit.
b) Increased i n liabilit y are credit, decreases are debits.
c) Increases i n capit al are credits, decreases are debits.
d) Increases i n profits are credits, decreases are debits.
e) Increases i n expenses are debits, decreases are credits.
2.) Based on Traditional Approach:-
a) Debit t he recei ver, credit t he gi ver
b) Debit what co mes i n, credit what goes out.
c) Debit all expenses and l osses, credit all i ncome and gai ns.
Journal
Dat e Parti cul ar L. F De bit Credit
(i) Date: In t he first col u mn t he dat e of t he transacti on is ent ered-t he year is written at
t he t op ,t hen t he mont h and i n t he narrow part of t he col umn t he particular dat e is ent ered.
(ii) Parti cul ars: In t he second col u mn, t he names of t he account s i nvol ved are written;
first t he account t o be debit ed, wit h t he wor d "Dr " written t owar ds t he end of t he col u mn.
In t he next li ne, after leavi ng a little space, t he name of t he account t o be credit ed is written
preceded by t he wor d "To" (t he moder n practice shows i ncli nati on t owar ds omitti ng "cr. "
and "To"). Then i n t he next li ne t he expl anati on for t he entry t oget her with necessar y det ails
is gi ven-t his is called narrati on.
(iii) L. F. ( Ledger Foli o): In t he t hird col umn t he nu mber of t he page i n t he l edger on
whi ch t he account is written up is ent ered.
(i v) Debit Amount (De bit): In t he fourt h col u mn t he a mount s t o be debit ed t o t he

vari ous account s concerned are ent ered.
(v) Credit Amount (Credit): In t he fift h col umn, t he a mount t o be credit ed t o vari ous
account s is ent ered.
Procedure of Journali zi ng
The foll owi ng pr ocedure is foll owed for passi ng j our nal entries-
– Anal yze each transaction i n ter ms of account s affect ed. As a rul e ever y transacti on has at
least t wo account s.
–Fi nd out t he t ype of account s affect ed i n a transacti on i. e. personal, real or no mi nal.
– Appl y t he rul es of debit and credit t o each t ype of account s i nvol ved.
– The debit and credit account s must be equal. So meti mes, a j our nal entry may have mor e
t han one debit or/ and more t han one credit. This t ype of j our nal entry is call ed co mpound
j our nal entry.
Regar dl ess of t he nu mber of debits or credits i n a co mpound j our nal entry, t he aggregat e
a mount of debits shoul d be equal t o t he aggregate a mount of credits.
–For a busi ness, j our nal entri es generall y ext end t o several pages, hence, t ot als of debit and
credit a mount col umns are cast at t he end of each page. Agai nst t he debit and credit t ot al at
t he end of a page, t he wor ds, ‘ Tot al c/f’ (c/f - i ndi cat es carried for war d) are written i n t he
particul ars col umn. The debit and credit t ot als are t hen written i n t he begi nni ng of t he next
page i n t he a mount col umns and agai nst t he mt he wor ds ‘ Tot al b/f’ (b/f - i ndi cat es br ought
for war d) are written i n the particul ars col umn.
On t he last page ‘ Gr and Tot al’ is written.
 For Exa mpl e; (1)
In t he Busi ness of M/s Vi shal Furni shers
a. 2 April Purchased Wo od Cutti ng Machi ne of Rs. 20, 000 i n cash.
Ma chi ner y A/ c Dr. 20000
To Cash A/ c 20000
( Bei ng Purchased Machi ner y for cash )
b. 2 April Sol d Machi nery of Rs. 20, 000 i n cash wit h no profit and Loss to Mr. Shya m.
Cas h A/ c Dr. 20000
To Machi ner y A/ c 20000
( Bei ng Sol d machi ner y to Shya m f or cash)
c. 3 April Sol d 2 Tabl e @ Rs. 2500 each to Mr. Prakas h for Cas h.
Cas h A/ c Dr. 5000
To Sal es A/ c 5000
( Bei ng 2 Tabl es sol d for cash)

BANK TRANS ACTI ONS
There are Al so So me of t he Bank Entri es Li ke Openi ng Any Bank Account Et c,

Wi t hdra wi ng Cash from Bank and Transferring Cash from One Bank t o Anot her if
Busi ness has its Account i n more t han One Bank whi ch are Referred as Cont ra Ent ri es i n
t he Busi ness.
 For Exa mpl e;(2)
In t he Books of M/s Prabhati Furni shers: 
a. 2 April Opened a New Bank Account i n SBI ( St ate bank of Indi a) Wi t h Rs. 1000.
SBI Bank A/ c Dr. 1000
To Cash A/ c 1000
( Bei ng Opened a Ne w Bank Account wit h SBI )
b. 3 April Deposited or Pai d i nt o Bank Rs. 20,000 i n cash.
To Cash A/ c 20000
( Bei ng Deposit ed Rs. 20000 cash i nt o Bank)
c. 4 April W
i t hdra wn Rs. 5, 000 fro m SBI Bank for offi ce Use.
Cas h A/ c Dr. 5000
To SBI Bank A/ c 5000
( Bei ng Wit hdra wn cash from SBI Bank)
d. 5 April Opened A Ne w Bank Account i n PNB Bank wit h Rs. 2000 i n cash.
PNB Bank A/ c Dr. 2000
To Cash A/ c 2000
( Bei ng Opened a Ne w PNB Account wit h Rs. 2000)

e. 6 April Transferred Rs. 6000 fro m SBI Bank Account to PNB Bank.
( Bei ng Transferred Rs. 6000 from SBI t o PNB Bank Account)
Ret urn of Goods i n t he Busi ness or from t he busi ness: 
1. Purchases Ret urn/ Ret urn Out ward

2. Sal es Ret urn/ Ret urn Inward
1. Purchases Ret urn : 
Thi s Purchase ret ur n i n t he busi ness generall y takes pl ace when goods purchased i n t he
busi ness gets da maged due t o means of Transport ati on or gets spoiled due not pr oper
carri age syst e m.
For Exa mpl e ;(4);
In t he Books of M/s Bi g Bazaar : 
a. 3 April Purchased 3 Cart oons of Grapes @ Rs. 500 each t hrough cheque.
Entry :
Pur chases A/ c Dr. 1500
To Bank A/ c 1500
( Bei ng purchased goods)
b. 3 April Ret urned 1 Cart oon of Grapes @ Rs. 500 each and recei ved a cas h
for it.
Entry :
Cas h A/ c Dr. 500
To Purchases Ret ur n 500
( Bei ng Goods ret urned and cash Recei ved).

2. Sal es Ret urn: 
Thi s Sal es Ret ur n also kno wn as Ret ur n Inward is generall y takes pl ace i n t he busi ness
when Goods i n whi ch the busi ness deals is sold t o t he cust o mers and due t o any Defect,
Spoil age are ret ur ned back by t he cust omers.
For Exa mpl e;(5): 
a. 1 April Sol d Goods of Rs, 10, 000 to Mr. Ra m and he gave a cheque whi ch
we deposited i nt o our Bank.
Bank A/ c Dr. 10000
To sal es A/ c 10000
( Bei ng Sol d goods and cheque recei ved and deposit ed i nt o bank)
b. 2 April Goods of Rs. 5000 Ret urned By Mr. Ra m and we gave hi ma cheque
for it.
Entry :
Sal es Ret ur n A/ c Dr. 5000
To Bank A/ c 5000
( Bei ng Goods ret urned by cust omer and cheque gi ven)
For Exa mpl e;(6) In t he Books of M/s Gi rdhari Furni shers :
a. 1 April St arted busi ness wit h Cas h Rs. 100, 000, SBI Bank Rs. 40, 000 and
St ock of Furnit ure Rs. 60, 000.
Cas h A/ c Dr. 100000
St ock A/ c Dr. 60000
To Capit al A/ c 200000
( Bei ng St art ed busi ness)

b. 2 April Purchased 10 Chai rs @ Rs. 2000 Each and 5 Tabl es @ Rs. 3000
each fro m M/s Vi shal Furni shers and gave t he m a cheque (SBI).
c. 3 April Ret urned 2 Chai rs @ Rs. 2000 to M

/ s Vi shal Furni shers and
recei ved a Cheque of HDFC Bank.
Cas h A/ c Dr. 4000
To Purchase Ret ur n A/ c 4000
d. 4 April Sol d 3 Tabl es @ Rs. 3500 each to Mr. Shya m and he gave a cheque
of PNB whi ch we deposited i nt o our Bank ( SBI)
To Sal es A/ c 10500
e. 5 April Mr. Shyam Ret urned 1 Tabl e to Us and we gave a cheque of Rs.
3500 to hi m
Sal es ret ur n A/ c Dr. 3500

PART III CASE STUDI ES ON J OURNAL WI TH PRACTI CAL

QUESTI ONS
2. Personal Account : 
Thi s particul ar Account Rul es are Mai nl y Appl ied over Persons, Parties and Indi vi dual s
who t akes or borrows or gi ves somet hi ng fromthe busi ness or t o t he busi ness on credit.
Rul e :
De bit “ The Recei ver”
Cr edit “The Gi ver”
For Exa mpl e;(7): 
In t he Books of M/s Shakti El ectroni cs the foll owi ng transacti ons took pl ace:
1 April Purchased 3 T. V ( Sa ms ung) @ Rs. 5000 each fro m M/s Veer

El ectroni cs on credi t.
To M/s Veer El ectroni cs A/ c 15000
( Bei ng goods purchased on credit)
2 April Sol d 2 Tel evisi on ( Sa ms ung) To Mr. Vi nod on credit @ Rs. 6000
Entry :
Vi nod A/ c Dr. 12000
( Bei ng goods sol d t o Vi nod on credit)

For Exa mpl e; (8): Questi on In t he Books of M/s Gandhi Jui ce Cent re and
Fruits : 
1 April St arted business wit h Cas h Rs. 100, 000 St ock of Grapes Rs. 5000 and
St ock of Bananas Rs. 5000 and PNB bank Rs. 5000
Cas h A/ c Dr. 100000
St ock of Grapes A/ c Dr. 5 000
St ock of Bananas A/ c Dr. 5000
( Bei ng St art ed busi ness)
2 April Sol d Bananas of Rs. 3000 to Mr. ka mal on Credit.
Mr. Ka mal A/ c Dr. 3000
To Sal es A/ c 3000
3 April Mr. Ka mal Ret urned Bananas of Rs. 1000 to Us.
To Mr. Ka mal A/ c 1000
( Bei ng Goods ret urned by Mr. Ka mal)
4 April Purchased Grapes of Rs. 5000 from M/s Bill u Fruit Corner and gave
hi m a cheque .
To PNB Bank A/ c 5000
5 April Ret urned Grapes of Rs. 2000 to Bill u and recei ved a Cheque of PNB.
Cas h A/ c Dr. 2000
To Purchases Ret ur n A/ c 2000

( Bei ng goods ret ur ned )
For Exa mpl e;(9): In t he Books of M/s Vijay Book Depot t he foll owi ng
transacti ons took Pl ace : 
1 April St arted business wit h Cas h Rs. 200, 000 and SBI Bank Rs. 100, 000
and St ock of Accounti ng Books Rs. 10, 000.
Cas h A/ c Dr. 200000
St ock A/ c Dr. 10000
To Capit al A/ c 310, 000
( Bei ng St art ed Busi ness)
2 April Purchased Furnit ure Rs. 20, 000 fro m M/s R. K Furni shers on Credit.
Fur nit ure A/ c Dr. 20000
To M/s R. K Fur nishers A/ c 20000
( Bei ng Purchased Fur niture)
4 April Pay me nt made to M/s R. K Furni shers t hrough Cheque Rs. 20000.
R. K Fur nishers A/ c Dr. 20000
5 April Sol d 6 Accounti ng Books @ Rs. 500 Each to Mr. Shyam and he gave
a Cheque of HDFC Bank.
Cas h A/ c Dr. 3000
To Sal es A/ c 3000
( Bei ng Sol d goods and Cheque recei ved)

6 April Sol d 2 Accounti ng Books to Mr. Ra m and he gave a Che que of I DBI
Bank whi ch we deposited i nt o our Bank @500 each
To Sal es A/ c 1000
( Bei ng Sol d goods and Cheque recei ved is Deposit ed i nt o bank.)
7 April Mr. Ra m returned 1 Accounti ng Book and we gave him a Cheque of

Rs. 500
PART I V CASE STUDI ES ON J OURNAL WI TH PRACTI CAL

QUESTI ONS
3. No mi nal Account : 
Thi s No mi nal Account’s Rul es are basi call y Appli ed over Expenses and Losses whi ch
occurs i n t he busi ness and also for t he i nco mes and pr ofits whi ch are recei ved t o t he
busi ness.
Rul e : 
“ Debit – All Expenses and Losses”
“ Cr edit – All Inco mes and Pr ofits”

For Exa mpl e;(10)
In t he Books of M/s BATA Shoe Co mpany: 
3 May Pay me nt of Re nt of t he Shop made Rs. 3000 i n cash for t he mont h of

April.
Rent A/ c Dr. 3000
To Cash A/ c 3000
( Bei ng Rent pai d for cash)
3 May Pay me nt of Wa ges Rs. 500 made through cash and of Sal ary Rs. 5000
t hrough Cheque.
Wa ges A/ c Dr. 500
Sal ar y A/ c Dr. 5000
To Cash A/ c 500
To Bank A/ c 5000
( Bei ng pay ment of Expenses made i n cash and bank )
3 May Cas h of Rs. 1000 is stol en by Thi eve.
Loss By Theft A/ c Dr. 1000
To Cash A/ c 1000
( Bei ng Cash Lost due t o t he t heft)
5 May Shoes ( BATA) of Rs. 2000 destroyed due to Fi re.
Loss by Fire A/ c Dr. 2000
To Purchases A/ c 2000
( Bei ng goods destroyed due t o fire)

Loss On Sal e of Fi xed Asset : For Exampl e;(11):
1 April Purchased 1 Hi t achi Ai r-conditi oner of Rs. 20000 t hrough a Cheque.
Hi t achi A. C. A/ c Dr. 20000
To Bank A/ c 20000
( Bei ng Purchased A. C thr ough Cheque)
1June Sol d A. C t o Mr. Mohan at Loss of Rs. 2000 and he gave a Cheque of
HDFC Bank.
Cas h A/ c Dr. 18000
P &L A/ c Dr. 2000
To Hit achi A. C A/ c 20000
( Bei ng sol d fi xed Asset at a Loss of Rs. 2000)
Al l t he Inco mes and Profits are Credited ( No mi nal Account ) : 
For Exa mpl e;(12) 
There are Cert ai n Incomes i n t he busi ness whi ch are recei ved ti me t o ti me Li ke, Any
Co mmi ssi on recei ved, Int erest Recei ved, Di scount recei ved, Rent recei ved Et c, t o t he
busi ness.
 Transacti on : Recei ved a Cheque of Canara Bank for t he Co mmi ssi on Rs.
600, Di vi dend Rs. 800, Rent Rs. 600.
Cas h A/ c Dr. 2000
To Co mmi ssi on A/ c 600
To Di vi dend A/ c 800
To Rent Recei ved A/ c 600
( Bei ng t he a mount received for t he Inco mes)

 Transacti on : Purchased L. G Lapt op for t he busi ness use Rs. 45000 fro m
M/ s Shar ma Co mputers.
L. G Lapt op A/ c Dr. 45000
To M/s Shar ma co mput ers A/ c 45000
( Bei ng Purchased Lapt op on Credit)
Sol d L. G Lapt op to Mr. Raj endra at a Profit of Rs. 1000 on credit.
Raj endra A/ c Dr. 46000
To P& L A/ c 1000
To L. G Lapt op A/ c 45000
( Bei ng sol d Lapt op t o Raj endra at a profit of Rs. 1000)
Loss Occurred i n t he Busi ness due to t he Bad or Doubtf ul Debts: 
So meti me; In t he Course of Busi ness Acti vities carri ed out t he transacti ons are hel d i n
whi ch goods are sol d to t he Cust omers on credit at t he ti me when t heir t urn co mes for
pay ment and due t o t heir i nsol vency are incapabl e of payi ng thei r f ull debt.
He nce beco mes Bad De bts for t he Concern/ Busi ness organi zati on.
For Exa mpl e;(13)
On 3 April M
/ s Gi rdhari f urni shers sold Furnit ure of Rs. 10000 on credit to
Mr. Ra m.
Entry:
Mr. Ra m A/ c Dr. 10000
( Bei ng Fur nit ure sol d t o Mr. Ra m on credit)

On 5 April Mr. Ram beca me i nsol vent, and had pai d Rs. 5000 or onl y 50 %
agai nst his debt.
Cas h A/ c Dr. 5000
Bad Debt s A/ c Dr. 5000
To Mr. Ra m A/ c 10000
( Bei ng Pay ment recei ved from debt or and Bad debt s decl ared)
On 5 April Mr. Ra mbeca me i nsol vent, and coul d pay onl y 50 pai se i n a rupee
agai nst his debt.
Cas h A/ c Dr. 5000
Bad Debt s A/ c Dr. 5000
To Mr. Ra m A/ c 10000
( Bei ng Pay ment recei ved from debt or and Bad debt s decl ared)
PART V CASE STUDI ES ON J OURNAL WI TH PRACTI CAL

QUESTI ONS
DI SCOUNT
1 . Trade Di scount 2. Cas h Di scount
1. Trade Di scount : Tr ade Di scount Recei ved/ Gi ven at t he ti me of sal e or Purchase of

Goods i n whi ch t he business deals.
 Not Shown as an Separat e Ledger Account, but onl y a mount of Tr ade Di scount is
De duct ed fromt he Li st Pri ce
2. Cas h Di scount : Cash Di scount is gi ven/ recei ved by t he busi ness at t he ti me of

ma ki ng pay ment. Si milarl y Cash discount is Al l owed t o t he Cust omers at t he ti me of
Recei vi ng Pay ment Fr om t he m.
 So we can concl ude t hat t here are 2 Types of Cash Di scount i n which First is, Cash
Di scount All owed & Second, Cash Di scount Recei ved.
Trade Di scount: 
A trade discount is gi ven i n t he busi ness when it acquires/ purchases any goods i n whi ch it
trades and si mil arl y, This trade discount is gi ven by t he busi ness t o its cust o mers when
busi ness sells t he goods furt her i n t he hands of Cust omers.
For Exa mpl e :  Here is a Chai n foll owed i n t he concer n Li ke; Ma nuf act urer 
Wh ol esal er Ret ail er  Cust o mer [ End User]
Accounti ng Treat ment: 
Thi s Trade discount is not shown i n t he Jour nal Entri es as an separat e Ledger Account but
its Amount is written after deducti ng t he Amount of Trade discount from t he Li st Pri ce.
DI FFERENCE BETWEEN TRADE DI SCOUNT AND CASH DI SCOUNT
TRADE DI SCOUNT CAS H DI SCOUNT

1. It is offered at t he ti me of sal e or 1. It is offered at t he time of getti ng qui ck
purchase. pay ment.
2. It is usuall y offered or all owed on 2. It is usuall y offered or all owed for full or
account of purchases made beyond a part settle ment of account at an earlier dat e.
prescri bed quantit y.
3. It is not deduct ed at t he ti me of
3. It is deduct ed from the list pri ce i n t he preparati on of t he i nvoice.
i nvoi ce.
4. It is dul y recor ded in t he books of t he
4. It is not recor ded i n t he books of account. account.
5. It is usuall y gi ven i n percent age. 5. It may be gi ven i n percent age or i n

absol ut e fi gure.
Co mpound Journal Ent ry
Tr ansacti ons whi ch are i nt er-connect ed and have taken pl ace si mult aneousl y are recor ded
by means of a co mpound or co mbi ned j our nal entry. For exa mpl e receipt of cash fro m a
debt or and all owance of discount t o hi m are recor ded by means of a si ngl e j our nal entry.
Si mil arl y transacti ons of t he sa me nat ure are recor ded by means of a co mbi ned entr y
pr ovi ded t hey t ake pl ace t he sa me day. For exa mpl e, if a mount is spent on t he sa me day for
sal ari es, wages, stati oner y, rent, et c. a co mbi ned entry can be passed debiti ng all t he
rel evant no mi nal account s wit h respecti ve a mount s and crediti ng cash account wit h t he
t ot al a mount spent.
For Exa mpl e (15) 
M/ s Lal Bal Pal had t he foll owi ng balances of Assets and Li abilities and
Transacti ons: 
Cas h Rs. 50000, Bank Rs. 60000 ( SBI), and Furnit ure Rs. 40000 Shya m’ s
Loan Rs. 50000
1 Apr. Cash A/ c Dr. 50000
(SBI) Bank A/ c Dr. 60000
Fur nit ure A/ c Dr. 40000
To Shya m’s Loan A/ c 50000
1 April Purchased goods fro m M/s Raj of Rs. 10000 at a Trade di scount @
10 %.
1 Apr. Pur chases A/ c Dr. 9000
To M/s Raj A/ c 9000
( Bei ng Purchases of goods made and trade discount recei ved)
Exa mpl e Of Cas h Discount All owed:
For Exa mpl e (16) 

2 April Sol d 4 Chairs @ 2500 each to Mr. Lax man @ 10% T. D. ( we are
f urnit ure Deal ers)
Mr. Lax man A/ c Dr. 9000
To Sal es A/ c 9000
10 April Mr. Lax man Pai d Rs. 8100 i n cas h i n f ull settle ment of his account.
Cas h A/ c Dr. 8100
Di scount All owed Dr. 900
To Mr. Lax man A/ c 9000
Or
10 April Mr. Lax man made t he pay me nt agai nst his debt and we all owed
10 % Cas h Di scount.
Cas h A/ c Dr. 8100
Di scount All owed A/ c Dr. 900
To Mr. Lax man A/ c 9000
Exa mpl e of Cash Di scount Recei ved : 
3 April : Purchased goods of Rs. 10000 fro m Mr. Bhas kar @ 10 % Trade
Di scount.
To Mr. Bhaskar A/ c 9000

5 April: Pay me nt made to Mr. Bhas kar of Rs. 8100 i n f ull settle ment of t hei r
account.
Mr. Bhaskar A/ c Dr. 9000
To Cash A/ c 8100
To Di scount Recei ved A/ c 900
Preparati on of Final Accounts

TRADI NG ACCOUNT
Pr eparati on of Fi nal account s or fi nanci al stat eme nt s of non- manufact uri ng entities or sol e
pr opri et or is mai nl y di vided i nt o foll owi ng t wo parts
(1)Inco me St ate ment ( Tradi ng and profit and l oss A/ c)

(2) Positi on St ate ment ( Bal ance sheet)
(1)Inco me St ate ment
The manner i n whi ch amount of profit or l oss is arri ved at is discl osed i n t he Inco me
St at e ment, prepared at the cl ose of t he year. The Inco me St at e ment discl oses net profit of
t he busi ness aft er adj usting fromt he i nco me ear ned duri ng t he year, all t he expendit ures of
t he busi ness i ncurred i n t hat year. The vari ous ite ms of i nco me and expendit ure, whi ch
ar ouse duri ng t he accounti ng peri od, are det ailed out t herei n, and gr ouped under si gnifi cant
Heads. The pri mar y objecti ve of t he Inco me Stat e ment is t o present t he det ails of vari ous
ite ms of i nco me or expendit ure whi ch have contri but ed t o t he maki ng of t he pr ofit or l oss.
Inco me St at e ment is sub-di vi ded i nt o foll owi ng two parts for a non- manufact uri ng concer n
or sol e pr opri et or:
1. Tradi ng account;
Tr adi ng Account Ite ms
(i) In a tradi ng fir m whose mai n busi ness is of buyi ng and selli ng, direct expenses will
i ncl ude all t hose expenses whi ch are i ncurred for bri ngi ng t he goods t o the godo wn of t he
fir m and for maki ng t hem ready for sal e e. g. frei ght and cart age pai d on purchases, octroi,
cust om dut y et c.
(ii) In a manufact uri ng fir m direct expenses wi ll i ncl ude expenses rel ated t o pr oducti on
acti vit y also e. g. wages, po wer and fuel, rent of fact or y pre mi ses et c. transferred t o its debit
si de. Thereaft er all t hose expense or l osses whi ch have not been debit ed to Tradi ng account
are debit ed t o P and L a/c and all i nco mes and gai ns besi des sal es are credit ed t o P and L
a/ c. The difference of t he t wo si des of t hese account s represents Net profit or Net Loss. If
t he t ot al of t he credit side exceeds t he t ot al of the debit si de t he difference will represent
net pr ofit. In reverse situati on t he difference wi ll represent net l oss. The net profit or net
l oss is transferred t o t he capit al account of t he entrepreneur. Net profit i ncreases t he capit al

and Net l oss decreases the capit al.
Preparati on of Tradi ng Account

Tr adi ng account is t he first step i n t he pr ocess of prepari ng fi nal account s. It hel ps i n fi ndi ng
out t he gr oss profit or gross l oss duri ng an accounti ng year, whi ch is an import ant i ndi cat or
of busi ness effi ci ency.
It is nor mall y prepared by a merchandi si ng concer n whi ch purchases and sells t he goods
duri ng a particul ar peri od.
The tradi ng account sho ws t he gr oss profit or gross l oss duri ng t he accounti ng peri od.
Tr adi ng account is based on mat chi ng t he selli ng pri ce of goods and servi ces wit h t he cost
of goods sol d and servi ces rendered.
Tradi ng Account St ateme nt i ncl ude
 Openi ng St ock
 Pur chases
 Di rect expenses
 Gr oss pr ofit
Ope ni ng St ock
In t he case of tradi ng concer n, t he openi ng st ock means t he fi nished goods onl y. We t ake
t he a mount of openi ng st ock from Tri al Bal ance.
Purchases
The a mount of purchases duri ng t he year i ncl udes cash as well as credit purchases. The
deducti ons from purchases are purchase ret urn, dra wi ngs of goods by t he pr opri et or,
di stri buti on of goods as free sa mpl es, et c.
Di rect expenses
It means all t hose expenses whi ch are i ncurred from t he ti me of purchases t o maki ng t he
goods i n suitabl e conditi on. Thi s expense i ncl udes wages, carriage i nwar d, wages,
ma nuf act uri ng Expenses, po wer, Fact or y Li ghti ng, coal wat er & Gas, Fuel & po wer, I mport Dut y,
Fact or y Rent, Pr oducti ve Expenses, Exci se Dut y, and warehousi ng Expenses, Wages & Sal ar y,
Oct r oi, Cust o m Dut y, Dock Char ges, Royalt y, Consu mabl es St ores, Rail way Fr ei ght et c.
Gr oss profit
If t he credit si de of Tradi ng A/ c is great er t han t he debit si de of Trading A/ c gr oss profit
wi ll arise.
The foll owi ng are t he ite ms appeari ng i n t he credit si de of Tradi ng Account

 Sal es Revenue
 Cl osi ng St ock
 Gr oss Loss
Sal es Revenue
The sal es revenue i. e. t he i nco me ear ned fromt he mai n busi ness acti vit y or acti vities. When
goods or servi ces are sol d t o cust omers t hen t he i nco me is earned.
If t here is any ret ur n, it shoul d be deduct ed fromt he sal es val ue. As per t he accr ual concept,
i nco me shoul d be recogni zed as soon as it is accr ued and not necessaril y onl y when t he
cash is pai d for.
Exa mpl e, if an i nvoi ce is made for t he sal e of goods and t he ter m of sale is door deli ver y,
and t hen recogniti on of sal e can be done onl y on getti ng pr oof of deli ver y of goods at t he
door of t he cust omer.
And if such pr oof is pendi ng at t he end of t he accounti ng peri od, t hen we can not treat t his
transacti on as sal es but wi ll have t o treat it as unear ned i nco me.
Cl osi ng St ock
In t he case of tradi ng busi ness, t here will be cl osi ng st ocks of fi nished goods onl y.
Accor di ng t o t he conventi on of conser vatis m, the st ock is val ued at cost or net reali zabl e
val ue whi chever is l ower.
Gr oss Loss
Whe n t he debit si de of Tr adi ng A/ c is great er t han t he credit si de of Tradi ng A/ c, t he gr oss
l oss will appear.
For mat of Tradi ng Account
Indi rect Expenses Indi rect Inco me

Ma nage me nt Expenses Di scount recei ved
Rent & Taxes Co mmi ssi on Recei ved
Li ghti ng Char ges Non Tradi ng Inco me
Pri nti ng & St ati onar y Int erest Recei ved
Post age and Tel ephone char ges Rent Recei ved
Legal Expenses Di vi dend
General Expenses Int erest on Debent ure Recei ved
Insurance Pre mi u m Abnor mal gai n
Mai nt enance Expenses Pr ofit on sal e of assets
Depr eci ati on
Repairs & Rene wal s
To Selli ng & Di stri buti on Expenses
Tr avelli ng Expenses
Bad debt s
Export Houses
Carri age out war ds
Agent co mmi ssi on pai d
Sa mpl es
Fi nanci al Expenses
Di scount all owed
Bank Char ges
Int erest on Capit al
Int erest on l oan
Di scount on Bills
Abnor mal Losses
Loss by Fire
Cas h Defal cati on
Loss on sal e of Assets
PROFI T AND LOSS ACCOUNT

Pr eparati on of Fi nal account s or fi nanci al stat eme nt s of non- manufact uri ng entities or sol e
pr opri et or is mai nl y di vided i nt o foll owi ng t wo parts
(1)Inco me St ate ment ( Tradi ng and profit and l oss A/ c)

(2) Positi on St ate ment ( Bal ance sheet)
Tr adi ng and pr ofit and loss account are prepared t o fi nd out t he pr ofit or l oss of a cert ai n
peri od. They are also called as Inco me St at e ment . The Bal ance sheet portrays t he fi nanci al
positi on of t he fir m on a particul ar dat e. It is also call ed as Positi on St ate ment.
These t wo st at e ment s i. e. Tradi ng and P&L account and Bal ance sheet are prepared t o gi ve
t he fi nal results of t he busi ness t hat is why bot h are coll ecti vel y called as Fi nal Account s.
Fi nal Account s are prepared from t he fi gures appeari ng i n Tri al Bal ance and additi onal
i nfor mati on.
(1)Inco me St ate ment

Inco me St at e ment is sub-di vi ded i nt o foll owi ng two parts for a non- manufact uri ng concer n
or sol e pr opri et or:
1. Tradi ng account;
Tr adi ng account is shows t he result of buyi ng and selli ng of goods duri ng t he gi ven
peri od of ti me and its prepared for cal cul ati ng t he gr oss profit and gr oss l osses.
2. PROFI T AND LOSS ACCOUNT

Pr ofit and Loss a/ c is an account whi ch is prepared t o fi nd out t he Net Profit Net l oss of t he
busi ness for a gi ven accounti ng peri od. It is start ed wit h t he bal ance from t he Tradi ng
Account i. e. Gr oss Pr ofit or Gr oss Loss. Gr oss Profit is transferred t o its credit si de and
Gr oss Loss i n Debit.
FORMAT OF TRADI NG ACCOUNT & PROFI T AND LOSS ACCOUNT

Dr. Trading & P & L Account for t he year endi ng ……. Cr.
Parti cul ar Amount Parti cul ar Amount
To Openi ng St ock Account By Sal es
To Purchases Less, Sal es Ret ur ns
Less: Purchase Ret ur ns By Cl osi ng St ock Account
Less: Use of Goods ot her By Gr oss Loss c/ d( b/ f)
t han sal es
Goods wit hdra wn for
personal use
Goods distri but ed as free sampl es
To Direct Expenses
Fr ei ght on Purchases
Ot her expenses
To Gr oss profit c/ d(b/ f)
To Gr oss Loss b/ d By Gr oss pr ofit b/ d

To Indirect expenses By I ndirect Inco me
( Rel at ed after sal es & Pr ofit on sal e of Assets
sal es rel at ed acti vities, By Net Loss c/ d (b/f)
Exp rel at ed wit h
Noncurrent assets)
Loss on sal e of Assets
Sal ari es Account
Rent Account
Int erest Account
Ot her Expenses Account
To Net Pr ofit c/ d (b/f)
POSI TI ON STATE MENTS/ BALANCE SHEET

Positi on st at e ment mai nl y co mprises of Bal ance Sheet, whi ch exhi bits assets and liabilities
of t he busi ness as at t he cl ose of t he peri od. For pr oper knowl edge of t he fi nanci al positi on
of t he busi ness, someti mes additi onal st at e ment s are also prepared li ke cash fl ow st at e ment,
Fund
Fl ow st at e ment et c. which is not mandat or y for non-cor porat e entities. These additi onal
st at e ment s are prepared for t he better underst andi ng of t he fi nanci al positi on of t he busi ness
Bal ance sheet is a stat eme nt prepared t o depi ct t he fi nanci al positi on of t he busi ness on a
particul ars dat e. It shows t he a mount and t ypes of assets and liabilities owned by t he
busi ness on a particul ar dat e. Preparati on of Bal ance sheet is an i mport ant exercise. It
refl ects all t ypes of i ncomes reali zed by t he entrepreneur and t he expense i ncurred by hi m.
It i ndi cat es t he act ual profit bei ng realized by the ent erpri se. Pal mer defi ned t he Bal ance
sheet as “a st at e ment at a gi ven dat e showi ng on‟ one si de trader‟s pr operty and possessi on,
and on t he ot her hand his liabilities”.
Thus t he Bal ance sheet refl ects t he assets on one si de and t he liabilities on t he ot her. The
st at e ment is usuall y made for a peri od of one year and refl ects t he annual cl osi ng st at us of
t he ent erprise for t he year under consi derati on.
BALANCE SHEET
The bal ance sheet may be defi ned as “a st at e ment whi ch sets out t he assets and liabilities
of a fir m or an i nstit uti on as at a cert ai n dat e. ” Si nce even a si ngl e transacti on will make a
difference t o some of t he assets or liabilities, t he bal ance sheet is true onl y at a parti cul ar
poi nt of ti me.
Me ani ng and Concept of Worki ng Capital

In accounti ng ter m worki ng capit al is t he difference bet ween t he current assets and current
liabilities.
Wor ki ng Capit al = Current Assets – Current Li abilities
If we break down t he co mponent s of wor ki ng capit al we will found wor ki ng capit al as
foll ows
Current Assets:
 Current means short ter m &
 Assets means recei vabl e
 it means current assets are short ter m recei vabl e
 Whi ch are i n cash or convert ed i nt o cash wit hi n one year.
Exa mpl e - cash, cash equi val ents, account s recei vabl e, st ock i nvent or y,
mar ket abl e securities, pre-pai d Expenses & accr ued i nco me.
An asset is cl assified as current when:
(i)It is expect ed t o be realised or i nt ends t o be sol d or consu med i n normal operati ng cycl e
of t he entit y;
(ii) The asset is hel d primaril y for t he pur pose of tradi ng;
(iii)It is expect ed t o be realised wit hi n t wel ve mont hs aft er t he reporting peri od;
(i v)It is non- restrict ed cash or cash equi val ent.
Ge nerall y current assets of an entit y, for t he purpose of wor ki ng capit al manage ment can
be gr ouped i nt o t he follo wi ng mai n heads:
(a) Invent or y (ra w mat erial, wor k i n pr ocess and fi nished goods)
(b) Recei vabl es (trade recei vabl es and bills recei vabl es)
(c) Cash or cash equi valent s (short-ter m mar ketabl e securities)
(d) Prepai d expenses
Current Li abilities:
 Current means short ter m &
 Li abilities means payabl e
 it means current liabilities are short ter m Payabl e
 Whi ch is pai d or payabl e wit hi n one year. f a company' s nor mal operati ng
cycl e is l onger t han one year, current liabilities are t he obli gati ons t hat will
be due wit hi n t he operati ng cycl e.
Exa mpl e – Bank overdraft, Account s payabl e or trade payabl es, Out st andi ng
Expenses, unaccr ued Inco me.
Aliabilit y is cl assified as current when:
(i) It is expect ed t o be settled i n nor mal operating cycl e of t he entit y.
(ii) The liabilit y is hel d pri maril y for t he pur pose of tradi ng
(iii) It is expect ed t o be settled wit hi n t wel ve mont hs aft er t he reporti ng peri od
Ge nerall y current liabilities of an entit y, for t he pur pose of wor ki ng capit al manage ment
can be gr ouped i nt o t he foll owi ng mai n heads:
(a) Payabl e (trade payables and bills Payabl e)
(b) Out st andi ng pay ments ( wages &sal ary et c.)
ARRANGE MENTS OF ASSETS AND LI ABI LI TI ES

(1) Assets: Assets may be gr ouped i n one of t he foll owi ng t wo ways:
(i) Li qui dity: Under thi s appr oach, t he asset, whi ch can be convert ed i nt o cash first, is
present ed first. Those assets, whi ch are most difficult i n t his respect, are present ed at t he
bott om.
(ii) Per manence: Assets, whi ch are t o be used, for l ong t er mi n t he busi ness and are not
meant t o be sol d are present ed first. Assets, whi ch are most li qui d, such as cash i n hand,
are present ed at t he botto m.
Bal ance Sheet By li qui d met hod

Fro m Li abilities Si de Amount Fro m Assets Si de Amount
Current Li abilities Current Assets
S. Credit ors Cash i n Hand
Bills Payabl e( B/ P) Cash at Bank
Bank Over draft Invest ment s
Non- Current Li abilities Sundr y Debt ors
Loans( Cr.) St ock of Fi nished Goods
Mort gage St ock of Ra w Mat eri als
Reser ve Fund Partl y Fi nished goods
Capi tal Non- Current Assets
Add : Int. on Cap Ma chi ner y
N. P Fur nit ue
Less : Dra wi ng Pat ent s
Inco me Tax Good wil
Int. on Dra wi ngs l
N . Loss
Bal ance Sheet by Fixed met hod

Non- Current Li abilities Non- Current Assets
Capit al Good will
Add : Int. on Pat ents
Cap N. P Fur nit ure
Less : Dra wi ng Ma chi ner y
Inco me Tax Current Assets
Int . on Dra wi ngs St ock of Partl y Fi nished
N. Loss goods St ock of Ra w
Reser ve Fund Mat eri als
Mort gage St ock of Fi nished
Loans( Cr.) goods Sundr y Debt ors
Current Invest ment s
Li abilities Bank Cash at Bank
Over draft Bills Cash i n
Payabl e( B/ P) Hand
S. Credit ors
OR
Capi tal and Non Current Non Current Assets
Li abilities: Ma chi ney
Capit al A/ c Fur nit ure
: Bal ance Pat ents
Add : Net Profit/ Less: Net Good will
Loss Less : Dra wi ngs
Long Ter m Current Assets:
Loans: Ter m St ock In Trade
Loans Sundr y Debt ors
Ot her Loans Bills Recei vabl e
Current Li abilities Pr epay ment s
: Short Ter m Loans: Advances
Cash Credit Bank
Over drafts Bal ances Cash
Ot her Loans In Hand
Cr edit ors
Bills Payabl e
Out st andi ng Expenses
Advances Taken
Pr ovisi on:
Pr ovisi on for Bad debts
Pr ovisi on for Retire ment
Benefits Provisi on for Taxati on
CLOSI NG STOCK
1. Cl osi ng stock
i. Meani ng –
a) St ock at t he end of current cal endar year (31st Dec.) or Current fi nancial Year (31 Mar.)
is known as cl osi ng st ock
b) St ock i n additi onal i nfor mati on of trial bal ance is known as cl osi ng stock
c) Val uati on of cl osi ng st ock- st ock will be val ued on mar ket pri ce or cost pri ce whi chever
less is
d) It is treat ed as current Assets.
ii. Adj ust ment entries

Cl osi ng st ock a/ c Dr.
To Tradi ng account
( Bei ng cl osi ng st ock transferred)
iii. Present ati on i n final account

Tradi ng / Profit &Loss A/ c
Parti cul ars Amount Parti cul ars Amount
By cl osi ng St ock
Bal ance sheet
Li abilities Amount Assets Amount
Current assets
Cl osi ng St ock
Q1. Fro m t he foll owi ng i nf or mati on, prepare a Tradi ng Account of M/s.
ABC Traders for t he Year ended 31st March, 2009:
Openi ng St ock Rs. 1, 00, 000
Pur chases 6, 72, 000
Carri age Inwar ds 30, 000
Wa ges 50, 000
Sal es 11, 00, 000
Ret ur ns i nwar d 1, 00, 000
Ret ur ns out war d 72, 000
Cl osi ng st ock 2, 00, 000

( Ans- Gr oss profit- 4, 20, 000)
Sol uti on
Dr Tradi ng Account for t he year endi ng ……. Cr.
To Openi ng St ock Account 1, 00, 000 By Sal es11, 00, 000
To Purchases Less, Sal es 10, 00, 000
6, 72, 000 6, 00, 000 Ret ur ns1, 00, 000 2, 00, 000
Less: Purch. Ret. By Cl osi ng St ock Account
72, 000
To Direct Expenses 80, 000
Carri age 4, 20, 000
Inwar ds30, 000 12, 00, 000 12, 00, 000
Wages 50, 000
To Gr oss profit c/ d(b/ f)
NU MERI CAL QUESTI ON FOR FI NAL ACCOUNT

Fi nal a/ c wit h Adj ust ment
2. Fr o m t he foll owi ng bal ances extract ed from the books of X & Co., prepare a tradi ng
profit and l oss account and bal ance sheet on 31st Dece mber, 2018
$ $
St ock on 1stJanuar y 11, 000 Ret ur ns out war ds 500
Bills recei vabl es 4, 500 Tr ade expenses 200
Pur chases 39, 000 Offi ce fi xt ures 1, 000
Wa ges 2, 800 Cash i n hand 500
Insurance 700 Cash at bank 4, 750
Sundr y debt ors 30, 000 Rent and taxes 1, 100
Carri age i nwar ds 800 Carri age out war ds 1, 450
Co mmi ssi on( Dr.) 800 Sal es 60, 000
Int erest on capit al 700 Bills payabl e 3, 000
St ati onar y 450 Cr edit ors 19, 650
Ret ur ns i nwar ds 1, 300 Capit al 17, 900
The st ock on 31st December 2018 was val ued at $25, 000.
Sol uti on
Dr Tradi ng Account for t he year endi ng ……. Cr.
To Openi ng St ock Account 11, 000 By Sal es 60, 000
To Purchases 39, 000 Less, Ret ur n i nwar d. 1, 300 58, 700
Less: Ret. Out war d 500 38, 500 By Cl osi ng St ock Account 25, 000
To Direct Expenses
Wa ges 2, 800
Carri age Inwar ds800
Tr ade Expenses 200 3, 800
To P & L ( Gr oss Pr ofit) (b/f) 30, 400

83, 700 83, 700
Dr Profit & Loss Account for t he year endi ng ……. Cr.

To Indirect Expenses By Gr oss Pr ofit 30, 400
Insurance 700 By Indirect Inco me Ni l
Co mmi ssi on Pai d 800
Int erest on Capit al
700
St ati oner y 450
Rent & Taxes 1, 100 5, 200
Carri age
Out war d1450 25, 200
30, 400 30, 400
To Net pr ofit c/ d(b/ f)
Sol uti on Bal ance sheet as on ……………….

Capi t al & Li abilities Amount Assets Amount
Capi t al Non Current
Openi ng Capit al Assets
17, 900 Offi ce fi xt ures 1, 000
Add: Net Pr ofits
25, 200 43, 100 Current Assets
Cl osi ng Capit al Bills recei vabl es 4, 500
Li abilities Ni l Sundr y debt ors 30, 000
Non Current Cl osi ng St ock 25, 000
Li abilities 19, 650 Cash i n hand 500
Current Li abilities 3, 000 Cash at bank 4, 750
Cr edit ors
Bills payabl e 65, 750 65, 750
Over vi e w on Depreci ati on and t heir Met hods

De pr eci ati on is an accounti ng met hod used for all ocati ng t he cost of a physi cal asset over
its life expect ancy. It represents t he used val ue of an asset and it hel ps co mpani es t o ear n
revenue fromt he asset’s re mai ni ng val ue.
Types of Depreci ation Met hod

There are different t ypes of met hods t o det er mi ne t he book val ue of an asset. Foll owi ng are
t he most co mmon met hods:
1. Strai ght-li ne
2. Doubl e decli ni ng bal ance
3. Units of producti on
4. Su m of years di gits
1. Strai ght- Li ne Met hod

Strai ght-li ne depreci ati on is t he si mpl est met hod for cal cul ati ng depreciati on expense. In
t his met hod, t he expense a mount re mai ns t he sa me ever y year over t he usef ul life of an
asset.
Strai ght Li ne Met hod:
De pr eci ati on Expense = ( Cost – Sal vage val ue) / Usef ul life
Consi der a pi ece of equip ment t hat costs $25, 000. It has an esti mat ed usef ul life of 8 years
and $0 sal vage val ue. The depreci ati on expense per year:
De pr eci ati on Expense = ($25, 000 – $0) / 8 = $3125 annuall y
2. Doubl e Decli ni ng Bal ance Met hod

Thi s met hod results i n a larger a mount expensed i n earlier years as opposed t o lat er years
of an asset’s usef ul life. Accor di ng t o t his met hod, assets are more pr oducti ve i n t heir earl y
years.
An asset l oses more of its val ue i n t he earl y years of its use. In t his met hod, t he depreci ati on
fact or is 2 ti mes mor e of t he strai ght-li ne expense met hod.
Doubl e- decli ni ng bal ance met hod: Peri odi c Depreci ati on Expense = Begi nni ng book val ue
x Rat e of depreci ati on
Consi der a pi ece of land, pl ant, and equi p ment ( PP&E). It costs $45, 000 and has an
esti mat ed usef ul life of 10 years. It has $2, 500 as its sal vage val ue.
3. Units of Producti on Met hod

Thi s met hod depreci at es assets on t he basis of the t ot al nu mber of hours used or t he t ot al
nu mber of units t o be produced by usi ng assets over t heir usef ul life.
The for mul a for t he units-of- producti on method:
De pr eci ati on Expense = ( Nu mber of units produced / Life i n t he nu mber of units) x ( Cost
– Sal vage val ue)
Consi der a pi ece of equi p ment t hat costs you $25, 000. It has an esti mat ed t ot al unit
pr oducti on of 100 million and t he sal vage val ue is $0. Duri ng t he first quart er of its use,
t he machi ne had pr oduced 4 milli on units.
De pr eci ati on Expense = (4/ 100 milli on) x ($25, 000 – $0) = $1, 000
4. Su m- of-t he- Years- Di gits Depreci ati on Method

Thi s is one of t he accelerat ed depreci ati on met hods. Hi gher expenses are i ncurred i n t he
earl y years and l ower expenses i n lat er years of an asset’s usef ul life.
Di vi de t he re mai ni ng life of an asset is by t he su m of years. You will multi pl y it by t he

depreci ati ng base for deter mi ni ng t he depreci ation expense.
De pr eci ati on Expense = ( Re mai ni ng life / Su m of t he years’ di gits) x ( Cost – Sal vage val ue)
Consi der a pi ece of equi p ment t hat costs $25, 000 and has an esti mated usef ul life of
8 years and a $0 sal vage val ue. To cal cul at e t he sum- of-t he- years-di gits
depreci ati on, set up a schedul e:
The depreci ati on base remai ns const ant t hroughout t he year
De pr eci ati on Base = Cost – Sal vage val ue
= $25, 000 – $0 = $25, 000
2. Initiall y, t he asset has 8 years as its re mai ni ng life. The foll owi ng year, its re mai ni ng life
is 7 years and so on.
3. RL / SYD is “re mai ni ng of life di vi ded by su m of years. ” Over here t he usef ul life of
asset is 8 years. The su m of years is 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36 years. The re mai ni ng
life (r m) at t he year begi nni ng is 8 years. Therefore, t he RM/ SYD = 8/36 = 0. 2222.
4. You will multi pl y RL / SYD by t he depreci ati ng base for det er mi ni ng the expense of t hat
year.
5. Thi s will be done for the foll owi ng years. At the begi nni ng of 2nd year, RL / SYD= 7/ 36
= 0. 1944. Expense for 2nd year = 0. 1944 x $25, 000 = $4, 861.
Us es of Depreci ati on Met hod

De pr eci ati on is i mport ant si nce an asset will defi nitel y under go wear and t ear over a peri od
of ti me. Thi s leads t o a reducti on i n wor ki ng capacit y and effecti veness of assets. Theref ore
it shoul d refl ect t he asset val ue whi ch it is carried i n books of account s. Each asset beco mes
obsol et e over ti me when t he ne wt echnol ogy t akes over. The asset val ue wi ll decrease over
ti me and it must be account ed for.
PROVI SI ON FOR DEPRECI ATI ON

6. Provi si on for depreci ati on
a) Meani ng
i. Due t o spent i n ti me, decrease i n life of fi xed assets & also reducti on in t he cost of fi xed
assets is known as depreci ati on
ii. Depreci ati on is non cash expenses, whi ch are not pai d out si der. So i n adj ust ment entry
depreci ati on will be debited and written off from P&L .
iii. It is also reduced cost of fi xed assets, so depreci ati on a mount will be deduct ed fro m
respecti ve assets.
b) Adj ust ment entries

De pr eci ati on a/ c Dr.
To Fi xed Assets a/ c
( Bei ng Depreci ati on char ged on Fi xed Assets)
P & L a/ c Dr.
To Depreci ati on a/ c
( Bei ng Depreci ati on transferred t o P & L a/ c )
c) Present ati on i n final account

Tradi ng / Profit &Loss A/ c
Parti cul ars Amoun Parti cul ars Amount
To Depreci ati on on Fi xed t
Assets
Bal ance sheet

Li abilities Amoun Assets Amount
t Fi xed Assets
Less;
Depr eci ati on
Wr itt en Do wn
/ Book Val ue
Val uati on of Goodwill

Good will may be descri bed as t he aggregat e of t hose i nt angi bl e attri but es of a busi ness
whi ch contri but e t o its superi or earni ng capacit y over a nor mal ret urn on i nvest ment. It may
arise from such attri but es of a busi ness as good recepti on, a favourabl e locati on, t he abilit y
and skill of its e mpl oyees and manage ment, nature of its products, et c.
Good will is an i nt angibl e asset. The real value is i ndet er mi nabl e for a non- purchased
good will and based on arbitrary measure ment. The val uati on of good will is oft en based on
t he cust oms of t he trade and generall y cal cul at ed as nu mber of year’s purchase of average
pr ofits or super-pr ofits.
Val uati on of purchased goodwill:

(1) Average profit method : Under t his met hod average pr ofit is cal cul ated on t he basis of
t he past fe w year’s profits. At t he ti me of cal cul ati ng average pr ofit abnor mal profit or l oss
wi ll be i gnored. Aft er calcul ati ng average pr ofit, it is multi pli ed by a nu mber (3 or 4 years),
as agreed. The pr oduct wi ll be t he val ue of t he good will.
Good will = Average Profit × No. of year purchase
(2) Wei ghted average profit met hod: To obt ai n t he average pr ofit, t he pr ofit of t he year
must be multi plied by its wei ght age and t he grand t ot al shoul d be di vi ded by t he aggregat e
nu mber of wei ghts. After cal cul ati ng average profit, it is multi plied by a nu mber (3 or 5),
as agreed. The pr oduct wi ll be t he val ue of t he good will.
Good will = Wei ght ed average Pr ofit × No. of year purchase
(3) Super- profit met hod: Super profit is t he excess of act ual profit over t he nor mal profit.
Under t his met hod, super profits are taken as t he basis for cal cul ati ng good will i n pl ace of
average pr ofit.
Goodwill is cal cul ated as foll ows:
St ep 1 Cal cul at e capit al e mpl oyed

St ep 2 Cal cul at e nor mal ret urn
Nor mal Ret ur n = Capit al e mpl oyed × Rat e of nor mal ret ur n
St ep 3 Cal cul at e fut ure mai nt ai nabl e pr ofit
St ep 4 Cal cul at e super profit
Fut ure Mai nt ai nabl e Pr ofit xxxx
Less: Nor mal Ret ur n (xxx)
Super Pr ofit xxxx
St ep 5 Good will = Super profit × No. of years purchases
(4) Annuit y met hod: Under t his met hod super pr ofits shoul d be discount ed usi ng
appr opri at e discount fact or. When unifor m annual super profit is expected, annuit y fact or
can be used for discounti ng t he fut ure val ues for converti ng i nt o t he present val ue.
Good will = Super Pr ofit × Annuit y fact or
(5) Capitali zati on of f ut ure mai nt ai nabl e method: Under t his met hod, t he fir mis val ued
by appl yi ng t he foll owi ng for mul a:
Good will = Fut ure mai ntai nabl e pr ofit / Nor mal rat e ret ur n ×100 – Capital e mpl oyed
(6) Capitali zati on of super profits met hod: Under t his met hod, goodwi ll is cal cul at ed by
capit alizi ng super-pr ofits at agreed rat e. The good will is cal cul at ed directl y by appl yi ng t he
foll owi ng for mul a:
Good will = Super profit / Capit alizati on rat e x 100

Accounti NG Syste M

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Accounti NG Syste M

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Uni t 2 Accounti ng Theory and Practi ces MBA 1ST SE M

Doubl e entry Syste m

Si ngl e Ent ry Syste m

 Real and No mi nal account s will be i gnored by thi s syst e m

Doubl e Ent ry System

 The syst e m does not have many modifi cati ons.

Di fferences bet ween si ngl e entry and dual entry syste ms

4. Res ponsi bility Accounti ng

5. Hu man Resource Accounti ng

THE CONCEPTS OF ACCOUNT, DEBI T AND CREDI T,

(1) Personal Account s:

(a) Nat ural personal accounts:

( b) Artifici al (legal) personal account:

(c) Represent ati ve personal accounts:

(2) I mpersonal Accounts:

(a) Real Accounts:

Rul e Of Debit & Credit i n bri ef

(1) Personal account is gover ned by t he foll owi ng two r ul es:

o De bit t he recei ver

(2) Real account is gover ned by t he foll owi ng t wo rul es:

 De bit what co mes i n

(3) No mi nal account is gover ned by t he foll owi ng two r ul es:

o De bit all expenses and losses

Si gnifi cance of Debi t and Credit

(a) Debit i n Personal Accounts

(iii) If t he account of a person who is a credit or of t he busi ness is debited, t he debit

( b) Credit i n Personal Accounts

(c) Debit i n Real Accounts:

( d) Credit i n Real Accounts:

(e) Debit i n No mi nal Accounts:

(f) Credit i n No mi nal Accounts:

THE ACCOUNTI NG PROCESS: J OURNALS ( DOUBLE

1.) Based on Accounti ng Equati on:-

a) Increases i n assets are debits, decreases are credit.

b) Increased i n liabilit y are credit, decreases are debits.

c) Increases i n capit al are credits, decreases are debits.

d) Increases i n profits are credits, decreases are debits.

e) Increases i n expenses are debits, decreases are credits.

2.) Based on Traditional Approach:-

a) Debit t he recei ver, credit t he gi ver

b) Debit what co mes i n, credit what goes out.

Dat e Parti cul ar L. F De bit Credit

(i v) Debit Amount (De bit): In t he fourt h col u mn t he a mount s t o be debit ed t o t he

–Fi nd out t he t ype of account s affect ed i n a transacti on i. e. personal, real or no mi nal.

On t he last page ‘ Gr and Tot al’ is written.

 For Exa mpl e; (1)

In t he Busi ness of M/s Vi shal Furni shers

a. 2 April Purchased Wo od Cutti ng Machi ne of Rs. 20, 000 i n cash.

Ma chi ner y A/ c Dr. 20000

( Bei ng Purchased Machi ner y for cash )

Cas h A/ c Dr. 20000

To Machi ner y A/ c 20000

( Bei ng Sol d machi ner y to Shya m f or cash)

Cas h A/ c Dr. 5000

( Bei ng 2 Tabl es sol d for cash)

BANK TRANS ACTI ONS

There are Al so So me of t he Bank Entri es Li ke Openi ng Any Bank Account Et c,

 For Exa mpl e;(2)

In t he Books of M/s Prabhati Furni shers: 

SBI Bank A/ c Dr. 1000

( Bei ng Opened a Ne w Bank Account wit h SBI )

b. 3 April Deposited or Pai d i nt o Bank Rs. 20,000 i n cash.