Accountancy

ACCOUNTANCY
CLASS-XI
VOLUME-I
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Contents
VOLUME-I
1. Introduction to Accounting ... 3-23
2. Theory Based Accounting ... 24-38
3. Accounting Equation ... 39-58
4. Recording of Business Transaction ... 59-71
5. Journal ... 72-110
6. Journal with GST ... 111-137
7. Subsidiary Books ... 138-172
8. Ledger ... 173-188

VOLUME I
CHAPTER
Introduction to
01 Accounting
BASIC ACCOUNTING TERMS

1. Business Transaction: A business transaction may be defined as an economic event involving
exchange of some value between two or more entities. It may be a purchase of goods, receipt of
money, payment to a creditor, paying expenses, etc. It may be a cash transaction or a credit
transaction.
For example:
Purchase of goods on credit.
Salary paid to employees.
Electricity expenses.
2. Capital: It is the amount invested by the owner in the firm. It may be in the form of cash or kind
or both. For a business entity capital is an obligation and a claim on the assets of business. So, it
appears as capital on the liabilities side of the balance sheet.
The amount of profits earned and additional capital introduced will increase the capital and the
amount of losses incurred and the amount withdrawn will decrease it. Capital is the difference
between the total assets of the business and its external liabilities.
3. Account: In reality, similar transactions are recorded, added, and removed in a single location.
Typically, one refers to such a location as a “Account.” It is crucial to comprehend the definition
and structure of an account before attempting to comprehend the meaning of debit and credit.
A record of all commercial transactions pertaining to a specific individual or thing is called an
account. In accounting, every individual asset, liability, expense, and revenue are kept in a distinct
record. The location where an account is kept for such records is called an account.
4. Receipts: The sum of money received by a business during an accounting period is called the
receipts of the business.
Capital receipts: The receipts that results in an increase in liabilities or a reduction in value
of assets. These receipts are reflected in the Balance Sheet. For example: bank loan, proceeds
from sale of an asset, etc.
Revenue receipts: The receipts that are generated through the normal activities of the business.
Such receipts are reflected in the Trading and Profit and Loss Account. For example: proceeds
from sale of goods or services, commission received, etc.
5. Revenue: The amounts earned by a business by selling its products or providing services to
customers are called sales revenue. Other items of revenue common to many earned by businesses
are: commission, interest, dividends, royalties, rent received, etc. Revenue is also called income.
RECEIPTS v/s REVENUE
Revenue is the total income earned by a business whereas receipt is the cash received by the business.
For eg: Sales made on credit by the business is a revenue for the business but not a receipt.
6. Expenses: Costs incurred by a business in the process of earning revenue are known as expenses.
The few common expenses of entities are: depreciation, rent, wages, salaries, interest, cost of
heater, light and water, telephone, etc.
7. Expenditure: Spending money or incurring a liability for some benefit, service or property received
is called expenditure.
Revenue Expenditure: Any expenditure incurred by business entities to maintain its day to
day operations. The benefit of such expenditure is exhausted within a year. Revenue expenditure
is also called expense. For eg: Rent, salary, etc.
Capital Expenditure: Any expenditure which occurred in obtaining or increasing the value of
a fixed asset is known as capital expenditure. The benefits of such expenditure are for more
than a year. For eg: Purchase of machinery, building, etc.
Deferred Revenue Expenditure: These expenses are of revenue nature but the benefit of such
expenditure lasts for more than a year. For example: Cost of advertising campaign.
8. Profit: Profit is the excess of revenues of a period over its related expenses during an accounting
period. It increases the investment of the owners.
9. Gain: The profit arising from the events or transactions which are incidental to the business such
as sale of fixed assets, winning a court case, appreciation in the value of an asset are called gain.
PROFIT v/s GAIN

Profit is related with the operating activities of the business, whereas gain is related with the incidental
or non-operating activities of the business.
10. Loss: Loss is the excess of expenses of a period over its related revenues. It decreases the investment
of the owners. It is also related to money or money’s worth lost (or cost incurred) without receiving
any benefit in return, e.g., cash or goods lost by theft or a fire accident, etc. It also includes loss on
sale of fixed assets.
11. Sales: The total revenue generated by selling goods or providing services to the customers is
called sales. The sales may be for cash or credit.
12. Sales Return or Returns Inward: When goods sold are returned by the customers due to any
reason like defective quality or not as per the terms of sale, it is called sales return or returns
inward. It is deducted from total sales to find the net sales. It is called “Returns Inward” because
the goods are coming in the business.
13. Purchase: The total amount of goods procured by a business for use or sale is called purchase. It
may be on cash or credit. In a trading concern, the goods purchased for resale with or without
processing. In a manufacturing concern, raw materials are purchased, processed further into
finished goods and then sold.
14. Purchase Returns or Returns Outward: When the purchased goods are returned to the suppliers
due to any reason like defective quality or not as per the terms of purchase, it is called as purchase
return. The purchase returns are deducted from the total purchases to find the net purchases. It
is also known as “Returns Outward” because goods move outside the business.
4 Accountancy Volume I PW
15. Liabilities: Liabilities refer to the financial obligations of a business. It may be categorised as:
Internal liability: The liability towards the owner of the business.
External Liability: The liability towards the third parties such as banks, creditors, etc.
Further the liabilities may be classified as:
Non-Current Liabilities: The liabilities that are payable after a long period of time that is more
than a year.
Current Liabilities: The liabilities that are payable in the near future that is within a year.
Contingent Liabilities: The liabilities that may arise due to happening or non-happening of
an uncertain event.
As per Schedule III of the Companies Act 2013, a current liability means a liability that
satisfies any of the following conditions:
(a) Expected to be settled during the normal operating cycle of the business.
(b) Due to be repaid within 12 months from the Balance Sheet date.
(c) It has been incurred mainly for the purpose of being traded.
(d) No unconditional right to defer settlement for at least 12 months from the date of balance
sheet.
16. Asset: Assets are economic resources of an enterprise that can be usefully expressed in monetary
terms.
These are the properties of every description belonging to the business.
The types of assets are:
(a) Non-current Assets: Non-current assets are those assets which are held for long term use
in the business with the purpose of producing goods or rendering services to earn revenue.
These assets are also called fixed assets. Such assets are not meant for resale and are used to
increase the profit earning capacity of the business. The fixed assets may be:
Tangible Assets: The assets that have physical existence. They can be seen and touched.
For eg: Machinery, Building, etc.
Intangible Assets: The assets that have no physical existence and they cannot be seen and
touched. For eg: Goodwill, patents, etc.
(b) Current Assets: These assets are meant for sale or they could be converted into cash within
one year. They are also known as floating or circulating assets. For example: cash in hand,
bank balance, bills receivables, prepaid expenses, etc.
(c) Fictitious Assets: These assets are also called nominal assets. They do not have any real value
and are treated to be assets on technical ground only. They are the expenditures or losses that
are shown in the Balance Sheet till they are not completely written off in the profit and loss
account.
As per Schedule III of the Companies Act 2013, a current asset means an asset that satisfies
any of the following conditions:
(a) Expected to be realised or consumed or sold during the normal operating cycle of the business.
(b) Expected to be realised or consumed or sold within 12 months from the Balance Sheet date.
Introduction to Accounting 5
(c) It has been held mainly for the purpose of being traded.
(d) They are cash or cash equivalents unless they are restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting date.
17. Discount: It is the reduction in the price of the goods sold. There are two types of discount:
Trade Discount: It is offered as deduction of a fixed percentage of list price at the time selling
goods. It is generally offered by manufacturers to wholesalers and by wholesalers to retailers.
It is not recorded in the books of accounts.
Cash Discount: It is allowed to the customers whose goods are sold on credit for making
prompt and early payments. It is allowed at the time of payment, so it is recorded in the books
along with the entry of payment.
18. Stock (Inventory): Stock includes the value of goods or some other item of business like spares,
loose tools, etc. in hand on a particular date. For a trading business, stock means the goods which
were purchased for reselling and are lying unsold on a particular date. These goods are called
stock-in-trade. For a manufacturing business, the term inventory is used, which includes – Stock
of Raw Material, Stock of Work In Progress, Stock of Finished Goods and Stock-in-Trade.
Stock (inventory) may be opening stock and closing stock. Opening stock is the goods lying unsold
in the beginning of an accounting period and closing stock is the goods lying unsold at the end of
an accounting period. The inventory is valued on the basis of cost or net realisable value (market
value) whichever is lower.
19. Trade Receivables: It includes debtors and bills receivables.
20. Debtors: Debtors are the persons whom business has sold goods or rendered services on credit
basis. They are the assets for a business.
For eg: If goods are sold to Mr. S on credit for `10,000, then Mr. S will be debtor of the business
for `10,000.
21. Bills Receivable (B/R): It is a bill of exchange drawn on the customer whom goods are sold on
credit and the customer formally agrees to pay the due amount on an agreed date. It is an asset
for the business.
22. Trade Payables: It includes creditors and bills payable.
23. Creditors: Creditors are the persons from whom business has purchased goods or availed services
on credit basis. They are the liabilities for a business.
For example: If goods are purchased from Mr. T on credit for `10,000, then Mr. T will be creditor
for the business for `10,000.
24. Bills Payable: It is a bill of exchange drawn on the business by the supplier from whom goods
are purchased on credit and the business formally agrees to pay the due amount on an agreed
date. It is a liability for the business.
25. Goods: Goods are the products in which the business deals in. It means the products that the
business is buying or producing and selling in its normal course of business. The products
purchased by the business for being used in the business are not called goods, they are called
assets.
For example: If a carpenter make furniture for selling them then they will be called goods whereas
if he makes a table and chair for his showroom then they will be counted as asset not goods.
26. Voucher: The documentary evidence in support of a business transaction is called voucher.
For eg: Cash memo, invoice, etc.
27. Account: It is the summary of relevant business transactions at one place relating to a person. It
is a brief history of financial transactions of a particular person or item. It has two sides: debit
side and credit.
28. Cost: The total amount spent on inputs by the business is called cost. It also includes the imputed
cost of the inputs supplied by the proprietor.
OTHER IMPORTANT TERMS

1. Proprietor: The owner of a business is called proprietor. He is the one who provides capital, takes
the risk, enjoys the profits and suffers the losses.
2. Entity: Entity means something or someone having a definite individual existence. Business entity
means a business enterprise that has its own existence. For example: Reliance Ltd, Big Bazaar, etc.
A business entity is also known as an accounting entity.
3. Debit and Credit: The word debit is derived from the Latin word debitum which means due for
that and the word credit is derived from the Latin word creder which means due to that. So, the
benefit receiving aspect of a transaction is known as debit and the benefit giving aspect of a
transaction is known as credit. Debit is denoted by Dr and credit by Cr.
4. Invoice: An invoice is a document issued by a seller to the buyer at the time of sale. It indicates
the quantities and costs of the products or services provided by the seller and specifies the amount
to be paid by the buyer and the terms of payment. It is issued in case of cash as well as credit sales.
5. Bad Debts: It is the amount that could not be recovered from the debtors due to any reason.
6. Insolvent: A person whose assets are not sufficient to meet his/her liabilities or we can say the
liabilities are more than the assets.
7. Books of Accounts: The books that are used to record the business transactions are known as
books of accounts. For example: Journal, ledger, cash book, etc.
8. Live Stock: Livestock are the domesticated animals raised and kept for commercial purposes.
9. Entry: Recording of the business transactions in journal or in subsidiary books is called entry.
10. Allowance: An allowance is a balance sheet contra-account that is linked with another account
having an opposite value to that account and is reported as a subtraction from the linked account’s
balance.
11. Solvent: A person whose assets are sufficient to meet his/her liabilities.
MEANING OF ACCOUNTING
Accounting has always been limited to the accountant’s duties of maintaining financial records.
Nonetheless, the accounting profession is being compelled to reevaluate its position and function at
both the organizational and corporate levels in light of the quickly evolving business environment of
today. Instead of only recording transactions, the accountant now serves as a member who contributes
information that is pertinent to the Board’s decisions. In general, bookkeeping and the creation of
financial reports are only small parts of modern accounting.
DEFINITION OF ACCOUNTING
The American Institute of Certified Public Accountants (AICPA) had defined accounting as the “art of
recording, classifying, and summarising in a significant manner and in terms of money, transactions
and events which are, in part at least, of financial character, and interpreting the results thereof”.
“Accounting is the art of recording, classifying and summarising in a significant manner and in terms
of money, transactions and events, which are, in part at least, of a financial character, and interpreting
the results thereof.“ –American Institute of Certified Public Accounting (AICPA) in 1941
“Accounting is the science of recording and classifying business transactions and events, primarily of a
financial character and the art of making significant summaries, analysis and interpretations of those
transactions and events and communicating the results to persons who must make decisions or form
judgement”. –Smith and Ashburne
In short, Accounting is the process of recording, classifying, summarizing, and communicating
financial information to users of financial statements, so that they can make rational decisions
about the entity.
CHARACTERISTICS OF ACCOUNTING
The following attributes or characteristics can be drawn from the definition of Accounting:
1. Identifying financial transactions and events
Accounting records only those transactions and events which are of financial nature.
So, first of all, such transactions and events are identified.
2. Measuring the transactions
Accounting measures the transactions and events in terms of money which are considered as
a common unit.
3. Recording of transactions
Accounting involves recording the financial transactions of books of accounts such as Journal
or Subsidiary Books.
4. Classifying the transactions
Transactions recorded in the books of original entry – Journal or Subsidiary books are classified
and grouped according to nature and posted in separate accounts known as ‘Ledger Accounts’.
5. Summarising the transactions
It involves presenting the classified data in a manner and in the form of statements, which are
understandable by the users.
It includes Trial balance, Trading Account, Profit and Loss Account and Balance Sheet.
6. Analysing and interpreting financial data
Results of the business are analysed and interpreted so that users of financial statements can
make a meaningful and sound judgment.
7. Communicating the financial data or reports to the users
Communicating the financial data to the users on time is the final step of Accounting so that
they can make appropriate decisions.
STEPS OF THE ACCOUNTING PROCESS
Accounting process is the process of collecting, recording, classifying, summarising and communicating
financial information to the users for judgement and decision-making. The following steps are involved
in accounting process:
1. Identification: It is the process of identifying and analysing business transactions.
2. Recording: For recording, we use ‘Journal’ or Subsidiary Books.
3. Classification of transactions: Classification means segregation of transactions on the basis of
nature and posting them in a format known as Ledger Account.
4. Summarisation: It includes preparation of Trial Balance and Financial Statements.
5. Analysis & Interpretation: It includes an assessment of the financial reports and making some
meaningful conclusions.
6. Communicating information to the users: It includes sharing the financial reports and
interpreted results to the users of financial statements.
OBJECTIVE OF ACCOUNTING
The main objectives of accounting are:
1. To maintain a systematic record of business transactions
Accounting is used to maintain a systematic record of all the financial transactions in a book
of accounts.
For this, all the transactions are recorded in chronological order in Journal and then posted to
the secondary book i.e. Ledger.
2. To ascertain profit and loss
Every businessman is keen to know the net results of business operations periodically.
To check whether the business has earned profits or incurred losses, we prepare a “Profit &
Loss Account”.
3. To determine the financial position
Another important objective is to determine the financial position of the business and to check
the value of assets and liabilities.
For this purpose, we prepare a “Balance Sheet”.
4. To provide information to various users
Providing information to the various interested parties or stakeholders is one of the most
important objectives of accounting.
It helps them in making good financial decisions.
5. To assist the management
By analysing financial data and providing interpretations in the form of reports, accounting
assists management in handling business operations effectively.
ADVANTAGES OF ACCOUNTING
The following are the main advantages of accounting:
1. Provide information about financial performance
Accounting provides factual information about financial performance during a given period of
time
Like, profit earned or loss incurred over a period and financial position at a particular point of
time.
2. Provide assistance to management
Accounting helps management in business planning, decision making and in exercising control.
For this, it provides financial information in the form of reports.
3. Facilitates comparative study
By keeping systematic records and preparation of reports at regular intervals, accounting helps
in making a comparison.
4. Helps in settlement of tax liability
Systematic accounting records help in settlement of various tax liabilities. Such as – Income
Tax, GST, etc.
5. Helpful in raising loan
Banks and Financial Institutions grant a loan to the firm on the basis of appraisal of the financial
statement of the firm.
6. Helpful in decision making
Accounting provides useful information to the management for taking decisions.
LIMITATION OF ACCOUNTING
Following are the limitations of accounting:
Accounting is not precise: Accounting is not completely free from personal bias or judgment.
Accounting is done on historic values of assets: Accounting records assets at their historical
cost less depreciation. It does not reflect their current market value.
Ignore the effect of price level changes: Accounting statements are prepared at historical
cost. So changes in the value of money are ignored.
Ignore the qualitative information: Accounting records only monetary transactions. It ignores
the qualitative aspects.
Affected by window dressing: Window dressing means manipulation in accounting to present
a more favourable position of the business than the actual position.
BRANCHES OF ACCOUNTING
The following are the main branches of accounting:
1. Financial accounting: Financial accounting involves identifying, measuring, recording, classifying,
summarising business transactions, i.e. the steps to identify, record, summarise and communicate
financial data.
2. Cost accounting: Cost Accounting is that branch of accounting which is concerned with the process
of ascertaining and controlling the cost of products or services.
3. Management accounting: Management accounting is a branch of accounting concerned with
the presentation of the accounting information in such a way as to assist the management in the
planning and control of the activities of the undertaking and in the decision making process.
4. Tax Accounting: If Accounts are prepared with a view to compute income tax, Goods and Service
Tax (G.S.T.), excise duty, import duty, etc., such accounts are called Tax Accounting.
5. Social Responsibility Accounting: The society provides infra-structure, capital, labour and other
facilities to business enterprises. Thus, it is the social responsibility of the business towards the
following:
(i) Employees: It is the social responsibility of the business to pay fair wages to employees, open
schools for their children, open hospitals, community centres, provide housing facilities to
them, etc.
(ii) Consumers: (i) Provide quality products at a reasonable price (ii) Provide service centres
for repair of products (iii) Provide facility for home delivery (iv) Open consumer grievances
redressal cell, etc.
(iii) Shareholders: (i) Provide regular and good return on the capital invested (ii) Capital
appreciation (iii) Provide right shares or bonus shares, etc.
(iv) Society: (i) Provide community hospitals, schools (ii) Pollution control techniques should be
installed (iii) Tree plantation, etc. The companies should keep a record of the amount spent
on its various social responsibilities.
6. Human Resources Accounting: Employers are increasingly aware of the importance of considering
their employees as valuable assets. In order to rapidly develop an entity, the relationship between
employer and employee is of paramount importance. Absenteeism will increase among workers
and lead to reduced production if there is no improvement in the situation of employees.
BOOKKEEPING
Accounting is a common term, which includes the concept of keeping records. The art of keeping records
and classifying business transactions in a set of books is known as bookkeeping. The following shall
therefore be included:
(i) Identification of financial transactions.
(ii) Measuring the transactions in terms of money.
(iii) Recording the financial transactions in the books of accounts.
(iv) Classifying the recorded transactions i.e., posting them in the ledger.
Definitions
1. “Book-keeping is an art of recording business dealings in a set of books.” –J.R. Batliboi
2. “Book-keeping is the science and art of recording correctly in the books of accounts of all those
business transactions that result in the transfer of money or money’s worth.” –R.N. Carter
ACCOUNTING
Accounting is a broad term and it includes book-keeping. Besides book-keeping, it also includes the
following:
(i) Summarisation of classified transactions i.e., preparation of Trading and Profit & Loss Account
and Balance Sheet.
(ii) Analysis and interpretation of financial statements (Profit and Loss Account and Balance Sheet)
and drawing meaningful conclusions.
(iii) Communicating the information to various end users of accounting service i.e., shareholders,
debenture holders, bankers, financial institutions, creditors, employees, etc.
ACCOUNTANCY
Accountancy refers to systematic knowledge of the principles and the technique applied in accounting.
It also stresses on the need to keep a book of accounts, summarize them and analyse and communicate
accounting information to different users in an accounting service.
Definition
“Accountancy refers to the entire body of the theory and practice of Accounting.” –Kohler
Accountancy
Accounting
ok-keepin
Bo g
DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING

Basis Book-keeping Accounting
Definition Bookkeeping includes identifying and Accounting is the process of measuring and
recording all financial transactions. recording all financial transactions that
happened in an accounting year
Objective The objective of Bookkeeping is to prepare The objective of Accounting is to record,
original books of accounts analyze, and interpret all the transactions
Scope It has a limited scope. Accounting has a wider scope as compared to
Bookkeeping.
Decision Making Management cannot take decisions on the basis With the help of accounting, management
of bookkeeping because it is only concerned can make decisions as it is responsible for
with the management of books. communicating the information.
Analysis The information is only recorded in the In Accounting, analysis is done to obtain
bookkeeping and not analyzed. important insights into the business
Skill Required There is no need of having any special skills to Accounting requires special skills because it is
record the transactions in Bookkeeping analytical in nature.
DIFFERENCE BETWEEN ACCOUNTING AND ACCOUNTANCY

Basis Accounting Accountancy
Meaning Accounting is the process that involves Accountancy is the body of knowledge that
re c o rd i n g . c l a s s i f y i n g , s u m m a r i z i n g , helps in measuring, processing and recording
presenting, and interpreting the financial the non-financial and financial statements.
information of an organization.
Scope Accounting is Narrower in scope. Accountancy is Wider In scope
Dependability Accounting depends only on the bookkeeping. While accountancy depends on both the
accounting and the bookkeeping.
Nature of Work Accounting is the nature of work performed. Accountancy is opted as a profession.
Concerned With It only contains the practical part. It contains both the theoretical as well as
practical parts
Based on Accounting is a concept that is totally based on Accountancy is the field of knowledge that is
the knowledge of the accountancy considered to be the route to accounting
Focus Accounting mainly focuses on the specified Accountancy focuses on the broader principles
process of recording all the daily transactions without going into the depth
and creating the reports on that basis.
Use Accounting is used to understand the net Accountancy involves the decision-making
income and financial position of a business and function which relies on the knowledge got
to present them to concerned parties from accounting.
ACCOUNTING AS A SOURCE OF INFORMATION

Information is generated at every step in the accounting process. There is no end to the generation
of information. It facilitates the dissemination of information between different groups of users. This
information allows interested parties to make a reasoned decision. The dissemination of information is
therefore an important aspect of the accounting process. The accounting should provide the following
information to be useful:
provide information for making economic decisions;
serve the users who rely on financial statements as their principal source of information;
provide information useful for predicting and evaluating the amount, timing and uncertainty
of potential cash-flows;
provide information for judging management’s ability to utilise resources effectively in meeting
goals; and
provide information on activities affecting the society
THE USERS OF ACCOUNTING INFORMATION
Users may be categorised into internal users and external users.
1. Internal Users
Owners: Owners contribute capital in the business and thus they are exposed to maximum
risk. So, they are always interested in the safety of their capital.
Management: Accounting information is used by management for taking various decisions.
Employees: Employees are interested in the financial statements to assess the ability of the
business to pay higher wages and bonuses.
2. External Users
Banks and financial institutions: Banks and Financial Institutions provide loans to businesses.
So, they are interested in financial information to ensure the safety and recovery of the loan.
Investors: Investors are interested to know the earning capacity of business and safety of their
investment.
Creditors: Creditors provide the goods on credit. So they need accounting information to
ascertain the financial soundness of the firm.
Government: The government needs accounting information to assess the tax liability of the
business entity.
Researchers: Researchers use accounting information in their research work.
Consumers: They require accounting information for establishing good accounting control,
which will reduce the cost of production.
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

Qualitative characteristics are the attributes of accounting information, which enhance it’s understanding
ability and usefulness:
Reliability: Reliability implies that the information must be free from material error and
personal bias.
Relevance: Accounting information must be relevant to the decision-making requirements of
the users.
Understandability: Information should be disclosed in financial statements in such a manner
that these are easily understandable.
Comparability: Both intra-firm and inter-firm comparison must be possible over different
time periods.
THE SYSTEM OF ACCOUNTING

System of accounting
There are following two systems of recording transactions in the books of accounts:
Double Entry System
Single Entry System
Double-entry system
The double entry system is based on the Dual Aspect Principle.
Every transaction has two aspects, ‘a Debit’ and ‘a credit’ of an equal amount.
This system of accounting recognises and records both aspects of the transaction.
Single entry system
Under this system, both aspects are not recorded for all the transactions.
Either only one aspect is recorded or both the aspects are not recorded for all the transactions.
ADVANTAGES OF THE DOUBLE-ENTRY SYSTEM OF ACCOUNTING

Following are the main advantages of the double-entry system of accounting:
Scientific system
As compared to the other systems, this system of recording transactions is more scientific and
useful to achieve the objective of accounting.
A complete record of the transaction
Since both the aspects of transactions are considered there is a complete recording of each and
every transaction.
Using these records, we are able to compute profit or loss easily.
Checks arithmetical accuracy of accounts
Under this system, by preparing a Trial Balance we are able to check the arithmetical accuracy
of the records.
Determination of profit/loss and depiction of financial position
Under this system by preparing ‘Profit & Loss A/c’ we get to know about the profit earned or
loss incurred.
By preparing the ‘Balance Sheet’ the financial position of the business can be ascertained, i.e.
position of assets and liabilities is depicted.
Helpful in decision making
Administration and management are able to take decisions on the basis of factual information
under the double-entry system of accounting.
ROLE OF ACCOUNTING
Accounting is concerned with recording, classifying, summarising and interpreting the financial
transactions of a company and communication to the users of accounting. It plays a lot of different roles:
(i) Role as a Language of Business: As a rule, accounting is referred as the language of business.
For the purposes of analysing and interpreting financial statements, they are Technical Documents
to be analysed and interpreted solely by those who have a knowledge of this accounting language.
(ii) Role of Information System: Accounting has become an information system these days. The
management shall inform the various users of the accounting service of the collected accounting
information. The information on the accounts relates to past transactions and does not provide
any indication of the entity in the future. In addition, a number of qualitative information relating
to the quality of management and relations between employers and employees is ignored.
(iii) Role of Providing Historical Records: At the end of each financial year, accounting information
shall be submitted by different users in form of a profit and loss account and balance sheet with
respect to all accounts so that it is historically relevant.
(iv) Role as a Service Activity: Accounting is now considered to be a service activity. In order to
enable users to make useful economic decisions about a business entity, it provides them with
quantitative financial information.
EXERCISES
MULTIPLE CHOICE QUESTIONS
1. We record in books of accounts.
(a) Financial transactions
(b) Non-financial transactions
(c) Both financial and Non-financial transactions
(d) None of these
2. Which of the following will not be recorded in books of accounts?

(a) Purchase of good (b) Sale of asset (c) Selection of staff (d) Expenses of firm
3. Which is the first step of the Accounting Process?

(a) Classifying (b) Analysing and Interpreting
(c) Recording (d) Financial Statements
4. Qualitative characteristics of Accounting Information are:

(a) Relevance (b) Reliability (c) Comparability (d) All of these
5. Which of the following is not the branch of accounting?

(a) Financial Accounting (b) Cost Accounting
(c) Book-keeping and Accounting (d) Management Accounting
6. Book-Keeping includes:
(a) Identification of financial transactions
(b) Measuring transactions in terms of money
(c) Recording transactions in books of the accounts and their classification
(d) All above
7. Accounting is a broad term. It includes book-keeping and also includes:

(a) Summarisation of classified transactions
(b) Analysis and interpretation of financial statements
(c) Communicating the information to various end users
(d) All above
8. Which of the following is not a business transaction?

(a) Purchase goods for resale
(b) Paid rent to landlord
(c) Purchased car by the owner for personal use
(d) Purchase of office equipment
9. Which of the following is a limitation of accounting?
(a) Provides complete and systematic records
(b) Based on accounting concepts and conventions
(c) Helps in taking managerial decisions
(d) Facilitates comparative study.
10. Qualitative characteristics of accounting includes:

(a) Reliability (b) Relevance
(c) Understandability and comparability (d) All of the above
11. Which of the following is not a qualitative characteristic of accounting?

(a) Reliability (b) Relevance (c) Materiality (d) Comparability
12. Which of the following is not an external user of Accounting Information?

(a) Potential Investors (b) Creditors
(c) Shareholders/Proprietors (d) Financial Institutions
13. Which of the following is not an advantage of Accounting?

(a) Provides information about profit or loss (b) Provides information of financial position
(c) Based on historical cost (d) Helps in taking managerial decisions
14. Which is the last step of the Accounting process?

(a) Preparation of Financial Statements (b) Communication of information to users
(c) Analysis and interpretation of information (d) Recording of transactions
15. Which is the first step in the process of Accounting?

(a) Recording of transactions (b) Classifying the transactions
(c) Identifying financial transactions (d) Preparation of Financial Statements
16. Which of the following is not a Current Liability?

(a) Creditors (b) Bank Overdraft (c) Term Loan (d) Short-term Loan
17. Which of the following is not a Current Asset?

(a) Debtors (b) Cash
(c) Computer (d) Marketable Security
18. Purchases usually refers to:

(a) Purchase of Plant & Machinery (b) Purchase of Investment
(c) Purchase of Goods (d) Purchase of Goods for resale
19. Which one is not a tangible asset?

(a) Computer (b) Stock
(c) Computer Software (d) Plant & Machinery
20. A person to whom money is payable by the firm for purchase of goods is called:
(a) Debtors (b) Creditors (c) Supplier (d) None of these
21. A person from whom money is receivable by the firm for sale of goods is called:
(a) Debtors (b) Creditors
(c) Supplier (d) None of these
22. Drawing refers to withdrawal of cash by the business entity for:

(a) Payment of salary to staff (b) Payment for purchase of goods
(c) Payment to meet domestic expenses (d) Payment of purchase expenses
23. Which of the following is not an intangible asset?

(a) Goodwill (b) Computer Software
(c) Patent (d) Computer
24. Which of the following is a capital expenditure?

(a) Repair of building
(b) White-wash of building
(c) Carriage paid and wage paid for installation of plant
(d) None of these
25. Which of the following is not a current liability?

(a) Salary Outstanding (b) Bills Payable
(c) Creditors (d) Bank Loan
ANSWERS
1. (a) 2. (c) 3. (c) 4. (d) 5. (c) 6. (d) 7. (d) 8. (c)
9. (b) 10. (d) 11. (c) 12. (c) 13. ( ) 14. (b) 15. (c) 16. (c)
17. (c) 18. (d) 19. (c) 20. (b) 21. (a) 22. (c) 23. (d) 24. (c)
25. (d)
VERY SHORT ANSWER TYPE QUESTIONS
1. Define accounting.
Ans. Accounting may be defined as the process of recording, classifying, summarising and communicating
the financial information to the users of accounting services for making rational decisions about
the entity.
2. Name any two functions of accounting.

Ans. (i) Business transactions are recorded either in the journal or in the subsidiary books depending
upon the size of the business and the volume of transactions.
(ii) After recording of transactions in the journal or in the subsidiary books, these are posted
ledger date wise.
3. Define Book-keeping.
Ans. Book-keeping is the art of recording and classifying the business transactions in a set of books.
4. State any two advantages of accounting.

Ans. Advantages of accounting are:
(i) Provides information about profit or loss of the business.
(ii) Provides information about the financial position of the business i.e., position of assets,
liabilities and capital.
5. Name any two limitations of accounting.

Ans. Limitations of accounting are:
(i) It is based on accounting concepts and conventions. For instance:
(a) Fixed assets are valued at historical costs; (b) Provision for doubtful debts is made on
the basis of principle of conservatism.
(ii) It is based on personal judgement. For instance: depreciation and provision for doubtful debts
are based on personal judgement of the accountant.
6. Name any two types of accounting information.

Ans. (i) Provides accounting information for making analysis and interpretation of financial statements.
(ii) Provides information about corporate social responsibilities of the entity.
7. Explain in brief about accounting (each part of 1 mark)

(i) Window dressing in accounting.
(ii) Reliability
(iii) Relevance
(iv) Understandability
(v) Comparability
(vi) Based on Historical Cost
Ans. (i) Window dressing in accounting: If the management of the business entity prefers to show
more or less profit than the true and fair profit, it is called window dressing in accounting. It
can be done by over or under valuation of closing stock, by showing revenue expenditures as
capital expenditure and vice versa.
(ii) Reliability: Reliability means that users of the accounting information must be provided
information on which they can depend and rely upon. This is possible only when it is free
from personal biasness and transactions are supported by verifiable evidences.
(iii) Relevance: The accounting information depicted by the financial statements must be relevant
keeping in view the informational need of various users. For instance information about
segments, departments and accounting conventions be disclosed.
(iv) Understandability: The various users of accounting information possess reasonable
knowledge of the business. The management should provide information which is not only
understandable but reliable and relevant too.
(v) Comparability: The management should use accounting period, accounting concepts and
conventions consistently so that the financial information can be compared with the past and
with similar firms.
(vi) Based on Historical Costs: Fixed assets are shown in the balance sheet at their original cost
(historical cost) while they should be shown at their current market price. Thus, fixed assets
do not reveal true and fair value and consequently balance sheet does not reveal true financial
position of the business entity.
8. Who are internal users of the accounting service?

Ans. Management, Directors and Officers, Shareholders and Employees of the entity are the internal
users.
9. Name the external users of accounting information.

Ans. Potential investors, bankers and financial institutions, creditors, employees, researchers,
government, etc. are the external users of accounting information.
10. Who uses published and unpublished accounting information?

Ans. Internal user-management.
11. Who uses published accounting information?

Ans. All external users like shareholders, proprietors, bankers, financial or to actuate Windows
institutions, creditors, employees, researchers, etc.
12. Explain accounting as a language of business.

Ans. Accounting is now considered as a language of business. Financial statements are technical
documents and they can be analyzed and interpreted by only those who are fully conversant with
the accounting process. Thus, accounting is rightly considered as a language of the business.
13. What are business transactions?
Ans. Business transactions refer to financial transactions entered into between two parties involving
exchange of goods or services for monetary consideration eg., purchase of goods, sale of goods,
payment of salary, rent; receipt of cash from debtors etc.
14. What is meant by capital?

Ans. Amount invested by the proprietor or owners in the business in the form of cash or assets is called
capital.
15. What is meant by current liability?

Ans. A liability shall be classified as current when it satisfies any one of the following criteria:
(i) It is expected to be settled in Company’s normal operating cycle;
(ii) It is held primarily for the purpose of being traded; or
(iii) It is due to be settled within 12 months after the reporting date.
16. What are non-current liabilities?

Ans. Non-current liabilities are those liabilities which are not current liabilities.. In short, liabilities
payable after a long period of time (i.e., after 12 months or after operating cycle whichever is more)
are termed as non-current liabilities. It includes debentures, long-term loan, mortgage loan, Bank
loan, etc.
17. Give two examples of current liabilities.

Ans (i) Creditors,
(ii) Bank Overdraft.
18. Name two non-current liabilities.

Ans. (i) Debentures
(ii) Bank Loan.
19. What are Assets?

Ans. Assets are economic resources of an individual or business enterprise that can be expressed in
terms of money e.g., land, building, cash, debtors, etc.
20. Give two examples each of tangible and intangible assets.

Ans. (a) Tangible Assets: (i) Computer, (ii) Machinery (iii) Furniture
(b) Intangible Assets: (i) Goodwill, (ii) Patent (iii) Branding
21. What are fixed assets?

Ans. Assets which are purchased in the business with a view to produce goods or services and which
are not meant for resale are called fixed assets e.g., land, building, machinery, furniture, etc.
22. Give two examples of tangible assets.
Ans. (i) Land
(ii) Plant
(iii) Computer.
23. What do you mean by capital receipt?

Ans. The money received by the business entity from proprietor or partners as capital or money received
by issuing share capital, debentures or raising bank loan is a capital receipt. Similarly, money
received or receivable by the business entity from sale of fixed asset is also a capital receipt.
24. What is gain?

Ans. Gains are profit arises from transactions which are incidental to business e.g., profit earned from
sale of investment or fixed assets. Profit in the nature of gains are non-recurring in nature.
25. What is discount?

Ans. A reduction in the price of goods by the business entity to its customers is called a discount. It
may be in the form of trade discount or cash discount.
26. What is meant by discount allowed?

Ans. If cash discount is allowed to debtors to induce them to make prompt payment, it is called discount
allowed. It is a loss so it is treated as an expense and is debited to Profit & Loss A/c
27. Distinguish between external and internal transactions.

Ans. Transactions between firm and other party are called external transactions eg, sale of goods to
Ram. While transactions which does not involve second party are called internal transactions eg,
charging depreciation on machinery, creation of provision for doubtful debt on debtors.
28. What is liquid asset?

Ans. Assets which are available to business entity in the form of cash or which are likely to be converted
into cash within a very short period are called liquid assets e.g., debtors, bills receivable, marketable
securities, etc.
29. What is meant by deferred revenue expenditure?

Ans. If the benefit of a revenue expenditure is likely to accrue to firm over a period of several years, it is
called deferred revenue expenditure e.g., advertisement development or advertisement campaign.
30. What is Trade Discount?

Ans. A reduction in the price of goods at a fixed percentage on the list price or catalogue price by the
seller to buyer is called a trade discount. The objective of giving reduction is that ultimate consumer
of goods get the product at the list price
SHORT ANSWER QUESTIONS
1. Briefly state the characteristics (features/attributes) of accounting.
2. What is meant by summarisation of accounting information?
3. What is the basic purpose of financial accounting?
4. Differentiate between accountancy and accounting.
5. Name the qualitative characteristics of accounting and explain any two of them.
6. Differentiate between reliability and relevance of accounting information.
7. “The role of accounting has changed with the economic development.” Comment.
8. Differentiate between recording and classification of financial transactions in accounting.
9. What do you mean by financial accounting? State its end product.
10. Distinguish between current liability and non-current liability.
11. What are assets? Name its types.
12. Explain the term: (i) Purchases, (ii) Sales
13. What is a stock? What is included in the stock of a manufacturing concern?
CHAPTER
02 Theory Based Accounting
The accounting information will be meaningful to its internal and external users only if it is reliable
and comparable. The comparability of information means it should be capable of making inter-firm
comparisons as well as intra-firm comparison. This will be possible only if the information provided
by the financial statements is based on consistent accounting policies, principles and practices.
Such consistency is required throughout the process of identifying the events and transactions to be
accounted for, measuring them, communicating them in the book of accounts, summarising the results
thereof and reporting them to the interested parties. This is why we need to develop a proper theory
base of accounting.
GENERALLY, ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

The accounting profession has created a number of generally accepted rules or principles to ensure
uniformity and consistency in accounting records. These guidelines go by a variety of titles, including
postulates, assumptions, norms, principles, and modifying principles.
Every science is based upon some principles and rules and we must know those principles and rules
to study it. The American Institute of Certified Public Accountants (AICPA) has defined principle as:
‘‘A general law or rule adopted or professed as a guide to action, a settled ground or basis of conduct
or practice.’’
To study accountancy, we also need to study the rules and principles on which it is based and these
principles are commonly known as GAAP. The Generally Accepted Accounting Principles (GAAP) refers
to the rules or guidelines adopted for recording and reporting of business transactions, in order to
bring uniformity in the preparation and the presentation of financial statements.
The majority of accounting professionals accept the generally accepted accounting principles, which
have developed over a long period of time based on prior experiences, usages or conventions, statements
made by people and professional bodies, and legislation by government agencies. Unlike scientific
principles, accounting concepts are dynamic in nature. These are adaptable and impacted by shifts in
the legal, social, and economic spheres in addition to user needs.
FEATURES OF ACCOUNTING PRINCIPLES

1. The accounting principles make the information more meaningful and helpful and thus they
increase the utility of records to its readers.
2. The accounting principles are supported by facts and cannot be influenced by personal bias and
thus they help in determining the true financial position of an enterprise.
3. The accounting principles are practical and feasible as they are guided by practical experience
and observation rather than theory.
4. The accounting principles are flexible in nature and can be changed according to a particular
situation to provide a well-reasoned solution.
5. The accounting principles are generally accepted all over the world as they have been developed
through the requirements and experience of accountants and therefore satisfy the criteria such
as relevance, objectivity, feasibility, etc.
BASIC ACCOUNTING CONCEPTS

1. Business Entity Concept: As per this concept, the business and the proprietor will be treated to
be two separate entities and all the business transactions will be recorded in the books of accounts
from the view point of the business and not the proprietor. The proprietor is treated as a creditor
to the extent of the capital provided by him. The business entity concept is utilised in the accounting
equation:
Assets = Capital + Liabilities
Capital is the financial input of the owner and the liability of the business towards the owner.
It is treated as the internal liability of the business. The profit earned by the business during
an accounting period is a favourable thing for the business, but it is treated as a liability while
determining the financial position of a business due to this concept because profit is the obligation
of the business to the owner(s).
2. Money Measurement Concept: According to this concept, only those transactions are recorded
in the books of accounts that could be expressed in the terms of money.
For example: The salary paid to manager `50,000 will be recorded in the books of accounts as it
can be expressed in terms of money but due to the resignation of the sales manager, the business
activities remained disturbed for few weeks will not be recorded as this could not be expressed
in monetary terms.
The two drawbacks of this concept or principle are:
(a) Non-monetary transactions are not recorded irrespective of their importance.
(b) The change in the value of money is not considered.
3. Going Concern Concept: As per this concept, it is assumed that the business will exist for a long
and indefinite period of time. This means that there is neither any intention nor the necessity to
wind up the business in the near foreseeable future. It is also known as continuity assumption.
This is an important assumption of accounting because it provides the basis for showing the value
of assets in the balance sheet. The going concern assumption facilitates the recording of transactions
in the following manner:
(a) Distinction between Capital and Revenue Expenditure
(b) Recording of Assets at Original Cost and Depreciation Charged Systematically
(c) Non-recording of Market Value of Fixed Assets
(d) Long-term Contracts with External Parties
(e) Recording of Prepaid Expenses as Assets
(f) Classification of Assets and Liabilities
Theory Based Accounting 25

4. Accounting Period Concept: As per the Going Concern Concept, a business is supposed to
continue for a long run or we can say for an indefinite period of time. So, the results of business
operations cannot be ascertained before the closure of the business operations; but the users of
the accounting information cannot wait for such a long period of time. They require financial
statements and periodic reports at regular intervals to know the operational results and the
financial position of the business. Therefore, it becomes necessary to close the accounts at regular
intervals and this is the underlying principle of Accounting Period Concept. Usually a period of
one year is considered as one accounting period, which may be a calendar year or a financial year.
This accounting period is known as accounting year.
5. Cost Concept: The Cost Concept is historical is nature as it suggests that all assets shall be recorded
in the book of accounts at their purchase price including the cost of acquisition.
The advantages of cost concept are:
(a) It is verifiable as the cost considered was arrived at on the basis of actual transaction
(b) It is reliable as the documentation exists to prove the transaction and the cost incurred
(c) It is justified as it is based on the assumption of going concern and thus it is not required to
exhibit or use the current/liquidation values.
(d) The values can be easily determined.
(e) This concept provides a strong and valid basis as the market value of assets change from time
to time and it is hard to track them.
However, this concept has certain limitations also:
(a) It ignores recording of assets that cannot be expressed in terms on money like brand image,
etc.
(b) The profit is inflated or understated as the depreciation is charged on the basis of historical
cost
(c) The Information derived using this concept has limited usage amongst creditors, investors,
management, etc.
6. Dual Aspect Concept: This concept is the foundation of accounting. The books of accounts are
maintained as per this principle only. As per this concept, every business transaction has dual
effect and thus it should be recorded at two places. It states that for every debit there is an equal
amount of credit. It is also known as the Balance Sheet concept.
For example: Purchase of goods for cash `5000 will increase the stock of goods and at the same
time will decrease the cash balance by the same amount.
7. Consistency Concept: This concept states that the accounting rules, concepts, principles, practices
and conventions should be observed and applied constantly, i.e., from one year to another, there
should not be any change in method. Consistency makes the results and performance of one period
easily comparable with the other period. The persons involved in maintaining accounts have to
follow the consistent rules, principles, concepts and conventions and thus it also prevents personal
bias. In case of any change in the accounting practice due to the requirement of law or Accounting
Standards the a proper disclosures for such a deviation from conventions being followed must be
made along with the impact of such deviation on the profit and loss of the concern.
Therefore, the benefits of consistency concept are:
(a) It facilitates intra-firm and inter-firm comparison.
(b) It eliminates the chances of any personal bias.
(c) It supports a particular choice of accounting practice when two or more methods or alternative
accounting practices are available and each equally acceptable.
8. Revenue Recognition Concept: According to this concept, the revenue for a business transaction
should be included in the accounting records only when it is realised. A revenue is assumed to be
realised when a legal right to receive it arises, that is why credit sales are recorded as revenue but
any income received in advance is not considered as revenue.
9. Matching Concept: This concept emphasises on the process of ascertaining the amount of profit
earned or the loss incurred during a particular period by deducting of related expenses from the
revenue earned during that period. The matching concept states that the expenses incurred in an
accounting period should be matched with revenues during that period.
10. Principle of Full Disclosure: The principle of full disclosure emphasises on the importance of
providing accurate, full and reliable information and data in the financial statements which is of
material interest to the users of such statement. The principle of full disclosure requires that all
material information must be impartially and honestly disclosed either on the face of the financial
statements or in the notes to the financial statements. This principle is very useful for the users
such as owners, bankers, investors, creditors, employees, government agencies, etc. since they
have great interest in the proceedings of the business. However, this principle does not require
that all information that one desires to get should be included in accounting statements. If there
is enough information included that the users will find materially interesting, then it is sufficient.
11. Materiality Concept: According to this concept, the items having an insignificant effect or being
irrelevant need not to be disclosed, but the main and important information of business must be
disclosed impartially. According to American Accounting Association, ‘‘An item should be regarded
as material if there is reason to believe that knowledge of it would influence the decision of
informed investors.’’ As per this concept, accounting should focus on material facts and the efforts
should not be wasted in recording and presenting facts that are immaterial in the determination
of income.
12. Conservatism (Prudence) Concept: This concept follows the policy of caution or playing safe
and thus it is very important in the present day uncertainties. It states that all the possible losses
shall be taken into account but not the possible profits or gains. Thus, it is often in the regard of
principle of conservatism that, “Do not anticipate a profit but provide for all possible losses.” It is
because of this principle that provisions are maintained by businesses for all likely losses and all
known liabilities such as provision for doubtful debts, provision for depreciation, etc.
The advantages of this principle are:
(a) It protects against contingent future losses and liabilities.
(b) It ignores the potential gains and incomes and thus prevents overstatement of assets.
(c) It presents a true and fair vies of the state of affairs of a business.
(d) It avoids window dressing of financial statements.

13. Accrual Concept: According to this concept, the revenue is recognised as and when it is realised
and not on its actual receipt. Similarly, the cost is recognised as and when it is incurred and not
when payment is made. As per this concept, the revenue is recorded when sales are made or
services are rendered, whether cash is received or not and all the expenses and incomes relating
to the accounting period are recorded whether actual cash has been paid or received or not. To
determine the actual profit or loss for the accounting period, this assumption must be made and
adhered to.
14. Objectivity Concept: According to this theory, all accounting transactions must be objectively
documented and free from the management’s or the accountant’s personal prejudice when
preparing the accounts. It is only feasible if every transaction is backed by authentic documents
and vouchers, such as agreements, cash memos, invoices, sales bills, pay-in slips, and
communications. For instance, if the products are being bought with cash, the transaction needs
to be accompanied by a cash receipt for the amount paid; if the goods are being bought on credit,
a copy of the invoice or delivery challan is required. The invoice or cash receipt serves as an
impartial foundation for transaction verification and serves as official documentation of the
transaction.
BASIS OF ACCOUNTING
There are two bases regarding the timing of recognition of revenue and costs
1. Cash Basis
2. Accrual Basis.
Cash Basis of Accounting: Under cash basis of accounting, entries are recorded only when cash is
received or paid, that is only in case of cash outflow and inflow. When a receipt or payment is due,
no entry is passed. Thus, credit transactions are not recorded under this basis of accounting. The
adjustments like outstanding expenses, accrued income are not considered under this method of
accounting. Therefore, excess of receipts over payments during an accounting period is represented
as income under the cash basis of accounting. The majority of the government accounting system has
a cash basis.
Advantages of Cash Basis of Accounting
(a) It is simple, easy and realistic method of accounting.
(b) People with conservative instinct find it suitable to adopt this method.
(c) Estimates and personal judgments are not required in this method.
(d) It is suitable for those organisations where most of the transactions are on cash basis.
Disadvantages of Cash Basis of Accounting
(a) Profit and loss cannot be ascertained clearly and accurately.
(b) Matching principle of accounting is not followed in this method.
(c) Financial position of the enterprise is not depicted clearly.
(d) This method is not recognised by the Companies Act, 2013.
Accrual Basis of Accounting or the Mercantile System: Under accrual basis of accounting, the
accounting entries are made as and when they become due for payment or receipt. This means that
the entries are not only made for actual receipts or payments of cash but also for amounts having
become due for payment or receipt. Transactions involving cash and credit are noted in the books of
accounts. Whether or whether cash is received, income is credited to the period in which it is earned.
Similarly, whether or not cash is paid, losses and expenses are detailed according to the time in which
they occur. Regardless of monetary payments or receipts, the difference between incomes earned and
expenses incurred determines the profit or loss for any given accounting period. Every business must
keep its books of accounts up to date using the accrual method of accounting. Because it is typically
used by business entities, it is therefore known as the mercantile basis of accounting.
Advantages of accrual basis
(a) Profit or loss for the particular period is ascertained properly.
(b) It is helpful in presenting the true financial position of business.
(c) Matching principles of accounting is followed in this method.
(d) This method is recognised by the Companies Act, 2013.
Disadvantages of accrual basis
(a) It is little bit complex method to understand.
(b) Estimates and personal judgment are required in this method.
ACCOUNTING STANDARDS
Introduction
(The present era of industrialization and globalization necessitated the study of accounting information
by the various users but the diversity in the accounting policies and in the treatment of transactions
made the financial statements less meaningful and uncomparable. A need was felt to formulate certain
minimum accounting standards which should be universally acceptable so that the financial statements
should possess the qualitative features of reliability, relevance, understandability and comparability.)
(The Institute of Chartered Accountants of India set up the Accounting Standards Board (ASB) in April,
1977 to identify the areas of accounting where alternative and diverse practices were followed. ASB
was, therefore, asked to draft the accounting standards in view of the legal provisions of the country.
ASB submitted the draft accounting standards to Institute of Chartered Accountants of India. Upto 1st
April, 2010, 32 accounting standards have been issued by ICAI.
MEANING OF ACCOUNTING STANDARDS

Accounting Standards (AS) are written statements of uniform accounting rules and guidelines issued by
the accounting body of the country (Institute of Chartered Accountants of India) to be followed while
reparing and presenting the financial statements. These accounting rules and procedures are related
to measurement, valuation and disclosure of accounting informations in the financial statements.
As per Kohlar, “Accounting standards are a code of conduct imposed on accountants by custom, law
and a professional body.”
NATURE AND OBJECTIVES OF ACCOUNTING STANDARDS

(i) Accounting standards are the guidelines to the accounting professionals so as to enhance the
reliability of financial statements among its users.
(ii) The basic objective of accounting standards is to bring uniformity in the accounting practices and
to ensure consistency and comparability in the financial statements over inter-period and from
other similar firms.

(iii) These accounting standards are mandatory in nature.
(iv) With the change in the economic environment and law of the nation, accounting standards are
subject to change from time to time but in no case they will override the provisions of law.
(v) Where alternative accounting practices are available, accounting standards prescribe a preferred
accounting practice, however management is free to use any accounting practice by giving suitable
disclosures. If the management prefers to change the existing accounting practice, the change in
practice must be disclosed along with its financial impact e.g., change in the method of charging
depreciation.
IMPORTANCE OF ACCOUNTING STANDARDS

(i) Accounting standards provide accounting rule and guidelines for the preparation of financial
statements.
(ii) They ensure consistency and uniformity in the financial statements and thus, make them
comparable over periods and from other similar firms.
(iii) The accounting standards are mandatory in nature so auditor has to ensure the compliance of
these standards. This enhances the reliability of financial statements among the various users of
accounting service.
(iv) The mandatory nature of accounting standards ensure complete disclosure of accounting policies
and practices. Thus, reliability of financial statements is further enhanced.
Accounting Standards issued by the Institute of Chartered Accountants of India
The Council of Institute of Chartered Accountants of India has issued 32 accounting standards so far
but as per Companies (Accounting Standards) Rule, 2006 notified till 31st August 2011, in pursuant to
Section 211 (3-C) of Companies Act, 1956 and Sec. 129 of Companies Act, 2013, 28 accounting standards
i.e., AS 1 to 7 and AS-9 to 29 are operational. AS-8 has been withdrawn by ICAI. The compliance of
operating accounting standards is mandatory. These accounting standards are as follow:
AS. No. Title
AS-1 Disclosure of Accounting Policies
AS-2 Valuation of Inventories (Revised)
AS-3 Cash Flow Statement (Revised)
AS-4 Contingencies and Events Occurring after the Balance Sheet Date (Revised)
AS-5 Prior Period and Extraordinary Items and Changes in Accounting Policies
AS-6 Depreciation Accounting (Revised)
AS-7 Accounting for Construction Contracts
AS-8 Accounting for Research and Development
AS-9 Revenue Recognition
AS-10 Accounting for Fixed Assets
AS-11 Accounting for the Effects of Changes in Foreign Exchange Rates (Revised)
AS-12 Accounting for Government Grants
AS-13 Accounting for Investments
AS-14 Accounting for Amalgamations
AS-15 Accounting for Retirement Benefits in the Financial Statements of Employers
AS-16 Borrowing Costs
AS. No. Title
AS-17 Segment Reporting

AS-18 Related Parties Disclosures
AS-19 Leases
AS-20 Earnings Per Share
AS-21 Consolidated Financial Statements
AS-22 Accounting for Taxes on Income
AS-23 Accounting for Investments in Associates in Consolidated Financial Statements
AS-24 Discontinuing Operations
AS-25 Interim Financial Reporting
AS-26 Intangible Assets
AS-27 Financial Reporting of Interests in Joint Venture
AS-28 Impairment of Assets
AS-29 Provisions, Contingent Liabilities and Contingent Assets
AS-30 Financial Instruments: Recognition and Measurement
AS-31 Financial Instruments Presentation
AS-32 Financial Instrument: Disclosures
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

Introduction
With the emergence of industrialization and automation at global level, various multi nation companies
(MNC’s) have emerged having branches in different countries. The accounting concepts and conventions
vary from country to country so financial information was not comparable. Thus, it was felt to have
a common set of accounting and financial reporting standards so as to understand and compare
the financial information worldwide. With this aim in view, International Accounting Standard
Committee (IASC) was established in 1973 through an agreement by professional accounting bodies
from U.K., U.S.A., Canada, France, Germany, Japan, Australia, Maxico, Netherlands and Ireland. The
Institute of Chartered Accountants of India joined IASC as an associate member in 1974 and
joined the board in 1993. IASC has issued 41 accounting standards known as International
Accounting Standards (IAS). The objective was to develop accounting standards which would be
acceptable worldwide so that financial reporting be improved internationally
International Accounting Standards Boards (IASB) and International Financial Reporting
Standards (IFRS).
In the year 2001, IASC was replaced with International Accounting Standards Board (IASB). IASB
reviewed all the 41-IAS and scrapped 12-IAS. So effective IAS are 29 now. The accounting standards
issued by IASB are termed as International Financial Reporting Standards (IFRS).
MEANING OF IFRS
International Financial Reporting Standards (IFRS) are the accounting standards developed by
International Accounting Standard Board (IASB). IASB has developed 10 principles based accounting
standards so far known as - IFRS. These are as under:)

IFRS Issued by AISB
S. No. Tittle
1. IFRS 1 First time Adoption of International Financial Reporting Standards.
2. IFRS 2 Share-Based Payment
3. IFRS 3 Business Combinations
4. IFRS 4 Insurance Contracts
5. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
6. IFRS 6 Exploration for and Evaluation of Mineral Resources
7. IFRS 7 Financial Instruments: Disclosures
8. IFRS 8 Operating Segments
9. IFRS 9 Financial Instruments
10. IFRS for Small and Medium Enterprises. It provides standards applicable to private
entities (those are not public accountable as defined in this standard).
The International Accounting Standards (IAS) presently in force are remaining 29 which are as
under:
S. No. Tittle
1. IFRS 1 Presentation of Financial Statements
2. IFRS 2 Inventories
3. IFRS 7 Cash Flow Statements
4. IFRS 8 Net Profit or Loss for the Period, Fundamental Errors and changes in Accounting
Policies
5. IFRS 10 Events after Balance Sheet-Date
6. IFRS 11 Construction Contracts
7. IFRS 12 Income Taxes
8. IFRS 16 Property, Plant and Equipment
9. IFRS 17 Leases
10. IFRS 18 Revenue
11. IFRS 19 Employee Benefits
12. IFRS 20 Accounting of Govt. Grants and Disclosure of Govt. Assistance
13. IFRS 21 The Effects of changes in Foreign Exchange Rates
14. IFRS 23 Borrowing Costs
15. IFRS 24 Related Party Disclosures
16. IFRS 26 Accounting & Reporting by Retirement Benefit Plans.
17. IFRS 27 Consolidated Financial Statements
18. IFRS 28 Investments in Associates
S. No. Tittle
19. IFRS 29 Financial Reporting in Hyperinflationary Economies
20. IFRS 31 Financial Reporting of Interests in Joint Ventures
21. IFRS 32 Financial Instruments: Disclosures and Presentations
22. IFRS 33 Earning Per Share
23. IFRS 34 Interim Financial Reporting
24. IFRS 36 Impairment of Assets
25. IFRS 37 Provisions, Contingent Liabilities and Contingent Assets
26. IFRS 38 Intangible Assets
27. IFRS 39 Financial Instruments: Recognition and Measurement
28. IFRS 40 Investment Property
29. IFRS 41 Agriculture
Difference between IFRS and Accounting Standards (AS) issued by Institute of Chartered
Accountants of India.
1. The IFRS are principle based accounting standards while Indian GAAP (Generally Accepted
Accounting Standards) or AS (accounting standards) are rules based accounting standards.
2. IFRS do not prescribe any format of Balance Sheet while Indian laws prescribe a specific format
of Balance Sheet and Statement of Profit & Loss.
3. IFRS are based on Fair Value Concept while Indian Accounting Standards are based on Historical
Cost Concepts.
4. Besides these, various differences also emerge on treatment of various items in various areas such
as useful life of tangible assets, prior period items, extraordinary items, impact on fixed assets
and so on.
Use of IFRS in India
Since Institute of Chartered Accountants of India had joined the IASC board in 1993 and it has also issued
32 Accounting Standards (AS) so far of which AS 1 to 7 and 9 to 29 are mandatory in nature. In India, the
National Advisory Committee on Accounting Standards advised the Ministry of Corporate Affairs, Govt.
of India to converge the Indian Accounting Standards in line with IFRS.
The Govt. of India has issued notification in this respect. The converged accounting standards are now
called Ind-AS. Till this date, 41 Ind AS have been issued and notified which are as under.)
Compliance of Ind AS in the phased manner as per M.C.A. notification in 2015
Financial Year Mandatory Applicable to
2016-17 Companies (Listed and Unlisted) whose net worth is equal to or exceeds 500 crores.
2017-18 Unlisted companies whose net worth is equal to or exceeds `250 crores and all listed
companies.
2018-19 All Banks, NBFC’s and Insurance Companies whose net worth is equal to or exceeds
`500 crores.

EXERCISES
1. Closing stock is valued as per Principle of conservation at:
(a) Cost Price (b) Market Price
(c) Cost or market price whichever is less (d) Its real price
2. Depreciation on fixed assets is charged based on?
(a) Going Concern Assumption (b) Matching Concept
(c) Consistency Assumption (d) All of these
3. Stock of pencil, eraser and inkpot is not shown as asset rather these are shown as revenue
expenditure based on:
(a) Principle of Prudence (b) Materiality Principle
(c) Historical Cost Principle (d) Matching Concept
4. “Revenue is recognised when sale is made or service is rendered rather than cash is received” is
based on:
(a) Matching Principle (b) Going Concern Assumption
(c) Accrual Assumption (d) All of these
5. Expenses like salary, rent, insurance etc. are recognised on the basis of period to which they relate
and not when they are paid based on:
(a) Going Concern Assumption (b) Matching Principle
(c) Accounting Period Principle (d) All of these
6. Contingent Liability is shown below the Balance Sheet on the basis of:
(a) Materiality Principle
(b) Going Concern Assumption
(c) (Full Disclosure Principle
(d) Matching Concept
7. Principle of Conservation/Prudence is applied to:
(a) Valuation of closing stock at cost or market price whichever is less
(b) Creation of provision for doubtful debt
(c) Writing off intangible assets like goodwill, patent, trademark etc.
(d) All of the above
8. Same accounting methods be used based on ____________ principle.

(a) Prudence (b) Materiality (c) Consistency (d) Full Disclosure
9. Profit of the business is computed based on:
(a) Matching Concept (b) Recognition Concept
(c) Principle of Conservation (d) All of these
10. The owner of a business is treated as creditor of the business to the extent of his capital based on
____________
(a) dual aspect concept (b) cost concept
(c) business entity concept (d) money measurement concept
11. IAS Stands for
(a) International accounting standard committee
(b) Indian accountings standard committee
(c) International accounting standard company
(d) Indian accounting standard company
12. IASB Stands for
(a) International accounting standard Board (b) International accounting standard Board
(c) Indian accounting standard Board (d) None of the above
13. ICAI established under
(a) Chartered accountant act 1994 (b) Company act 1956
(c) Partnership act 1930 (d) Company act 2013
14. When accounting standard board has been constituting
(a) 21 Feb 1977 (b) 21 March 1977 (c) 21 April (d) 21 May 1977
15. IAS in accounting stands for
(a) Indian administrative services (b) International accountings standard
(c) Indian accounting standard (d) None of the above
16. Income taxes Comes under
(a) Ind AS 11 (b) Ind As 12 (c) Ind AS 13 (d) Ind AS 14
17. Intangible assets comes under
(a) AS 22 (b) AS 23 (c) AS 24 (d) AS 26
18. GAAP of Indian has been established by
(a) MCA (b) ICAI
(c) Ministry of France (d) ICSI
19. How many numbers of accounting standard have been issued by ICAI
(a) 38 (b) 41 (c) 32 (d) 12
20. The global recognized set of standards for the preparation of financial statement by business
entity used in multiple countries is termed as
(a) IFRS (b) ICAI (c) ASB (d) IAS
ANSWERS
1. (c) 2. (1) 3. (b) 4. (c) 5. (b) 6. (c) 7. (d) 8. (c)
9. (1) 10. (1) 11. (a) 12. (1) 13. (1) 14. (c) 15. (b) 16. (2)
17. (d) 18. (2) 19. (c) 20. (1)

1. Name two features of accounting principles.
Ans. (i) Accounting principles are man-made based on experience so they are not exact as principle
of natural science.
(ii) Accounting principles are theory base of accounting. They act as guide for accounting.
2. What is meant by accounting assumptions or concepts?

Ans. The accounting concepts are fundamental assumptions within which the accounting operates.
They are generally accepted accounting rules and business transactions are recorded in the books
of accounts based on the concepts or assumptions.
3. What is meant by accounting period principle?

Ans. As per principle of going concern, life of business is fairly long and users of accounting service
cannot wait or the financial statements till the liquidation of the business. It is therefore, prudent
that all business should prepare their financial statements on a periodic basis, normally on yearly
basis. As per companies Act, 2013 and Income Tax Act, 1961, accounting period is counted from
1st April to 31st March on yearly basis.
4. State materiality principle.

Ans. The principle of materiality requires the accounting of material facts in the books of accounts.
An item should be regarded as material if there is reason to believe that knowledge of it would
influence the decision of an informed investor.
5. What is meant by prudence or conservatism principle?

Ans.According to principle of conservatism or prudence, if the management anticipate loss, provision
should be made for loss but if it anticipates profit, it should not be recorded in the books of accounts
unless and until it is realised.
6. Why is owner’s capital considered as liability to firm?

Ans. According to business entity concept, business is considered a separate entity distinct from its
owner (s). Thus, owner of the business is considered as creditor of the firm to the extent of his
capital.
7. Give two reasons for showing the fixed assets at their historical cost.
Ans. Fixed assets are shown at historical cost because:
(i) The cost price paid for purchase of asset is verifiable from cost records.
(ii) It is difficult to determine the market price of each asset. Moreover, the valuation of asset will
vary from person to person.
8. What is verifiable objective concept?

Ans. The verifiable objective concept requires that accounting transactions should be recorded in
an objective manner and should be free from personal bias of the accountant. This is feasible if
transactions are supported by documentary evidence and vouchers.
9. What is the need of having accounting principles?
Ans. The accounting principles are needed to make financial statements in a standardized form so that
they serve the end users of financial statements in a better way
10. Explain the matching concept or matching principle.

Ans. According to matching concept, expenses incurred in an accounting period should be matched with
revenue during that period. Since accounts are prepared on accrual basis so expenses incurred
in an accounting period are matched with revenue recognized in that period.
11. What is the need of having Accounting Standards?

Ans. To avoid the diversity in the accounting policies and in the treatment of transactions in the financial
statements in the present era, a need was felt to formulate certain minimum accounting standards
which should be universally acceptable.
12. How many Accounting standards have been released so far in India? Are all of them mandatory?
Ans. 32 accounting standards have been issued so far. All of them are not mandatory. AS 1 to 7 and 9
to 29 are operational and hence, mandatory.
13. Name any three Accounting Standards.

Ans. (i) Cash Flow Statements (Revised) AS-3
(ii) Depreciation Accounting (Revised) AS-6
(iii) Revenue Recognition AS-9
14. Is the use of Accounting Standards mandatory in India?

Ans. Yes, use of accounting standards is mandatory in India under Companies Act, 2013.
15. Name any two reasons to support the nature of accounting standards.
Ans. (i) The accounting standards are mandatory in nature.
(ii) The basic objective of accounting standards is to bring uniformity and consistency in the
accounting practices so as to ensure comparability in the financial statements over inter-
period and from other similar firms.
16. How many International Accounting Standards (IAS) have been superseded by IASB?
Ans. 12-IAS out of 41 developed.
17. Whether Indian Government has agreed to comply with IFRS? If yes, from which date.
Ans. India Government has made the compliance of converged IFRS w.e.f. 1st April, 2016 in a phased
manner.
18. What are IFRS (International Financial Reporting Standards)?

Ans. The accounting standards developed and issued by IASB are called IFRS.

19. How many IFRS have been developed so far?
Ans. 10 IFRS have been developed of which 1 to 9 applies on companies and No. 10 applies on small
and medium size enterprises.
20. What is the basic difference between IFRS and Accounting Standards (AS) issued by ICAI (Institute
of Chartered Accountants of India)?
Ans. The IFRS are principles based accounting standards while AS are rules based accounting standards.

1. What are accounting principles? Explain any two of them.
2. What is meant by dual aspect concept? How is it related to Accounting Equation?
3. Differentiate between principle of consistency and conservatism assumption.
4. What is meant by accounting principles? Why are they needed?
5. Explain:
(i) Revenue Recognition Concept
(ii) Accrual Assumption
6. Define Accounting Standards. Who is responsible for issuing them in our country?
7. How many accounting standards have been released so far in India? Name four of them.
8. What is meant by Accounting Standards? Discuss its objectives.
9. What was the basic objective to form International Accounting Standard Committee (IASC)? When
was it formed?
10. How many International Accounting Standards (IAS) were released so far and how many standards
are still in force?
11. Discuss the contents of IFRS based financial statements.
12. State the benefits of IFRS compliance.
TOPICS TO BE COVERED
GAAP
Features of Accounting Principles
Basic Accounting Concepts
Basis of Accounting
Accounting Standards (AS)
AS issued by ICAI
IFRS
Use of IFRS in India
CHAPTER
03 Accounting Equation
An accounting equation is a mathematical expression, which states that assets of a firm are equal to
the sum of its liabilities and the capital contributed by the owner.
Thus, it can be expressed as:
Assets = Equities (Total claims)
Or,
Assets = Liabilities (Outsider’s Claims) + Capital (Owner’s Equity)
Or,
Capital (Owner’s Equity) = Assets – Liabilities
Or,
Liabilities = Assets – Capital (Owner’s Equity)
Accounting equation is based on the dual aspect concept, which states that every transaction has a
two sided effect, i.e., on the assets, and on the liabilities and capital and thus the accounting equation
should remain in balance at all times.
Illustration 1. Find the missing figures in the given table:
Assets Liabilities Capital
(a) `1,50,000 — `50,000
(b) `80,000 `20,000 —
(c) — `30,000 `20,000
Sol. (a) Assets = Liabilities + Capital

1,50,000 = Liabilities + 50,000
Liabilities = 1,50,000 – 50,000
Liabilities = `1,00,000
(b) Assets = Liabilities + Capital
80,000 = 20,000 + Capital
Capital = 80,000 – 20,000
Capital = `60,000
(c) Assets = Liabilities + Capital
Assets = 30,000 + 20,000
Assets = `50,000
Illustration 2. The total assets and capital were `10,00,000 and `8,50,000 respectively. Find the
liabilities.
Assets = Liabilities + Capital
10,00,000 = Liabilities + 8,50,000
Liabilities = `1,50,000
Illustration 3. The total assets and liabilities were `15,00,000 and `1,50,000 respectively. Find the
capital.
Assets = Liabilities + Capital
15,00,000 = 1,50,000 + Capital
Capital = `13,50,000
RULES FOR ACCOUNTING EQUATIONS

1. Capital: The capital is increased by the funds introduced by the proprietor in the business, the
profit earned by the business and the interest allowed on capital and the capital is decreased by
the drawings made by the proprietor, the loss of the business and interest charged on the drawings.
The expenses incurred by the business are subtracted from and the incomes earned by the business
are added to the capital.
2. Outsiders’ Claims (Liabilities): The liabilities are increased by all the credit transactions and
the expenses due but on paid whereas the repayment of liabilities decreases it.
3. Assets: The purchase of assets increase the assets and sale decreases them. Sometimes, a single
transactions results in increase of one asset and decrease of another; sale of goods for credit will
increase the debtors but reduce the stock. Similarly, purchase of machinery for cash will increase
the machinery but decrease the cash.
4. Expenses and Incomes: The expenses paid are subtracted from cash and capital and the incomes
received are added to cash and capital.
5. Miscellaneous Rules: The prepaid expenses increase the asset and decrease the cash, similarly
the advance incomes increase the cash and also the liabilities. The outstanding expenses increase
the liability and decrease the capital and the accrued incomes increase the assets and the capital.
PROCEDURE FOR ACCOUNTING EQUATION

1. Analyse Transactions: Each and every business transaction shall be analysed that which of the
accounting variables will be affected by it.
2. Ascertain the Effect of Transactions: Determine how the transaction will affect the variable
that is whether it will result in an increase or decrease in them.
3. Record the Change: Once the effect is analysed, the change shall be recorded on the correct side
of the accounting equation.
Illustration 4. Analyse the following transactions and show their effect on accounting equation.
(a) Ram started business with cash `5,00,000.
(b) Purchased furniture for cash `50,000.
(c) Purchased goods for cash `3,00,000.
(d) Purchased goods on credit `2,00,000.
(e) Goods costing `2,50,000 were sold on credit for `3,50,000.
(f) Rent paid `30,000.
Sol. (a) The business will receive cash in form of capital, which will increase both cash and capital by
`5,00,000.
Transaction Assets = Capital + Liabilities
Cash
Capital Introduced 5,00,000 = 5,00,000
(b) The cash balance will decrease and a new asset furniture will increase by `50,000.
Cash + Furniture
Old Equation 5,00,000 = 5,00,000
New Transaction –50,000 + 50,000 =
New Equation 4,50,000 + 50,000 = 5,00,000
(c) The cash balance will decrease and a new asset stock will increase by `3,00,000.
Cash + Furniture + Stock
Old Equation 4,50,000 + 50,000 = 5,00,000
New Transaction –3,00,000 + 3,00,000 =
New Equation 1,50,000 + 50,000 + 3,00,000 = 5,00,000
(d) The stock will increase by `2,00,000 and as the purchase is being made on credit so a new
liability named creditors will arise for `2,00,000.
Cash + Furniture + Stock Creditors
Old Equation 1,50,000 + 50,000 + 3,00,000 = 5,00,000
New Transaction + 2,00,000 = 2,00,000
New Equation 1,50,000 + 50,000 + 5,00,000 = 5,00,000 + 2,00,000
(e) Stock will decrease by `2,50,000, cash will increase by `3,50,000 and the profit of `1,00,000
on sale will increase the capital.
Old Equation 1,50,000 + 50,000 + 5,00,000 = 5,00,000 + 2,00,000
New Transaction +3,50,000 – 2,50,000 = +1,00,000
New Equation 5,00,000 + 50,000 + 2,50,000 = 6,00,000 + 2,00,000
Accounting Equation 41
(f) Cash will decrease by `30,000 and as it is an expense, so it will decrease the capital by `30,000.

Old Equation 5,00,000 + 50,000 + 2,50,000 = 6,00,000 + 2,00,000
New Transaction –30,000 = –30,000
New Equation 4,70,000 + 50,000 + 2,50,000 = 5,70,000 + 2,00,000
THE BALANCE SHEET OF RAM’S BUSINESS IS PRESENTED AS BELOW:

Balance Sheet
Liabilities Amount Assets Amount

Creditors 2,00,000 Cash 4,70,000
Capital 5,70,000 Stock 50,000
Furniture 2,50,000
7,70,000 7,70,000
Illustration: 5 Analyse the following transactions and show their effect on accounting equation.
(a) Started business with cash `40,000.
(b) Opened a Bank Account with a deposit of `10,000.
(c) Bought goods from Hari for `11,000.
(d) Purchased goods for cash `10,000.
(e) Sold goods costing `1,500 to Ajit for `1,800.
(f) Cash withdrawn from bank for office use `5,000
(g) Withdrew cash from bank for personal use `2,000.
Sol. (a) The business will receive cash in form of capital, which will increase both cash (asset) and
capital by `40,000.

Cash
Capital Introduced 40,000 = 40,000
(b) The bank balance (asset) will increase and the cash balance (asset) will decrease `10,000.

Cash + Bank
Old Equation 40,000 = 40,000
New Transaction – 10,000 + 10,000 =
New Equation 30,000 + 10,000 = 40,000
(c) The goods are purchased on credit, so the stock (asset) and creditors (liability) will increase
by `11,000.
Cash + Bank + Stock Creditors

Old Equation 30,000 + 10,000 = 40,000
New Transaction + 11,000 = + 11000
New Equation 30,000 + 10,000 + 11,000 = 40,000 + 11000
(d) The goods are purchased for cash, so the stock (asset) will increase and cash (assets) will
decrease by `10,000.
Cash + Bank + Stock Creditors

Old Equation 30,000 + 10,000 + 11,000 = 40,000 + 11000
New Equation 20,000 + 10,000 + 21,000 = 40,000 + 11000
(e) The goods are sold on credit, so the debtors (asset) will increase by `1,800, the stock (asset)
will decrease by `1,500 and the capital will increase by the profit of `300.
Cash + Bank + Stock + Debtors Creditors

Old Equation 20,000 + 10,000 + 21,000 = 40,000 + 11,000
New Transaction – 1,500 + 1800 = + 300
New Equation 20,000 + 10,000 + 19,500 + 1800 = 40,300 + 11,000
(f) The bank balance (asset) will decrease and the cash balance (asset) will increase `5,000

Old Equation 20,000 + 10,000 + 19,500 + 1800 = 40,300 + 11,000
New Transaction + 5,000 – 5,000 = + 300
New Equation 25,000 + 5,000 + 19,500 + 1800 = 40,300 + 11,000
(g) As the cash is withdrawn for personal use, so the bank balance (asset) will decrease and the
capital will decrease `2,000.

Old Equation 25,000 + 5,000 + 19,500 + 1,800 = 40,300 + 11,000
New Transaction – 2,000 = – 2000
New Equation 25,000 + 3,000 + 19,500 + 1,800 = 38,300 + 11,000
Balance sheet of the business is presented as below:
Balance Sheet
Creditors 11,000 Cash 25,000
Capital 38,300 Bank 3,000
Stock 19,500
Debtors 1,800
49,300 49,300
Illustration 6. Analyse the following transactions and show their effect on accounting equation.
(a) Commenced business with cash `10,000.
(b) Purchased machinery for `1,000.
(c) Paid rent of `500.
(d) Purchased goods on credit `2,000.
(e) Sold goods (cost price `2,000) for `1,500 on cash.
(f) Paid insurance in advance `1,500.
(g) Purchased goods for cash `3,000 and credit `2,000.
(h) Sold goods for cash `2,000 costing `2,500.
(i) Paid salary `2,500 and salary outstanding being `500.
(j) Goods withdrawn for personal use `2000.
Sol. (a) The business will receive cash in form of capital, which will increase both cash (asset) and
capital.
Cash
Capital Introduced 10,000 = 10,000
(b) The machinery (asset) will increase and the cash balance (asset) will decrease.
Cash + Machinery
Old Equation 10,000 = 10,000
New Equation 9,000 + 1,000 = 10,000
(c) The rent paid is an expense, so it will decrease cash (asset) and capital.
Cash + Machinery
Old Equation 9,000 + 1,000 = 10,000
New Transaction – 500 = – 500
New Equation 8,500 + 1,000 = 9,500
(d) The goods are purchased on credit, so the stock (asset) will increase and creditors (liability)
will increase.
Cash + Machinery + Stock Creditors
Old Equation 8,500 + 1,000 = 9,500
New Transaction + 2,000 = + 2,000
New Equation 8,500 + 1,000 + 2,000 = 9,500 + 2,000
(e) The goods are sold for cash, so the cash (asset) will increase by `1,500, the stock (asset) will
decrease by `2,000 and the capital will decrease by the loss of `500.
Cash + Machinery + Stock Creditors
Old Equation 8,500 + 1,000 + 2,000 = 9,500 + 2000
New Transaction + 1500 – 2,000 = – 500
New Equation 10,000 + 1,000 = 9,000 + 2,000
(f) The insurance paid in advance will reduce cash (asset) and increase prepaid insurance (asset),
it will not be recognised as the current year’s expense; so it will not affect the capital.
Cash + Machinery + Prepaid Creditors
Old Equation insurance =
New Transaction 10,000 + 1,000 = 9,000 + 2000
– 1,500 + 1,500
New Equation 8,500 + 1,000 + 1,500 = 9,000 + 2,000
(g) The purchase will increase the stock (asset), the cash purchase will reduce (cash) and the
credit purchase will increase the creditors (liability).
Cash + Machinery + Prepaid + Stock Creditors
Old Equation insurance = 9,000 + 2000
New Transaction 8,500 + 1,000 + 1,500 = + 2000
–3,000 + 5,000
New Equation 5,500 + 1,000 + 1,500 + 5,000 = 9,000 + 4,000
(h) Cash (asset) will increase by the selling price, stock (asset) will decrease by the cost price and
the loss will be deducted from capital.
Cash + Machinery + Prepaid + Stock Creditors
Old Equation insurance =
New Transaction 5,500 + 1,000 + 1,500 + 5,000 = 9,000 + 4,000
+ 2,000 – 2,500 – 500
New Equation 7,500 + 1,000 + 1,500 + 2,500 = 8,500 + 4,000
(i) Total salary (paid and outstanding) will be deducted from capital as it is an expense, paid
salary will be deducted from cash (asset) and salary outstanding will be a liability.
Cash + Machinery + Prepaid + Stock Creditors + O/s
Old Equation insurance = salary
New Transaction 7,500 + 1,000 + 1,500 + 2,500 = 8,500 + 4,000
– 2,500 – 2,500 – 3,000 + 500
New Equation 5,000 + 1,000 + 1,500 + 2,500 = 5,500 + 4,000 + 500
(j) Goods withdrawn for personal use will be treated as drawings and it will reduce the stock
(asset) and the capital.
Cash + Machinery + Prepaid + Stock Creditors + O/s
Old Equation insurance = salary
New Transaction 5,000 + 1,000 + 1,500 + 2,500 = 5,500 + 4,000 + 500
– 2,000 – 2,000 + 500
New Equation 5,000 + 1,000 + 1,500 + 500 = 3,500 + 4,000 + 500
The balance sheet of the business is presented as below:

Balance Sheet
O/s Salary 500 Machinery 1,000
Capital 3,500 Stock 500
Prepaid Insurance 1,500
8,000 8,000
Illustration 7. Prepare accounting equation from the following:

(i) Started a business with cash `2,00,000 and goods worth `40,000.
(ii) Sold half of the goods to Manohar at a 20% profit on cost.
(iii) Rent paid `10,000.
(iv) Manohar paid `23,500 in full settlement.
Sol.
Cash + Stock + Debtors
(i) 2,00,000 + 40,000 = 2,40,000
New Equation 2,00,000 + 40,000 = 2,40,000
(ii) – 20,000 + 24,000 = + 4,000
New Equation 2,00,000 + 20,000 + 24,000 = 2,44,000
(iii) – 10,000 – 10,000
New Equation 1,90,000 + 20,000 + 24,000 = 2,34,000
(iv) + 23,500 – 24,000 – 500
Final Equation 2,13,500 + 20,000 = 2,33,500
Illustration 8. Show the accounting equation on the basis of the following transactions and prepare
Balance Sheet for the final equation:
(i) Started business with cash `60,000, Machinery `30,000 and Goods `10,000.
(ii) Purchased building for cash `50,000.
(iii) Purchased goods on credit `5,000 and on cash `2,000.
(iv) Insurance Premium Paid in Advance `1,000.
(v) Depreciation on building `800 and on machinery `3,000.
(vi) Cash withdrawn for personal use `2,000.
(vii) Rent received in advance `5,000.
(viii) Sold goods costing `14,000 for `15,500.
(ix) Interest on capital `1,200.
Sol.
Cash + Machinery + Stock + Building + Prepaid Creditors + Advance

(i) Expense Income
60,000 + 30,000 + 10,000 = 1,00,000
New Equation 60,000 + 30,000 + 10,000 = 1,00,000
(ii) – 50,000 + 50,000
New Equation 10,000 + 30,000 + 10,000 + 50,000 = 1,00,000
(iii) – 2,000 + 7,000 = + 5,000
New Equation 8,000 + 30,000 + 17,000 + 50,000 = 1,00,000 + 5,000
(iv) – 1,000 + 1,000 = – 500
New Equation 7,000 + 30,000 + 17,000 + 50,000 + 1,000 = 1,00,000 + 5,000
(v) – 3,000 – 800 = – 3,800
New Equation 7,000 + 27,000 + 17,000 + 49,200 + 1,000 = 96,200 + 5,000
(vi) – 2,000 = – 2,000
New Equation 5,000 + 27,000 + 17,000 + 49,200 + 1,000 = 94,200 + 5,000
(vii) + 5,000 = + 5,000
New Equation 10,000 + 27,000 + 17,000 + 49,200 + 1,000 = 94,200 + 5,000 + 5,000
(viii) + 15,500 – 4,000 = 1,500
Final Equation 25,500 + 27,000 + 3,000 + 49,200 + 1,000 = 95,700 + 5,000 + 5,000
Balance Sheet
Advance Income 5,000 Machinery 27,000
Capital 95,700 Stock 3,000
Building 49,200
Prepaid Expense 1,000
1,05,700 1,05,700
NET INCOME
The net income or net profit is the difference opening capital and closing capital. If the closing capital
is more than the opening capital then there is profit and if closing capital is less than the opening
capital then there is loss.
Closing Capital = Opening Capital + Further Capital Introduced – Drawings + Profit
Profit = Closing Capital – Opening Capital
Illustration 9. Premchand started a business on 1st April, 2015 with a capital of `2,00,000. On 31st
March, 2016 his assets were worth `4,80,000 and liabilities `1,20,000. Find out his closing capital and
profit earned during the year.
Sol. Opening Capital = `2,00,000
Closing Capital = 4,80,000 – 1,20,000 = `3,60,000
Profit = 3,60,000 – 2,00,000 = `1,60,000
Illustration 10. On 31st March 2020, the total assets and outside liabilities were `6,00,000 and `2,40,000
respectively. During the year, the owner had introduced additional capital of `50,000 and withdrawn
`30,000 for personal use. He made a profit of `1,00,000 during the year. Find out his opening capital
Sol. Closing Capital = Assets – Liabilities (on closing date)
Closing Capital = 6,00,000 – 2,40,000 = `3,60,000
Now,
Closing Capital = Opening Capital + Further Capital Introduced – Drawings + Profit
3,60,000 = Opening Capital + 50,000 – 30,000 + 1,00,000
Opening Capital = 3,60,000 – 1,20,000 = `2,40,000
Illustration 11. Solve the following:
(a) If the capital of the business is `1,00,000 and outside liabilities are `50,000. Calculate total
equity of the business.
(b) If total assets of the business are `1,50,000 and Capital is `1,05,000. Calculate liabilities.
(c) If total assets of the business are `2,50,000 and outside liabilities are `85,000. Calculate
owner’s equity.
Sol. (a) Total Assets (equity) = Capital + Liabilities
= 1,00,000 + 50,000
= `1,50,000
(b) Total Assets (equity) = Capital + Liabilities
1,50,000 = 1,05,000 + Liabilities
Liabilities = `45,000
(c) Total Assets (equity) = Capital + Liabilities
2,50,000 = Capital + 85,000
Capital = `1,65,000
Illustration 12. On 1st April, 2021, R started business with a capital of `2,00,000 and a loan of `1,00,000
borrowed from a friend. During the year, he earned a profit of `50,000, introduced an additional capital
of `80,000 and had withdrawn `9,000 for his personal use. Find his closing capital.
Sol. Closing Capital = Opening Capital + Further Capital Introduced – Drawings + Profit
3,60,000 = Opening Capital + 50,000 – 30,000 + 1,00,000
Opening Capital = 3,60,000 – 1,20,000= `2,40,000
Illustration 13. Ajay started business on 1st April, 2021 with capital of `2,50,000. On 31st March, 2022
his total assets were `10,50,000 and liabilities were `5,50,000. Calculate the amount of profit earned
by the business during the year.
Sol. Closing Capital = Total Assets – Total Liabilities
= 10,50,000 – 5,50,000 = 5,00,000
Profit = Closing Capital – Opening Capital
= 5,00,000 – 2,50,000 = `2,50,000
Illustration 14. Calculate the missing figures in the given table:

Case Opening Capital Closing Capital Additional Capital Drawings Profit/Loss
(`) (`) (`) (`) (`)
(a) ? 71,000 5,000 4,000 15,000
(b) 45,000 ? 11,500 9,000 60,000
(c) 80,000 1,20,000 ? 15,000 42,000
(d) 90,000 1,15,000 25,000 ? 10,000
(e) 55,000 80,000 25,000 10,000 ?
Sol. (a) Closing Capital = Opening Capital + Further Capital – Drawings + Profit
71,000 = Opening Capital + 5,000 – 4,000 + 15,000
Opening Capital = `56,000
(b) Closing Capital = Opening Capital + Further Capital – Drawings + Profit
= 45,000 + 11,500 – 9,000 + 60,000 = `1,07,500
(c) Closing Capital = Opening Capital + Further Capital – Drawings + Profit
1,20,000 = 80,000 + Further Capital – 15,000 + 42,000
Further Capital = `13,000
(d) Closing Capital = Opening Capital + Further Capital Introduced – Drawings + Profit
1,15,000 = 90.000 + 25,000 – Drawings + 10,000
Drawings = `10,000
(e) Closing Capital = Opening Capital + Further Capital Introduced – Drawings + Profit
80,000 = 55.000 + 25,000 – 10,000 + Profit
Profit = `10,000
RULES OF DEBIT AND CREDIT

To understand the rules of debit and credit, we first need to understand the classification of accounts.
There are two approaches for classification of accounts:
Traditional Approach
Modern Approach.
TRADITIONAL APPROACH
As per traditional approach the accounts are classified as below:
Classification of Accounts
Personal Impersonal
Natural Artificial Representative Real Nominal
Tangible Intangible
I. PERSONAL ACCOUNTS
These are the accounts that are linked to individuals or group of individuals. The personal accounts
may further be classified as:
(a) Natural Personal Accounts: Natural persons means the persons that are born, so these accounts
are related to an individual human beings.
(b) Artificial Personal Accounts: Artificial persons means the persons that are created by law or
those who are not natural persons, so these accounts are related to companies, firms and other
form of businesses and organisations.
(c) Representative Personal Accounts: This account indirectly representing a natural or artificial
person. These accounts represent outstanding and prepaid items. Capital and Drawings accounts
are also personal accounts.
The rule for personal accounts is: Debit the receiver, Credit the giver.
II. IMPERSONAL ACCOUNTS
These are the accounts which are not personal accounts. The impersonal accounts are further classified
as:
(a) Real Accounts: These accounts are related to the properties and assets owned by the business
concern. Real accounts can be further classified into tangible real accounts and intangible real
accounts.
(i) Tangible Real Accounts: These accounts represent the assets and properties which can be
seen, touched, felt, measured, and purchased. For e.g., machinery, goods, building, furniture,
etc.
(ii) Intangible Real Accounts: These accounts represent assets and properties which cannot be
seen, touched or felt but they can be measured in terms of money. For e.g., goodwill, patents,
copyrights, etc.
The rule for Real accounts is: Debit what comes in, Credit what goes out.
(b) Nominal Accounts: These accounts are related to incomes, expenses, gains and losses of a business
concern. For eg: Wages, Rent, Interest Received, etc. Sales Account and Purchases Account are
also nominal accounts.
The rule for nominal accounts is: Debit all expenses and losses, Credit all incomes and gains.
MODERN APPROACH
This approach is also known as Accounting Equation Approach. As per this approach the accounts
are classified as below:
(a) Assets Account: The increase in assets is debited and the decrease in assets is credited.
(b) Capital Account: The increase in capital is credited and the increase in capital is debited. The
drawings are debited to capital account.
(c) Liabilities Accounts: The increase in liabilities is credited and the increase in liabilities is debited.
(d) Revenues or Incomes Accounts: All the revenues and incomes are credited.
(e) Expenses or Losses Accounts: All the expenses and losses are debited.
Illustration: 15 Classify the following accounts as per Traditional Approach and Modern Approach.
(a) Capital (b) Sales
(c) Outstanding Salary (d) Cash
(e) Rent (f) State Bank of India
(g) Interest Received (h) Goodwill
(i) Building (j) Reliance Ltd.
(k) Prepaid Insurance (l) Debtors
(m) Purchases
Sol.
Accounts Traditional Approach Modern Approach
(a) Capital Personal Capital
(a) Sales Nominal Revenue and Income
(b) Outstanding Salary Personal (Representative) Liability
(c) Cash Real (Tangible) Asset
(d) Rent Nominal Expenses and Losses
(e) State Bank of India Personal (Artificial) Asset
(f) Interest Received Nominal Revenue and Income
(g) Goodwill Real (Intangible) Asset
(h) Building Real (Tangible) Asset
(i) Reliance Ltd. Personal (Artificial) Liability
(j) Prepaid Insurance Personal (Representative) Asset
(k) Debtors Personal Asset
(l) Purchases Nominal Expenses and Losses
EXERCISES
1. During the course of accounting equation, debit means:
(a) Increase in asset (b) Increase in liabilities
(c) Decrease in asset (d) All of these
2. Increase in liability or income always has a

(a) Dr. balance (b) Cr. balance (c) Both (a) & (b) (d) None of these
3. During the course of accounting equation, credit means:

(a) Increase in capital (b) Increase in liability
(c) Increase in liability or capital (d) None of these
4. While preparing accounting equation, debit means-

(a) Increase in asset (b) Increase in expense
(c) Increase in asset or expense (d) None of these
5. Which of the following accounting equation is correct?

(a) Assets + Liabilities = Capital (b) Assets + Capital = Liability
(c) Assets – Liabilities = Capital (d) None of these
6. Which of the following accounting equation is incorrect?

(a) Capital = Assets – Liabilities (b) Assets = Liabilities + Capital
(c) Assets = Liabilities – Capital (d) Liabilities = Assets – Capital
7. Payment to creditor will lead to:
(a) Decrease in asset and increase in liability (b) Decrease in asset and decrease in liability
(c) Increase in asset and increase in liability (d) Increase in asset and decrease in liability
8. In accounting equation, wages paid 1,000 will reduce cash and ____________ .
(a) Reduce liability (b) Reduce capital (c) Increase liability (d) Increase capital
9. Charge interest on capital equation. `2,000 will ____________ accounting

(a) Increase (b) Decrease (c) Not affect (d) Can’t say
10. Ram commenced business with a capital of `2,00,000. At the end of year, his assets were valued
`1,50,000. His profit or loss will be `4,00,000 and liabilities were of
(a) 2,50,000 profit (b) 50,000 profit (c) 50,000 loss (d) None of above
11. An increase in one asset is accompanied by ____________ .

(a) Decrease in another asset (b) Increase in liability
(c) Increase in capital (d) Any of above
ANSWERS
1. (a) 2. (b) 3. (c) 4. (c) 5. (c) 6. (c) 7. (b) 8. (b)
9. (c) 10. (b) 11. (d)

1. Give two examples of increase in asset and decrease of another asset.
Ans. (i) Cash received from debtors
(ii) Cash deposited into bank
2. What is an account?
Ans. Account refers to ledger record of each item in a summarized form. Transactions are recorded on
debit and credit side as per accounting rules.
3. What do debit item of capital account and credit item of a debtor’s account mean?
Ans. Debit item of capital A/c refers to drawing and credit item of debtor’s A/c means cash received
from debtor.
4. Name the side on which increase in cash and increase in capital are recorded.
Ans. Increase in cash-debit side and increase in capital - credit side.
5. What is meant by debit and credit?

Ans. Debit: When an amount is recorded on the left hand side of an account, it is called debit.
Credit: When an amount is written on the right hand side of an account, it is called credit.
6. What is an accounting equation?
Ans. An accounting equation is a mathematical equation which shows that assets of a business are
always equal to total of its liabilities and capital.
Thus, Assets = Liabilities + Capital
7. How is the accounting equation affected if goods costing 4,000 is sold to Ram for 5,000?
Ans. – 4,000 (stock) + 5,000 (debtor) = + 1,000 capital (profit)
8. Name five categories of accounts as per accounting equation.

Ans. Assets, liabilities, capital, expense (loss) and income (gain).
9. Why are the rules for recording debit and credit items both capital and liability?
Ans. Rules for recording debit and credit items are same for recording capital and liability as they are
written on the same side of Balance Sheet i.e., liability side. Moreover, capital is considered as
internal liability.

1. What is meant by accounting equation? Explain with illustrations.
2. What is an account? What does it reveal? Give a specimen of an account.
3. Explain with reasons that rules of debit and credit are same for liability and capital.
4. Discuss the rules of debit and credit for assets and expenses (losses).
5. Discuss the rules of debit and credit for liabilities, capital and revenue (gain)
6. Justify that accounting equation holds good under all circumstances.
PRACTICAL QUESTIONS
1. Prepare accounting equation from the following: (`)
1. Commenced business with cash 1,00,000
2. Cash deposited into bank 60,000
3. Bought goods from X for 20,000 and paid `5,000 immediately
4. Sold goods for 20,000 for cash which costs 15,000.
5. Returned goods to X being defective `1,000
6. Borrowed loan 30,000 from bank
7. Paid wages 6,000 and wages still outstanding 1,000
[Ans. Cash 49,000 + Bank 90,000 + Stock 4,000 = Creditors 14,000 + Bank Loan 30,000
+ Wages O/s `1,000 + Capital 98,000.]
2. Monu had the following transactions: (`)
1. Started business with cash 1,00,000
2. Deposited cash into bank 60,000
3. Bought a machine by raising a bank loan 50,000
4. Bought goods for cash 20,000 and on credit 40,000
5. Goods bought for cash was sold to Amit 25,000
6. Amit returned goods worth 5,000
7. Amit settled his account by paying 19,500
8. Paid instalment of bank loan 20,000 and paid interest by cheque 2,000
9. Charge 10% depreciation on machine.
Use accounting equation to show effect of above transactions
[Hint: Trans 6 - Amit returned goods `5,000. It costs `4,000 so 1,000 is loss. Trans 7 – 500
discount is a loss so reduce capital Trans 8 - Interest paid is a loss.
[Ans. Cash 39,500 + Bank `38,000 + Stock `44,000 + Machine `45,000 = Creditors * 40,000
+ Bank Loan `30,000 + Capital 96,500.]
3. Prove that accounting equation is satisfied in all the following cases:

(i) Commenced business with cash 50,000.
(ii) Paid rent 4,000 including 1,000 as advance.
(iii) Bought goods for cash 30,000 and on credit 20,000.
(iv) Sold the goods bought on credit for 25,000.
(v) Purchased furniture worth 10,000 for office uses and for `5,000 for personal use.
[Ans. Cash `26,000 + Stock `30,000 + Furniture `10,000 + Prepaid Rent `1,000 = Creditors
`20,000 + Capital `47,000.]
[Hint. Rent 3,000 is expense (loss), `1,000 Prepaid (Asset) & Cash will reduce by 4,000.]
4. Show the effect of the following transactions on the accounting equation:

(i) Started business with cash `20,000, goods `30,000 and furniture `10,000.
(ii) Bought goods on credit from Ram `25,000.
(iii) Bought goods for cash `10,000.
(iv) Returned goods to Ram worth `4,000.
(v) Sold goods costing `20,000 for `26,000 in cash.
(vi) Settled the account of Ram at a discount of `1,000.
(vii) Charge interest on capital `3,000.
[Ans. Cash 16,000 + Stock 41,000 + Furniture `10,000 = Capital 67,000]
5. Show that accounting equation is satisfied in the following cases:

1. Sumit commenced business with cash `40,000 and goods `25,000.
2. Sold 40% goods at a profit of 30% to Sohan.
3. Goods costing `1,000 was given as charity and goods worth `2,000 was taken away by Sumit
for domestic use.
4. Salary is paid as advance `3,000 to a worker, Ram whose wife is ill.
5. Insurance Premium was paid `4,000 of which 14th relates to next year.
6. Rent paid 5,000 but it is still due 1,000.
[Ans. Cash `28,000 + Stock `12,000 + Debtors `13,000 + Prepaid Expenses `4,000
= Outstanding Expenses `1,000 + Capital `56,000]
6. Ram commenced business on 1st Jan., 2022 with a capital of 60,000. At the end of the year, his
assets were worth 1,10,000 and liabilities were 40,000. Find his capital at the end of the year and
profit earned. [Ans. Capital `70,000, Profit 10,000]
7. X started business on 1st April, 2021 with a capital of 1,20,000. He took bank loan 40,000. On 31st
March, 2022, his assets were 2,40,000 and creditors were 30,000. Loan has not been paid so far.
Determine his capital at the end of the year and profit earned.
[Ans. Capital `1,70,000, Profit 50,000]
8. X Started business on 1st April, 2021 with a capital of 1,20,000. During the year, he introduced
further capital 30,000 but withdrew 25,000 during the year for personal use. At the end of the
year, his assets worth 2,00,000 and liabilities amounting to 30,000.
Determine his capital at the end of the year and profit or loss incurred during the year ending 31st
March, 2022. [Ans. Capital `1,70,000, Profit 45,000]
9. Give an example of each type of transaction from the following information:

(i) Decrease in asset, decrease in liability.
(ii) Increase in asset, decrease in another asset.
(iii) Increase in liability, decrease in another liability.
(iv) Increase in asset, increase in liability.
(v) Increase in asset, increase in capital.
(vi) Decrease in asset, decrease in owner’s equity.
[Ans. (i) Paid creditors/loan; (ii) Bought furniture/cash received from debtor; (iii) Bills payable
accepted by the creditor; (iv) Goods purchased on credit; (v) Further capital introduced;
(vi) Withdrew cash for personal use.]
10. On which side, the decrease in the following accounts be recorded? Also specify the nature of
account to which they belong?
(i) Capital (ii) Bank Loan (iii) Cash (iv) Debtor (v) Creditor (vi) Furniture
[Ans. (i) Credit - capital (ii) Debit - Asset (iii) Credit - liability (iv) Debit – Asset (v) Credit -
Liability (vi) Debit - Asset]
11. Open T-shape account of creditor, Mohan from the following transaction and balance it:
(i) Bought goods from Mohan 20,000
(ii) Paid cash 4,000
(iii) Returned goods to Mohan 1,000
(iv) Paid by cheque 7,000
[Ans. (i) Credit (ii) Debit (iii) Debit (iv) Debit: balance 8,000]
12. Record the following transactions in Cash A/c, Debtor’s A/c and Creditor’s A/c and balance them:
`
(i) Cash sales 20,000
(ii) Bought goods from Naresh 15,000
(iii) Goods sold to Suresh 22,000
(iv) Goods returned to Naresh 2,000
(v) Paid cash to Naresh 9,000
(vi) Suresh returned goods 3,000
(vii) Cash received from Suresh 16,000
[Ans. Cash A/c (i) debit (v) credit (vii) debit; balance `27,000 Debtor’s A/c (iii) debit (vi)
credit (vii) credit; balance `3,000 Creditor’s A/c (ii) credit (iv) debit (v) debit; balance 4,000]
13. Prepare accounting equation from the following transactions:

(`)
1. Started business with cash 40,000 and goods 50,000
2. Purchased goods from Ram on credit 30,000
3. Goods purchased from Ram is sold to Mohan 40,000
4. Furniture purchased for cash 10,000
5. Mohan returned goods worth 4,000
6. Settled the account of Ram by paying 29,200
7. Received cash from Mohan 20,000
8. Charged interest on capital 8,000
[Hint: Trans 5–Goods returned `4,000 has cost of 3,000 so 1,000 loss on return]
[Ans. Cash `20,800 + Stock `53,000 + Debtors `16,000 + Furniture `10,000
= Capital `99,800.]
14. Prepare an accounting equation and balance sheet from the following transactions:
1. Commenced business with cash `50,000 and goods `50,000.
2. Sold half the goods at a profit of 20% to Gopal.
3. Bought goods for cash `20,000 and on credit `25,000.
4. Bought furniture on credit `25,000 from Mohan.
5. Paid `24,500 to Mohan in full settlement of his account.
6. Withdrew cash `3,000 and goods for `4,000 for personal use.
7. Charge interest on drawing `500.
[Ans. Cash `2,500 + Stock `66,000 + Furniture `25,000 + Debtors `30,000
= Creditors `25,000 + Capital `98,500]
15. Create an accounting equation on the basis of the following transactions :
(i) Started business with cash `40,000 and furniture `20,000.
(ii) Bought goods for cash `10,000 and on credit from Atul for `20,000.
(iii) Goods bought from Atul on credit was sold for `26,000.
(iv) Cleared the account of Atul by paying `19,500.
(v) Paid salary `6,000 and still unpaid `2,000.
(vi) Received commission `3,000 including `1,000 as advance.
[Ans. Cash `33,500 + Furniture `20,000 + Stock `10,000 = Salary Outstanding `2,000
+ Advance com. `1,000 + Capital 60,500.]
CHAPTER
Recording of Business
04 Transaction
INTRODUCTION
In accounting, we only record financial transactions that can be measured in monetary terms. All of
these transactions are recorded in the books of accounts using written evidence such as cash memos,
purchase bills, sales bills, cash receipts, pay-in slips, pass books, debit notes, credit notes, and so on. This
proof of documenting transactions in the books of accounts is known as’source documents’. Vouchers
are created on the basis of source documents using debit and credit rules based on the double entry
bookkeeping system. Transactions are then documented in the books of original entry (i.e., journal
or auxiliary books) in chronological order. The recorded transactions are subsequently posted to the
ledger accounts.
This chapter deals with Source Documents and Preparation of Vouchers.
SOURCE DOCUMENTS
Business transactions are recorded in the books of accounts using written documentation known as
source documents. It offers detailed information on a transaction that determines whether accounts
are debited or credited. A cash memo, for example, is a source document for cash sales; an invoice
represents credit sales; a purchase bill represents credit purchases; the counterfoil of a pay-in-slip is
proof that cash or a cheque has been deposited in the bank; and so on. These documents are known
as source documents, and they serve as proof in support of a transaction. The notion of verifiability
and objectivity focuses on source documents. Thus, business transactions start with source papers.
Features of Source Documents
(i) It is a written document.
(ii) They act as evidence of the origin of a business transaction.
(iii) These documents are numbered, dated and the name of the firm is usually printed on them.
(iv) Vouchers are prepared on the basis of source documents.
(v) They act as proof in the court of law.
(vi) The auditor examines the entries by checking these supporting documents as evidence for each
transaction.
(vii) They provide information concerning the nature of business transactions along with the amount
involved.
Most commonly used Source Documents
1. Cash Memo: A cash memo is an accounting document that aids in the tracking of accounting
transactions involving cash or any other payment type, as well as the management of accounting
processes. This aids in the understanding of a company’s cash sales, analysis and reconciliation,
tax payment, cash flow status, inventory planning, and other activities.
2. Invoice or Bill: An invoice or bill is an important written document that indicates the sale or
supply by one business to another business or consumer. It contains information about the
particular sale transaction, such as buyer’s details, quantity, value, tax, and payment terms.
(A) Normal invoice:
(B) GST based Invoice:
3. Receipt: A receipt is a written acknowledgment that something of value has been transferred
from one party to another. In addition to the receipts consumers typically receive from vendors
and service providers, receipts are also issued in business-to-business dealings as well as stock
market transactions.
4. Pay-in-slip: A pay-in-slip is a bank deposit slip that is used to deposit money into a bank account.
When a person needs to deposit checks or cash into his bank account, he normally fills out a slip
that includes the account number, the date, and the deposit details.
Recording of Business Transaction 61

5. Cheque: A cheque is a document you can issue to your bank, directing it to pay the specified sum
mentioned in digits as well as words to the person whose name is borne on the cheque.
Cheques are also called negotiable instruments. In banking terms, a negotiable instrument is a
document that promises its bearer a payment of the specified amount either on furnishing the
document to the banker or by a given date.
6. Debit Note: A debit note is a document used by a vendor to inform the buyer of current debt
obligations. The debit note can provide information regarding an upcoming invoice or serve as a
reminder for funds currently due. Debit notes can also be created by buyers when returning goods
received on credit. For returned items, notes will include the total anticipated credit, an inventory
of the returned items, and the reason for their return.
7. Credit note: A credit note, also known as a credit memo, is a commercial document issued by the
seller and sent to the buyer when there is a reduction in the amount payable to the seller. By
issuing a credit note, the seller promises to pay back the reduced amount or adjust it in a subsequent
transaction.
VOUCHERS
A voucher is created once we have received the invoice from a supplier. It has to be stamped as “paid”
when a cheque or digital payment is made to a supplier and is then archived along with any supporting
documents.
A mechanism called a “payment run” is performed in account payable systems to produce payments
that correspond to the unpaid vouchers. The voucher can be used in accounts receivable to adjust an
account. Also, the voucher can be used to adjust the accounts under the general ledger, and it is called
a journal voucher.
Features
(i) Voucher is a printed form of the firm.
(ii) It is written by the accountant on the basis of source document. Accounts are accordingly debited
or credited as per rule.
(iii) It is serially numbered and source document is attached with each voucher.
(iv) Each voucher is, then, checked and signed by the authorized officer.
(v) These vouchers are subject to vouching by the auditor.
Difference between Source document and voucher
Basis Source Documents Vouchers
1. Meaning Source documents are written evidence in Voucher is a document providing evidence of
support of a transaction. a business transaction.
2. Detail It contains full description of a transaction. It contains detail as to which account is to be

debited and which account is to be credited.
3. Evidence It is an evidence of a business transaction. It is an evidence of correct recording of the

transaction.
4. Preparation It is prepared due to origin of a business It is prepared to record the transaction as per
transaction e.g., sale, purchase, etc. accounting rules by the accountant.
TYPES OF VOUCHERS
Vouchers are of two types, namely:
1. Cash Vouchers
2. Non-Cash Vouchers or Transfer Vouchers.
1. Cash Vouchers: Cash Vouchers are those vouchers which are prepared at the time of receipt of
cash/cheque or while making payment in cash/cheque. Thus, they are of two types, namely:
(i) Debit Vouchers
(ii) Credit Vouchers
(i) Debit Vouchers: Debit vouchers are prepared at the time of making payment either in cash
or through cheques. Payments are generally made in the following circumstances:
Purchase of goods for cash
Payment of expenses like wages, salary, rent, etc.
Purchase of fixed assets for cash
Purchase of Investment for cash
Payment to creditors
Making drawings
Depositing cash into bank

Format of a Debit Voucher
A debit voucher reveals the following information’s:

(i) Name and address of the firm to whom payment is made
(ii) Date of payment
(iii) Voucher Number
(iv) Title of Account debited (e.g., name of firm, Purchases A/c, Salary A/c etc.)
(v) Amount
(vi) Brief narration of transaction
(vii) Signature of person preparing it
(viii) Signature of Manager/authorized signatory
(ix) Signature of receiver of payment
(x) Affix revenue stamp of 1 if the amount exceeds `5,000 or more.
(ii) Credit Voucher: Credit vouchers are prepared at the time of receiving payment. Payment is
usually received in the following cases:
Sale of goods for cash
Sale of fixed assets
Sale of Investments
Cash received from debtors
Sale of old newspapers, etc.
Withdrawal of cash from bank.
Capital introduced in the business
Format of a Credit Voucher
Rajdhani Agencies
21/3 Karol Bagh, New Delhi-110005
Voucher No. 204 Date 5-6-2022
Credit Sales A/c Amount
For goods sold vide cash memo no. 551 12,000
12,000
Sd/- Sd/-
Manager Accountant
Contents
(i) Name and address of firm
(ii) Date of preparation
(iii) Voucher number
(iv) Title of account credited
(v) Amount of transaction
(vi) Brief narration of transaction
(vii) Signature of person preparing it
(viii) Signature of manager/authorized person.
2. Non-Cash Vouchers or Transfer Vouchers: These vouchers are prepared for non-cash
transactions. These vouchers are prepared in the following cases:
Credit sales
Credit purchases
Credit purchase of fixed assets
Credit sales of fixed asset
Purchases Return
Sales Return
Provision for depreciation/doubtful debts
Bad debts
Rectification of errors
Specimen of Transfer Voucher
Arya Book Depot
30 Naiwala, Karol Bagh, New Delhi-110005
Voucher No. 112 Date 1-4-2022

Amount
Debits – Royal Bok Deposit, Hisar 15,200
15,200
Credit – Sales A/c `
(Credit sales vide Bill No. 2421) 15,200
Sd/- Sd/-
Manager Accountant
Contents
(i) Name and address of firm debited/credited
(ii) Date of preparation

(iii) Voucher Number
(iv) Title of Accounts debited and credited with brief detail.
(v) Net amount of Transaction
(vi) Source document attached.
(vii) Signature of person who prepared it.
(viii) Signature of manager/authorized signatory.
Preparation of Accounting Vouchers

The source documents are analysed to find out the nature of the transaction so that it can be decided
as to which account is to be debited and which account is to be credited.
Example: Let us suppose that Mohan Lal & Sons, purchases stationery items from Arya Book Depot
on credit for 4,200 and receives bill No. 411 dated 3-4-2022.
While preparing voucher the account clerk will decide which account is to be debited and which
account is to be credited.
(i) Since stationery has been purchased so stationery account will be debited following rule:
Debit the expenses and losses and Credit the gain and income

(ii) Stationery is purchased from the supplier, Arya Book Depot so it is to be credited following the
rule Debit the receiver and credit the giver.
Thus, voucher of the transaction will be:
Illustration 1. Prepare debit vouchers of Modern Traders from the following information:
2022
Aug. 1 Bought goods from M/s Bharat Stores for cash vide cash memo No. 110 for `5,000.
Aug. 5 Salary paid for the month of July, 2022 vide salary sheet No. 7 `10,300.
Aug. 6 Paid Cash `3,200 to Mona & Co. for the purchase of Furniture vide Bill No. 432 dated 1 July,
2022.
Sol. (i)
(ii) Modern Traders
(iii)
Notes:
1. Receipt column for first two transactions was not filled as they were cash transactions with source
documents.
2. Receipt column for Aug 6, 2022 was filled as source document is attached with credit purchase
of furniture dated 1-7-2022.
ILLUSTRATION 2: Prepare credit vouchers of Rama & Co. from the following transaction:
2022 (`)
2020 Sold goods for cash vide cash Memo No. 470 11,000
Oct. 6 Withdrew cash from bank vide cheque no. 011375 10,000

Sol.
Illustration 3. Prepare transfer voucher from the following source document:

Arya Book Depot
30 Naiwala, Karol Bagh, New Delhi -110005
Bill No. 315 Hisar Book Centre, Hisar Date: 6-11-2022
Rate Amount
Qty. Particulars
(`) (`)
10 Accountancy for XII 300 3,000
10 Analysis of Financial Statements 200 2,000
4 Statistics 350 1,400
6,400
E & OE. Sd/-
For Arya Book Depot
Sol.
ARYA BOOK DEPOT
30 Naiwala, Karol Bagh, New Delhi – 110005
Voucher No. 411 Date: 6-11-2022
Amount (`)
Debit – Hisar Book Centre, Hisar 6,400
6,400
Credit – Sales A/c (`)
(Being credit sales vide Bill No. 315) 6,400
6,400
6,400
Sd/- Sd/-
Manager Accountant
EXERCISES
1. While returning the goods bought from seller, we prepare:
(a) Debit Note (b) Credit Note (c) Invoice (d) Cash Memo
2. When sold goods is returned by the customer, we prepare:

(a) Debit Note (b) Credit Note (c) Invoice (d) Voucher
3. For depositing cash in our bank account, we require:

(a) Cheque (b) Pay-in-slip (c) Voucher (d) Pass Book
4. For withdrawing money from our bank account, we require:

(a) Pay-in-slip (b) Cheque (c) Pass Book (d) None of these
5. For selling goods on credit to a customer, we prepare:

(a) Cash Memo (b) Invoice (c) Debit Note (d) Credit Note
6. For selling goods on cash, we prepare:

(a) Cash Memo (b) Invoice (c) Debit Note (d) Credit Note
7. Invoice is a source voucher for the purchase of goods

(a) For cash (b) On credit (c) On cash or credit (d) None of these
8. Voucher is prepared by accounts clerk for

(a) Cash and credit sales (b) Cash and credit purchases
(c) Cash received or paid (d) All of these
9. Invoice is a/an
(a) Source voucher (b) Accounting voucher
(c) Both (a) and (b) (d) Neither (a) nor (b)
10. Invoice is a source voucher for:

(a) Cash sales (b) Credit sales (c) Both (a) and (b) (d) Neither (a) nor (b)
11. When goods is purchased on cash payment, purchaser will get

(a) Invoice (b) Cash Memo
(c) Accounting Voucher (d) None of these
12. When goods is purchased on credit, buyer for goods will get
(a) Cash Memo (b) Invoice
(c) Accounting Voucher (d) None of these

13. We prepare Credit Note to give
(a) Debit to an account (b) Credit to an account
(c) Both (a) and (b) (d) None of these
14. Debit Not is prepared to give

(a) Debit to an account (b) Credit to an account
(c) Both (a) and (b) (d) None of these
15. Accounting entry is passed on the basis of ...

(a) Source Document (b) Accounting Voucher
(c) Either (a) or (b) (d) None of these
ANSWERS
1. (a) 2. (b) 3. (b) 4. (b) 5. (b) 6. (a) 7. (b) 8. (d)
9. (a) 10. (b) 11. (b) 12. (b) 13. (b) 14. (a) 15. (b)

1. What do you mean by source document?
Ans. (i) Cash received from debtors
(ii) Cash deposited into bank
2. What is a Cash Memo?
Ans. Cash Memo is prepared while selling goods for cash. It contains columns for detail of goods,
quantity, rate, amount received and date of transaction.
3. What is a Receipt?
Ans. Receipt is issued to customer when cash is received from him. It is an acknowledgement of cash
received from the customer.
4. What is a Debit Note?
Ans. A debit note is a source document prepared and sent by the buyer of goods to the seller of goods
stating that the account of the buyer has been debited on account of return of defective goods or
over valued account, etc.
5. What is a Credit Note?
Ans. A credit note is a source document prepared and sent by the seller of goods to the buyer of goods
when the sold goods is returned by the buyer or more discount is offered to the buyer. It states
that account of the buyer of goods has been credited.
6. What is Cheque?
Ans. A cheque is a negotiable instrument. It is drawn by the account holder of the bank directing it to
pay a specified amount to the named person or to the bearer on demand.
7. Explain Debit Voucher.
Ans. Debit vouchers are prepared at the time of making payment either in cash or through cheques for
purchase of goods or fixed assets or for making payments to creditors, expenses etc.
8. Explain Credit Voucher.

Ans. Credit vouchers are prepared at the time of receiving payment in respect of sale of goods/asset
for cash, cash received from debtors, etc.
9. State two differences between Source Documents and Vouchers.

Ans. (i) Source documents are written evidences in support of transactions while voucher is a written
document prepared by the accountant providing the evidence of a business transaction.
(ii) Source document is an evidence of a business transaction while voucher is an evidence of
correct recording of transaction in the books of accounts.
10. What is a Transfer Voucher?

Ans. Transfer voucher are prepared for non-cash transactions like credit sales credit purchases,
purchases return, sales return, provision for depreciation/doubtful debts, rectification of errors,
etc.

1. What do you mean by Source Documents? Why are they needed?
2. Explain any two source documents.
3. What is a voucher? Discuss the various types of vouchers.
4. Prepare debit vouchers of Mona General Store, Delhi from the following transactions:
2022
Oct. 10 Bought goods from Sonu Store for cash vide cash memo no 191 for 3,500
Oct. 16 Paid 2,500 to Rama & Sons for the purchase of goods vide Bill No. 112 dated Sept. 10,
2022.
5. Prepare Transfer Vouchers of Golden Agencies, Delhi from the following particular:
2022
Sept 9 Bought goods from Silver Agencies vide Bill No. 221 4,200
Sept 13 Sold goods to Mohan vide Bill No. 439 for 6,300.

CHAPTER
05 Journal
The first step in the accounting process is to record the business transactions in a systematic manner.
Every transaction must be documented as soon as it takes place, in the order of its occurrence. All
recorded information must be backed up by trustworthy written documentation, such as cash receipts
and other voucher Typically, business transactions are entered into journals or subsidiary books.
The French word “jour,” which means “day,” is where the term “journal” originates from. Therefore,
Journal may be defined as a daily record of all the business dealings. A journal is a basic book of accounts
where all business transactions are initially entered in the order they occur and then posted to the
ledger accounts whenever it is most convenient. It is necessary to have a complete awareness of the
principles of debit and credit.
FEATURES OF A JOURNAL
(a) Book of Original Entry: The journal is called the book of original entry because every transaction
is first recorded in the journal.
(b) Helpful in Preparing Subsidiary Books: A journal records the debit and credit aspects together,
which clearly indicates the accounts that get affected by a transaction. Thus it is helpful in
preparation of subsidiary books and it makes posting of transactions in the ledger easier.
(c) Day Book: The journal records every transaction on the same day on which it occurs So, it is called
the day book.
(d) Chronological Recording: The transactions are recorded in the journal in chronological order,
which means in the order of their occurrence.
(e) Portrays all Aspects: The journal records both credit and debit aspects of a transaction according
to double entry book keeping system, which reveals all sides of a transaction.
FUNCTIONS OF A JOURNAL
(a) Maintenance of Record: The most important objective of a journal is to maintain a complete
record of each business transaction on daily basis and as per their time of occurrence in a
chronological order.
(b) Reserves Identity of each Transaction: Both debit and credit aspect of every transaction is
recorded in the Journal which is helpful in deriving complete information about each transaction
correctly and every aspect of the transaction is identified easily.
(c) Basis for Ledger Posting: Journal makes it easy to prepare the ledger.
(d) Serves as a Legal Evidence: Journal can be taken as a reliable source for legal evidence of
transactions. Business can use journal in case of omission or to settle down the business disputes.
ADVANTAGES OF JOURNAL
(a) Each transaction is recorded in the journal as soon as it occurs, so the chances of omission is
minimised.
(b) Since all transactions are recorded in a chronological order on a daily basis, any transaction can
be easily located.
(c) Since all the transactions are recorded with a narration, it can be easily ascertained when and
why a transaction has taken place.
(d) As for each and every transaction, the concerned accounts to be debited and credited are clearly
stated in the journal, there is minimal possibility of committing any mistake in posting the
transactions into the ledger.
(e) Any mistake in ledger can be easily detected with the help of journal.
(f) Since the journal records both debit and credit aspects of a transaction, so it is very helpful in
ledger posting.
(g) Journal entries facilitate cross-checking for transactions posted into the ledger in case of any
discrepancy, e.g. disagreement of trial balance, etc.
(h) History of each transaction can be found out from the journal.
LIMITATION OF JOURNAL
(a) Recording of transactions in journal is not viable when number of transactions is large.
(b) Recording of repetitive transactions in journal increases burden of posting into ledger as well.
(c) Journal usually does not record cash transactions since they are usually large in number and
repetitive. For such transactions, usually a cash book is maintained.
(d) Journal cannot provide required information at once.
SPECIMEN OF JOURNAL
Date Particulars L.F. Debit Credit
The Journal has five columns,

(a) Date: It records the date, month and year of the business transaction.
(b) Particulars: In this column, the details regarding account titles and description are recorded. The
account to be debited is recorded first and then the account to be credited. A brief description of
the business transaction is also recorded as the narration.
For example: Received cash from Amit `30,000 on 5th Oct 2022. It will be recorded as below:
5/10/22 Cash A/c Dr. 30,000
To Amit’s A/c 30,000
(Being cash received from Amit.)
Journal 73
(c) Ledger Folio: This column is meant to record the page number of the ledger in which the accounts
has been posted.
(d) Debit: The amount to be debited is recorded in this column.
(e) Credit: The amount to be credited is recorded in this column.
Rules of Debit and Credit
To understand the rules of debit and credit, we first need to understand the classification of accounts.
There are two approaches for classification of accounts:
Traditional Approach
Modern Approach.
TRADITIONAL APPROACH
As per traditional approach the accounts are classified as below:
Classification of Accounts
Personal Impersonal
Natural Artificial Representative Real Nominal
Tangible Intangible
I. Personal Accounts: These are the accounts that are linked to individuals or group of individuals.
The personal accounts may further be classified as:
(a) Natural Personal Accounts: Natural persons means the persons that are born, so these
accounts are related to an individual human beings.
(b) Artificial Personal Accounts: Artificial persons means the persons that are created by law
or those who are not natural persons, so these accounts are related to companies, firms and
other form of businesses and organisations.
(c) Representative Personal Accounts: This account indirectly representing a natural or artificial
person. These accounts represent outstanding and prepaid items. Capital and Drawings
accounts are also personal accounts.
The rule for personal accounts is: Debit the receiver, Credit the giver.
II. Impersonal Accounts: These are the accounts which are not personal accounts. The impersonal
accounts are further classified as:
(a) Real Accounts: These accounts are related to the properties and assets owned by the business
concern. Real accounts can be further classified into tangible real accounts and intangible
real accounts.
(i) Tangible Real Accounts: These accounts represent the assets and properties which can
be seen, touched, felt, measured, and purchased. For example, machinery, goods, building,
furniture, etc.
(ii) Intangible Real Accounts: These accounts represent assets and properties which cannot
be seen, touched or felt but they can be measured in terms of money. For example,
goodwill, patents, copyrights, etc.
The rule for Real accounts is: Debit what comes in, Credit what goes out.
(b) Nominal Accounts: These accounts are related to incomes, expenses, gains and losses of a
business concern. For example, Wages, Rent, Interest Received, etc. Sales Account and
Purchases Account are also nominal accounts.
The rule for nominal accounts is: Debit all expenses and losses, Credit all incomes and gains.
MODERN APPROACH
This approach is also known as Accounting Equation Approach. As per this approach the accounts
are classified as below:
(a) Assets Account: The increase in assets is debited and the decrease in assets is credited.
(b) Capital Account: The increase in capital is credited and the increase in capital is debited. The
drawings are debited to capital account.
(c) Liabilities Accounts: The increase in liabilities is credited and the increase in liabilities is debited.
(d) Revenues or Incomes Accounts: All the revenues and incomes are credited.
(e) Expenses or Losses Accounts: All the expenses and losses are debited.
CLASSIFICATION OF GOODS FOR JOURNALISING

Goods means the articles that are sold by the business in its normal course. For example, for a jeweler,
gold will be considered as goods, whereas for a carpenter furniture will be considered as goods, and
so on.
The following things are not included in goods:
The purchase of any article for personal use.
The purchase of any article to be used in business and not for resale purpose.
For the purpose of journal entry, the goods are classified as:
(a) Purchase Account: It is a nominal account (expense) that is used to record the purchase of goods.
(b) Purchase Return (Return Outward) Account: It is a nominal account that records the goods
returned to the supplier for any reason.
(c) Sales Account: It is a nominal account (income) that records the sale of goods and the selling
price is recorded.
(d) Sales Return (Return inward): It is a nominal account that records the goods returned by the
customers for any reason.
Journal 75
ANALYSING AND RECORDING TRANSACTIONS IN JOURNAL
Illustration: 1 Analyse the following transactions as per the rules of debit and credit and then journalise them:
Date Amount
Jan 2000
1 Commenced business with cash 1,50,000
1 Opened bank account with cash 50,000
2 Purchased machinery from Harichand 10,000
3 Goods purchased 30,000
8 Sold goods to Ramlal 25,000
10 Goods purchased from Ajit 10,000
15 Goods returned by Ramlal 3,000
19 Cash withdrawn for personal use 20,000
25 Goods returned to Ajit 6,000
28 Cash received from Ramlal on account 15,000
28 Cash withdrawn from bank 10,000
31 Salary paid by cheque 25,000
Sol. Analysis of Transactions

Transaction Accounts Nature of Debit/Credit
Affected Accounts
Commenced business with cash Cash Real Debit (Comes in business)
Capital Personal Credit (Giver)
Opened bank account with cash Cash Real Credit (Goes out of business)
Bank Personal Debit (Receiver)
Purchased machinery from Harichand Machinery Real Debit (Comes in business)
Harichand Personal Credit (Giver)
Goods purchased Purchase Nominal Debit (Expense)
Cash Real Credit (Goes out of business)
Sold goods to Ramlal Sale Nominal Credit (Income)
Ramlal Personal Debit (Receiver)
Goods purchased from Ajit Purchase Nominal Debit (Expense)
Ajit Personal Credit (Giver)
Goods returned by Ramlal Ramlal Personal Credit (Giver)
Sales Return Nominal Debit (Expense/Reduction in Income)
Cash withdrawn for personal use Cash Real Credit (Goes out of business)
Transaction Accounts Nature of Debit/Credit
Affected Accounts
Drawings Personal Debit (Receiver)
Goods returned to Ajit Ajit Personal Debit (Receiver)
Purchase Nominal Credit (Income/Reduction in Expense)
Return
Cash received from Ramlal on account Ramlal Personal Credit (Giver)
Cash Real Debit (Comes in business)
Cash withdrawn from bank Cash Real Debit (Comes in business)
Bank Personal Credit (Giver)
Salary paid by cheque Salary Nominal Debit (Expense)
Bank Personal Credit (Giver)
Journal Entries
Jan 2000
1. Cash A/c Dr. 1,50,000
To Capital A/c 1,50,000
(Being commenced business with cash.)
1. Bank A/c Dr. 50,000
To Cash A/c 50,000
(Being bank account opened.)
2. Machinery A/c Dr. 10,000
To Harichand A/c 10,000
(Being purchase of machinery.)
3. Purchase A/c Dr. 30,000
To Cash A/c 30,000
(Being purchase of goods.)
8. Ramlal’s A/c Dr. 25,000

To Sales A/c 25,000
(Being sale of goods.)
10. Purchase A/c Dr 10,000
To Ajit’s A/c 10,000
(Being purchase of goods.)
15. Sales Return A/c Dr 3,000
To Ramlal’s A/c 3,000
(Being sales return.)
19. Drawings A/c Dr. 20,000
To Cash A/c 20,000
(Being cash withdrawn for personal use.)
Journal 77
25. Ajit’s A/c Dr 6,000
To Purchase Return A/c 6,000
(Being purchase returns.)
28. Cash A/c Dr. 15,000
To Ramlal’s A/c 15,000
(Being cash received.)
28. Cash A/c Dr. 10,000
To Bank A/c 10,000
(Being cash withdrawn from bank.)
31. Salary A/c Dr. 25,000
To Bank A/c 25,000
(Being salary paid.)
Special Entries Related to Purchase

1. Goods are Donated
Donation A/c Dr. XX
To Purchase A/c XX
(Being goods donated.)
2. Goods distributed as charity
Charity A/c Dr. XX
To Purchase A/c XX
(Being goods distributed as charity.)
3. Goods distributed as sample
Donation A/c Dr. XX
To Purchase A/c XX
(Being goods donated)
4. Goods are withdrawn for personal use
Drawings A/c Dr. XX
To Purchase A/c XX
(Being goods withdrawn for personal use.)
5. Goods lost or destroyed by fire
(a) If goods are not insured
Loss by Fire A/c Dr. XX
To Purchase A/c XX
(Being goods destroyed by fire.)
(b) If goods are insured but claim is not accepted by the Insurance Company

Loss by Fire A/c Dr. XX
To Purchase A/c XX
(c) If goods are insured and the claim is accepted by the Insurance Company

Loss by Fire A/c Dr. Amount of
To Purchase A/c Loss Amount of
(Being goods destroyed by fire.) Loss

Insurance Co A/c Dr. Claim
To Loss by Fire A/c Accepted Claim
(Being claim accepted by insurance company.) Accepted
Or

Loss by Fire A/c Dr. Actual loss
Insurance Co A/c Dr. Claim Amount of
To Purchase A/c Accepted Loss
DISTINGUISHING BETWEEN CASH AND CREDIT TRANSACTIONS

(a) Goods purchased for `10,000: This is a cash transaction as no name is given.
(b) Purchased machinery from Manohar Singh for cash: Here, name of seller and cash both are
mentioned. In such case, we ignore the name and consider it as a cash transaction.
(c) Sold goods to Prem Kumar: Here only name is mentioned, nothing is given regarding the payment,
so it is a credit transaction.
SOME SPECIFIC JOURNAL ENTRIES

Depreciation on fixed assets.
Eg: Depreciate Machinery by `500.

Depreciation A/c Dr. 500
To Machinery A/c 500
(Being depreciation charged.)
Journal 79
Outstanding Expenses.
Eg: Salary Outstanding `2,500
Salary A/c Dr. 2,500
To Salary Outstanding A/c 2,500
(Being outstanding salary.)
Prepaid Expenses.
Eg: Rent paid in advance `1,500
Prepaid Rent A/c Dr. 1,500
To Rent A/c 1,500
(Being rent paid in advance.)
Accrued Income.
Eg: Interest due but not received `250
Accrued Interest A/c Dr. 250
To Interest A/c 250
(Being interest due but not received.)
Advance Income.
Eg: Commission received in advance `1,200
Commission A/c Dr. 1,200
To Received in Advance Commission A/c 1,200
(Being commission received in advance.)
Income Tax.
Eg: Income Tax paid `5,000
Drawings A/c Dr. 5,000
To Cash A/c 5,000
(Being income tax paid.)
Life Insurance Premium.

Eg: Insurance premium paid for proprietor’s life insurance `1000
To Cash A/c 1,000
(Being life insurance premium paid for proprietor.)
Interest on capital.
Eg: Interest on capital `750
Interest on Capital A/c Dr. 750
To Capital A/c 750
(Being interest allowed on capital.)
Interest on drawing.
Eg: Interest on drawing `60
Drawing A/c Dr. 60
To Interest on Drawings A/c 60
(Being interest charged on drawings.)
COMPOUND ENTRIES
The compound or combined entries are the entries where two or more accounts are credited and/or
debited at the same time. Such entries affect two or more accounts at the same time.
For eg: Purchased office furniture from Prayag for `20,000 and paid him 40% of the amount by cheque.
Here, the accounts affected are:
Furniture A/c – Real A/c: It will be debited by `20,000 as it is coming in the business.
Bank A/c – Personal A/c: It will be credited by `8,000 as it is the giver.
Prayag’s A/c – Personal A/c: It will be credited by `12,000 as he is the giver.
So, the journal entry will be
Furniture A/c Dr. 20,000
To Bank A/c 8,000
To Prayag’s A/c 12,000
(Being furniture purchased and paid 40% by cheque.)
ENTRIES RELATED TO CASH DISCOUNT AND TRADE DISCOUNT

A. Trade discount: It is the discount offered by the seller to the buyer on the list price of the goods
or assets. This discount is not recorded in the books of accounts and the purchase is recorded at
the net cost that is list price less discount.
For eg: Purchased office furniture of list price `20,000 from Prayag at 10% Trade discount.
Journal Entry
To Prayag’s A/c 18,000
(Being furniture purchased.)
Working Note:
The purchase price of furniture will be = 20,000 – 10% of 20,000 = 18,000
Journal 81
B. Cash discount: This discount is offered to the debtors for prompt payments. It is duly recorded
in the books of accounts. The discount allowed to the debtors is an expense for the business and
is debited and the discount received from creditors is an income for the business as is credited.
Cash discount is either mentioned by its name or as “full settlement”.
For eg: Paid `14,500 to X in full settlement of `15,000.
Journal Entry
X’s A/c Dr. 15,000
To Discount A/c 500
To Cash A/c 14,500
(Being cash paid in full settlement.)
Working Note:
The cash discount = 15000 – 14500 = 500
For eg: Received `7,250 from Y in full settlement of `8,000.
Journal Entry
Cash A/c Dr. 7,250
Discount A/c Dr. 750
To Y’s A/c 8,000
(Being cash received in full settlement.)
Working Note:
The cash discount allowed = 8,000 – 7,250 = 750
WHEN BOTH CASH AND TRADE DISCOUNT COMES TOGETHER.

Eg: Goods costing `10,000 was purchased from Hari at 10% trade discount. 40% of the amount was
paid to him and he allowed a discount of 2%.
Purchase A/c Dr. 9,000
To Hari’s A/c 5,400
To Cash A/c 3,528
To Discount A/c 72
(Being goods purchased and paid 40% of the amount at 2% cash
discount.)
Working Note:
Cost of Purchasing the goods = 10,000 – 10% = 9,000
Cash to be paid = 9000 × 40% = 3600
Discount received = 3600 × 2% = 72
Actual cash paid = 3600 – 72 = 3,528
Eg: Goods sold to Mohan for `50,000 at 20% trade discount. 60% of the amount was received
from him and allowed him a discount of 5%.
Cash A/c Dr. 7,250
Discount A/c Dr. 750
To Y’s A/c 8,000
(Being cash received in full settlement.)
Working Note:
Selling Price = 50,000 – 20% = 40,000
Cash to be received = 40,000 × 60% = 24,000
Discount allowed = 24,000 × 5% = 1,200
Actual cash received = 24,000 – 1,200 = 22,800
Entries related to Bad Debts.
Bad debts are the amounts that could not be recovered from the debtors due to insolvency or any
other reason.
The journal entry for bad debts will be as below:
(a) If full amount not recovered: The journal entry will be:
Bad debts A/c Dr. XX
To Debtor’s A/c XX
(Being bad debts written off.)
For eg: Mr. X, a debtor of `5000, could not pay his debts and thus his account was written off as
bad debt.
Bad debts A/c Dr. 5,000
To X’s A/c 5,000
(Being bad debts written off.)
(b) If partial amount is not recovered: The journal entry will be:
Cash A/c Dr. XX
Bad debts A/c Dr. XX
(Being only partial debt could be received.)
For eg: Mr. X, a debtor of `5,000, became insolvent and a final dividend of 40p in a rupee was
received.
Cash A/c (5000 × .40) Dr. 2,000
Bad debts A/c (5000 × .60) Dr. 3,000 5,000
To X’s A/c
(Being only partial debt could be received.)
Journal 83
In case the amount written off as bad debts is further recovered, then the entry will be:
Cash A/c Dr. XX
To Bad Debts Recovered A/c XX
(Being bad debts recovered.)
BANKING TRANSACTIONS
The journal entries in respect of banking transactions are given below:
(a) Cash deposited in bank.
Bank A/c Dr. XX
To Cash A/c XX
(Being cash deposited in bank.)
(b) Cash withdrawn from bank or cash withdrawn from bank for office use.
Cash A/c Dr. XX
To Bank A/c XX
(Being cash withdrawn from bank.)
(c) Cash withdrawn from bank for personal use.
Drawings A/c Dr. XX
To Bank A/c XX
(Being cash withdrawn from bank for personal use.)
(d) Payment received by cheque from a debtor.

Cheque in hand A/c Dr. XX
(Being cheque received from debtor.)
(e) The cheque received from debtor was sent to bank.

Bank A/c Dr. XX
To Cheque in hand A/c XX
(Being cheque received from debtor was deposited in bank.)
(f) The cheque received from debtor was endorsed to creditor.

Creditor’s A/c Dr. XX
To Cheque in hand A/c XX
(Being cheque received from debtor was endorsed to creditor.)
(g) Payment received by cheque from a debtor was sent to bank or deposited in bank.
Bank A/c Dr. XX
(Being payment received from debtor.)
(h) Paid by cheque to any creditor.

Creditor’s A/c Dr. XX
To Bank A/c XX
(Being paid to creditor.)
(i) Paid expense by cheque.

Expense A/c Dr. XX
To Bank A/c XX
(Being expense paid.)
(j) Dishonour of a cheque sent to bank.

Debtor’s A/c Dr. XX
To Bank A/c XX
(Being dishonour of cheque.)
(k) Dishonour of a cheque endorsed to creditor.

Debtor’s A/c Dr. XX
To Creditor A/c XX
(Being dishonour of cheque.)
ILLUSTRATIONS
1. Pass Journal entries for the following:
books of Arun:
2022
May 1 Commenced business with cash 1,00,000
May 3 Bought goods from Ram of list price 20,000 less trade discount 20%
May 7 Sold goods to Gopal 20,000
May 8 Returned defective goods by Gopal 3,000
May 11 Received cash from Gopal and allowed him discount
May 15 Mohan bought goods from us
May 16 Paid cash to Ram and he allowed us discount
May 18 Paid salary 2,000 and rent 1,000
Journal 85
May 20 Received interest 1,500 and commission 2,500
May 25 Bought goods from Naresh for cash of list price 25,000 less trade discount 20% and cash
discount of 2%
Ans. Journal of Arun
2022 Cash A/c Dr. 1,00,000
May 1 To Capital A/c 1,00,000
(Started business with cash)
May 3 Purchases A/c Dr. 16,000
To Ram 16,000
(Bought goods Ram of list price `20,000 less trade discount 20%)
May 7 Gopal Dr. 20,000
To Sales A/c 20,000
(Goods sold to Gopal)
May 8 Sales Return A/c Dr. 3,000
To Gopal 3,000
(Goods returned by Gopal)
May 11 Cash A/c Dr. 16,500
Discount Allowed A/c 500
To Gopal 17,000
(Cash receive from Gopal and allowed him discount)
May 15 Mohan Dr. 15,000
To Sales A/c 15,000
(Goods sold to Mohan)
May 18 Salary A/c Dr. 2,000
Rent A/c Dr. 1,000
To Cash A/c 3,000
(Paid salary and rent)
To Interest A/c 1,500
To Commission A/c 2,500
(Interest and Commission received)
To Cash A/c 19,6001
To Discount Received A/c 4002
(Goods purchased of list price `25,000 less trade discount 20% and
cash discount 2%)
List price 25,000
Less: Trade Discount 20% 5,000
20,000
Less: Cash Discount 2% 4002
19,6001
Total 2,14,000 2,14,000
2. Pass journal entry in the books of Laxman from the following transactions:
2022
Jan. 1 Started business with cash `80,000; goods `30,000 and furniture `40,000 [Hint: Goods
will represent here as Stock A/c as not purchased by the firm].
Jan. 3 Bought goods from Arun of the list price `25,000 at a trade discount of 20%.
Jan. 5 Returned goods to Arun of the list price `2,000.
Jan. 7 Settled the account of Arun by paying cash under a discount of 4%.
Jan. 10 Sold goods to Raj of the list price `30,000 under trade discount of 15%.
Jan. 13 Raj returned goods of the list price `2,000.
Jan. 15 Raj paid `23,100 in full settlement of his account.
Jan. 19 Purchased goods from Amit `8,000 and Sumit `12,000.
Jan. 23 Paid Amit `7,800 and received discount `200.
Jan. 25 Settled the account of Sumit by paying `11,400.
Jan. 30 Paid salary `2,000; rent `600 and stationery `400.
Ans.
2022 Cash A/c Dr. 80,000
Jan 1 Stock A/c Dr. 30,000
To Laxman’s Capital A/c 1,50,000
(Started business with cash, goods and furniture)
Jan. 3 Purchases A/c Dr. 20,000
To Arun 20,000
(Goods returned of list price `25,000 less trade dis. 20%)
May 5 ArunDr. 1,600
To Purchases Return A/c 1,600
(Goods returned to Arun of list price `2,000 less trade dis. 20%)
Jan 7 ArunDr. 18,400
To Cash A/c 17,664
(Paid cash and discount received)
Jan. 10 RajDr. 25,5000
To Sales A/c 25,500
(Sold Goods `30,000 Less trade discount 15%)
Jan. 13 Sales Return A/c Dr. 1,700
To Raj 1,700
(Goods returned by Raj of list price `2,000 less trade discount)
Jan. 15 Cash A/c Dr. 23,100
Discount Allowed A/c Dr. 700
To Raj 23,800
(Received cash from Raj & Allowed him discount)
Journal 87
To Amit 8,000
To Sumit 12,000
(Bought goods from Amit & Sumit)
Jan. 23 AmitDr. 8,000
To Cash A/c 7,800
(Paid cash and received discount)
Jan. 25 SumitDr. 12,000
To Cash A/c 11,400
(Paid cash and received discount)
Jan. 30 Salary A/c Dr. 2,000
Rent A/c Dr. 600
Stationery A/c Dr. 400
To Cash A/c 3,000
(Paid salary, rent and stationery)
Total 2,84,000 2,84,000
3. Journalise the following transactions:

(i) Kamal is declared insolvent. Received 70 paisa in a rupee from his official receiver on a debt
of 2,000.
(ii) Ram who owed us rupee 1,000; becomes bankrupt and paid 50 paisa in a
(iii) Received cash from Mohan 500 whose account was written off as bad debt last year.
Ans. Journal
(i) Cash A/c Dr. 1,400
Bad Debts A/c Dr. 600
To Kamal 2,000
(Received 70 paisa in a rupee from Kamal on his insolvency)
(ii) Cash A/c Dr. 500
To Ram 1,000
(Received 50 paisa in a rupee due to bankruptcy of Ram)
(iii) Cash A/c Dr. 500
To Bad Debts Recovered A/c 500
(Bad debts recovered which was decline bad debts last year)
Total 3,500 3,500
Note : Entry (iii) Amount due from Mohan was written off as bad debts last year so Mohan’s A/c
will be zero. Now, cash recovered from Mohan will be treated as bad debt recovered.
4. Journalise the following:
(i) Goods worth `2,000 were distributed as free samples.
(ii) Goods worth `1,000 and cash `500 were given as charity.
(iii) Goods worth `2,000 were stolen by an employee.
(iv) Goods worth `8,000 were destroyed by fire and it was fully insured.
(v) Goods damaged by fire `2,000 and insurance company admitted a claim of `1,500.
(vi) Withdrew cash `500 and goods worth `1,000 for domestic use.
(vii) Used cement worth`10,000 during construction of office cycle shed.
Ans. Journal
(i) Advertainment A/c Sales Promotion Expenses A/c Dr. 2,000
To Purchases A/c 2,000
(Goods distributed as free samples)
(ii) Charity A/c Dr. 1,500
To Cash A/c 500
(Goods and cash given away as charity)
(iii) Loss by Theft A/c Dr. 2,000
(Goods stolen by employee)
(iv) (a) Loss by Fire A/c Dr. 8,000
(Goods destroyed by fire)
(b) Insurance Co. Dr. 8,000
To Loss by Fire A/c 8,000
(Claim lodged with insurance Co.)
(v) (a) Loss by Fire A/c Dr. 2,000
(Goods lost by Fire)
(b) Insurance Co. Dr. 1,500
Profit and Loss A/c Dr. 500
To Loss by Fire A/c 2,000
(Insurance claim lodged)
(vi) Drawings A/c Dr. 1,500
To Cash A/c 500
(Withdrew cash and goods for domestic use)
(vii) Building A/c Dr. 10,000
(Cement used for the construction of cycle shed for office)
Total 37,000 37,000
Journal 89
5. Pass the journal entries for the following transactions:
2022 (`)
Jan. 1 Paid into bank for opening a bank current account 30,000
Jan. 3 Withdrew cash from bank for office use 5,000
and for personal use 1,000
Jan. 5 Bought goods from Ram and paid the amount by cheque 4,000
Jan. 9 Taken a bank loan 20,000
Jan. 11 Bought goods and paid by cheque 8,000
Jan 15 Sold goods to Ram and received cheque 12,000
Jan 17 Cheque of Ram deposited into bank
Jan. 20 Paid salary 3,000 and rent 2,000 by cheque
Jan. 25 Withdrew goods for personal use 4,000
Jan. 28 Repaid bank loan and 5,000
paid interest by cheque 500
Jan. 29 Cheque received from Mohan `950 in full settlement of his account 1,000
Jan. 31 Cheque of Mohan endorsed to Gopi.
Ans. Journal
2022 Bank A/c Dr. 30,000
Jan 1 To Cash A/c 30,000
(opened a bank current account)
Drawing A/c Dr. 1,000
To Bank A/c 6,000
(Withdrew cash from bank for office use and personal use)
To Bank A/c 4,000
(Bought goods & Paid by cheque)
Jan. 9 Bank A/c Dr. 20,000
To Bank Loan A/c 20,000
(Bank loan taken)
To Bank A/c 8,000
(Bought goods and paid by cheque)
Jan. 15 Cheque-in-Hand A/c Dr. 12,000
To Sales A/c 12,000
(Sold goods to Ram and got cheque)
Jan. 20 Salary A/c Dr. 3,000
Rent A/c Dr. 2,000
To Bank A/c 5,000
(Salary and rent paid by cheque)
Jan. 25 Drawings A/c Dr. 4,000
To Purchase A/c 4,000
(Withdrew goods for personal use)
Jan. 28 Bank Loan A/c Dr. 5,000
Interest A/c Dr. 500
To Bank A/c 5,500
(repaid Bank loan and interest by cheque)
Jan. 29 Cheque-in-Hand A/c Dr. 950
To Mohan 1,000
(Cheque received from Mohan in full settlement of is account)
Jan. 31 Gopi 950
To Cheque-in-Hand A/c Dr. 950
(Cheque of Mohan endorsed to Gopi)
Total 1,08,450 1,08,450
6. Record the following transactions in the journal.

(i) Bought goods of list price `20,000 from Ram less 20% trade discount and 2% cash discount
and paid 50% by cheque.
(ii) Sold goods to Kamal of list price `30,000 less 25% trade discount and 2% cash discount.
Received a cheque of 50% amount which was deposited in the bank on the same day.
(iii) Received cash from Rakesh for bad debt written off last year 200.
(iv) Goods sold to Brown for `10,000 allowing him trade discount 20% and cash discount 5%. He
paid 1/4th amount immediately by cheque which was deposited in bank.
(v) A debtor, Sohan is declared insolvent. Received a cheque of 25 paisa in a rupee on a debt of
`1,000 which was deposited in the bank.
(vi) Cheque of Brown was dishonoured.
Ans. Journal
(i) Purchases A/c Dr. 16,000
To Ram 8,000
To Bank A/c 7,840
(Bought goods at trade discount 20% and cash discount 2% and
paid 50% by cheque:
Purchases `20,000 – `4,000 (T.D) = `16,000
Cash discount 2% on 50% of `16,000 is `160)
(ii) Bank A/c Dr. 11,025
KamalDr. 11,250
To Sales A/c 22,500
(Sold goods at trade discount 25% & cash discount 2% and got cheque
of 50% amount deposited on same day
Sales `30,000 – `7,500 (T.D.) = `22,500
Cash discount 2% of `11,250 = `225
Journal 91
(iii) Cash A/c Dr. 200
To Bad Debts Recovered A/c 200
(Bad Debts recovered in cash)
(iv) Bank A/c Dr. 1,900
Brown Dr. 6,000
To Sales A/c 8,000
(Sold goods to Brown at trade discount 20% and cash discount 5%.
1/4th sales is on cash basis Sales `10,000 – `2,000 (T.D.) = `8,000
Cash discount 5% on`2,000 = `100)
(v) Bank A/c Dr. 250
To Sohan 1,000
(Receive cheque for 25% amount on declaration of insolvency &
deposited into bank)
(vi) BrownDr. 2,000
To Bank A/c 1,900
To Discount Allowed 100
(Cheque of Brown dishonoured and discount allowed I disallowed)
Total 49,700 49,700
7. Following balances appeared in the books of Super Garments as on 1st January, 2022:
Assets: Cash `5,000; Cash at Bank `12,500; Debtors `14,000; (Ashok `5,000 Kewal `6,000, Mohan
`3,000), stock `24,500 and furniture `14,000
Liabilities: Creditors `12,000 (Ram 4,000; Amit `5,000 and Sunil `3,000) Bank loan `18,000.
Following transactions took place during January, 2022:
Jan. 3 Bought goods from Suresh for `25,000 at a trade discount of 20% and cash discount of
2%. Paid 40% amount immediately.
Jan. 5 Sold goods to Kewal 10,000.
Jan. 8 Received 15,500 from Kewal in full settlement of his account.
Jan. 10 Received cheque from Ashok 4,900 allowing him discount 100.
Jan. 12 Cheque received from Ashok was deposited into bank.
Jan. 15 Cheque received from Mohan 2,950 in full settlement of his account, was deposited in
bank on the same day.
Jan. 18 Cheque of Ashok was dishonoured.
Jan. 20 Bought goods from Brown for 10,000.
Jan. 23 Goods bought from Brown was sold to James at a profit of 20%.
Jan. 25 Withdrew cash from bank 4,000 for office use and 1,000 for private use:
Jan 27 Goods distributed as free sample 3,000 and given as charity 1,000.
Jan. 29 Ashok became insolvent and paid 60% only.
Jan. 30 Goods sold for cash 11,000 of which 6,000 deposited into bank.
Pass Journal entries for above transaction.
Ans. Journal of Super Garment
2022 Cash A/c Dr. 5,000
Jan 1 BankDr. 12,500
AshokDr. 5,000
KewelDr. 6,000
MohanDr. 3,000
Stock A/c Dr. 24,500
To Ram 4,000
To Amit 5,000
To Sunil 3,000
To Bank Loan 18,000
To Capital A/c (Balancing Figure) 40,000
(Assets and liabilities brought forward)
Jan 3 Purchases A/c Dr. 20,000
To Suresh (60%) 12,000
To Cash A/c 7,840
(Goods purchased (60% credit, 40% cash and cash discount received
2%)
Jan. 5 KewelDr. 10,000
To Sales A/c 10,000
(Goods sold to Kewal)
To Kewal 16,000
(Cash received and discount allowed)
Jan. 10 Cheque-in-Hand A/c Dr. 4,900
To Ashok 5,000
(Cheque received & discount allowed)
To Cheque-in-Hand A/c 4,900
(Cheque of Ashok deposited into bank)
To Mohan 3,000
(Cheque deposited and discount allowed)
Jan. 18 AshokDr. 5,000
To Bank A/c 4,900
To Discount Allowed A/c 100
(Cheque dishonoured & Discount allowed is disallowed)
Journal 93
Jan. 20 Purchased A/c Dr. 10,000
To Brown 10,000
(Bought goods)
Jan. 23 James Dr. 12,000
To Sales A/c 12,000
(Bought goods from Brown sold at 20% profit)
8. Enter the following transactions in the books of Ratnakar:

2022
May 1 Commenced business with cash `4,00,000 of which `3,00,000 deposited into bank.
May 4 Bought goods of list price `80,000 less trade discount 10% from Monu and paid cheque
for 50% amount.
May 7 Sold goods to Amit of list price `1,20,000 less trade discount 15%. He paid cheque for
`50,000 which was banked.
May 10 Purchased building for `2,50,000 by issuing cheque, however, brokerage charges 2%
and registration charges `10,000 paid in cash.
May 13 Received cheque from Amit for `51,000 in full settlement of account and cheque was
deposited in bank on May 16.
May 17 Paid insurance premium of building `2,000 and life insurance premium `5,000 by cheque.
May 20 Withdrew goods for personal use `4,000 and goods distributed as free samples `2,000.
May 25 Bought goods of list price `50,000 less 10% trade discount and 2% cash discount from
Neha. Paid 30% amount by cash and 40% by cheque.
May 29 Bought machinery from Haryana Store 30,000. Paid carriage `1,000 and installation
charges `2,000.
May 30 Repair charges paid `800 and salary paid `1,200.
Ans.
Journal
2022 Cash A/c Dr. 1.,00,000
May 1 Bank A/c Dr. 3,00,000
(Started business with cash & Bank)
To monu 36,000
To Bank A/c 36,000
(Bought goods and paid 50% by cheque)
May 7 Bank A/c Dr. 50,000
Amit Dr. 52,000
To Sales A/c 1,02,000
(Goods sold to Amit & Partly cheque received)
May 10 Building A/c Dr. 2,65,000
To Bank A/c 2,50,000
To Cash A/c 15,000
(Purchased building by cheque and paid brokerage and registration
charges in cash)
May 13 Cheque-in-Hand A/c Dr. 51,000
Discount Allowed A/c Dr. 1,000
To Amit 52,000
(Received cheque and allowed discount)
May 16 Bank A/c Dr. 51,000
To Cheque-in-Hand A/c 51,000
(Cheque of Amit deposited in bank)
May 17 Insurance A/c Dr. 2,000
To Bank A/c 7,000
(Paid insurance and drawing)
May 20 Drawings A/c Dr. 4,000
Advertisement A/c Dr. 2,000
To purchases A/c 6,000
(Withdrew goods for personal use and free sample distributed)
To Cash A/c 13,230
To Bank A/c 17,640
To Discount received A/c 630
To Neha (30%) 13,500
(Goods purchases for `50,000 less trade discount 10% and 2% cash
discount. Paid cash 30% 40% by cheque)
May 29 Machinery A/c Dr. 33,000
To Haryana Store 30,000
To Cash A/c 3,000
(Machinery purchased and installation charges paid)
May 30 Repair A/c Dr. 800
Salary A/c Dr. 1,200
To Cash A/c 2,000
(Repair & Salary paid)
Total 10,35,000 10,35,000
9. Pass journal entries for the following transactions:

1. Bought goods for `1,00,000 from Ram.
2. Sold goods bought from Ram to Shyam at a profit of 20%.
3. Shyam returned 1/4th goods supplied to him.
Journal 95
4. Goods returned by Shyam is returned to Ram.
5. Paid cash to Ram at a discount of 3%.
6. Shyam settled his account by cheque of `88,000 which was banked on the same day.
Ans. Journal
1. Purchases A/c Dr. 1,00,000
To Ram 1,00,000
(Bought good)
2. Shyam Dr. 1,20,000
To Sales 1,20,000
(Sold goods `1,00,000 × 120/100 = `1,20,000)
3. Sales Return A/c Dr. 30,000
To Shayam 30,000
(Goods returned to Ram `30,000 × 120/100)
4. Ram Dr. 25,000
(Goods returned to Ram `30,000 × 100/120)
5. Ram Dr. 75,000
To Cash a/c 72,750
To Discount Received A/c 2,250
(paid to Ram and received discount)
6. Bank A/c Dr. 88,000
Discount Allowed A/c Dr. 2,000
To Shaym 90,000
(Payment received and discount allowed)
Total 4,40,000 4,40,000

1. Sold goods to Kamal costing `10,000 at 30% above cost less trade discount 10% and cash
discount 2%. Kamal was not willing to avail cash discount.
2. Bought a second hand machinery from Gopal for `25,000. Spent `4,000 on its repair and
`1,000 towards installation.
3. Paid insurance premium `2,500. It includes `500 paid for the next year.
4. Sold goods to Raman of list price `10,000 less 15% trade discount and 2% cash discount. He
paid the payment on the spot.
5. Kamal died in an accident and nothing could be recovered from him.
6. Allowed interest on capital amounting `50,000 @ 8% p.a.
7. Charge depreciation on Machine @ 10% at the end of the year.
8. Commission Accrued (due but not received) `500.
Ans. Journal
1. KamalDr. 11,700
To Sales A/c 11,700
(Goods sold for 13,000 less trade discount 10%)
2. Machinery A/c Dr. 30,000
To Gopal 25,000
To Cash A/c 5,000
(Bought machine from Gopal & paid expenses on it )
11. Journalise the following transactions in the books of Ravi:

2022
May 1 Paid cash into bank/banked/cash deposited into bank 40,000.
May 5 Bought 10 shares of Wipro Ltd. for `40,000 and paid brokerage @1%. Payment is made
by cheque.
May 8 Bought goods from Sonam for `60,000 on credit and paid carriage charges `1,000.
May 11 Paid to Sonam by cheque getting 5% cash discount for making her prompt payment.
May 15 Sold 1/3 goods bought from Sonam at a profit of 20% on cost.
May 18 Bought machinery for `25,000 from Rahul. Paid carriage 500, wages and installation
charges `1,500.
May 20 Paid income tax `3,000.
May 24 Goods destroyed by fire cost `5,500 but insurance company admitted the claim of 4,000
only.
May 27 Received `100 from sale of old newspapers and `1,000 from sale of old furniture.
May 29 Received VPP from Gopal for `2,000. Paid `25 to peon who paid conveyance charges to
collect it.
Ans. Journal of Ravi
2022 Bank A/c Dr. 40,000
May 1 To Cash A/c 40,000
(Deposited cash into bank)
May 5 Investment A/c Dr. 40,400
To Bank A/c 40,400
Purchased 10 shares of Wipro Ltd. For 40,000 + Brokerage 1% &
paid by cheque
(i) To Sonam 60,000
(Bought goods from Sonam)
Journal 97
(ii) Carriage A/c Dr. 1,000
To Cash A/c 1,000
(Paid carriage charges)
May 11 Sonam Dr. 60,000
To Bank A/c 57,000
To Discount Received A/c 3,000
(For paid by Cheque and received discount @5%)
To Sales A/c 24,000
(Sold goods 1/3 of `60,000 × 120/100)
May 18 Machinery A/c Dr. 27,000
To Rahul 25,000
To Cash A/c 2,000
(Bought machinery from Rahul & paid expenses on it)
May 20 Drawings A/c Dr. 3,000
To Cash A/c 3,000
(Aid for income tax)
May 24 Loss by Fire Dr. 5,500
(i) To Purchases A/c 5,500
(Goods lost by fire)
(ii) Insurance Co. Dr. 4,000
Profit & Loss A/c Dr. 1,500
To Loss by Fire 5,500
(Insurance Co. admitted or claim of `4,000 only)
To Mis. Income A/c 100
To Furniture A/c 1,000
(Sale of old newspaper & old furniture)
12. Record the following journal entries in the books of Goyal Brothers:
2022
Jan. 1 Started business with cash `40,000, goods `30,000 and furniture `20,000.
[Hint: Goods will represent stock as it is not purchased by firm]
Jan. 3 Paid into bank `30,000.
Jan. 7 Bought goods from Ashok `20,000 and Nitin `15,000.
Jan. 9 Sold goods bought from Ashok at a profit of 25% to Gopi on credit and goods bought
from Nitin at a profit of 10% for cash.
Jan. 13 Settled the account of Ashok by paying `19,500 by cheque and Nitin allowed discount
of 600 for paying cheque promptly.
Jan. 19 Gopi paid by cheque and deducted 2% cash discount. Cheque was banked.
Jan. 25 Mohan sold us goods for `10,000.
Jan. 28 Withdrew from bank for personal use `1,000.
Jan. 30 Repair of furniture `500.
Jan. 31 Goods costing `2,000 (sale price `2,500) used in making furniture.
Jan. 31 Allowed interest on capital `5,000.
Ans.
Journal
Date Particulars L.F Debit Credit
2022 Cash A/c Dr. 40,000
Jan. 1 Stock A/c Dr. 30,000
To Capital A/c 90,000
(Commenced business with cash, goods and furniture)
To Cash A/c 30,000
(Cash deposited in bank)
To Ashok 20,000
To Nitin 15,000
(Bought goods)
Jan. 9 GopiDr. 25,000
Cash A/c Dr. 16,500
To sales 41,500
(Goods sold for cash and credit)
Jan. 13 AshokDr. 20,000
NitinDr. 15,000
To Bank A/c 33,900
To Discount Received A/c (`50,000 + 600) 1,100
(Paid cheque and discount received `500 + 600)
To gopi 25,000
(Received cheque & allowed discount)
To Mohan 10,000
(Bought goods)
Jan. 28 Drawings A/c Dr. 1,000
To Bank A/c 1,000
(Withdrew from bank for personal use)
Journal 99
Jan. 30 Repair A/c Dr. 500
To Cash A/c 500
(repair on furniture)
Jan. 31 Furniture A/c Dr. 2,000
(Goods used in making furniture)
Jan. 31 Interest on Capital A/c Dr. 5,000
(Interest allowed on capital)
Total 2,75,000 2,75,000
EXERCISES
1. Journal is called a book of:
(a) Original entry (b) Special purpose book
(c) Final entry (d) Secondary entry
2. Journal is prepared:
(a) To ascertain the financial position of the entity
(b) To make ledger posting easy
(c) To first of all record the business transactions
(d) None of the above
3. All the business transactions are recorded in journal:

(a) On monthly basis (b) On weekly basis
(c) In chronological order (d) On convenience basis
4. A compound journal entry has:

(a) One debit and one credit item (b) More than one debit item
(c) More than one credit item (d) More than one debit or credit items
5. Sold goods to Ram for 10,000 @ 10% trade discount will be recorded as:
(a) Sales `10,000 (b) Sales `9,000 and `1,000 Trade Discount
(c) Sales `9,000 (d) Sales `9,000 and Discount Allowed `1,000
6. Personal accounts refer to:

(a) Liabilities (b) Assets
(c) Debtors, Creditors etc. (d) Expenses, losses, income and gains

7. Real Account refers to:
(a) Tangible Assets (b) Intangible Assets
(c) Both tangible and intangible assets (d) Expenses, losses, income and gains
8. Nominal Account refers to:

(a) All expenses (b) All losses (c) Gains & incomes (d) All of these
9. If bad debt of `2,000 from Ram during last year is recovered now. It will be credited to:
(a) Bad Debt A/c (b) Ram
(c) Profit & Loss A/c (d) Bad Debt Recovered A/c
10. Paid `2,000 as carriage and Plant & Machinery. It should 3,000 as wages for installation of be
debited to:
(a) Carriage & Wages A/c (b) Plant & Machinery A/c
(c) Repair A/c (d) Drawing A/c
11. Sold goods to Mona of list price `10,000 @ 10% trade discount and 2% cash discount. Mona gave
cheque for 40% amount which was banked. Discount Allowed will be debited by:
(a) `1,000 (b) `180 (c) `72 (d) `200
12. Goods costing `8,000 was sold to Sumit at a profit of 25% profit on cost less 10% trade discount
and 2% cash discount. Sumit paid 50% amount in Cash. Cash A/c will be debited by:
(a) `4,500 (b) `4,410 (c) `8,820 (d) `3,920
13. Goods costing `8,000 was sold to Mohan at a profit of 20% on sales price less trade discount of
10%. Sales A/c will be credited by:
(a) `10,000 (b) `9,600 (c) `9,000 (d) `8,640
14. Salary Outstanding A/c is a:

(a) Nominal A/c (b) Real A/c
(c) Personal A/c (d) Personal Representative A/c
15. Gopal bought goods from Ram & Co. for `20,000 @ 10% trade discount and 2% cash discount if
amount is paid within 10 days. He paid 50% amount within 8 days by cheque. Amount of Discount
Received is:
(a) Nil (b) `180 (c) `200 (d) `2,000
16. Goods lost by fire costing credited to: `10,000 (Market value `12,000) will be
(a) Sales A/c `10,000 (b) Purchases A/c `10,000
(c) Sales A/c `12,000 (d) Purchases A/c `12,000
17. Mohan is our debtor for `15,000. He was declared insolvent so only 50% amount is recovered
from him. The unpaid amount will be recorded as:
(a) Dr. Discount A/c (b) Dr. Bad Debt A/c (c) Cr. Discount A/c (d) Cr. Bad Debt A/c
Journal 101
18. Sold goods to Ram `4,000 against cheque will be debited to:
(a) Cash A/c (b) Bank A/c
(c) Cheque-in-hand A/c (d) Ram’s A/c
19. ‘Debit what come in and credit what goes out’ is rule of:
(a) Personal A/c (b) Real A/c (c) Nominal A/c (d) None of these
20. Prepaid Rent A/c is a:

(a) Nominal A/c (b) Real A/c
(c) Personal A/c (d) Representative Personal A/c
ANSWERS
1. (a) 2. (c) 3. (c) 4. (d) 5. (c) 6. (c) 7. (c) 8. (d)
9. (d) 10. (b) 11. (c) 12. (b) 13. (c) 14. (d) 15. (b) 16. (b)
17. (b) 18. (c) 19. (b) 20. (d)

1. What is journalising?
Ans. The process of recording transactions in the journal on the basis of rules of double entry system
is called as journalizing.
2. State three features of Journal.

Ans. Features of Journal are:
(i) It records both debit and credit aspects of a transaction based on double entry system.
(ii) Each journal entry is accompanied by brief explanation of the transaction, called narration.
(iii) Transactions of the business entity are recorded in the journal on daily basis.
3. State three advantages of Journal.

Ans. Advantages of journal are:
(i) Provides date wise recording of business transactions.
(ii) Provides detail of each transaction in the form of narration.
(iii) Facilitates ledger posting of transactions.
4. State three limitations of Journal.

Ans. Limitations of Journal are:
(i) It is a complex system of recording business transactions.
(ii) Not suitable when volume of business transactions is large.
(iii) Journal is no substitute of ledger.

5. What is a simple journal entry?
Ans. If a journal entry involves one debit and one credit account, it is called as simple journal entry.
6. What is Double Entry System?

Ans. Double entry system is a system of accounting in which both the aspects of a business transaction
are recorded in terms of debit and credit amount.
7. Name the various types of accounts as per British system of accounting.

Ans. (i) Personal Accounts, (ii) Impersonal Accounts.
8. Explain the rule of debit and credit for assets and expenses/losses.
Ans. (i) Dr. increase in Assets/Expenses (losses).
(ii) Cr. Decrease in assets.
9. Explain:
(a) Personal Account (b) Real Account
(c) Nominal Account
Ans. (a) Personal Account: Accounts related to an individual, firm, company, institutions, etc. are
called personal accounts.
(b) Real Accounts: Accounts of all the properties of the business whether tangible or intangible
are termed as real accounts e.g., cash, furniture, goodwill A/c.
(c) Nominal Account: All the accounts related to expenses, losses, revenue, income and gains
are termed as nominal accounts e.g., Purchases A/c, Sales A/c, Salary A/c, Bad debt A/c,
Interest received A/c.
10. Explain the rule of debit and credit for liabilities, capital and income/ gains.
Ans. (i) Cr. Increase in Liabilities / Capital / Revenue / Gain.
(ii) Dr. decrease in liabilities / Capital.
11. What are representative personal accounts?

Ans. An account representing a particular person or group of persons is termed as representative
personal account e.g., wages for the month of December is due but not paid to workers is put
under the head, “wages outstanding”. This account represents all the workers whose wages has
not been paid so far.
Journal 103
1. Differentiate between simple and compound journal entry by giving examples.
2. What is bad debt? How does it differ with bad debt recovered?
3. What is goods? State its various forms in accounting.
4. How will you treat goods lost by fire in accounts under various circumstances?
5. Differentiate between discount allowed and discount received. Explain with the help of journal
entries.
6. State the nature of the following accounts and whether they will be debited or credited :
(i) Wages (ii) Wages outstanding
(iii) Insurance (iv) Insurance prepaid
(v) Wages paid for installation of machine (vi) Discount allowed
(vii) Bad debt recovered (viii) Interest on capital
(ix) Commission received in advance
PRACTICAL QUESTIONS
BASIC LEVEL QUESTIONS
1. Enter the following transactions in the journal of Gopi:

2022 (`)
Jan. 1 Commenced business with cash 40,000
Jan. 4 Bought goods from Ram 25,000
Jan. 6 Sold goods for cash. 16,000
Jan. 10 Bought goods from Mohan for cash 8,000
Jan. 15 Bought furniture 10,000
Jan. 17 Paid cash to Ram 18,000
Jan. 20 Sold goods to Hari 15,000
Jan. 24 Cash received from Hari 13,000
Jan. 28 Paid salary to Mohan 2,000
Jan. 29 Received commission 500
Jan. 30 Withdrew cash for personal use 4,000
Jan. 31 Paid rent to landlord, Amit 3,000
[Ans. Total `1,54,500]

2. Record the following transactions in the journal of Raman:
2022 (`)
May 1 Started business with cash 50,000
May 3 Bought goods for cash 8,000
May 6 Sold goods to Mohan 9,000
May 9 Bought goods from Sumit 11,000
May 12 Sold goods to Ramesh for cash 4,000
May 15 Bought furniture for cash 8,000
May 20 Paid wages to Gopal 3,000
May 23 Withdrew goods for personal use 1,000
May 27 Paid rent in cash 2,500
May 29 Cash received from Mohan 8,000
May 30 Paid cash to Sumit 10,000
[Ans. Total `1,14,500]
3. Pass journal entries in the books of Shyam:

2021
Dec. 1 Sold goods to Amar of the list price `50,000 less 15% trade discount.
Dec. 5 Amar returned goods of list price `6,000 being defective.
Dec. 8 Amar paid the amount due under a cash discount of 2%.
Dec. 12 Sold goods to Karan of list price `40,000 at 10% trade discount and 2% cash discount.
Karan paid cash for only 40% value of goods. [Ans. Total `1,21,000]
4. Record the following transactions in the journal of Mohan:

2021
Dec. 2 Bought goods from Amit of the list price `20,000 at 15% trade discount.
Dec. 5 Sold goods to Gopal of the list price `12,000 at 10% trade discount.
Dec. 8 Goods returned to Amit of list price `4,000.
Dec. 12 Gopal returned goods of list price `3,000.
Dec. 18 Paid cash to Amit `13,000 and received discount `600.
Dec. 24 Received cash `8,000 from Gopal in full settlement of his account.
[Ans. Total `55,600]

2022 (`)
June 1 Paid wages 5,000
June 1 Paid salaries 3,000
June 1 Paid stationery 1,000
Journal 105
June 4 Bought goods from Ram of list price `15,000 less 10% trade discount and 2% cash
discount for making cash payment.
June 10 Sold goods of list price `20,000 at 10% trade discount and 2% cash discount to Mohan.
Mohan paid the amount promptly.
June 14 Received interest `600 and commission `400.
June 18 Withdrew cash for office use `3,000 and `1,000 for personal use from bank.
June 20 Paid to Sohan `14,200 in full settlement of his account `14.500.[Ans. Total `60,000]
MEDIUM LEVEL QUESTIONS

6. Record the following transactions in the books of Raj General Store:
2022
Jan. 1 Commenced business with cash `50,000; goods `30,000 and furniture `20,000
[Hint: Goods be treated as Stock.]
Jan. 4 Bought goods from Amit of list price `30,000 less trade discount 15%.
Jan. 7 Returned defective goods to Amit of the list price `5,000,
Jan. 10 Settled the account of Amit by paying cash under discount of 2%.
Jan. 15 Sold goods to Mohan of the list price `20,000 less 15% trade discount and 2% cash
discount. Mohan paid 40% price of goods promptly.
Jan. 20 Mohan returned goods of list price `3,000.
Jan. 23 Mohan paid `7,500 in full settlement of his account.
Jan. 27 Paid freight `500; carriage `400 and stationery `600.[Ans. Total `1,79,700]
7. Enter the following transactions in the journal of Mohan:

2022 (`)
Jan. 1 Started business with cash `80,000 and goods `40,000. 40,000
[Hint: Goods be treated as stock]
Jan. 3 Paid into bank for opening a bank current account. 50,000
Jan. 6 Bought goods from Ram and paid by cheque. 10,000
Jan. 9 Sold goods to Amar and received cheque. 12,000
Jan. 11 Cheque received from Amar deposited in the bank.
Jan. 15 Withdrew cash by cheque for personal use. 3,000
Jan. 17 Took a bank loan. 40,000
Jan. 19 Paid salary `2,000 and rent `1,000 by cheque.
Jan. 21 Interest allowed by bank. 300
Jan. 25 Ram who owed us `1,000 met with an accident and nothing could be recovered.
Jan. 27 Cheque received from Amit for `8,000 in full settlement of his account `8,200.
Jan. 29 Cheque of Amit endorsed to Sohan in full settlement of his claim for `8,150.
[Ans. Total `2,76,650]

8. Enter the following transactions in the journal:
(i) Bought goods of list price `15,000 from Ravi at trade discount 10% and 2% cash discount
and he paid 40% amount by cheque.
(ii) Sold goods to Mohit of list price `20,000 less 10% trade discount and 2% cash discount.
Received a cheque of 60% amount and banked on the same date.
(iii) Withdrew cash from bank `5,000 for office use and `2,000 for personal use.
(iv) Paid fire insurance premium `1,000 of office and life insurance premium `5,000 of the owner.
(v) Recovered cash `500 from Suresh for bad debt written off last year.
(vi) Goods sold to Aakash for `25,000 allowing him trade discount 20% and cash discount 2%.
He paid 50% amount by cheque which was banked.
(vii) Ram who owed us `1,000, was declared insolvent and 40% amount could be recovered from
him.[Ans. Total `66,000]
9. (A) Pass opening entry of Rohit as on 1-4-2022 from the following details:
Assets: Cash `5,000, Bank `12,000, Debtors `35,000 (Ashok `8,000, Balbir `7,000, Hari
`20,000), Stock `25,000, Furniture `38,000.
Liabilities: Creditors `30,000 (Mohan `15,000, Kapil `9,000 and Amar `6,000), Bank loan
`20,000, Capital `65,000.
(B) Following balances appeared in the books of Vijay General Store on 1-4-2022.
Assets: Cash `8,000, Bank `10,500, Debtors `25,000 (A `10,000, B `8,000 and C `7,000),
Stock `24,500, Furniture `12,000.
Liabilities: Creditors `22,000 (X `8,000, Y `5,000 and Z `9,000), Bank Loan `15,000.
Following transactions took place during April:
Apr. 3 Bought Goods from X for `20,000 at a trade discount of 10%.
Apr. 7 Sold goods of list price `15,000 at a trade discount of 10% to A
Apr. 9 Received a cheque from B for `6,000.
Apr. 11 Cheque of B deposited into bank
Apr. 14 B’s cheque returned dishonoured.
Apr. 15 Got a cheque from A for `23,000 and banked in full settlement of his account.
Apr. 18 Paid X by cheque `15,000.
Apr. 23 Bought goods from Amar of list price `10,000 less 10% trade discount.
Apr. 25 Sold goods bought from Amar to Mohan at profit of 20%.
Apr. 26 Goods costing `1,000 were distributed as free samples and goods costing `500 were
given as charity.
Apr. 28 Bank charges were `200.
Apr. 29 Paid rent `3,000, salary `2,000 by cheque, Enter these transaction in the journal.
[Ans. Capital `43,000 and Total `1,94,500]
Journal 107
ADVANCE LEVEL QUESTIONS
10. Record the following transactions in the books of Hari:

2022
June 1 Commenced business with cash `1,00,000, goods `60,000 and furniture `20,000
June 3 Opened a bank current account by depositing cash `70,000.
June 5 Bought goods of list price `25,000 from Ashok less trade discount 10% and issued cheque
for 40% amount.
June 8 Sold goods of list price `30,000 to Karan less trade discount 15%. He gave cheque for
`10,000 which was deposited in bank.
June 11 Bought a shop for `60,000 by issuing cheque, however, brokerage 1% and registration
charges `4,000 were paid in cash.
June 15 Paid insurance premium of shop `500 and income tax `800.
June 19 Withdrew goods for `4,000 and cash from bank `5,000 for personal use.
June 23 Bought a plant for `18,000 from Gupta Machinery and paid carriage `500 and installation
charges `1,500
June 27 Issued a cheque to Ashok for `13,000 in full settlement of his account.
June 27 Received a cheque from Karan for `15,000 in full settlement of his account.
June 28 Cheque of Karan deposited in bank.
June 30 Cheque of Karan was dishonoured.
June 30 Paid Repair charges `200 and rent `1,000 in cash. [Ans. Total `4,53,600]
11. Joumalise the following transactions:

1. Sold goods costing `20,000 to Amit at 30% profit on cost less trade discount 10% and cash
discount 2% but Amit was not willing to avail cash discount.
2. Bought a second hand machine from Goel Store for `20,000, Paid `500 on carriage and `1,500
towards installation cost.
3. Paid insurance premium which include `400 towards next year.
4. Rent paid `3,000 but `1,000 is still due.
5. Sold goods to Deepak of list price `20,000 less trade discount 10% and cash discount 2%.
Deepak gave cheque for 40% amount which was banked.
6. Paid Goel Stores `5,000 in cash and a cheque for `15,000.
7. Amit met with accident and died so nothing could be recovered from him.
8. Charge 10% depreciation on machine.
9. Allow interest on capital `4,000.
10. Charge interest on drawing `500. [Ans. Total `1,17,900]

12. Enter the following transactions in the Journal of Amar:
1. Bought goods from Sohan for `20,000 and paid carriage `300.
2. Bought a horse for `11,000 for delivering goods to customers
3. Bought motor cycle for `20,000 for personal use of Amar and paid by cheque.
4. Sold goods to Mohan of list price `30,000 less 10% trade discount.
5. An old machine of book value `40,000 is exchanged for a new machine costing `1,00,000. The
old machine is valued `30,000 by Goyal Stores.
6. Received a cheque from Mohan under 2% cash discount and deposited in the bank after two
days.
7. Cheque of Mohan dishonoured due to his insolvency.
8. Mohan could pay only 50 paisa in a rupee due to his insolvency.
9. Charge depreciation on machine `5,000.[Ans. Total `3,00,760]
13. Record the following transactions in the journal of Ramakant:

2022
Jan. 1 Started business with cash `30,000, goods `40,000 and furniture `30,000.
[Hint: Goods be treated as stock.]
Jan. 4 Bought goods from Ashok `20,000 and Rakesh `15,000.
Jan. 7 Sold goods bought from Ashok at a profit of 50% less 20% trade discount to Amar.
Jan. 10 Amar paid the amount due under cash discount of 2% by cheque.
Jan. 12 Half the goods bought from Rakesh is sold at a profit of 20% to Ram. Carriage charges
paid `100 but it is not to be charged to customer.
Jan. 13 Gopi sold us goods for `25,000.
Jan. 14 Cheque of Amar endorsed to Gopi and balance amount paid in cash.
Jan. 19 A second hand machinery is purchased for Gopal for cash. Paid `500 for carriage and
`18,000 from `1,500 on its repair.
Jan. 22 Goods costing `1000 (sales price `1200) is stolen.
Jan. 27 Goods costing `3,000 (Sales price `4,000) is taken by owner for personal use.
Jan. 29 Allow interest on capital `2,500.
Jan. 30 Wages due but not paid to Sohan `1,500.[Ans. Total `2,70,100]
14. Joumalise the following transactions in the books of Ravi:

2022
Apr. 1 Cash paid into bank `50,000.
Apr. 3 Bought goods from Ajay for `40,000 and paid carriage charges `1,000.
Apr. 7 Sold 4th goods bought from Ajay to Mohan at a profit of 25%.
Apr. 10 Paid Ajay by cheque under cash discount of 2%.
Journal 109
Apr. 13 Bought a second hand Machine from Varun & Co. for `30,000 and paid `4,000 for its
overhauling and paid `1,000 for carriage.
Apr. 15 Goods lost by fire `5,000 but it was not insured.
Apr. 17 Mohan returned us 10% goods.
Apr. 19 Mohan settled his account by cheque which was banked on the next day.
Apr. 21 Paid Insurance Premium `800 of which `200 is prepaid.
Apr. 25 Wages paid `5,000 to Gopi but `1,000 is still unpaid.
Apr. 29 Ashok from whom `5,000 were due became insolvent. He could pay only 40 paisa in a
rupee.[Ans. Total `2,24,250]
15. Record the journal entries in the books of Rohit from the following transactions:
2022
May 1 Assets: Cash `20,000, Bank `30,000, Stock `30,000, Debtors `20,000 (Ram `5,000,
Mohan `8,000, Sohan `7,000), Furniture `20,000.
Liabilities: Creditors `30,000 (X `5,000), Y `10,000 and (Z `5,000), Capital `80,000.
May 3 Bought goods from Raja for `25,000 and paid cash `10,000 Paid carriage `200.
May 5 Bought machinery from Kamal Motors for`25,000 and paid carriage `500 and installation
cost `1,500.
May 8 Sold goods costing `15,000 at a profit of 20% to Mohan. Paid carriage `200 to be charged
to customer.
May 9 Received two cheques from Mohan for `15,000 and `3,000 in full settlement of his
account.
May 11 First cheque of Mohan was endorsed to Raja and second cheque was deposited in Bank.
May 12 Goods costing `4,000 (sale price `5,000) was destroyed by fire. Insurance Company
admitted the claim in full.
May 15 Paid income tax `1,000.
May 18 Paid rent `2,000, salary `3,000 but rent `1,000 and salary `1,500 are still to be paid.
May 21 Bought shares of Tata Motors for `10,000 and brokerage paid 1%.
May 25 Goods taken by proprietor for personal use `2,000 and goods distributed as free sample
`1,000.[Ans. Total `2,58,400]
[Hint: Capital Reserve `10,000]

CHAPTER
06 Journal with GST
GOODS AND SERVICES TAX (GST)

Introduction
Goods and Services Tax (GST) is a comprehensive Value Added Tax introduced by Government of India
we.f. 1st July, 2017 replacing practically all the indirect taxes levied by the Central Government and
State Governments/Union Territories.
List of Taxes Merged into GST
1. Levied by Central Government: Central Excise Duty, Additional Custom Duty, Service Tax, Central
Surcharges and Cesses, C.V.D., Special Additional Duties (S.A.D.), Duty on Textile and Textile
Products etc.
2. Levied by State Governments/Union Territories: Value Added Tax (V.A.T.), C.S.T., Luxury Tax,
Entry Tax, Octroi, Entertainment Tax, Purchase Tax, Taxes on Advertisement, Tax on Lottery, State
Surcharge and Cesses, etc.
OBJECTIVES OF LEVYING GST

To develop common national market for buying and selling of goods and services.
Uniformity of Tax Structure in the country on goods and services.
To ensure removal to double taxation and to check tax evasion.
To ensure simplification of tax regime.
To ensure better tax management as single indirect tax is levied in place of multiple taxes levied
earlier.
Easy compliance of tax liability as it is comprehensive online based system and it ensures complete
transparency.
GST will ensure competitiveness among business entities so goods and services will become
cheaper to consumers.
Gain to manufacturers, suppliers of goods and services and to exporters as system provides
complete set-off of Input Tax paid on purchase of goods and services with the Output GST Collected
on sale of goods and services.
System will ensure efficiency in tax collection as it is based on online tax collection and will also
reduce the cost of collection of GST.
All States and Union Territories work under dual rate of tax concept ie, CGST and SGST while
inter-state transactions work under single rate of tax, called IGST.
FEATURES (CHARACTERISTICS) OF GST
1. Comprehensive Indirect Tax: Goods and Services Tax (GST) is a comprehensive value added
tax replacing practically all the indirect taxes levied by the State Government / Union Territories
and the Central Government.
2. Value Added Tax: GST is a value added tax as GST paid (Input GST) paid on purchase of goods
and services is set-off against the GST collected (Output GST) collected on sale of goods and
services. Thus, it is levied on the incremental value of goods and services.
3. GST is Collected/Charged by Registered Dealer with GST: Only the registered dealer is
authorised to charge and collect the GST at the time of sales of goods and/or services.
4. Uniformity of Tax Structure: GST is charged on goods and/or services at the same rate (slab)
throughout the country. However, mechanism for charging GST on inter-state and intra-state
(within the same state) sales is slightly different.
5. GST Paid/Charged by a Registered Dealer is Subject to Set-off: GST paid at the time of purchase
of goods and/or services is subject to set-off with the GST collected at the time of sale (supply) of
goods and/or services by a registered dealer. Thus, GST is neither an expense nor an income of
the registered dealer. Ultimately, GST is paid and borne by the ultimate consumer of goods and/
or services.
6. GST is Destination based Tax: If the supply (sale) of goods and service from one state to another
state dealer, Output IGST will be levied. On the other hand if the supply (sale) of goods and services
is from one dealer to another dealer within the same State, Output CGST and Output SGST will be
charged with the slab rate, however, total amount of GST will remain the same. Thus, it is levied
based on destination of supply.
7. Input GST Paid is Subject to Set-off with the Output GST Collected on Sale of Goods and/or
Services: Thus, for a registered dealer, GST paid and collected is subject to set-off. It is ultimately
borne by the consumer of goods and/or services.
GOODS AND SERVICES TAX (GST) MECHANISM

Goods and Services Tax (GST) is levied by the Government on every supply (sale) of goods and services
except on alcohol and petroleum at the prescribed rates. It is a value added tax as GST paid on purchase
of goods and services, called Input GST is set-off against the GST collected on sale of goods and services,
called Output GST.
Thus, GST paid on purchase of goods and services is not the cost of the purchaser as it is set-off against
the GST collected on sale of goods and services. In this way, the ultimate consumer of goods and services
bears the burden of GST charged by the last supplier.
WHO CAN COLLECT GST?

Every registered dealer can collect Goods and Services Tax (GST) whose annual turnover exceeds
40 lakhs p.a. and 20 lakhs in case of North Eastern States and Hilly States w.e.f. 1st April 2019.

KINDS OF GST
S. No. Types of GST India Valid On Collected By

1. CGST (Central Goods and Services Tax) Intrastate Central government
2. SGST (State Goods and Services Tax) Intrastate State Government
3. ITGST (Integrated Goods and Services Tax) Intrastate Central Government
4. UTGST (Union Territory Goods and Services Tax) Union Territory (UT) Union Territory (UT Government)
TAX RATES UNDER GST - 5 SLABS
LIST OF SERVICES EXEMPTED FROM GST

Person engaged in charitable activities.
Person whose aggregate turnover is less than 40 lakhs (or 20 lakhs for North Eastern State and
Hilly States.) w.e.f. 1st April, 2019.
Supply of goods and services to Government embassies of other countries, U.N.O., etc.
Supply of services to the Government.
Payment of Wages and Salaries to employees.
Export of goods and services to other countries provided exporter is not getting export incentives.
Educational services provided by institutions to students, faculty members, transportation and
mid-day meal services upto higher secondary.
Travelling expenses claimed by staff.
Health services given by doctors as consultancy (i.e., not giving medicines).
Electricity and water.
Interest.
Services under Reverse Charge Mechanism e.g., Lawyers fee, Royalty for use of copyright. etc.
Journal with GST 113

REVERSE CHARGE MACHANISM (RCM)
Reverse Charge Mechanism means that GST shall be paid and deposited with the Government by.
recipient of Goods / Services and not by Supplier of Goods / Services. As per normal mechanism of
levy of GST, the Receiver of Goods / Services pays GST to the Supplier and such supplier then deposits
GST with the Government.
ACCOUNTING PROCEDURE
In case of Intra-state supply of goods and services (i.e., sales within the same state)
(i) For Purchase of goods:
Purchases A/c Dr.
Input CGST A/c Dr.
Input SGST A/c Dr.
To Bank/Creditors A/c
(Goods Purchased)
(ii) For Sale of goods:
Bank/Debtors A/c Dr.
To Sales A/c
To Output CGST A/c
To Output SGST A/c
(Goods Sold)
(iii) For Purchases Returns:
Creditors A/c Dr.
To Purchase Returns A/c
To Input SGST A/c
(Purchase Returns)
In case of purchase returns, Input CGST A/c an Input SGST A/cs are credited because at the time of
purchases Input CGST A/c and Input SGST A/cs were debited.
(iv) For Sale Returns:
Sales Returns A/c Dr.
Output CGST A/c Dr.
Output SGST A/c Dr.
To Debtors A/c
(Sales Returns)
In case of sale returns, Output CGST A/c and Output SGST A/cs are debited because at the time of sale
Output A/c and Output SGST A/cs were credited.

(v) For Purchases of fixed Assets:
Fixed Assets A/c Dr.
Input CGST A/c Dr.
Input SGST A/c Dr.
To Bank A/c
(Purchase of fixed assets)
(vi) For Expenses:
Expenses A/c Dr.
Input CGST A/c Dr.
Input SGST A/c Dr.
To Bank A/c
(Expenses incurred)
(vii) For Income (for example commission received)
Bank A/c Dr.
To Commission Received A/c
To Output CGST A/c
To Output SGST A/c
(Income received)
(viii) For goods withdrawn by the Proprietor for the personal use:
Drawings A/c Dr.
To Purchases A/c
To Input CGST A/c
To Input SGST A/c
(Goods taken for personal use)
(ix) For goods given as free samples, loss of goods by fire or goods stolen:
Advertisement A/c (Free Samples) Dr.
Loss by Fire A/c Dr.
Loss by Theft A/c Dr.
To Purchases A/c
To Input CGST A/c
To Input SGST A/c
(Goods distributed as free samples, goods stolen and goods destroyed by fire and input CGST and
Input SGST reversed)
(x) For Setting of Input CGST against Output CGST:
Output CGST A/c Dr.
To Input CGST A/c
(Input CGST set off against Output CGST)

(xi) For setting off Input SGST against Output SGST:
Output SGST A/c Dr.
To Input SGST A/c
(input SGST set off against Output SGST)
(xii) For Payment of GST:
Output CGST A/c Dr.
Output SGST A/c Dr.
To Bank A/c
(Balance amount of Output GST deposited with the Government)
GST NOT LEVIED

GST is not levied in the following cases:
1. Amount introduced into the business by proprietor as Capital.
2. Amount withdrawn by the proprietor for personal use.
3. Amount deposited into the Bank.
4. Amount withdrawn from Bank.
5. Amount paid to Creditors and discount received.
6. Amount received from Debtors and discount allowed.
7. Bad debts written off and bad debts recovered.
8. Payment of Wages and Salary.
9. Payment of Electricity and Water Bills.
10. Payment of Travelling Expenses.
ORDER OF SETTING OFF OF INPUT GST

NEW ORDER OF SET-OFF OF INPUT GST WITH OUTPUT GST W.E.F.
1ST FEBRUARY 2019
Output IGST (Cr.) Output CGST (Cr.) Output SGST (Cr.)
Set-off Order (Dr.)

Set-off Order (Dr.) Set-off Order (Dr.)
1. Input IGST
1. Input IGST 1. Input IGST
2. Input CGST
2. Input CGST 2. Input SGST
3. Input SGST
If Output IGST (Cr.) If Output CGST (Cr.) If Output SGST (Cr.) is

is more, to pay is more, to pay more, to pay
or or or
If Input IGST (Dr.) is If Input CGST (Dr.) If Input SGST (Dr.) is
more, carry forward is more, carry more, carry forward

Illustration. Pass journal entries for the following transactions in the books of Sahil Ltd. assuming
that both parties belong to the same state and CGST @6% and SGST @6% are levied:
1. Purchased goods for `1,80,000 from Akanksha & Co.
2. Sold goods for `3,50,000 to Nupur Store.
3. Returned goods to Akanksha & Co. for `20,000.
4. Nupur Store returned goods for `16,000.
5. Paid for Printing and Stationary `10,000.
6. Goods withdrawn by the proprietor for personal use `40,000.
7. Goods destroyed by fire `30,000.
8. Payment made of balance of GST.
Sol. Journal
Input CGST A/c Dr. 10,800
Input SGST A/c Dr. 10,800
To Akanksha & Co. A/c 2,01,600
(Being goods purchased and GST @ 6% and SGST @ 6% paid)
2. Nupur Store A/c Dr. 3,92,000
To Output CGST A/c 21,000
To Output SGST A/c 21,000
(Being goods sold and CGST @6% and SGST @6 % collected)
3. Akanksha & Co. A/c Dr. 22,100
To Input CGST A/c 1,200
To Input SGST A/c 1,200
(Being goods returned to supplier after adjustment of GST)
4. Sales Return A/c Dr. 16,000
Output CGST A/c Dr. 960
Output SGST A/c 960
To Nupur A/c 17,920
(Being gods returned from debtors after adjustment of GST)
5. Printing & Stationery A/c Dr. 10,000
Input CGST A/c Dr. 600
Input SGST A/c Dr. 600
To Bank A/c 11,200
(Being expenses paid with CGST @ 6% and SGST @6% paid)
To input SGST A/c 2,400
(Being goods taken for personal use and GST adjusted)

7. Loss by Fire A/c Dr. 33,600
(Being goods distribution and GST reversed)
8. Output CGST A/c Dr. 20,040
Output SGST A/c Dr. 20,040
To Bank A/c 28,080
(Being GST adjusted and Balance amount paid)
Working Note:
Total Input CGST = 10,800 – 1,200 + 600 – 1,200 – 900 = `6,000
Total Input SGST = 10,800 – 1,200 + 600 – 1,200 – 900 = `6,000
Total Input CGST = 21,000 – 960 = `20,040
Total Input SGST = 21,000 – 960 = `20,040
Net CGST Paid = 20,040 – 6,000 = `14,040
Net SGST Paid = 20,040 – 6,000 = `14,040
JOURNAL ENTRIES (In case of Inter-State Supply of Goods and Services I.E. Sales
from One State to Another State):
1. For purchase of goods:
Journal
Purchases A/c Dr. C.P of Goods
Input IGST A/c Dr. Amt. of IGST
To Bank/Creditors A/c XXX
(Being goods purchased and GST paid)
2. For sale of goods:

Journal
Bank/Debtors A/c Dr. XXX
To Sales A/c S.P. of Goods
To Input IGST A/c Amt. of IGST
(Being goods sold and GST collected)
3. For purchase return:

Journal
Creditors A/c Dr. XXX C.P of Goods
To purchased Return A/c Amt. of IGT
To Input A/c
(Being goods returned to suppliers with GST)

4. For sales return:
Journal
Sales Return A/c Dr. S.P of Goods
Output IGST A/c Dr. Amt. of IGST
To Debtors A/c XXX
(Being goods returned from Debtors)
5. For purchase of fixed assets:

Journal
Fixed Assets A/c Dr. C.P of Assets
To Bank A/c XXX
(Being assets purchased and GST paid)
6. For expenses paid:

Journal
Date Particulars L.F. Debit v
Particular Expenses A/c Dr. Amt. of Exp
To Bank A/c XXX
(Being expenses paid with GST)
7. For income received:
Journal
Bank A/c Dr. XXX
To Income Received A/c Amt. of Income
To Output IGST A/c Amt. of IGST
(Being income received with GST)
8. For setting off Input IGST against Output IGST:

Journal
Output IGST A/c Dr. XXX
To Input IGST A/c Bal. Amt. of
(Being Input IGST set off against Output IGST) Input IGST
9. If Input IGST exceeds the Output IGST, Input IGST will be first adjusted against CGST, and
the balance, if any, will be adjusted against setting off SGST.
Illustration. Pass journal entries for the following transactions in the books of Sahil Ltd. of Noida,
Uttar Pradesh assuming:

CGST 9% and SGST 9% are levied:
1. Purchased goods for `6,00,000 from Sayeba & Co. of Patna, Bihar.
2. Purchased goods for `1,00,000 from Gaurav Store of Varanasi, Uttar Pradesh.
3. Sold goods costing `1,60,000 to Ishika of Ranchi, Jharkhand at a profit of 25% on cost less 10%
Trade Discount.
4. Sold goods costing `5,00,000 to Shubham of Allahabad, Uttar Pradesh at a profit of 60% on cost
less 15% Trade Discount against cheque which was deposited into the bank.
5. Paid for Advertisement `16,000.
6. Purchased a computer for office use for `60,000 and payment was made by cheque.
7. Proprietor withdrew `20,000 for his personal use.
8. Payment made of the balance amount of GST.
Sol. Journal
Input IGST A/c Dr. 1,08,000
To Sayeba & Co. A/c 7,08,000
(Being goods from outside the state and IGST paid)
To Gaurav Store A/c 1,18,000
(Being goods purchased and CGST 9% and SGST 9% paid)
3. Ishika A/c Dr. 2,12,400
To Output IGST A/c 32,400
(Being goods sold outside the state less 10% TD)
4. Bank A/c Dr. 8,02,400
(Being goods sold and CGST 9% and SGST 9% collected)
5. Advertisement Exp. A/c Dr. 16,000
To Cash A/c 18,880
(Being Adv. Paid with CGST 9% and SGT 9% paid)
6. Office Equipment (Computer) A/c Dr. 60,000
To Bank A/c 70,800
(Being expenses Paid with CGST 9% and SGST 9% paid)

To Cash A/c 20,000
(Being drawings made for personal use)
Output IGST A/c Dr. 32,400
To Input IGST A/c 32,400
(Being input IGST set off against Output IGST)
8. Output CGST A/c Dr. 61,200
(Being CGST adjusted)
Output SGST A/c Dr. 61,200
To Bank A/c 15,120
(Being final payment of GST made)
GST BASED ILLUSTRATIONS WITHOUT DISCOUNT

Accounting treatment of GST based questions can be understood from the following illustrations:
Illustration 1. (Intra-state dealer) Pass journal entries in the books of M/s Goel and Sons, Delhi for
the month of January 2022, who is a registered intra-state dealer on which 9% CGST and 9% SGST is
charged.
Date Particulars Amount
2022
Jan. 2 Purchased goods from M/s Rama Sales, Delhi 40,000
Jan. 5 Bought goods from M/s Mehta Stores, Delhi 60,000
Jan. 9 Sold goods to M/s Super Sales 70,000
Jan. 13 Sold goods to M/s Mohan Brothers against cheque which was deposited in Bank 20,000
Jan. 15 Paid Salary to employees by cheque 30,000
Jan. 18 Purchased goods from M/s Neela Agencies against cheque 25,000
Jan. 21 Paid Electricity Bill by cheque 6,500
Jan. 21 Paid Legal Fee by cheque 5,000
Jan. 23 Paid Telephone Bill including GST 2,360
Jan. 25 Goods returned to M/s Mehta Store being defective 5,000
Jan. 26 Super Sales returned goods to us 6,000
Jan. 28 Sold goods to M/s Kumar & Sons 50,000
Sol. Journal
Date Particulars L.F Debit Credit
2022 Purchases A/c Dr. 40,000
Jan. 2 Input CGST A/c Dr. 3,600
To Rama Sales 47,200
(Purchased goods from M/s Rama Sales)

To Mehta Stores 70,800
(Bought goods from Mehta Stores)
Jan. 9 Super Sales A/c Dr. 82,600
To Sales A/c 70,000
(Goods sold to M/s Super Sales)
To Sales A/c 20,000
(Goods sold against cheque deposited in bank)
Jan. 15 Salaries A/c Dr. 30,000
To Bank A/c 30,000
(Salary paid by cheque) (GST is exempted)
To Bank A/c 29,500
(Goods purchased against cheque)
Jan. 21 Electricity A/c Dr. 6,500
To Bank A/c 6,500
(Electricity bill paid) (GST is exempted)
Jan. 21 Legal Fee A/c Dr. 5,000
To Bank A/c 5,900
(Legal fee paid under R.C.M.)
Jan. 23 Telephone Charges A/c Dr. 2,000
To Cash A/c 2,360
(Telephone bill including GST paid i.e., `2,360 × 18/118)
Jan. 25 Mehta Stores Dr. 5,900
To Input CGST A/c 450
To Input SGST Ac 450
(Goods returned to M/s Mehta Stores)

Jan. 26 Sales Return A/c Dr. 6,000
Output CGST A/c Dr. 540
Output SGST A/ c Dr. 540
To Super Stores 7,080
(Goods returned to M/s Super Sales)
Illustration 2. (Inter-state dealer) Following are the transactions of M/s Raj Agencies, Delhi for the
month of February, 2022 who is inter-state registered dealer. GST is charged @ 18% on products.
Pass journal entries
2022
Feb. 1 Bought goods from M/s Rama & Co., Delhi 50,000
Feb. 3 Purchased goods from M/s Amar Sales, Mumbai 70,000
Feb. 5 Sold goods against cheque which was deposied in Bank 40,000
Feb. 7 Bought Furniture for office from M/s Laxmi Furniture, Faridabad 30,000
Feb. 9 Purchased goods from M/s Mehra & Sons, Delhi 45,000
Feb. 10 Paid Transportation charges 2,000
Feb. 12 Sold goods to Super Sales, Kanpur 60,000
Feb. 15 Paid Salary to staff by cheque 25,000
Feb. 18 Returned goods to M/s Amar Sales, Mumbai 10,000
Feb. 20 Lawyers Fee paid to Gupta Association, Haryana by cheque 10,000
Feb. 22 Goods worth 5,000 given as charity and goods worth 15,000 were distributed as
free samples out of goods purchased from Amar Sales, Mumbai
Feb. 24 Sold goods to Mona Stores, Delhi 80,000
Feb. 27 Paid Electricity charges 5,000
Sol. Journal
2022 Purchases A/c Dr. 50,000
Feb. 1 Input CGST A/c Dr. 4,500
To Rama & Co 59,000
(Goods purchased from Rama & Co.)
Feb. 2 Purchases A/c Dr. 70,000
Input IGST A/c Dr. 12,600
To Amar Sales 82,600
(Goods purchased from Amar Sales)
Feb. 5 Bank A/c Dr. 47,200
To Sales A/c 40,000
(Goods sold and cheque deposited)

Feb. 7 Furniture A/c Dr. 30,000
To Laxmi Furnitures A/c 35,400
(Bought furniture)
Feb. 9 Purchases A/c Dr. 45,000

To Mehra & Sons 53,100
(Goods purchased from Mehra & Sons)
Feb. 10 Conveyance Charges A/c Dr. 2,000

To Cash A/c 2,000
(Paid transportation charges)
Feb. 12 Super Sales A/c Dr. 70,800

To Sales A/c 60,000
(Sold goods to Super sales)
Feb. 15 Salary A/c Dr. 25,000

To Bank A/c 25,000
(Paid Salary)
Feb. 18 Amar Sales A/c Dr. 11,800

(Goods returned to Amar Sales)
Apr. 3 Purchases A/c Dr. 50,000

To Maya & Sons 59,000
(Bought goods from Maya & Sons)
Apr. 5 Rohan & Co. Dr. 70,800

To Sales A/c 60,000
(Sold goods to Rohan & Co.)
Apr. 8 Salary A/c Dr. 20,000

To Bank A/c 20,000
(Paid salary by cheque)
Apr. 10 Purchases A/c Dr. 35,000

To Mona Trading Co. 41,300
(Bought goods from Mona Trading Co.)

Apr. 14 Telephone Expenses A/c Dr. 2,000
To Bank A/c 2,360
[Paid Telephone bill including GST (viz., 2,360 × 18/118) 2,000
+ 3601
Apr. 16 Mona Trading Co. Dr. 17,700

To Purchases Return 15,000
(Goods returned to Mona Trading Co.)
Apr. 18 Cheque-in-hand A/c Dr. 47,200

To Sales A/e 40,000
(Goods sold against cheque)
Apr. 20 Bank A/c Dr. 47,200

To Cheque-in-hand A/c 47,200
(Cheque deposited in Bank)
Apr. 21 Goods Loss by Fire A/c Dr. 11,800

(Goods bought from Maya & Sons lost by fire)
Apr. 25 Legal Fee A/c Dr. 8,000

To Bank A/c 9,440
(Legal fee paid under RCM)
Apr. 27 Mohan Lal & Sons Dr. 21,240

To Sales A/c 18,000
(Sold Goods to Mohan Lal & Sons)
TREATMENT OF DISCOUNT AND GST

We have already discussed in Chapter 7 that Discount is of two types, namely:
(i) Trade Discount: It is given by the seller to the buyer of goods and services to boost the sales. It
is never recorded in the books.
(ii) Cash Discount: It is given by the seller to buyer to recover the payment quickly and promptly
from the customer.

GST Act on Treatment of Discount
As per Section 15 of GST Act, 2017, GST is charged on Taxable Value of Goods and/or Services supplied/
sold.
Taxable Value is computed after deducting all discounts (i.e., Trade Discount and Cash Discount.)
Taxable Value of Goods and/or Services under GST Act, 2017
As per Section 15(2) of GST Act, 2017 Taxable Value of goods and/or Services is determined by
deducting all discounts:
(i) Pre-sales Discounts i.e., Trade Discount and Cash Discount if the payment is made immediately.
(Discussed in detail in the following pages)
(ii) Pre-sales Discount i.e., Trade Discount and Post-sales Discount (i.e.. Cash Discount, Rebate etc.)
—Not Explained as discussion is not meant for Class 11 students.

Notes:
1. As per syllabus contents: Simple GST calculations including Trade Discount, Freight and Cartage Expenses
are in syllabus.
2. NCERT has not discussed treatment of Cash Discount with GST
3. We have decided to discuss the treatment of Pre-sales Discount i.e.. Trade Discount and Cash Discount when
payment is made immediately, for the sake of basic knowledge to Class 11 students.
4. Moreover, no chapter of Class 12 deals with treatment of GST.
Concept of Taxable Value on which GST is Charged

It will be clear from the following illustrations:
Example 1: (Only Trade Discount Given)
Amit & Co., Delhi sold goods to Sumit & Co., Delhi of List Price & `30,000 less 10% Trade Discount.
Rate of CGST and SGST is 6% each.
Invoice of Amit & Co. will be: (`)
List Price 30,000
Less: Trade Discount-10% 3,000
Taxable Value 27,000
Add: CGST @ 6% 1,620
SGST @ 6% 1,620
Invoice Value: 30,240
Journal
Sumit & Co. Dr. 30,240
To Sales A/c 27,000
(Sold goods for 30,000 less: Trade Discount @ 10%)
Note: In case of inter-state sales, Output IGST will be charged @ 12% instead of CGST and SCST 6% each

Example 2. Rama & Co., Haryana sold goods to Atul & Sons, Haryana of List Price 50,000 less - 10%
Trade Discount and 2% Cash Discount as payment is made at the time of sales. Rate of CGST and SGST
is 9% each.
Invoice of Rama & Co.: (`)
List Price 50,000
Less: Trade Discount @ 10% 5,000
Sales Value 45,000
Less: Cash Discount @ 2% 900
Add: CGST @9% 3,969
SGST @ 9% 3,969
Invoice Value 52,038
Notes: 1. Here, sales value is after deducting Trade Discount
2. Taxable Value is after deducting Cash Discount and discount allowed is recorded in the books.
Journal
Cash A/c Dr. 52,038
Discount Allowed. A/c Dr. 900
To Sales A/c 45,000
(Sold goods of list price `50,000 less: Trade Discount 10% and
Cash Discount 2%)
Example 3. Mona & Co., Delhi purchased goods from Sohan Lal & Sons, Delhi of List Price 80,000 less
Trade Discount 25% and 2% Cash Discount Mona & Co. paid half the amount immediately by cheque.
Rate of CGST and SGST is 9% each.
Invoice:
List Price (`)
Less: Trade Discount @25% 80,000
Purchase Value 20,000
Cash (`) Credit (`) Total (`)
Purchase Value 30,000 30,000 60,000
Less: Cash Discount @ 2% 600 ------- 600
Taxable Value 29,400 30,000 59,400
Add: CGST @ 9% 2,646 2,700 5,346
SGST @ 9% 2,646 2,700 5,346
Invoice Value 34,692 35,400 70,692

Journal
Purchases A/c Dr. 60,000
To Sohan Lal & Sons 35,400
To Bank A/c 34,692
(Purchased goods for 80,000 Less 25% Trade Discount and 2% Cash Discount from Sohan Lal & Sons
and paid half the amount by cheque.)
Treatment of Trade Discount and Cash Discount will be clear from the following illustrations:
Illustration 5(A). Pass journal entries in the books of Mona & Co. for the following transactions:
(I) Bought goods from Goel Agency for 20,000 less 10% Trade Discount plus CGST and SGST @ 6%
each.
(II) Sold goods to Mohan for 30,000 less 10% Trade Discount plus IGST @12%. He gave cheque for
half the amount which was banked on the same day.
(III) Purchased goods from Sona & Co. of list price 20.000 at a Trade Discount of 20% and Cash Discount
of 2-5%, CGST and SGST rates were 6% each. Sona & Co. availed Cash Discount.
(IV) Sold goods costing 20,000 to Gopi at a profit of 25% on cost less 10% Trade Discount plus CGST
and SGST @ 6% each. Cash Discount allowed is 2%, Gopi availed it by paying cheque which was
banked on the same day.
(V) Bought goods from Super Store for `50,000 less 10% Trade Discount and 2% Cash Discount, IGST
was @ 12%. Half the payment was paid by cheque.
Sol. Journal
Input SCST A/c Dr. 1,080
To Goel Agencies 20,160
(Bought goods from Goel Agencies)
Mohan’s A/ c Dr. 15,120
Bank A/ c Dr. 15,120
To Sales A/c 27,000
(Sold goods to Mohan and received cheque for the amount)
To Cash A/c 17,472
(Bought goods at 20% Trade Discount and 2.5% Cash Discount)

Bank A/c Dr. 24,696
To Sales A/c 21,600
(Sold goods costing 20,000 at a profit of 25% less 10% Trade
Discount and 2% Cash Discount to Gopi)

To Super Store A/c (Credit Purchase) 25,200
To Bank A/c 24,696
To Discount Received A/c (Cash Purchase) 450
(Bought goods 12% IGST at 10% Trade Discount and 2% Cash
Discount, paid half the amount due)
Working Notes: (`)

(i) List Price 20,000
Less: Trade Discount (10%) 2,000
Taxable Value
18,000
Add: CGST @6% 1,080
SGST @ 6% 1,080
Invoice Value
20,160
(ii) (`)
List Price
30,000
Less: Trade Discount 3,000
Taxable Value
27,000
Add: IGST @ 12% 3,240
Invoice Value
30,240
Cash and Credit = 30,240 + 2 = 15,120 each.
(iii) (`)
List Price
20,000
Less: Trade Discount (20%) 4,000
Purchase Value
16,000
Less: Cash Discount (2.5%) 400
Taxable Value
15,600
Add: CGST @ 6% 936
SGST @ 6% 936
Invoice Value
17,472

(iv) (`)
List Price 20,000+ 25% (ie., 5,000) 25,000
Less Trade Discount (10%) 2,500
Sales Value 22,500
Lass Cash Discount (2%) 450
Add: CGST @ 6% 1,323
SGST @ 6% 1,323
Invoice Value
24,696
(v)
Particulars Cash (`) Credit (`) Total (`)
List Price 25,000 25,000 50,000
Less: Trade Discount (10%) 2,500 2,500 5,000
Purchase Value 22,500 22,500 45,000
Lass: Cash Discount (2%) 450 ------ 450
Taxable Value 22,050 22,500 44,550
Add: IGST 12% 2,646 2,700 5,346
Invoice Value 24,696 25,200 49,896

EXERCISES
1. The basic objective of levying GST is:
(a) To develop common nation market for buying and selling of goods
(b) Uniformity of tax structure
(c) Removal of double taxation
(d) All the above
2. A registered dealer can collect GST whose annual turnover exceeds
(a) 20 lakh and 10 lakh for North-Eastern States
(b) 40 lakhs and 20 lakhs for North-Eastern States
(c) 20 lakhs
(d) 40 lakhs
3. GST is exempted on the following service:
(a) Payment of Wages and Salary (b) Payment of Electricity
(c) Payment of Water Charges (d) All above
4. Input GST is reversed in case of:
(a) Purchases Return (b) Goods Lost by Fire
(c) Goods distributed as free sample (d) All above
5. Bought goods from Super Store for 50,000 less 10% trade discount and 2% cash discount. Paid
40% payment by cheque. Discount received will be:
(a) `400 (b) `360 (c) `5,000 (d) `900
6. Gopi of Delhi bought goods from Mona & Co., Delhi for 40,000. Slab of GST was 12%. Gopi will
debit GST paid as:
(a) Input GST (b) Input IGST
(c) Input CGST and Input SGST (d) None of above
7. Sold goods costing 20,000 to Gopi at a profit of 25% on cost less 10% trade discount and 2% cash
discount. We will credit sales by:
(a) 20,000 (b) 25,000 (c) 22,500 (d) 22,050
8. Order of Input GST set-off out of output IGST is:
(a) Input IGST, Input CGST and Input SGST (b) Input CGST, Input SGST and Input IGST
(c) Input SGST, Input CGST and Input IGST (d) None of above
9. In case of intra-state sales, both buyer and seller must belong to:
(a) Same City (b) Same District (c) Same State (d) All of these
10. In case of inter-state sales, both buyer and seller must belong to:
(a) Same State (b) Same District (c) Different State (d) Different Districts

11. Output GST is reversed in case of:
(a) Purchases Return (b) Sales Return
(c) Goods distributed as free samples (d) All above
12. There are ____________ slabs of GST as per GST Act, 2017.
(a) 2 (b) 3 (c) 4 (d) 5
13. In case of a sales transaction having Trade Discount and Cash Discount, GST is charged on ____________
as per slab rate.
(a) Sales Value (b) Taxable Value (c) Either (a) or (d) None of above
14. In case of a sales transaction having Trade Discount and Cash Discount and GST, Sales A/c is
credited with ____________.
(a) Sales Value (b) Taxable Value (c) Either (a) or (b) (d) None of above
15. Rent paid 5,600 including 12% GST for office. Rent A/c will be debited with ____________.
(a) 5,600 (b) 5,000 (c) Either (a) or (b) (d) Can’t say
16. Rent paid 5,600 including 12% GST for the residential house of owner. Rent paid will be debited
to ____________
(a) Rent A/c 5,600 (b) Rent A/c 5,000 (c) Drawing A/c 5,600 (d) Drawing A/c 5,000
17. Insurance premium paid is 4,000 with CGST and SGST @ 6% each. It includes 4th premium as
prepaid Entry for Prepaid Insurance will be for ____________.
(a) 1,120 (b) 1,000 (c) Either (a) or (b) (d) Neither (a) or (b)
18. Rent for the month of March, 2022 10,000 for office is outstanding. It is subject to CGST and SGST
@ 6% each. Rent Outstanding A/c will be credited with ____________.
19. Rent for the month of March, 2022 is outstanding 10,000. It is subject to CGST and SGST @ 6%
each. Rent A/c will be debited with ____________.
20. Paid Telephone Bill `2,360 including CGST and SGST @ 9% each. I say Telephone Expenses A/c
will be debited with ____________.
ANSWERS
1. (d) 2. (b) 3. (d) 4. (d) 5. (b) 6. (c) 7. (c) 8. (a)
9. (d) 10. (c) 11. (b) 12. (d) 13. (b) 14. (a) 15. (b) 16. (c)
17. (b) 18. (b) 19. (a) 20. (b)

1. What is meant by Goods and Services Tax (GST)?
Ans. Goods and Services Tax (GST) is levied by Government on every supply of goods and services
except on alcohol and petroleum and exempt goods.
2. When was Goods and Services Tax (GST) introduced in our country?
Ans. GST was introduced in India we.f. 1st July, 2017.
3. Whether GST paid by a registered dealer on purchase of goods and services is his cost?
Ans. No, GST paid by a registered dealer on purchases is not a part of its cost as it is set-off against the
GST collected on sales of goods and services.
4. Who can collect GST?

Ans. Every registered dealer can collect GST whose annual turnover exceeds `40 lakh and `20 lakh for
North Eastern and Hilly States w.e.f. 1st April, 2019.
5. Which GST is paid on intra-state purchases?

Ans. Input CGST and Input SGST are paid.
6. Which GST is paid on inter-state purchases?

Ans. Input IGST is paid on inter-state purchases.
7. Which GST is collected on inter-state sales?

Ans. Output IGST.
8. Which GST is collected on intra-state sales?

Ans. Output CGST and Output SGST.
9. How many slabs of GST have been prescribed by GST Counsel?

Ans. 5 slabs namely 0%, 5%, 12%, 18% and 28%.
10. Name 3 services which are exempted from GST.

Ans. (i) Persons engaged in charitable activities.
(ii) Educational services provided by institution to students and faculty members upto higher
secondary.
(iii) Supply of goods to Government.
(iv) Supply of goods to embassies and U.N.O.
11. What is Reverse Charge Mechanism (R.C.M.)?

Ans. Under GST, certain services are under R.C.M. It means that dealer of services like lawyer will not
registered dealer who is taking services from unregistered dealer will pay GST and can claim Input
GST set-off.

12. Name two services under R.C.M. (Reverse Charge Mechanism).
Ans. (i) Payment of Legal Fee.
(ii) Transportation of goods.
(iii) Payment of Royalty for copy right.
(iv) Insurance Commission.
13. Whether input credit of fixed assets be obtained by a registered dealer?

Ans. Yes, Credit of Input CGST, SGST and IGST can be availed by a registered dealer on fixed assets which
are used for furtherance of business e.g., Plant and Machinery, Furniture, Computer, Printer etc.
14. What journal entry will be passed by Rama Garments, Delhi for purchase of a computer from H.P.
Computers Ltd., Delhi who is a GST registered dealer?
Ans.
Computer A/c Dr. (`) (`)

Input CGST A/c Dr.
Input SGST A/c Dr.
To H.P Computers Ltd.
15. What journal entry will be passed for sold goods to Mona & Co. for goods costing 20,000 at a profit
of 25% on cost less 10% Trade Discount against cheque? GST rates were 12%.
Ans.
Cheque-in Hand A/c Dr. 25,200

To Sales A/c 22,500
Or

1. Who can collect GST in our country?
2. What is meant by Reverse Charge Mechanism (RCM) under GST regime?
3. Name six services which are exempted under GST rules.
4. Differentiate between intra-state and inter-state dealer under Goods and Services Tax (GST).
PRACTICAL QUESTIONS
1. Pass journal entries in the books of M/s Goel Brothers, Delhi who is registered dealer with GST
as an intra-state dealer dealing in products having CGST and SGST @ 6% each:
2022
Jan. 1 Bought goods from Mohan for `20,000.
Jan. 3 Sold goods to Rama & Co. for `10,000.
Jan. 6 Bought furniture from Verma & Co. for `8,000 and issued cheque.
Jan. 10 Paid electricity bill `3,000.
Jan. 15 Paid legal fee `5,000 by cheque.
Jan. 18 Rama & Co. returned goods for `4,000 being not as per specifications.
[Hints: (i) GST is not charged on Electricity charges. (ii) GST is charged on Legal Fees.]
2. Pass journal entries charging CGST and SGST @ 6% each except where it is not required as per
GST Act:
1. Bought goods from Mohan `25,000
2. Sold goods to Ram for `30,000
3. Goods costing `5,000 bought from Mohan were distributed as free samples
4. Paid salary to staff `10,000
5. Bought goods from Goel & Co. of list price `40,000 less 10% Trade Discount
6. Goods of list price `10,000 bought from Goel & Co. were given for charitable purposes.
[Hint: GST is not charged on salary.]
3. (Intra-State Dealer) Records the following transaction in the books of M/s Raj & Co., Delhi for
the month of February, 2022 who is registered dealer under GST which is subject to 18%.
Pass journal entries.
2022 `
Feb. 1 Bought goods worth 50,000 from M/s Goyal Agencies, Delhi @ Trade
Discount of 20%
Feb. 3 Purchased goods for 30,000 from M/s Mona Trading Co., Calcutta
Feb. 4 Paid Salary to employees by cheque 20,000
Feb. 5 Paid Telephone Bill including GST @ 18% by cheque 2,360

Feb. 7 Sold goods against cheque which was deposited in bank on Feb. 8 20,000
Feb. 9 Bought furniture from M/s Goel Furniture’s, Ambala 25,000
Feb. 11 Sold goods to M/s Maya Sales, Kanpur 50,000
Feb. 15 Legal Fee paid to Advocate Gupta of Bombay by cheque 8,000
Feb. 17 Goods returned to M/s Goyal Agencies of list price 10,000
Feb. 19 Goods worth 5,000 were distributed as free sample which were bought
from M/s Mona Trading Co.
Feb. 21 Sold goods against cheque to Ram which was deposited into bank 30,000
on next day
Feb. 24 Sold goods to M/s Rohan Sons, Delhi 50,000
Feb. 26 Bought goods from M/s Pahuja Store, Shimla 25,000
[Hints: (i) Legal fee is under R.C.M. under GST. (ii) Purchases Return is also subject to T.D. @ 20%]
4. Pass journal entries in the books of Amar & Sons for the following transactions:
1. Sold goods to Mohan for `20,000 less 10% Trade Discount plus IGST @ 12%. He gave half the
payment by cheque which was banked on the same day.
2. Bought goods from Mona & Co. for `25,000 less 10% Trade Discount plus CGST and SGST @
6% each.
3. Bought goods from Rama Store for `40,000 less 10% Trade Discount and 2-5% Cash Discount,
IGST slab was 12%. Paid half the amount by cheque.
4. Sold goods costing `40,000 to Sohan at a profit of 25% on cost less 10% Trade Discount. CGST
and SGST were @ 6% each. He was allowed 2-5% Cash Discount, however, he paid cheque
immediately for 40% amount.
5. Paid Electricity Charges `2,000.
6. Paid Telephone Expenses by cheque including GST @ 12% `2,800.
5. Journalise the following transactions in the books of Gama & Co., Delhi who is inter-state dealer
dealing in products with 12% GST slab
1. Sold goods costing 20,000 to Goyal & Sons Rohtak, at a profit of 25% less 15% Trade Discount
and 2% Cash Discount. Goyal & Sons availed Cash Discount by paying cheque of next day.
2. Bought goods from Gupta & Co., Delhi of list price 30,000 less 20% Trade Discount and 2-5%
Cash Discount. It paid 1/4th amount by cheque.
3. Bought goods from Kumar & Co., Bangaluru of list price `40,000 less 20% Trade Discount
and 2% Cash Discount. He decided not to avail Cash Discount.
4. Paid Legal fees to lawyer `5,000.
5. 1/3 goods bought from Gupta & Co. was returned being defective.
6. Goods sold to Goyal & Sons costing `4,000 was returned by him as it was not as per
specifications.

6. Following are the transactions of Rajan & Sons, Delhi who is registered as inter-state dealer dealing
in 18% GST slab products.
1. Bought Machinery from Laxmi Machines, Noida for `30,000 by issuing cheque.
2. Paid Telephone Expenses 2,360 inclusive of GST in cash.
3. Bought goods from Maya & Sons, Delhi for list price `40,000 less 10% Trade Discount and
2.5% Cash Discount. Paid cheque for half the amount.
4. Paid salary to staff by cheque `10,000.
5. One fourth goods bought from Maya & Sons was distributed as free samples.
6. Sold goods costing `40,000 at a profit of 25% on cost less 10% Trade Discount to Gopi Brothers,
Kanpur. It was also offered 2% Cash Discount but it issued cheque for half the amount which
was lodged in the bank on the same day.
7. Bought Maruti Car from Maruti Ltd. for `4,30,000 by cheque.
[Note: GST on Car is not allowed to set-off so added in cost.]
7. Journalise the following transactions of Beta & Co., Delhi who deals in goods of 12% GST slab:
2022
Mar. 1 Paid water charges `500.
Mar. 7 Bought goods from Neha & Co. of list price `20,000 less 10% Trade Discount.
Mar. 13 Sold goods costing `20,000 at 25% profit on cost less 10% discount to Roma & Co.
Mar. 19 Returned goods of list price 4,000 to Neha & Co. being defective.
Mar. 25 Roma & Co. returned goods costing 4,000 as it was not upto mark.
Mar. 31 Rent to landlord 5,000 for March remains unpaid.
[Hint: If nothing is stated about place of customer/supplier, assume it as intra-state dealer.]
8. Journalise the following transactions of Rupa & Co., Delhi for the month of March, 2022 who is a
inter-state dealer dealing in 12% GST slab products and closes its books on 31st December, every
year.
2022
Mar. 1 Paid Insurance Premium on March 1, 2022 for `6,000 to National Insurance Co., Delhi
by cheque.
Mar. 12 Sold goods of list price `40,000 at 10% Trade Discount and 2% Cash Discount to Ram
Lal & Sons, Karnal. It paid 75% amount by cheque immediately.
Mar. 18 Bought goods from Neha & Co., Delhi for `30,000.
Mar. 22 Paid legal fees to Arun Associates, Delhi `10,000 by cheque.
Mar. 25 Rent due `5,600 including GST.
Mar. 26 1/3rd goods bought from Neha & Co. was donated to a N.G.O.
Mar. 31 Commission of March `6,000 remains unpaid.

CHAPTER
07 Subsidiary Books
INTRODUCTION
A separate journal and book of original entries which record transactions in a classified manner
according to their nature shall be referred to as the subsidiary books. The transactions shall be separated
according to their nature within the subsidiary’s book, and those of an identical or repeated nature
shall also be reported separately. If transactions are recorded in the Subsidiary Book, no additional
entries shall be required. After recording transactions into the subsidiary books, they are posted into
ledger accounts. Hence, subsidiary books are the alternative solutions for the accountants to record
the transactions in the general journal.
There are cash and credit transactions going on in the business. Cash transactions are transactions in
which payments are made immediately, whereas credit transactions are transactions in which an amount
is promised to be paid in the future. In a business, cash transactions are more frequently recurring;
hence, all cash transactions are recorded in a separate book, called a cash book. Other subsidiary books
record the systematic nature of credit.
IMPORTANCE OF SUBSIDIARY BOOKS

The advantages or importance of Subsidiary books are listed as follows:
Facilitate smooth recording of growing transactions: Recording all transactions in the book
of journal entries makes very bulky and massive through time. This is making it difficult to run
the journal. In contrast, the smooth record of growing financial movements in companies is
facilitated by subsidiaries’ books. As different texts are used for recording different nature of the
transactions, subsidiary books cannot be as large and massive as a general journal.
Division of work is possible: A business can employ several book-keepers for separate books
when transactions are recorded separately according to their nature.
Easy to obtain required information: Subsidiary books used separate books for recurring
transactions. One can quickly get the necessary information at any time on such vital business
transactions.
No disturbance in other accounting processes: When journals are taken over for posting or
auditing, any additional accounting words will have to be delayed. On the other hand, a particular
accounting procedure should be postponed for an indefinite period of posting or auditing activities
such as recording in cashbook, purchase book and any other specific document.
LIMITATIONS OF SUBSIDIARY BOOKS

Subsidiary books are not also free from limitations. The limitation of subsidiary books can be pointed
out as follows:
Recording the transaction in subsidiary books requires several registers or books and several
book-keepers. Hence, keeping recording in the subsidiary books is expensive.
The system of subsidiary books lacks chronological order and lacks complete information.
Recording in the subsidiary books is the practical system of recording. However, it is not suitable
for a small business with a small volume of transactions.
ADVANTAGE OF SUBSIDIARY BOOKS

The advantages of the subsidiary book are as follows:
1. Proper With Systematic Record of the Business Transactions: Business transactions are
appropriately divided and grouped into cash and non-cash transactions, which are further classed
as credit purchases, credit sales, returns, and so on. Individual transactions are facilitated by the
books, which allow them to be correctly and regularly recorded in subsidiary books.
2. Convenience While Posting: Transactions of this sort are documented in a single location, in
one of the auxiliary books. For example, all credit purchases of items are documented in the buy
book, but all credit sales of goods are recorded in the sales book.
3. Efficiency: The work is being divided here which gives the advantage of specialization. When the
same work is done by a person repeatedly and continuously the person becomes efficient in
handling it.
4. Helpful in Decision Making: Subsidiary books include accurate and full information about each
sort of transaction separately. Thus, management can use the knowledge to make future decisions.
5. Errors and Frauds are Prevented: Internal checks become more effective since the task can now
be divided in such a way that the work of one person is automatically reviewed by another. With
this internal check, the likelihood of errors or fraud can be eliminated or reduced to a minimum.
6. Availability of Requisite Information at a Glance: Transactions are recorded in only one journal,
making it difficult to retrieve information on a specific item. When subsidiary books are maintained,
details regarding a certain sort of transaction can be easily acquired from them. Maintaining these
auxiliary books allows you to get all of the information you need at a look.
TYPES OF SUBSIDIARY BOOKS

Subsidiary books are kept based on the financial transactions of the company concern. A business
can purchase and sell things on cash and credit. According to the sample, it can make various cash
and cheque payments, receive cash and cheques, and determine whether things are damaged or not.
Receipt cash and cheques for items returned as defective or not based on samples, as well as goods
returned by debtors in the same circumstance. Each type of transactions of a similar sort is recorded
in its own book. The table below shows the various subsidiary books and the unique situations under
which they are maintained.
Types of subsidiary books Transaction to be recorded
Purchase Book It records the transaction only related to the credit purchase of merchandise
goods.
Purchased Return Book It records the transaction relating to returning goods purchased on credit
to the suppliers or creditors.
Subsidiary Books 139

Types of subsidiary books Transaction to be recorded
Sales Book The transactions related to returning goods sold on credit to the debtor or
customer are recorded in Sale Returned Book.
Sales Return Book The transactions related to returning goods sold on credit to the debtor or
customer are recorded in the Sale Returned Book.
Cash Book It records the receipt and payment of cash, including deposits and
withdrawals from the bank.
Bills Receivable Book It records the transactions concerning the bills to be received or collected.
Bills Payable Book It records the transactions concerning the bills to be paid or accepted by
the traders.
CASH BOOK
A cash book is a special form of book that records an organization’s cash transactions. It serves as both
a diary and a ledger for all monetary transactions inside a company organization.
It records all cash receipts on the debit side and all cash payments made by the organization on the
credit side.
Cash Books are normally separated into two sections: cash receipts and cash payments. The Cash
Receipts area keeps track of any money that enters the business, including customer payments and loans.
WHAT IS CASH BOOK?

A Cash Book is a financial record-keeping instrument that allows businesses and organizations to keep
track of their cash transactions in a systematic and orderly manner. It is an essential component of a
company’s accounting system, allowing it to keep a complete and accurate record of all cash inflows
and outflows.
To put it simply, consider a Cash Book to be a financial diary. Every time a firm receives cash (for
example, sales revenue) or spends cash (for expenses such as salaries or supplies), it records it in the
Cash Book. This allows them to keep track of how much money they have at any time.
FEATURE OF CASH BOOK CASH BOOK

A Cash Book is a critical financial tool used for systematic recording and tracking of cash transactions.
Its key features include:
Chronological Recording
Segregation of Cash Receipts and Payments
Date and Particulars Columns
Cash and Discount Columns (in Triple Column Cash Book)
Petty Cash Management (in Petty Cash Book)
Imprest System Control (in Imprest System Cash Book)
Bank Transaction Tracking (in Bank Cash Book)
Summarized Daily Entries (in Simple Cash Book)

TYPES OF CASH BOOK
Cash Books come in several types, each designed to suit specific accounting needs. These variations
in Cash Books help organizations better manage their cash transactions. Here are the common types
of Cash Books:
Single Column Cash Book

This is the simplest type of Cash Book and is often used by small businesses. It records cash transactions
in a single column, showing only the date, particulars (a brief description of the transaction), and the
amount of cash received or paid. It’s a straightforward way to keep track of cash flows.
Double Column Cash Book

The Double Column Cash Book, as the name suggests, has two columns: one for cash received and
another for cash paid. It provides a more detailed view of cash inflows and outflows, making it easier
to analyze and manage the sources and uses of cash.
Petty Cash Book

A Petty Cash Book is a specialized cash book used to manage small, routine expenses that occur
frequently, like office supplies or minor repairs. It typically has a fixed amount of money (the petty
cash fund) that is replenished as needed. Entries in the Petty Cash Book track these small expenses,
ensuring proper documentation and control.
ADVANTAGE OF CASH BOOK

A Cash Book offers several advantages for businesses and organizations in maintaining financial records
and managing cash transactions efficiently. Here are the key benefits:
Transparency: Provides a clear and transparent record of all cash inflows and outflows, aiding in
financial accountability.
Accuracy: Ensures accurate tracking of cash movements, reducing the risk of errors and discrepancies.
Cash Flow Management: Helps in monitoring cash flow, ensuring that there’s enough cash to cover
expenses and make informed financial decisions.
Financial Reporting: Facilitates the preparation of financial statements, making it easier to assess
the financial health of the organization.
Audit Trail: Creates a comprehensive audit trail, making it simpler to verify financial transactions
during audits.
Budgeting: Supports budgeting by offering insights into spending patterns and allowing for better
financial planning.
CASH BOOK AND CASH ACCOUNT

We have seen above that cash book is a substitute of cash account. All the cash transactions are
recorded in chronological order (date wise) in both of these still they differ in many respects. The
major differences between the two are:

Cash Book Cash Account
1. It is one of the subsidiary book/books of original entry. 1. It is a part o a ledger account.
2. Cash Book is a Book of original entry so Journal is not 2. Transaction are posted in it from that journal.
kept for cash transaction.
3. It records both the aspects of a transaction. 3. It records only cash aspect of a transaction.
1. SIMPLE CASH BOOK OR SINGLE COLUMN CASH BOOK

The format of a Simple Cash Book is similar to a ledger account, with one amount column on each side.
The left-hand side of the cash book is called Debit Side and it records cash receipts and the right-hand
side of the cash book is called Credit side and it records cash payments.
Format for the simple cash book is as follows:
In the Books of ….
Cash Book
Date Particulars J.F. Amount Date Particulars J.F. Amount
Columns of a Simple Cash Book:

1. Date: This column contains the date, month, and year of the transaction.
2. Particulars: This column contains the name of the account for which cash has been received or
paid.
3. Journal Folio (J.F.): This column keeps track of the journal page number where the posting of
this amount has been made.
4. Amount: This column records the actual amount of cash receipts on the Dr. side, while cash
payments are recorded on the Cr. side.
Here, Debit side represents the receipts side and Credit side represents the payments side.
Balancing of Single-column Cash Book
Cash Book is balanced like a ledger account represents:
The total of the Debit column of the cash book should always be greater than the total of the
payments i.e. Credit column.
The difference is recorded on the credit side as ‘By Balance c/d’.
The closing balance becomes the opening balance for the next month and is recorded on the debit
side as ‘To Balance b/d’.
Illustration. In the Cash Book of M/s Paramjeet Enterprises for the month of June 2022, record the
following transactions:
Date Particulars
June 1 Cash in hand `45,000
June 5 Commission received in cash for `8,000 with CGST and SGST @ 6% each
June 10 Rent Paid for `7,000 with CSGT and SGST @6% each

June 13 Goods sol for cash for `13,000 plus CGST and SGST @6% each
June 21 Goods purchased for cash for `9,000 plus CGST and SGST @6% each
June 30 Salaries paid `7,000
Sol. In the books of M/s Paramjeet Enterprises

Cash Book
Date Particulars Amount Date Particulars Amount
June 1 To Balance b/d 45,000 June 10 By Rent A/c 7,000
June 5 To Commission A/c 8,000 June 10 By Input CGST A/c 420
June 5 To Output CGST A/c 480 June 10 By Input SGST A/c 420
June 5 To Output SGST A/c 480 June 21 By Purchases A/c 9,000
June 13 Sales A/c 13,000 June 21 By Input CGST A/c 540
June 13 To Output CGST A/c 780 June 21 By Input SGST A/c 540
June 13 To Output SGST A/c 780 June 30 By Salaries A/c 7,000
June 30 By Balance c/d 43,600
68,520 68,520
July 1 To Balance b/d 43,600
Illustration 1. Enter the following transactions in a simple cash book:

2024
Jan. 1 Cash in hand 22,400
Jan. 5 Received from Ramesh 600
Jan. 7 Paid rent 60
Jan. 8 Sold Goods 600
Jan. 10 Paid Mohan 1,400
Jan. 27 Purchased furniture 400
Jan. 31 Paid salaries 200
Sol. Cash Book
Dr. Cr.
Date Particulars L.F Amount Date Particulars L.F Amount
2023 2023
Jan. 1 To Balance b/d 22,400 Jan. 7 By Rent A/c 60
Jan. 5 To Ramesh 600 Jan. 10 By Mohan 1,400
Jan. 8 To sales A/c 600 Jan. 27 By Furniture A/c 400
Jan. 31 By Salaries A/c 200
Jan. 31 By Balance c/d 21,540
23,600 23,600
Feb. 1 To Balance b/d 21,540

Illustration 2. Prepare a single-column cash book from the following transactions of Shri Ram Prakash
Gupta:
2023
Jan. 1 Cash in hand 2,000
Jan. 6 Cash purchases 1,000
Jan. 10 Wages paid 20
Jan. 11 Cash sales 3,000
Jan. 12 Cash received from Suresh and 990
allowed him discount 10
Jan. 19 Cash paid to Munna 1,235
and discount received 15
Jan. 27 Cash paid to Radhey 200
Jan. 28 ore Purchased goods for cash 1,035
Sol. Single Column Cash Book
Dr. Cr.
Date Particulars L.F Amount Date Particulars L.F Amount
2023 2023
Jan. 1 To Balance b/d 2,000 Jan. 6 By Purchases A/c 1,000
Jan. 11 To sales A/c 3,000 Jan. 10 By Wages A/c 20
Jan. 11 To Suresh 990 Jan 19 By Munna 1,235
Jan. 27 By Radhey 200
Jan. 28 By Purchases A/c 1,035
Jan. 31 By Balance c/d 2,500
5,990 5,990
Feb. 1 To Balance b/d 2,500
2. DOUBLE COLUMN OR TWO COLUMN CASH BOOK

For a Double Column or Two Column Cash Book, there are two columns to record amount on both
sides. One column is to record transactions related to cash, and another column records transactions
related to banks. So, one is the cash column and the other is the bank column. A two-column cash book
is prepared when both cash and bank transactions happen in the business.
Format for the double-column cash book is as follows:
Cash Book
Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
Columns of a Double Column Cash Book represent:

1. Date: This column contains the date, month, and year of the transaction.
2. Particulars: This column contains the name of the account for which cash has been received or
paid.
3. Journal Folio (J.F.): This column keeps track of the journal page number where the posting of
this amount has been made.

4. Cash: This column records the actual amount of cash receipts on the Dr. side, while cash payments
are recorded on the Cr. side.
5. Bank: This column records the amount received through the bank on the Dr. side, while payments
made through the bank are recorded on the Cr. side.
Balancing of Double-column Cash Book
Cash Columns always indicate a Debit Balance: Cash columns are balanced exactly in the same
way that single-column cash books are balanced. Cash Column always has a debit balance for the
reason that cash payments can never go beyond cash in hand. As a result, the amount will be
shown on the credit side as ‘By Balance c/d’.
The Bank Column may indicate either a Debit Balance or a Credit Balance: The bank column is
also balanced like a cash column. But The bank column may indicate either a debit or a credit
balance, unlike the cash column. An overdraft occurs when the total of the bank column on the
credit side exceeds the total of the bank column on the debit side. Or it can be said that cash
withdrawn from the bank exceeds cash deposited into the bank. In this case, the difference will
be written as “To Balance c/d” on the debit side. If the total of the debit side exceeds the total of
the credit side, the difference is written as “By Balance c/d” on the credit side.
Illustration 3. In the Cash Book of M/s Kiran Traders for the month of March 2022, record the following
transactions:
March 1 Cash Balance 7,000
March 1 Bank Balance 12,750
March 6 Paid by Bank 7,000
March 12 Paid wages in cash 2,300
March 15 Received from Om 7,500
March 17 Paid Charu through cheque 2,250
March 21 Drew from bank 2,500
March 23 Paid Salaries in cash 2,400
March 31 Paid into Bank 2,750
Sol. In the Books of M/s Kiran Traders
Cash Book
Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
March 1 To Balance b/d 7,000 12,750 March 6 By Bank A/c C 7,000 —
March 6 To cash A/c C* — 7,000 March 12 By Wages A/c 2,300 —
March 15 To Om A/c 7,500 — March 17 By Charu A/c — 2,250
March 21 To Bank A/c C 2,500 — March 21 By Cash A/c C — 2,500
March 31 To Cash A/c C 2,750 March 23 By Salaries A/c 2,400 —
March 31 BY Bank A/c C 2,750 —
March 31 By Balance c/d 2,550 17,500
17,000 22,500 17,000 22,500
April 1 To Balance b/d 2,550 17,750
*C denotes Contra Entry i.e. transaction involving both Cash and Bank.

Illustration 4. Enter the following transaction of M/S Rams Prasad in Cash Book:
Dec. 1 Cash-in-hand `4,000
Bank overdraft `1,000
Dec. 3 Recived a cheque from Ramlal on Account `290 and allowed him discount `100
Dec. 7 Ramlal’s cheque deposited n Bank
Dec. 10 Withdrew from bank for office use `800
Dec. 12 Paid bill payable by cheque `600
Dec. 15 Cheque recived from chandulal of `400 and allowed him discount `100
Dec. 20 Issued a cheque for petty cash `100
Sol. In the Books of M/s Rama Prasad
Dr. Cr.
Date Particulars L.F Cash Bank Date Particulars L.F Cash Bank
Dec. 1 To Balance b/d 4,000 – Dec. 1 By Balance b/d – 1,000
Dec. 7 To Cheque in Hand – 290 Dec. 10 By Cash A/c C – 800
Dec. 10 To Bank A/c C 800 – Dec. 12 By Bills Payable A/c – 600
Dec. 15 To Chandulal – 400 Dec. 20 By Petty Cash A/c – 100
Dec. 31 To Balance c/d – 1,810 Dec. 31 By Balance c/d 4,800 –
4,800 2,500 4,800 2,500
Illustration 5. From the following transactions prepare Cash Book with Cash and Bank Columns:
Feb. 1 Cash-in-hand `7,500, Cash-at-bank `8,000
Feb. 3 Discount a bill receivable for `6,000 at 2% through Bank
Feb. 5 Bought goods for `2,000 and paid by cheque
Feb. 15 Paid Trade expenses `120
Feb. 16 Drew from Bank for office use `1,000
Feb. 17 Sold goods for `12,500 and received a cheque
Feb. 25 Paid Insurance `100
Feb. 27 Cheque received on 17th deposited in Bank
Feb. 28 Received a cheque from John & Co. `6,000
Feb. 28 Purchased 100 NSC for `100 at `95 each and paid by cheque.
Sol. In the Books of ...
Dr. Cr.
Date Particulars L.F Cash (`) Bank (`) Date Particulars L.F Cash (`) Bank (`)
Feb. 1 To Balance b/d 7,500 8,000 Feb. 1 By Purchase A/c 2,000

Feb. 3 To Bills Receivable A/c 5,880 Feb. 15 By Trade Expense 120
Feb. 16 To Bank A/c C 1,000 Feb. 16 By Cash A/c C 1,000
Feb. 27 To Cheque in Hand A/c 12,500 Feb. 25 By Insurance A/c 100
Feb. 28 To john & Co. 6,000 Feb. 28 By Investment (NSC) A/c 9,500
Feb. 28 By Balance C/d 8,280 19,880
8,500 32,380 8,500 32,380

Illustration 6. Prepare a two column Cash Book with cash and bank column with following information:
2014
April 1 Cash in hand 50,000
Bank Overdraft 35,000
April 2 Cash sales 30,000
April 4 Paid Salaries 5,000
April 8 Cash deposited into bank 10,000
April 10 Goods purchased from Ram Lal 10,000
April 12 Payment made to Ram Lal in full settlement. 9,750
April 14 Goods sold to Ram 20,000
April 20 Received cheque from Ram and allowed him discount of `200 19,800
April 24 Cheque received from Ram deposited into Bank
April 25 Withdrew cash from Bank for personal use 500
April 28 Paid rent by cheque 5,000
Sol. Cash Book

Dr. Cr.
Date Particulars L.F. Cash (`) Bank (`) Date Particulars L.F. Cash (`) Bank (`)
2014 – 2014
April 1 To Balance b/d 50,000 – April 1 By balance b/d – 35,000
April 2 To Sales A/c 30,000 April 4 By Salaries A/c 5,000 –
April 8 To Cash A/c C – 10,000 April 8 By Bank A/c C 10,000 –
April 24 To cheque in hand A/c – 19,800 April 12 By Ram Lal 9,750 –
April 30 By Balance c/d 10,700 April 25 By Drawings – 500
April 28 By Rent – 5,000
April 30 By Balance c/d 55,250
80,000 40,500 80,000 40,500
Petty Cash Book:

The term “petty” is taken from the French word “petit,” which means “small.” In every sort of business,
a number of small payments are done on a regular basis, such as transportation, refreshments, cartage,
postage, stationery, and so on.
If the main cashier records all these petty payments in the main Cash Book, he will be more
burdened with the work and the Cash Book will also become voluminous.
Petty Cashiers are assigned the task of making small payments and recording them in a separate
book called “Petty Cash Book.”
Simple Petty Cash Book:
A Simple Cash Book is identical to a Simple Petty Cash Book. The difference between both of the cash
books is that the columns of ‘Particulars’ and ‘Date’ are the same for the receipt and payment sides.
Cash received from the main cashier is shown in the ‘Amount Received Column’ on the left-hand
side of the cash book.

Cash paid for petty expenses is shown in the ‘Amount Paid Column’ on the right-hand side of the
cash book.
The date and particulars of each transaction are shown in the common column of ‘Date’ and
‘Particulars’.
Format for the simple petty cash book is as follows:
Simple Petty Cash Book
From of Petty Cash Book
Dr. Cr. Analysis of Payment
Amount Cash Date Particulars Vou- Total Postage Wages Conveyance Cartage Stationery Misc.
Received Book cher Pay- & Expenses
Folio No. ments Courier
` ` ` ` ` ` ` `
Following is the explanation of the columns of a Simple Petty Cash Book:

1. Amount Received: The cash received from the main cashier is recorded in this column. It also
contains the opening balance of petty cash.
2. Cash Book Folio: This column keeps track of the page number in the main Cash Book where all
the payments to the petty cashier are shown.
3. Date: This column records the date on which cash has been received from the main cashier and
all the petty expenses paid.
4. Particulars: Details of cash collected from the main cashier, payment of petty expense, and opening
and closing balances are shown in this column using words like ‘to’ and ‘by’.
5. V.No.: This column contains the serial number of the voucher that certifies the payment of cash
in regard to petty expenses.
6. Amount Paid: The amount spent for petty expenses is recorded in this column.
Illustration. From the following information, prepare a Simple Petty Cash Book for the month of
October, 2022.
October 1 Received from Main Cashier for Petty Cash 4,000
October 9 Paid for taxi 1,200
October 14 Paid for refreshment 1,120
October 17 Purchased Stationery plus CGST and SGST @ 6% each 2,500
October 20 Paid for Telephone Expenses plus CGST and SGST @ 6% each 1,400
October 26 Paid for cartage 1,180

Sol. In the Books of ….
Simple Patty Cash Book
Amount Cash Book Folio Date Particulars V. No. Amount
Received Paid
8,000 Oct 1 To Cash A/c 1,200
Oct 9 To Travelling Expenses A/c 1,120
Oct 14 By Refreshment A/c 2,500
Oct 17 By Stationery A/c 150
Oct 17 By Input CGST A/c 150
Oct 17 By Output SGST A/c 1,400
Oct 20 By Telephone expenses A/c 84
Oct 20 BY Input SGST A/c 84
Oct 20 By Input SGST A/c 1,312
Oct 31 By Balance c/d 8,000
8,000 8,000
1,312 Nov 1 To Balance b/s
IMPREST SYSTEM OF PETTY CASH

The second system of petty cash is the imprest system. Here the petty cashier is given a lump sum
amount of money at the beginning of the accounting period. This period could be a week, a month or
even sometimes a day. This money given in advance is known as a float.
Then at the end of the period, he will tally his expenses. He will be reimbursed for the exact amount of
the total expenses. This will bring his cash in hand to the original figure. So say for example the petty
cashier has `1,000/- at the start of the week. Then during the week, he spends `880/- on various
expenses. At the end of the week, the accounting department will give him the `880/- back. So his cash
balance at the beginning of next week will again be `1,000/-.
Illustration. Enter the following transactions in the petty cash book of sh. prem Sagar with appropriate
analysis columns. Balance it on 15th May 2020 and show the amount which should be received from
the cashier to make up the amount of the ‘imprest’ `5,000.
2020 `
May 1 Received from cashier `4,720, the amount required to make up the amount
of the ‘imprest’ viz. 5,000
Purchased stamps 400
Paid for carriage 300
May 3 Paid for office cleaning 200
Paid for wages 250
Paid railway fare 350
Paid bus fare 400
May 8 Paid for wages 240
Tea to office staff 220
May 10 Paid reward to servants 150
Bought shorthand note books for office 580
Paid wages to casual labour 400
May 12 Purchased pens and Pencils 520
Paid for envelopes 250
May 15 Paid for repairs to typewriter 200

Petty Cash Book
Analysis of Payment
Dr. Cr.
Amount Cas Date Particulars V. Total Portage Wages Conve- Cart- Statio- Misc.
Received Book No. Pay- & yance age nary Expenses
Folio ment Courier
` 2020 ` ` ` ` ` `
280 May. 1 To Bal. h/d
4,720 1 To Cash A/c
1 By Stamps 400 400
1 By Carriage 300 300
3 By Office
cleaning 200 200
3 By Wages 250 250
3 By Railway Fare 350 350
3 By Bus Fare 400 400
8 By Wages 240 240
8 By Tea to Office Staff 220 220
10 By Reward to Servants 150 150
10 By Note Books 580 580
10 By Wages 400 400
12 By Pens & Pencils 520 520
12 By Envelopes 250 250
12 By Repairs 200 200
Total Payments 4,460 400 890 750 300 1,350 770
15 By Bal c/d 540
5,000
5,000
540 May. 16 To Bal. b/d
4,460 May. 16 To Cash A/c
PURCHASE BOOK
Purchase Book is prepared by the firms to record the credit purchase of goods. Purchase of goods
for cash and purchase of other things other than goods are not recorded in the purchase book. Cash
purchases are recorded in Cash Book and other things are recorded in Journals and respective Ledgers.
The invoice received from suppliers with the net amount after trade discount helps to record the credit
purchases in the Purchase Book.
Purchase Book is prepared because it becomes easier, and we can have a periodic total of credit
purchase of goods. It helps to know and check the price charged for goods. It also reduces to burden
to pass journal entries for each credit purchase of goods. The Purchase Book is totalled at the end of
the specified period (week, month, or year), and it is posted to Purchase Account.
Format of Purchase Book
Purchase Book
Date Particulars Invoice L.F Details Purchases Input Input Input Total
CGST SGST IGST
2022 M/s Sunil Lal, Main Road, Ranchi:
July 2

The purchase book has ten columns:
1. Date: The date of the transaction is written in the first column.
2. Particulars: The name of the supplier, the name of the articles, and the quantities purchased are
written in the particulars column.
3. Invoice Number: The invoice number of the goods purchased is written.
4. Ledger Folio (L.F.): At the time of posting the purchase in the ledger, the page number of the leger
is written.
5. Details: The amount in respect of each article is written. If any trade discount is availed, it is
deducted from the gross amount.
6. Purchase: The net amount of purchases, i.e., Purchases less trade discount is shown in this column.
7. Input Central GST (CGST): CGST is charged on those goods, which are purchased within the state,
i.e., the seller and the buyer belong to the same state. A separate column is made to make entries
for CGST. It is calculated on the net purchase value, i.e., Purchases less trade discount, and further
shown on the debit side of the ledger account of Input CGST.
8. Input State GST (SGST): SGST is also charged on those goods which are purchased within the
state, i.e., the seller and the buyer belong to the same state. A separate column is made to make
entries for SGST. It is calculated on the net purchase value, i.e., Purchases less trade discount, and
further shown on the debit side of the ledger account of Input SGST.
9. Input Integrated GST (IGST): IGST is charged on those goods which are purchased from outside
of the state, i.e., the seller and the buyer does not belong to the same state. A separate column is
made to make entries of the tax collected under IGST. It is also calculated on the net purchases
value, i.e., Purchases less trade discount, and further shown on the debit side of the ledger account
of Input IGST.
10. Total: Total amount of every transaction is shown in this column.
Illustration. Prepare the Purchase Book for July 2022 of Sunita General Stores, Ranchi assuming CGST
@ 5% and SGST @ 5%. The following information is given:
Date Particulars
2022 Purchased from M/s Sunil Lal, Main Road:
July 2 50 Bags of baba Rice @`9,000 per bag
30 Bags of Basmati Rice @`750 per bag
July 5 Purchased from Shiv Lal, Upper Bazar:
75 tin of Mustard Oil @ `120 per tin
60 tin of Olive Oil @ `100 per tin
Less: Trade Discount 6%
July 17 Purchased from Deva store, Hyderabad:
100 packets of Good Day @ `22 per packet
July 22 Purchased from Ankit General Store, Main road:
65 pieces of Lux soap @ `9 per soap
40 pieces of Dove soap @ `22 per soap
35 pieces of Johnson Baby soap @ `28 per soap
Less: Trade Discount 10%

Sol. Sunita General Stores, Ranchi
Purchases Book
Date Particulars Invoice L.F. Details Purchases Input Input Input Total
CGST SGST IGST
2022
July 2 M/s Sunil Lal, Main Road, Ranchi:
50 Bags of Baba Rice @ `900 per bag 45,000
30 bags of Basmati Rice @ `750 22,500

per bag
67,500
Add: CGST @ 5% 3,375
SGST @ 5% 3,375
74,250 67,500 3,375 3,375 — 74,250
July 5 Shiv Lal, Upper Bazar, Ranchi
75 Tin of Mustard Oil @ `120 per tin 9,000
60 tin of Olive Oil @ `100 per tin 6,000
15,000
900
14,100
Add: CGST @5% 705
SGST @5% 705
15,510 14,100 705 705 --- 15,510
July 17 Deva Store, Hyderabad:
100 packets of Good Day @ `22 per 2,200

packet
85 packet of Rusk @ `15 per packet 1,275
4,475
Add: IGST @10% 347.5
3,833.5 3,475 ---- ----- 347.50 3.822.50
July 22 Amit General Store, Main road

Ranchi:
65 piece of lux soap @ `10 per soap 650
40 piece of Dove soap @ `22 per 880

soap
35 piece of Johnson Baby soap 980

@ `28 per soap
2,510
Less: Trade Discount @10% 251

Date Particulars Invoice L.F. Details Purchases Input Input Input Total
CGST SGST IGST
2,259
Add: CGST @5% 112,95
SGST @5% 112.95
2,484.9 2,259 112.95 112.95 — 2,489.90
July 31 Total 87,334 4,192.95 4,192.95 347.50 96,067.40
SALES BOOK
Buying and Selling are the two main constituents of a business. Goods are sold by a company on either
cash or credit basis. Recording of cash sales and credit sales takes place in different subsidiary books.
All the credit sales of goods are recorded in the ‘Sales Book’, whereas all the cash sales of the goods
are recorded in the ‘Cash Book’. Importantly, the credit sales of anything other than goods, i.e., assets
are directly recorded to ‘Journal’ and not in ‘Sales Book’.
The following transactions are not recorded in the Sales Book:
1. Cash Sales: All the cash sales of the goods are recorded in the ‘Cash Book’, and not in the ‘Sales
Book’.
2. Sale of Assets: Any sale of assets either in cash or credit is not recorded in the ‘Sales Book’.
The entries in the Sales Book are recorded on the basis of the sales invoices issued by the company to
its customers at the time of sales. Generally, every company makes a minimum of two copies of the sales
invoice. One is to give to the purchaser of the goods, and the other to maintain the internal records and
pass respective entries in the Sales Book. Sales invoices contain all the important information related to
sales, i.e., date, name of the customer, quantity of the goods sold, rate, gross amount, discount allowed,
the tax levied, and the net amount of sales.
Format of Sales Book:
Date Particulars Invoice L.F. Details Sales Output Output Output Total
CGST SGST IGST
Explanation of the Columns of the Sales Book:

1. Date: This column represents the date on which the sale of goods took place.
2. Particulars: The name of the customer along with the address of the firm, the quantity of goods
sold, the rate at which the goods are sold, the discount allowed and tax levied on goods sold are
shown in this column.
3. Invoice No.: Invoice no. mentioned on the sales invoice generated at the time of sale is mentioned
in this column.
4. Ledger Folio(LF): This column is used to mention the ledger no. of the ledger account in which
the entries have been recorded regarding that particular transaction.

5. Details: This column is used to show all the additions and deductions related to the sale of goods,
i.e., discount allowed, taxes charged, etc.
6. Sale: The net amount of sales, i.e., Sales less trade discount is shown in this column.
7. Output Central GST (CGST): CGST is charged on those goods which are sold within the state, i.e.,
the seller and the buyer belongs to the same state. A separate column is made to make entries for
CGST. It is calculated on the net sales value, i.e., Sales less trade discount and further shown on
the credit side of the ledger account of Output CGST.
8. Output State GST (SGST): SGST is also charged on those goods which are sold within the state,
i.e., the seller and the buyer belongs to the same state. A separate column is made to make entries
for SGST. It is calculated on the net sales value, i.e., Sales less trade discount and further shown
on the credit side of the ledger account of Output SGST.
9. Output Integrated GST (IGST): IGST is charged on those goods which are sold outside of the
state, i.e., the seller and the buyer does not belong to the same state. A separate column is made
to make entries of the tax collected under IGST. It is also calculated on the net sales value, i.e.,
Sales less trade discount and further shown on the credit side of the ledger account of Output
IGST.
10. Total: Total amount of every transaction is shown in this column.
Illustration. Prepare a Sales Book from the following transactions of Sahil Furniture House, New Delhi,
assuming CGST @ 6% and SGST @ 6%.
Date Particulars
2019 Sold goods on credit to Sayeba Furniture Co. New Delhi

June 1 300 Chairs @ `600 each
72 Tables @ `1,000 Each
Trade Discount @ 20%
June 15 Sold goods on credit to Nupur Furniture Store, Rohini, New Delhi
20 Almirah @ `2,200 each
10 Sofa Sets @ `3,600 each
Trade Discount @ `30%
June 20 Sold Goods on credit to Vishal Furniture Shop, Jaipur (Rajasthan)

100 Chairs @ `300 each
Trade Discount @ 10%
June 15 Sold goods in cash to Furniture Mall, Delhi

25 Chairs @ `200 Each
Trade Discount @15%
June 30 Sold Assets to Rishabh Machinery Store, Noida (UP)

4 Old Machinery @ `10,000 each
1 Old Computer @ `1,500 each

Sol. Sahil Furniture House, New Delhi
Sales Book
Date Particulars Invoice L.F. Details Sale Output Output Output Total
CGST SGST IGST
2019
June 1 Sayeba Furniture Co. Pahadganj, Delhi
300 Chairs @ `600 each 1,60,000

72 Tables @ `1,000 Each 72,000
2,52,000
2,01,600
Add: CGST @6% 12,096
Add: SGST @6% 12,096
2,25,792 2,01,600 12,096 12,096 — 2,25,792
June 15 Nupur Furniture Store, Rohini New
Delhi
20 Almirah @ ` 2,200 each 44,000
10 Sofa Sets @ ` 3,600 each 36,000
80,000
Less: Trade Discounts @ 30% 24,000
56,000
Add: CGST @ 6% 3,360
SGST @ 6% 3,360
62,720 56,000 3,360 3,360 — 62,720
June 20 Vishal Furniture Shop, Jaipur
(Rajasthan)
100 Chairs @ `300 each 30,000
27,000
Add: IGST @12% 3,240
30,240 27,000 — — 3,240 30,240
June 30 Total 2,84,600 15,456 3,240 3,240 3,18,752
Note:
1. Only credit sales are recorded in the sales book, so the transaction on June 25 will not be recorded
in the sales book as it is a cash transaction.
2. Only credit sales of Goods are recorded in the sales book, so the transaction on June 30 will not
be recorded in the sales book as it is related to the sale of an Asset.
PURCHASE RETURN BOOK

The Purchase Return Book refers to the subsidiary book where the record of the ‘return of goods
purchased on credit’ is maintained. It is also called as ‘Return Outward Book’. There could be a number
of factors for which the suppliers might return the goods that they purchased earlier on credit. Some
of the reasons are as follows:

1. It is maybe because the goods delivered by the supplier do not match the sample.
2. Sometimes, the goods bought do not deliver at the scheduled time.
3. When the good has any fault, or goods might be broken or damaged while being out for delivery.
4. Goods can be returned if the goods don’t match the order being placed.
5. Goods are of poorer quality than what was promised.
6. Also, the return might take place if the price of the invoice exceeds the amount which was negotiated
at the time when the order was placed.
What is a Debit Note?
At the time when goods are delivered back to the supplier, in addition to the returned products, a debit
note is also generated. A ‘debit note’ incorporates the party’s name from which the credit purchase
was made, the particulars of the returned products, and also the reasons for which the goods have
been returned.
Some of the important features of a Debit Note are:
Each debit note has a unique serial number.
It also clearly has the correct date.
Also, for every debit note, a replica is created in case it might be useful in the future.
When the goods are returned back to the supplier, he is provided with the original copy of the
debit note. He is also notified regarding the amount debited from his account on account of returned
products.
It is due to the fact that the sum stated on this note is debited from the party’s account, it is also
known as a debit note.
In exchange for the debit note, the party to whom the items were returned generates a credit note
and sends it back to the party who initiated the process of return.
The duplicate copy of the debit note serves as the source document using which the purchase return
journal is prepared and entries are recorded. A debit note can be sent when the sales invoice seems
to be mistakenly undercharged, undercast, or when specific products are not documented in the sales
invoice.
Format of Purchase Return Book
The basic structure or the format of the purchase return book is identical to that of the formats of the
purchase book and sales book. Also, the entries in the purchase return book are recorded in the same
way as those recorded in the purchase book and sales book. There is a separate field in the purchase
return book where the debit note number is written. Debit note no. actually replaces the invoice number
written in the Purchase book. The format of the purchase return book is presented below:
Purchase Return Book
Date Particulars Debit L.F. Details Purchase Input Input Input Total
Note No. Return (`) CGST SGST IGST Amount
Following is the explanation of the columns of the purchase return book:

1. Date: The date on which the return of goods on credit purchases has been placed is mentioned
in this column.
2. Particulars: This column consist the details like the name of the party to which the return has
been placed, a complete description of the goods returned, the exact quantity being returned, the
unit price of the good, and the percentage of trade discount.

3. Debit Note No.: It records the number of the debit note using which the transaction in the purchase
return book has been recorded.
4. L.F.: L.F. stands for Ledger Folio. It records the page number of the ledger where the transaction
has been posted.
5. Details: This column represents the gross amount of the goods returned. If there is any kind of
trade discount, it is deducted from the gross amount.
6. Purchase Return: This column represents the net amount of the goods return adjusted with the
amount of trade discount.
7. Input CGST: CGST is chargeable on the goods which are exchanged within the state meaning
thereby the seller and the buyer belong to the same state. CGST is calculated on the net purchase
return value already adjusted with the trade discount. This amount is shown in this column.
8. Input SGST: SGST is again chargeable on the goods which are exchanged within the state meaning
thereby the seller and the buyer belong to the same state. Like CGST, SGST is also calculated on
the net purchase return value already adjusted with the trade discount and this amount is shown
in this column.
9. Input IGST: IGST is chargeable on the goods which are bought from outside the state meaning
thereby the seller and the buyer does not belong to the same state. IGST is calculated on the net
purchase return value already adjusted with the trade discount. The amount for IGST is mentioned
in this column.
10. Total Amount: It consists of the total amount which finally arrives after including the balances
of every column.
Illustration. In Model Town, Punjab, Mr. Shyam owns an enterprise dealing with spare parts. Following
are the transactions that happened in the month of October 2022. Assume CGST @ 6%, SGST @ 6%,
and IGST @12%. Prepare a Purchase Return Book for Mr. Shyam.
Year Particulars
2022
Oct 14 (Debit note no. 131) Goods were returned to Ghanshyam & Co, Amritsar (Punjab) worth `6,000 for the
reason that goods were not similar to the sample
Oct 17 (Debit Note no. 135) Allowance was claimed from Rama Prasad & Sons, Ludhiana (Punjab) for the
mistake in the sale invoice for `1,500
Oct 26 (Debit Note no. 138) Goods were returned to Kasturi enterprise, Panipat (Haryana) worth `3,000 and
10% trade discount was applicable
Sol. Purchases Return Book

of Mr. Shyam’s Enterprises
Date Particulars Debit L.F. Details Purchase Input Input Input Total
Note No. Return (`) CGST SGST IGST Amount
2022 Ghanshyam & Co. Amritsar 131 6,000

Oct 14 (Punjab)
Add: CGST @6% 360
Add: SGST @6% 360
6,720 6,000 360 360 — 6,720

Oct 17 Rama Prashad & Sons, 135 1,500
Ludhiana (Punjab)
Add: CGST @6% 90
Add: SGST @ 6% 90
1,680 1,500 90 90 — 1,680
Oct 26 Kasturi Enterprise, Panipat 138 3,000

(Haryana)
Less: Trade discount @ (300)

10%
2700
Add: IGST @ `12% 324
3024 3,000 — — 324 3024
Oct 31 Total 10,200 450 450 324 11,424
SALES RETURN BOOK

A ‘Sales Return Book’ is maintained to record the goods returned by customers to whom sales were
made on a credit basis.
The following items are not recorded in the Sales Return Book:
1. Return of goods initially sold for cash because such transactions are recorded in the Cash Book;
and
2. Return of items other than the goods
At the time when goods are received back by the supplier, in addition to the returned products, a credit
note is also generated. A ‘credit note’ includes the party’s name from whom the goods are received back,
the particulars of the returned products, and also the reasons for which the goods have been received.
What is a Credit Note?
A credit note can be issued when a sales invoice is mistakenly overcharged or when a special discount
is given to the customer due to defective goods.
Important Points about a Credit Note:
The Credit Note serves as the source document for entries in the Sales Return Book.
Each credit note has a unique serial number.
It also contains the correct date.
It is called a credit note because the amount written on it is credited to the customer’s account.
Also, for every credit note, a duplicate copy is created in case it might be useful in the future.
The duplicate copy is kept to record the entries in the books and the original copy is sent to the
customer.
The credit note is referred to as a debit note by the customers who return back the goods.
Sales Return Book is also known as ‘Return Inward Book’ or ‘Sales Return Journal’. Sometimes, trade
discount is also provided to the customers on credit sales. So, if a trade discount was allowed when the
sales were made, then it is deducted while recording the value of goods returned in the Sales Return
Book.

Format of Sales Return Book:
The basic structure or the format of the sales return book is identical to that of the format of the
purchase return book except for the debit note number, which is replaced by the credit note number.
The format of the sales return book is presented below
Sales Return Book
Date Particulars Credit L.F. Details Sales Output Output Output Total
Note No. Return CGST SGST IGST Amount
Following is the explanation of the columns of the Sales Return Book:

1. Date: The date on which the return of goods on credit sales has been placed is mentioned in this
column.
2. Particulars: This column consist the details like the name of the party by whom the return has
been placed, a complete description of the goods returned, the exact quantity being returned, the
unit price of the good, percentage of trade discount.
3. Credit Note No.: It records the number of the credit note using which the transaction in the sales
return book has been recorded.
4. L.F.: L.F. stands for Ledger Folio. It records the page number of the ledger where the transaction
has been posted.
5. Details: This column represents the gross amount of the goods returned. In case there is any
trade discount, it is deducted from the gross amount.
6. Sales Return: This column represents the net amount of the goods returned adjusted with the
amount of trade discount.
7. Output CGST: CGST is chargeable on the goods, which are exchanged within the state meaning,
thereby, the seller, and the buyer belong to the same state. CGST is calculated on the net sales
return value already adjusted with the trade discount. This amount is shown in this column.
8. Output SGST: SGST is again chargeable on the goods which are exchanged within the state meaning,
thereby, the seller and the buyer belong to the same state. Like CGST, SGST is also calculated on
the net sales return value already adjusted with the trade discount, and this amount is shown in
this column.
9. Output IGST: IGST is chargeable on the goods which are bought from outside the state meaning,
thereby, the seller and the buyer does not belong to the same state. IGST is calculated on the net
sales return value already adjusted with the trade discount. The amount for IGST is mentioned in
this column.
10. Total Amount: It consists of the total amount, which finally arrives after including the balances
of every column.
Ledger Posting of Sales Return Book
Before posting transactions from the Sales Return Book to the ledger, it is important to keep the
following points in mind:
1. Entries posted to Customers’ Personal Accounts: Firstly, the names of customers who have
returned goods are recorded in the Sales Return Book. Then, the total value of goods returned is
credited to the customer’s account. The total value of goods returned includes the value of goods
returned plus GST chargeable at the time of sale.

2. Entries posted in Sales Return Book: The final amount showing in the total amount column
according to the format is debited to the Sales Return Account in the ledger. The entry is recorded
in the debit side of the ledger account as – ‘To Sundries as per Sales Return Book’.
3. Entries posted in GST accounts: The amount of GST chargeable at the time of sale is debited from the
output IGST, output CGST, and output SGST accounts. Usually, the percentage for CGST, SGST, and IGST is
6%, 6%, and 12%, respectively.
Illustration. Prepare the Sales Return book for Ms. Gauri, who runs an enterprise in Gujarat. Following are
some of the transactions which took place in the month of December 2021. Assume CGST @6% and SGST @6%,
and IGST @12%.
Year Particulars
Dec 6 (Credit Note No. 150) Allowance allowed to Ramesh & Co., Jaipur (Rajasthan) for the mistake in the
invoice for `500
Dec 12 (Credit Note No. 157) Goods returned back by Jayant & Sons, Surat (Gujarat) worth `5,000 at a trade
discount of 10%
Dec 23 (Credit Note No. 163) Goods worth `3,500 were returned by Gopal & Sons, Ahmedabad (Gujarat) for
the reason that these were defective
Sol. In the Books of Mrs. Gauri

Sales Return Book
Date Particulars Credit L.F. Details Sale Output Output Output Total
Note No. Return CGST SGST IGST Amount
2021 Ramesh & Co., Jaipur (Rajasthan) 150 500
Dec 6
Add: IGST @ 12% 60
560 500 — — 60 560
Dec 12 Jayant & Sons, Surat (Gujrat) 157 5,000
Less: Trade discount @ 10% (500)
4,500
Add: CGST @ 6% 270
Add: SGST @ 6% 270
5,040 4,500 270 270 — 5,040
Dec 23 Gopal & Sons, Ahmedabad (Gujrat) 163 3,500
Add: CGST @ 6% 210

Add: SGST @6% 210
3,920 3,500 210 210 — 3,920
Dec 31 Total 8,500 480 480 60 9,520
JOURNAL PROPER
Journal Proper is the book that is maintained to record those transactions which are not recorded in
the special books. Transactions that do not find a place in any other subsidiary book, such as Cash
Book, Purchase Book, Sales Book, Bills Payable Book, Purchase, and Sales Return Book are recorded
in the Journal Proper. It is also known as Journal Residual.

Uses of Journal Proper
1. Opening Entry: Opening Entries are recorded at the beginning of the accounting year. It records
the assets’ debit balances, the liabilities’ credit balance, and the capital that appears on the Balance
Sheet of the previous year. The following entry is passed to record the opening balances:
Sundry Assets A/c XXX
To Sundry Liabilities A/c XXX
To Capital A/c XXX
(Being the last year balances brought forward)
2. Closing Entry: Closing entry is passed at the end of the accounting year to record the transactions
and close the accounts relating to expenses and revenues by transferring them to the Trading
Account and Profit and Loss Account. Closing Entries recorded in the Journal for preparing the
Trading and Profit and Loss Account, i.e., transferring revenue and expenditure accounts to these
two accounts.
Trading A/c XXX
To Opening Stock A/c XXX
To Purchases A/c XXX
To Direct Expenses A/c XXX
(Being entry made ascertain gross profit)
Sales A/c (Net) XXX
Closing Stock A/c XXX
To Trading A/c XXX
(Being entry made to ascertain gross profit)
Sales A/c (Net) XXX
Closing Stock A/c XXX
To Trading A/c XXX
(Being entry made to ascertain gross profit)
Trading A/c XXX
To Profit and Loss A/c XXX
(Being Gross, Profit determined transferred to Profit and loss A/c)
Or
Proft & Loss A/c
To Trading A/c XXX
(Being gross Loss determined transferred to Profit and Loss A/c) XXX
Profit and Loss A/c XXX
To Trading A/c XXX
(Being Gross Loss Determined transferred to profit and loss A/c)
Indirect Revenues A/c XXX
(Being indirect gains credited to Profit and loss A/c)

Profit & Loss A/c XXX
To Capital A/c XXX
(Being Net Profit transferred to Capital A/c)
Or
Capital A/c XXX
(Being Net loss determined transferred to Capital A/c)
3. Rectification Entry: Journal Proper records the entries that are passed to rectify the errors in
the books of original entries or of a Ledger.
4. Transfer Entry: When an amount is to be transferred from one account to another, the transfer
entry is recorded in the Journal Proper.
5. Adjustment Entry: The number of expenses or revenue needs to be adjusted at the end of the
year due to advance or non-payment of income or expenses of the concerned account. Journal
Proper records the entry for adjustment of the amount received or paid in advance or for the
amounts not yet settled in cash.
(a) Prepaid Expenses: Expenses paid in advance for the future period.
(b) Outstanding Expenses: Expenses that have arisen but have not yet been paid.
(c) Interest on Capital: The interest that the proprietor thinks is suitable to allow for his
investment in the business.
(d) Depreciation: Depreciation is the fall in the value of assets due to wear and tear over a period.
6. Entry for Dishonor Of Bills: When the accepted promissory notes or bills are not being paid by
the person who accepted them, an entry is passed in the Journal Proper to record the dishonour
or non-payment of the bill or promissory note.
7. Miscellaneous Entries: Journal Proper also records the following transactions:
(a) Credit purchase of goods or material other than the goods dealt in by the business.
(b) Discount Allowed or Discount Received.
(c) Loss or Damage of Goods or property, either due to fire or accidents.
(d) When any debtor becomes insolvent, the amount due to him becomes irrecoverable.
(e) An allowance to be given to customers or a charge to be made to them after the issue of the
invoice.
Format of Journal Proper
Explanation of the column of the Journal Proper:

1. Date: In this first column, the date of the transaction is recorded, i.e. on the date on which the
transaction took place.
2. Particulars: In the second column, the name of accounts are recorded through which transactions
took place. The accounts in which debit amounts and credit amounts are recorded. Narration is
written after the entry has been passed in this column. Narration is a short description of the
transactions.
3. Ledger Folio (L.F.): In the third column, the accounts posted to which the ledger page is recorded.

4. Debit Amount (`): In the fourth column, the amount debited is recorded concerning the account
recorded in the second column.
5. Credit Amount (`): In the last column, the amount credited is recorded concerning the account
in the second column.
Illustration. For the following transactions, pass the necessary journal entries in the specified Journal
book:
1. On 31st March 2022, the Ledger accounts had the following balances:
Building `3,00,000, Plant and Machinery `1,50,000, Furniture `75,000, Stock `25,500, Investments
`50,000, Debtors `22,500, Cash and Bank `10,800, Outstanding Salaries `23,600, General Reserve
`72,700, Creditors `17,500, Capital `5,20,000.
Pass the journal entries for opening the books for the year 2022-23.
2. On 31st March 2022, the accounts are to be closed:
Opening Stock `22,600, Purchases `30,200, Wages `7,000, Salaries `9,200, Sales `64,900, Purchase
Return `3,500, Carriage Inward `1,900, Sales Return `1,250, Rent `13,100, Discount Allowed
`850, Discount Received `1,200, Closing Stock `35,800, Bills Receivable `16,000, Cash in Hand
`22,000, Cash at Bank `30,900, Freehold Premises `64,000, Building `1,20,000, Furniture `40,000.
3. On 31st March 2022, the following transfer entries were made:
(a) Santosh drawing `3,000 to Purchase Account.
(b) Sales Return of `6,400 to Sales.
(c) Gross Profit of `34,800.
4. Following adjustment entries have to be passed on 31st March 2022:
(a) Interest accrued on Investment `850.
(b) Appreciate Land (`7,50,000) by 10%.
(c) Wages Outstanding `12,500.
(d) Good worth `9,000 lost due to fire.
(e) Purchased Furniture from Amit Traders on credit worth `37,800.
Sol. 1. Journal
Date Particulars L.F. Amount Amount
Building A/c 3,0,000
Plant and Machinery A/c 1,50,000
Furniture A/c 75,000
Stock A/c 25,500
Investments A/c 50,000
Debtors A/c 22,500
Cash and Bank A/c 10,800
To Creditors A/c 17,500
To General Reserve A/c 72,700
To Outstanding Salaries A/c 23,600
(Being the last year’s balances brought forward)

2. Journal
Trading A/c 62,950
To Opening Stock A/c 22,600
To Wages A/c 7,000
To Sales Return A/c 1,250
To Carriage Inward A/c 1,900
(Being transferred to Trading A/c to determine gross profit)
March 31 Sales A/c 64,900
Purchases Return A/c 3,500
Closing Stock A/c 35,800
To Trading A/c 1,04,200
(Being transferred to Trading A/c to determine gross profit)
March 31 Trading A/c (`1,04,200 – `62,950) 41,250
To Profit and Loss A/c 41,250
(Being the gross profit transferred to profit and loss A/c)
March 31 Profit and Loss A/c 23,150
To Salaries A/c 9,200
To Rent A/c 13,100
To Discount Allowed 850
(Being transferred to Profit and loss A/c to determine net profit)
March 31 Discount Received A/c 1,200
(Being transferred to Profit and Loss A/c to Determine net Profit)
March 31 Profit and Loss A/c (`41,250 + `1,200 – `23,150) 19,300
(Being the net profit determined transferred to Capital A/c)
3. Journal Proper
Date Particulars L.F Amount Amount
Drawings A/c 3,000
(Being Santosh’s drawing transferred to Purchases A/c)
Sales A/c 6,400
To Sales Return A/c 6,400
(Being Sales return transferred to Sales A/c )
Trading A/c 34,800
(Being gross profit transferred to profit and Loss A/c)

4. Journal Proper
Date Particulars L.F Amount Amount
2022 Accrued Interest A/c 850
Mar 31 To Interest Received A/c 850
(Being the adjustment of interest accrued but not received)
(b) Land A/c 75,000
To Appropriation A/c 75,000
(Being the adjustment of appreciation on Land)
(c) Wages A/c 12,500
To Outstanding Wages A/c 12,500
(Being the adjustment of wages due but not paid)
(d) Furniture and Fixture’s A/c 37,800
To Amit Traders A/c 37,800
(Being the furniture purchased on credit)
EXERCISES
1. Purchase returns book records
(a) Cash purchase (b) Credit sales
(c) Return of sold goods (d) Return of goods purchased on credit
2. Sales Book records

(a) Cash sales (b) Sales of assets on credit
(c) Sales of goods on credit (d) Sales of loose tools
3. Debit Note is issued for purchased goods returned to

(a) Debtor (b) Creditor (c) Bank (d) Customer
4. Credit Note issued for sold goods returned by buyer to

(a) Debtors (b) Creditors (c) Bank (d) Consigner
5. A return inward book is kept to record

(a) Coming of all the employees
(b) Sales return
(c) Purchase return
(d) Employees joining back who had left the organization
6. Sales Day book is used to record

(a) Credit sales of trading goods (b) Only Cash sales of trading goods
(c) Sales of all types including capital goods (d) None of the above.

7. Purchases Book is used to record
(a) All purchases of goods
(b) All credit purchases
(c) All credit purchases of goods
(d) All credit purchases of assets other than goods.
8. Rectifying Entries are recorded in

(a) Ledger (b) Balance Sheet (c) Cash Book (d) Journal Proper
9. Which of the following is not a book of original entry.

(a) Journal Book (b) Ledger Book (c) Purchase book (d) Sales book
10. When a customer returns the goods to supplier, which document is sent to him (customer)
(a) An invoice is sent to him (b) A Debit Note is sent to him
(c) A Credit Note is sent to him (d) None of the above
11. The total of Returns Inward book is posted to

(a) Purchase Account (b) Purchase Returns Account
(c) Sales Returns Account (d) Individual Accounts of Customer.
12. Closing entries are recorded in

(a) Cash Book (b) Ledger (c) Journal Proper (d) Balance Sheet
13. When the purchase day book of a firm is overcast, it will

(a) Increase gross profit and reduce net profit (b) Reduce gross profit and increase net profit
(c) Reduce gross profit and as well as net profit (d) Increase gross profit as well as net profit
14. Purchase of fixed assets on credit is originally recorded in

(a) Purchases book (b) Ledger (c) Cash book (d) Journal proper
15. Rent paid by cheque is recorded in

(a) Cash Book (b) Pass book (c) Expense Book (d) Journal Proper
ANSWERS
1. (d) 2. (3) 3. (2) 4. (a) 5. (b) 6. (a) 7. (c) 8. (d)
9. (b) 10. (c) 11. (c) 12. (c) 13. (c) 14. (d) 15. (a)

1. What is Credit note book?
Ans. A subsidiary book in which only credit transactions of purchase of goods are recorded is called
Credit note book.
2. What is Debit note book?

Ans. A subsidiary book in which only credit transactions of sales of goods are recorded is called Debit
note book.
3. What is the other name of Purchase book?

Ans. Purchase book is also known as Credit note book or Jamavahi.
4. For what time interval (period) traders can maintain for the purchase book?
Ans. According to the convenience and needs, traders can maintain purchase book for a fixed period.
This time interval (period) may be on weekly, fortnightly, monthly, quarterly, etc. basis.
5. How many types of purchase book are there? Which are they?
Ans. There are two types of purchase book:
1. Simple purchase book and
2. Columnar purchase book.
6. When columnar purchase book according to types of goods is used?

Ans. When a businessman purchases goods of more than one type, columnar purchase book for each
type of goods is prepared instead of simple purchase book to know the details and information
about each variety of goods.
7. Explain any two advantages of subsidiary books.

Ans. Two advantages of subsidiary books are as under:
1. Because of preparing the subsidiary books, benefit of division of labour can be obtained.
2. Audit work becomes easier and speedy.
8. Which types of transactions are recorded in sales book?

Ans. Transactions of only credit sales of goods are recorded in sales book.
9. By which other name purchase returns book is known?

Ans. Purchase returns book is also known as Goods returns debit book.
10. Who writes the debit note for whom?

Ans. Trader of goods purchaser writes debit note on trader of goods seller.

1. Which transactions are not recorded in the purchase book?
2. Explain the formula of Net amount of purchase.
3. When columnar sales book is maintained?
4. Why purchase book is also known as Credit book?
5. Why sales book is also known as Debit book?
6. Which types of subsidiary books are not popular in practice?
7. Which types of subsidiary books are more popular in practice?
8. How many types of cash book are there ? Which are they?
9. Which vouchers/documents are necessary for the preparation of goods subsidiary books?
10. How many types of subsidiary books for bills are there? Which are they?
11. Which book is maintained when the trader deals with only one type of goods?
12. Transaction of goods return – credit is recorded in which subsidiary book?
13. In which book trade discount and cash discount is recorded?
14. Name of supplier and name of customer are recorded in which subsidiary books?

1. From the following particulars, prepare single column cash book of Ms. Kokila.
2002
Mar. 1 Cash in hand `20,000.
Mar 4 Cash purchases `4,000.
Mar. 7 Cash sales `8,000.
Mar. 8 Paid to Balan `5,000
Mar. 9 Received cash from Cheran `10,000.
Mar. 13 Paid into bank `10,000.
Mar. 14 Cash withdrawn from bank `4,000.
Mar. 18 Paid salaries `1,000.
Mar. 20 Bought furniture `3,000.
Mar. 28 Rent paid `1,000. [Ans. Cash balance `18,000]
2. Enter the following transactions in the single column cash book of Mrs. Lalitha.
2002
Aug. 1 Cash in hand `46,000.
Aug. 3 Paid in to Bank `12,000
Aug. 4 Cash sales `24,000.

Aug. 5 Credit sales to Mani `3,000.
Aug. 7 Printing charges `3,000.
Aug. 9 Received cheque from Natesan `8,000.
Aug. 12 Dividend received `2,000.
Aug. 14 Computer purchased `35,000.
Aug. 17 Cash received from Mani `3,000.
Aug. 24 Cash withdrawn from bank `2,000.[Ans. Cash balance `35,000]
3. Prepare a single column cash book from the following particulars of Mr. Chandran.
2002
Dec 1 Cash balance `80,000.
Dec 7 Bought goods for cash `25,000
Dec 9 Purchased goods on credit from Guru `6,000.
Dec 12 Sold goods to Somu on credit `8,000.
Dec 14 Paid Guru `6,000.
Dec 17 Cash received from Somu `8,000.
Dec 20 Paid trade expenses `10,000.
Dec 21 Received cheque from Krishna `10,000.
Dec 27 Commission received `5,000.[Ans. Cash balance `62,000]
4. Enter the following transactions in the double column cash book of Mr. Srinivasan.
2002
May 1 Cash in hand `50,000.
May 3 Cash paid to Rajan `6,000.
Discount allowed by him `100.
May 6 Cash purchases `10,000.
5. Enter the following transactions in cash book with cash and discount column of Mr. Nandakumar.
2003
Jan 1 Cash in hand `60,000.
Jan 3 Bought goods from Premnath ` 10,000.
Jan 4 Opened a current account with bank `15,000.
Jan 7 Withdraw from bank `5,000.
Jan 8 Sold goods to Kandan for `10,000 credit on terms 2% cash discount if payable within
two weeks.
Jan 10 Paid cash to Premnath, less 1% C.D.
Jan 14 Received a cheque from Arul `3,400, allowed him discount `100.
Jan 15 Kandan settled his account. [Ans. Cash balance `53,300]

6. Enter the following transaction in the Cash Book with Discount and Cash Columns of Mr. Guru.
2003
Sep 1 Cash in hand `19,000.
Sep 3 Sold goods for cash `10,000.
Sep 4 Credit purchases from Venkat `18,000.
Sep 6 Received from Mohan `4,160
Discount allowed to him `40.
Sep 8 Paid for Electricity charges `850.
Sep 9 Cash deposited in bank `20,000.
Sep 14 Paid cash to Venkat `17,600 in full settlement.
Sep 24 Received cash from Vel Murugan `4,800.
Sep 26 Salaries paid `4,000.
Sep 28 Cash drawn from bank `5,000. [Ans. Cash balance `510]
7. Enter the following transactions in Cash Book with cash and bank columns: Balance the cash book.
2003
May 1 Cash in hand `30,000.
May 2 Paid into bank `10,000.
May 3 Cash purchases `2,500.
May 4 Loan obtained from Vasan `10,000.
May 5 Cash deposited in bank `7,500.
May 6 Cash sales `2,500.
May 10 Received cash from Arun `2,900 and allowed him discount `100.
May 13 Cash sales `15,000.
May 15 Electricity charges paid `1,000.
May 18 Paid for miscellaneous expenses `2,000.
May 20 Received cash from Murali `3,450 Discount allowed `50.
[Ans. Cash balance `52,350]
8. Record the following transactions in Sujatha’s cash book with cash and bank columns.
2002
Mar 1 Cash Balance `45,000.
Bank Balance `42,000.
Mar 3 Cash paid into bank `5,000.
Mar 5 Purchases by cheque `9,000.
Mar 8 Cash sales, deposited in the bank `13,500.
Mar 10 Furniture purchased `600.

Mar 14 Cheque received from Ramu `2550.
Mar 17 Ramu’s cheque deposited in the bank for collection.
Mar 18 Cash withdrawn for personal use by cheque `750.
Mar 20 Cash withdrawn from bank `3,000.
Mar 26 Ramu’s cheque was returned by bank as dishonoured.
[Ans. Cash balance `42,400; Bank Balance `47,750]
9. Prepare Double Column Cash Book with cash and bank columns from the following:
2003
Jan 1 Cash in hand `22,000 Cash at bank `5,000.
Jan 2 Sold goods for cash `15,000.
Jan 4 Cash withdrawn from bank `2,000.
Jan 5 Credit purchases from Deena `15,000.
Jan 6 Cash deposited into bank `5,000.
Jan 10 Paid wages by cheque `10,000.
Jan 14 Cash received from sale of furniture ` 10,000 and out of it paid into bank `2,000.
Jan 18 Bank charges charged by the bank `1,300.
Jan 20 Cheque issued to Deena `15,000.
Jan 24 Received a cheque for `1,000 from Pasubathy, deposited into the bank.
Jan 28 Deena, to whom we have issued a cheque for credit purchases has reported that our
cheque is dishonoured. [Ans. Cash balance `42,000; Bank balance (Cr) `300]
10. Prepare a cash book with cash, bank and discount columns from the transactions given below:
2002
Jan 1 Cash Balance `75,000. Bank Balance `45,000.
Jan 3 Deposited into bank `60,000.
Jan 4 Bought furniture and paid by cheque `7,500
Jan 24 Paid Murugan `4,000. Discount allow by him `50.
Jan 26 Paid into bank `5,000.[Ans. Cash balance `12,250; Bank balance (Cr.) ` 9,050]
11. Enter the following transactions in Muralis cash book with column for discount, cash & bank.
2002
April 1 Cash balance `4,000. Bank overdraft `10,500.
April 4 Received `2,000 from Manoj in cash. Allowed him discount of `100.
April 7 Cash sales `2,000.
April 10 Furniture purchased `800 by cheque.
April 12 Paid rent by cheque `1,500.
April 15 Paid `2,500 to Karthikeyan half cash and half by cheque.
April 18 Cash sales `15,000.
April 20 Paid packing charges `500.

12. Enter the following transactions in the Three Column Cash Book of Mr. Albert.
2002
May 1 Cash in hand `30,000. Cash at bank `2,000
May 3 Received cheque for goods sold to Arun and banked it `1000.
May 5 Paid into bank `4,000.
May 9 Paid cash to David from whom goods worth `6,000 were purchased for credit on 1st
May on term 2% cash discount within two weeks.
May 10 Paid to Robert by cheque `2,400 in full settlement of his account of `2,500.
May 12 Received cash from Nathan `4,750. Discount allowed `250.
May 19 Interest allowed by bank `200.
May 20 Robert to whom we have issued a cheque has reported that our cheque is dishonoured.
May 22 Roshan got exchange a five hundred rupee note.
May 31 Paid into bank all cash in excess of `5,000.
[Ans. Cash balance `5,000. Bank balance `27,070. Deposited into bank `19,870]
13. Enter the following transactions in the Triple Column Cash Book of Mr. Raja Durai.
2002
May 1 Cash balance `6,000.
Bank balance `4,000.
May 2 Withdrew from Bank `2,000.
May 3 Abdulla directly paid into our bank account `3,000.
May 4 Cheque received from Daniel `5,000 sent to bank.
May 7 Cheque received from Ramakrishnan for sales `8,000.
May 8 Received cash from Subramaniyam `2,800. Discount allowed `200.
May 10 Ramakrishnan’s cheque sent to bank for collection.
May 14 Paid to Balu by cheque `13,900. Discount received `100.
May 17 Withdrew cash for personal use `1,500 and by cheque `12,500.
May 27 Rent paid `2,000. [Ans. Cash balance `7,300; Bank balance (cr) `8,400]

CHAPTER
08 Ledger
INTRODUCTION
A ledger in accounting refers to a book that contains different accounts where records of transactions
pertaining to a specific account are stored. It is also known as the book of final entry or principal book
of accounts. It is a book where all transactions either debited or credited are stored.
A ledger account is a combination of all the ledgers and contains information related to all the accounting
activities of an organisation. It is regarded as the most important book in accounting as it helps in
creating a trial balance that acts as a precursor to the preparation of financial statements.
The information stored in a ledger account contains both starting and ending balances which are
adjusted during the course of the accounting period with respective debits and credits.
A ledger contains different components which include the various transaction elements such as date,
amount, particulars and l.f. (ledger folio). Individual transactions are contained within a ledger account
and are identified by a transaction number or any other type of notation.
OBJECTIVES OF LEDGER
The main objectives or purpose of preparing ledgers are as follows:
1. To record the Business Transactions in books of accounts in a systematic manner: The main
objective of the ledger is record keeping of business transactions. Once the transactions are
recorded in the journal, they are transferred to different ledger accounts. In this way, the books
of accounts are maintained to ensure that all the business transactions are recorded in a systematic
manner.
2. Ledger consists of different types of accounts: It consists of different types of accounts such
as cash A/C, bank A/C, debtors A/C, and creditors A/C. These accounts are totalled and balanced
to find the balance of each account. The account has T shape where the right side is represented
as Debit - Dr and left side is represented as Credit - Cr. The balances of assets, liabilities and capital
are carried forward to next financial year. But the balance of an income and expense account is
transferred to Profit and loss A/C, and not carried forward to next year.
3. Classification of accounts as Assets, Liabilities, Income, Expenses & Capital: Here, different
accounts are mainly classified under Assets, Liabilities, Capital, Expense and Income. This is to
make the classification easy and to record them easily in financial statements. For example, the
balance of all assets, liabilities, and capital is taken to the Balance Sheet. Whereas the balance of
expenses and incomes is to be taken into the Profit and loss account.
4. Helps to know the ledger account balances: As we know, it helps us to know the different ledger
account balances. This helps us to analyse the different accounts and make useful decisions. For
example, Debtors’ balance helps us to know the balance amount due from debtors, this helps to
take steps to collect the amount due from debtors. Similarly, Cash balance helps us to know the
amount available in liquid cash.
5. Assists in the preparation of Trial Balance: It also assists in the preparation of trial balance,
once the accounts are balanced. The next step after posting and balancing is preparing a trial
balance. The trial balance contains all the account balances. Trial balance is prepared to ensure
the arithmetical accuracy of books of accounts. The total amount of debit balance must be equal
to the total amount of credit balance in a Trial balance.
6. Basis for preparation of Financial Statements: It also helps in the preparation of financial
statements. As we know, the financial statements include the trading & profit and loss account,
balance sheet with notes to accounts, and cash flow statement. The balance sheet depicts the
financial position. The cash flow statement gives the picture of the cash position. The profit and
loss statement helps to ascertain the financial performance i.e, profit earned or loss incurred
during the period.
7. Provides reliable financial information to users of financial information: It provides reliable
and useful information to the users of financial statements. The users would include debtors,
creditors, competitors, government, credit rating agencies, investors, and shareholders. They are
interested to know the financial information of the business enterprise. For example, Government
is interested to know the sales account balance to levy tax on sales.
8. To reduce frauds, errors and omission of financial transactions: It helps to record all the
business transactions without the omission of any transaction. This also helps to minimize the
errors, frauds, and thefts in the business organisation. This helps to maintain the books of accounts
without any errors or omissions.
ADVANTAGES OF LEDGER
Some of the advantages of the ledger are:
1. It is the ledger through which effective use of the double-entry system of accounting is guaranteed.
Every single transaction is partitioned into two sections – collector and supplier – and recorded
in the two concerned accounts in the ledger.
2. Exchanges identifying with various people or concerns are recorded in the account of every
individual or concern independently. Therefore, complete and reliable data is accessible in regard
to every single account.
3. Various kinds of income and expenses are recorded in various accounts independently. Thus, it
is conceivable to learn the measure of income and expenditure under each head and the general
outcome at the year-end through trading and profit and loss accounts.
4. A separate account is opened for every detail of assets and liabilities. It is, in this manner,
conceivable to find out the estimation of various assets and liabilities and the genuine budgetary
situation at the year end through the company balance sheet.
5. Exchanges being recorded in the journal last longer in the ledger and the chances of mistakes and
defalcations are distant.
6. One of the advantages of a ledger includes that significant data and measurements are gathered
from the ledger and provided to the administration to empower them to run the whole thing
proficiently.
DISADVANTAGES OF LEDGER
1. There are chances of the ledger being totally unsafe if someone else gets access to the book or
system file. If the user is careful, then the ledger is way safer.
2. You will have to keep a constant eye on the ledger files as they can contain very serious and
sensitive files along with other such information.

3. Ledger depends on the transaction data entered in it. If an error occurs in the transaction data,
the entire results will have an error and will thus become undependable.
4. The ledger will take a lot of users’ time and energy. It is also difficult as we have to keep a check
if our records are safe or not, also.
5. The provided information is totally useful for the students and will give a clear understanding of
the ledger and ledger posting.
DISTINCTION BETWEEN BOOKS OF ORIGINAL ENTRY AND LEDGER

As all the business transactions are first of all recorded either in the journal or in the subsidiary books
so they are called as ‘books of original entry’. The transactions recorded in the books of original entry
are, thereafter, posted to ledger accounts so it is called as ‘principal book of accounts’ or book of final
entry.
S. No. Books of Original Entry Ledger
1. The business transactions are recorded first in the All the transactions recorded in the journal or in the
books of original entry i.e., in the journal or in the subsidiary books are later posted to ledger accounts.
subsidiary books.
2. All the transactions are recorded date wise so at In ledger, transactions are classified account wise
any point of time, position of an account cannot be and date wise so the position of any account can be
determined from books of original entry. determined at any point of time.
3. Trial Balance cannot be prepared with the help of books Trial balance is prepared from ledger records to check
of original entry. the arithmetic accuracy of books of accounts.
4. Financial statements (final accounts) cannot be Financial statements can be prepared easily on the basis
prepared with the help of books of original entry. of ledger records.
5. The process of recording in the books of original entry The process of recording entries in the ledger is called
is called ‘Journalising.’ ‘posting’.
6. Page number of ledger (L.F.) is written in the books of Page number of journal or subsidiary book (J.F.) is
original entry. written in ledger.
7. Complete detail of transactions is recorded in these Complete detail of transactions is not recorded in the
books. ledger.
DISTINCTION BETWEEN JOURNAL AND LEDGER

S. No. Journal Ledger
1. Journal is a book of primary entry. Ledger is a book of final entry.
2. Transactions are recorded in the journal on the the The transactions recorded in the journal are posted
basis of source documents (vouchers). to ledger..
3. Format of journal has 5 columns-Date, Particular, L.F., Ledger is divided into two parts-Debit and Credit
Debit Amount and Credit Amount. and each part is subdivided into columns of date,
particulars, J.F. and amount.
4. Journal is totalled but never balanced. Ledger accounts are totalled and then balanced.
Ledger 175
5. The process of recording is called journalising. The process of recording is called posting..
6. Trial balance cannot be drawn on the basis of journal. Trial balance can be prepared on the basis of ledger
records.
7. Financial statements cannot be prepared on the basis Financial statements can be prepared on the basis of
of journalising. ledger posting.
8. Recording of transactions in journal is the first stage. Ledger posting of recorded transactions in the journal
is the second stage.
LEDGER FORMAT
The ledger consists of two columns prepared in a T format. The two sides of debit and credit contain
date, particulars, folio number and amount columns. The ledger format is as follows.
RULES FOR POSTING OF ENTRIES IN THE LEDGER

1. A separate account is opened for each account and entries from the journal are posted in respective
ledger account accordingly.
2. The words like ‘To’ and ‘By’ are used while posting the entries in the ledger accounts. ‘To’ is used
when accounts are posted in the debit side column of a particular account. ‘By’ is used when
accounts are posted in the credit side column of a particular account. These words may not have
meaning but are used to represent the debit and credit accounts.
3. The account which is debited in the journal should also be debited in the ledger book but the
reference should be of respective credit account.
Example of Ledger Accounts
Let us assume ABC Ltd. records the following transactions for the year ending on March 31, 2023:
1. Plant purchased for `34,000 through cheque on April 1, 2022.
2. Goods sold for cash amounted to `3,900 on August 18, 2022.
3. Goods sold to MNP Ltd. on credit for `7,200 on January 20, 2023.
4. Depreciation charged on Plant `3,400 on March 31, 2023.
Sol. Journal entries in the Books of ABC Ltd. for the year ending March 31, 2023:
Journal
2022-2023 Plant A/c 34,000
April 1 To Bank A/c 34,000
(Being Plant purchased through cheque)
Aug 18 Cash A/c 3,900
To Sale A/c 3,900
(Being goods sold for cash)

Jan 20 MNP Ltd. 7,200
To Sales A/c 7,200
(Being goods sold on credit)
Mar 31 Depreciation A/c 3,400
To Plant A/c 3,400
(Being Depreciation charged on Pant)
Plant A/c
2022-23 To Bank A/c 34,000 2022-23 By Depreciation 3,400
Apr 1 Mar 31
Bank A/c
2022-23 By Plant A/c 34,000
Apr 31
Sales A/c
2022-23 By cash A/c 3,900
Aug 31
Jan 20 By MNP Ltd. 7,200
MNP Ltd A/c

2022-23 To Sales A/c 7,200
Jan 20
Depreciation A/c
2022-23 To Plant A/c 3,400
Mar 31
Balancing of Accounts
1. The debit and credit columns of every ledger account are compared when all the journal entries
are posted in the ledger accounts. The difference between the total of debit and credit side is
ascertained. The difference is to be placed in the amount column of the side having a lesser total.
2. ‘Balance c/d’ is to be entered in the particulars column against the difference, and in the date
column, the last day of the accounting period is entered. Now both the debit and credit columns
are to be totalled, and the totals will be equal. The totals of both sides are to be recorded in the
same line horizontally. The difference has to be brought down to the opposite side below the total.
‘Balance b/d’, is to be entered in the particulars column against the difference brought down, and
in the date column, the first day of the next accounting period is entered.
Ledger 177
3. If the total on the debit side of an account is higher, the balancing figure is the debit balance, and
if the credit side of an account has a higher total, the balancing figure is the credit balance. If the
two sides are equal, that account will show nil balance.
Example:
Sales A/c
2022-23 2022-23 By Cash A/c 3,900

Aug 18
Mar 31 To Balance c/d 11,100 Jan 20 By MNP Ltd. 7,200
11,100 11,100
2023-24 By Balance b/d 11,000

Apr 1
EXERCISES
1. What is a ledger in accounting?
(a) A summary of financial transaction (b) A book of original entry
(c) A record of individual accounts (d) A statement of financial position
2. Which type of ledger contains details of a specific group of accounts, such as accounts receivable
or accounts payable?
(a) General Ledger (b) Subsidiary Ledger (c) Trial Balance (d) Cash Book
3. Posting from the journal to the ledger involves transferring information to the:
(a) Income Statement (b) Balance Sheet
(c) Trial Balance (d) Individual Accounts in the Ledger
4. What is the purpose of posting in the ledger?
(a) To create a trial balance
(b) To summarize financial transactions
(c) To record original entries
(d) To update individual accounts with transaction details
5. In a ledger, what does the term “debit” represent?
(a) An increase in assets (b) An increase in liabilities
(c) A decrease in equity (d) A decrease in expenses
6. When a transaction is recorded in the ledger, which accounts are affected?
(a) Only one account (b) Two accounts - one debited, one credited
(c) Three accounts - one debited, two credited (d) Four accounts - two debited, two credited

7. Which of the following is not a type of ledger account?
(a) Personal Account (b) Real Account (c) Nominal Account (d) Temporary Account
8. What is the purpose of a subsidiary ledger?

(a) To record all transactions in detail
(b) To provide a summary of financial transactions
(c) To record details of a specific group of accounts
(d) To prepare financial statements
9. Which financial statement is directly prepared from the ledger?

(a) Income Statement (b) Balance Sheet
(c) Cash Flow Statement (d) Trial Balance
10. In a ledger, which side is the “credit” side usually recorded on?
(a) Left side (b) Right side (c) Top side (d) Bottom side
ANSWERS
1. (c) 2. (b) 3. (d) 4. (d) 5. (a) 6. (b) 7. (d) 8. (c)
9. (b) 10. (b)

1. What is the primary purpose of a ledger in accounting?
Ans. To record and classify financial transactions of individual accounts.
2. Define the term “posting” in the context of accounting.

Ans. Posting involves transferring information from the journal to the individual accounts in the ledger.
3. What is a Subsidiary Ledger?

Ans. It is a detailed ledger containing accounts for a specific group, like accounts receivable or accounts
payable.
4. Explain the term “double entry” as it applies to ledger entries.
Ans. Every transaction is recorded with an equal debit and credit entry in the ledger, maintaining the
accounting equation.
5. What is the purpose of a Trial Balance?
Ans. To ensure the equality of total debits and total credits in the ledger and to detect errors.
6. In which ledger would you find detailed information about individual customer accounts?
Ans. Subsidiary Ledger (Accounts Receivable Ledger).
7. What is meant by a Real Account in the ledger?

Ans. Real accounts represent tangible assets like land, buildings, and machinery.
Ledger 179
8. What does the term “debit” signify in the context of ledger entries?
Ans. An increase in assets or expenses and a decrease in liabilities or income.
9. In a ledger, what is the opposite of a debit entry?

Ans. Credit entry.
10. What is the main purpose of posting transactions to the ledger?

Ans. To update individual accounts with detailed information from the journal entries.

1. Explain the concept of a Subsidiary Ledger. Give examples of the types of accounts that might be
included in a subsidiary ledger.
2. Describe the process of posting from a journal to a ledger. Why is this process essential in
accounting?
3. Differentiate between a Personal Account and a Real Account. Provide examples of each.
4. Elaborate on the purpose of a Cash Book in the ledger. How does a double-column cash book differ
from a single-column cash book?
5. Explain the terms “Debit” and “Credit” in the context of ledger entries. Provide examples of
transactions that would result in a debit and credit entry.
6. What role does the ledger play in the preparation of financial statements such as the Income
Statement and the Balance Sheet?
7. Discuss the importance of a Bank Reconciliation Statement in the reconciliation process. Why
might there be differences between the bank statement and the cash book?
8. Explain the concept of a Nominal Account. Provide examples of nominal accounts and briefly
describe their nature.
PRACTICAL QUESTIONS
BASIC LEVEL QUESTIONS
1. Journalise the following transactions and post them into ledger:
2022 (`)
Jan. 1 Commenced business with cash. 60,000
Jan. 2 Opened a bank account. 20,000
Jan. 3 Bought goods 10,000
Jan. 5 Bought goods from Ram 8,000
and Mohan 9,000
Jan. 7 Sold goods for cash 7,600
Jan. 9 Paid Salary 4,000

Jan. 13 Paid cash to Ram 8,000
Jan. 15 Issued a cheque to Mohan 9,000
Jan. 17 Sold goods to Sohan 11,500
Jan. 20 Cash deposited into bank 10,000
Jan. 24 Paid Rent 3,000
[Ans. Dr. Cash A/c `7,600; Bank `21,000; Purchases A/c `27,000;
Salary A/c `4,000; Furniture A/c`5,000; Rent A/c `3,000;
Sohan `11,500; Cr. Capital A/c `60,000; Sales A/c `19,100]
2. Journalise the following transactions post them into ledger and balance them:
2022 (`)
May 1 Started business with cash 80,000
May 3 Bought goods `15,000 and furniture `10,000
May 5 Paid for stationery 500
May 8 Sold goods to Ram 8,000
May 10 Opened a bank account by depositing 30,000
May 11 Bought goods from Ashok for `10,000 less 10% trade discount.
May 13 Received cash from Ram `7,900 and allowed him discount `100.
May 15 Issued cheque for `8,800 to Ashok in full settlement of his account.
May 19 Bought goods from Amit `8,000 and Sumit `9,000
May 21 Sold goods to Krishna `7,500 and to Ramesh for `8,500
May 23 Received a cheque from Ramesh for `8,300 in full settlement of his account and banked.
May 25 Issued cheque for `5,000 to Amit and for `6,000 to Sumit.
May 28 Cash deposited into bank `10,000.
[Ans. Balances of Ledger A/c (Dr.) Cash A/c `22,400; Bank A/c `28,500, Purchases A/c
`41,000; Furniture A/c `10,000; Stationery A/c `500, Discount Allowed A/c `300;
Krishna `7,500] (Cr) Capital A/c `80,000; Sales A/c `24,000,
Discount Received A/c `200; Amit `3,000; Sumit `3,000]
3. Journalise the following transactions, post them into ledger and prepare trial balance after
balancing the accounts:
2022
Jan. 1 Commenced business with cash `1,00,000
Jan. 3 Opened a bank A/c with `50,000.
Jan. 5 Bought goods of list price `20,000 less 10% and paid by cheque.
Jan. 7 Sold goods to Ram of list price `10,000 less 10% trade discount.
Jan. 9 Bought furniture `6,000 and paid carriage charges `500.
Jan. 11 Bought goods from Amit `6,000 and from Rakesh `7,000.
Jan. 13 Received a cheque from Ram for `8,800 in full settlement of his account and banked it.
Ledger 181
Jan. 15 Paid Salary `3,000 and rent `2,000.
Jan. 22 Deposited `10,000 into bank.
Jan. 25 Paid cash to Amit `5,900 and he gave discount `100.
Jan. 28 Issued a cheque for `6,000 to Rakesh.
[Ans. Trial Balance total `1,10,100 (Dr.) Cash A/c `22,600; Bank A/c `44,800;
Purchases A/c `31,000; Furniture A/c `6,500, Discount allowed A/c `200;
Salary `3,000; Rent A/c `2,000. (Cr) Capital A/c `1,00,000; Sales A/c `9,000;
Rakesh `1,000; Discount Received A/c `100]
MEDIUM LEVEL QUESTIONS

4. From the following transactions of Royal Enterprises Delhi, pass journal entries, post them into
ledger and prepare trial balance after closing the accounts:
2022
Jan. 1 Assets: Cash `10,000; Debtors (Amit `6,000; Amar `5,500; Sohan `4,500; Mohan `4,000);
Stock `22,000; Furniture `13,000. Liabilities: Creditors (Varun `7,000; Arun `6,000 and
Kamal `4,000)
Jan. 5 Sold goods for cash `9,000.
Jan. 8 Bought goods from Varun for `10,000 less 10% trade discount.
Jan. 10 Paid salary `3,000 and rent `2,000.
Jan. 13 Sold goods to Amit for `5,000 and to Sohan `6,000.
Jan. 15 Withdrew cash for personal use `2,000.
Jan. 17 Cash received from Amit `6,000 and allowed him discount `200.
Jan. 19 Paid `8,000 to Varun and received discount `250.
Jan. 22 Bought furniture `3,000 and paid carriage `200.
Jan. 25 Sohan returned goods for `1,000.
Jan. 28 Paid `4,000 to Kamal.
Jan. 30 Received cash from Sohan `300. `7,000 and allowed him discount
[Ans. Total of Trial Balance `82,000]
[Hint. Capital `48,000; Dr. Items-Cash A/c `9,800, Amit `4,800; Amar `5,500, Sohan `2,200,
Mohan `4,000; Stock `22,000; Furniture A/c `16,200; Sales Return A/c `1,000, Purchases A/c
``9,000; Salary A/c `2,000; Discount Allowed `3,000, Rent A/c `2,000, Drawing A/c `500. Cr.
Items-Capital `48,000; Varun `7,750; Arun `6,000; Sales A/c `20,000, Discount Received `250.]
BASED ON CASH BOOK

5. Prepare simple cash book from the following transactions and post them into ledger:
2022 (`)
June 1 Cash in hand 5,000
June 3 Bought goods for cash 3,500
June 5 Sold goods to Ram for cash 6,000
June 7 Paid Ram 2,500

June 9 Paid Salary 2,000
June 11 Received Interest 300
June 15 Paid rent to landlord 1,500
June 18 Bought furniture 2,000
June 21 Sold goods 3,400
[Ans. Cash Balance `3,200]
6. Record the following transactions in the cash book with cash and bank column and post them
into ledger:
2021
Oct. 1 Cash in hand `7,000 and cash at bank `10,000.
Oct. 3 Bought goods for `3,000.
Oct. 5 Sold goods to Ram of list price `5,000 less 10% trade discount and 2% cash discount
for cash.
Oct. 7 Received two cheques from Ram for `5,000 and from Gopal for `6,000
Oct. 9 Cheque received from Ram is lodged in bank while cheque received from Gopal is
endorsed to Mohan.
Oct. 15 Paid salary `3,000 in cash and rent by cheque `2,000.
Oct. 17 Withdrew `2,500 from bank.
Oct. 20 Bank allowed interest `200.
Oct. 25 Paid stationery `400.[Ans. Cash `7,510; bank `10,700 and discount Dr. 90]
[Hint: Oct. 7 Cheque received — Journal proper, Oct. 9 Cheque endorsed — Journal proper]
ADVANCE LEVEL QUESTIONS

7. Prepare cash book with cash and bank columns from the following transactions and post them
into ledger:
2022
May 1 Cash in hand `6,500 and bank overdraft `8,000.
May 3 Sold goods to Ram of list price `10,000 less 10% trade discount.
May 5 Bought goods from Mohan `8,000 less 10% trade discount.
May 8 Received `2,000 cash and a cheque for `6,900 from Ram in full settlement of his account
and it is banked.
May 11 Paid salary `3,000 and rent `2,000.
May 13 Paid Mohan by cheque after deducting 2% cash discount.
May 15 Bank is asked to issue draft in favour of Gopal for `4,000. Bank charged `60.
May 18 Deposited cash into bank `2,000.
May 21 Received a cheque for `4,000 from Amar and it was endorsed to Sunil.
May 25 Bank charged interest `300.
[Ans. Cash `1,500; Bank overdraft `10,516; Discount Dr. `100 & Cr. `144]
[Hint: May 21 Received cheque and then endorsed Journal Proper]
Ledger 183
8. Prepare cash Book with cash and ban k column from the following transactions and post them
into ledger.
2022
Jan. 1 Cash in hand `6,000
Bank (Cr.) 8,000
Jan. 3 Received cheque for `5,000 from Amit and for `4,000 from Kamal.
Jan. 5 Cheque received from Amit is banked while cheque received from Kamal is endorsed to
Mohan.
Jan. 7 Paid rent `3,000.
Jan. 11 Deposited `2,000 into bank.
Jan. 13 Cheque received from Amit was dishonoured and bank charged `100 on it.
Jan. 15 Received fresh cheque from Amit and it was banked.
Jan. 18 Withdrew cash from bank for office use `3,000 and for personal use `2,000.
Jan. 21 Bank charged interest `200.[Ans. Cash `4,000, Bank O/D `6,200]
[Hint: Jan. 3 - Cheques received - Journal Proper; Jan. 5 - Cheque endorsed - Journal Proper]
PURCHASES BOOK
9. Record the following transactions in the purchases book of Amar and post them into ledger:
2022
Jan. 5 Bought goods from Ram for `10,000 less 10% trade discount.
Jan. 10 Bought furniture from Mohan on credit for `3,500.
Jan. 15 Kumar sold us goods of list price `12,000 less 15% trade discount.
[Ans. Total `19,200]
10. Enter the following transaction of Ram from Purchases Book into ledger:
Purchases Book
Date Particulars Invoice L.F. Details Cost IGST Packing Total
No. & Fright
2022 Mohan 10,000
Jan. 4 Less: 10% Trade Discount 1,000
Purchases Value 9,000
Add: Fright 200
Taxable Value 9,200
Add: IGST @ 12% 1,104
10,304 9,000 1,104 200 10,304
Jan. 15 Sohan Less: 15% Trade discount 8,000
Purchases Value 1,200
Add: Packing Charges 6,800
Taxable Value 200
Add: IGST @ 12% 7,000
840
7,840 6,800 840 200 7,840
Jan. 31 Purchases A/c 15,800 1,944 400 18,144
[Ans. Purchases A/c `15,800; Input IGST A/c `1,944; Freight A/c `400 and
Mohan Cr. `10,304; Sohan Cr. `7,840]

SALES BOOK
11. Record the following transactions in the sales book of Kumar General Store and post them into
ledger:
2022
May 3 Sold goods to Amba Store of list price `6,000 less 10% trade discount.
May 8 Goel Store bought goods from us for `5,500.
May 15 Sold old furniture to Ram for `1,200.
May 20
Sold goods to Anand of list price and 2% cash discount for cash. `8,000 less 10% trade
discount[Ans. Total 10,900]
PURCHASES RETURN BOOK

12. Record the following transactions in the purchases return book of Sohan and post them into ledger:
2022
April 6 Returned goods to Ram of list price `2,000 less 10% trade discount.
April 12
Allowance claimed from Sohan on account of mistake in total of `1,000 in the invoice
no. 1105.
April 18 Goods returned to Gopal for `1,200 being defective goods. [Ans. Total `4,000]
SALES RETURN BOOK

13. Prepare Sales Return Book of Amit from the following transactions and post them into ledger:
2022
May 3 Rakesh returned goods to us of list price `2,000 less 10% trade discount.
May 7 Allowance claimed by Ram for `100 due to mistake in invoice.
May 11 Goods returned by Kamal of list price `4,000 less 15%. [Ans. `5,300]
14. Record the following transactions of Kumar & Sons in the subsidiary books, post them into ledger
and prepare trial balance:
2022 (`)
Jan. 1 Commenced business with cash. 1,50,000
Jan. 2 Opened a bank account by depositing cash. 80,000
Jan. 5 Bought goods 15,000
Jan. 11 Sold goods 10,000
Jan. 13 Bought goods of list price `10,000 from Ram less 10% trade discount.
Jan. 15 Returned goods to Ram of list price `1,000.
Jan. 17 Sold goods to Gopal of list price `12,000 less 15% trade discount.
Jan. 19 Gopal returned goods of list price `2,000.
Jan. 21 Paid Salary `4,000 in cash and rent by cheque `3,000.
Ledger 185
Jan. 23 Received two cheques from Gopal for `4,000 and for `4,500.
Jan. 25 Endorsed cheque received from Gopal for 4,000 to Ram and banked cheque for `4,500.
Jan. 27 Deposited cash into bank `10,000.
Jan. 29 Paid Stationery `500.
Jan. 31 Bank allowed interest `1,500 and charged bank charges `200.
[Ans. Trial Balance Total `1,76,700; Dr. Items: Cash A/c `42,500;
Bank A/c 92,800; Purchases A/c 24,000; Sales Return A/c `1700;
Furniture A/c `8,000; Salary A/c `4,000; Rent A/c 3,000;
Stationery A/c `500; Bank charges A/c `200.
Cr. Items: Capital A/c `1,50,000; Sales `20,200;
P. Return A/c `900, Interest A/c 1,500; Ram `4,100]
15. Record the following transactions in the proper subsidiary books of Ram, post them into ledger
and prepare trial balance.
2022
May 1 Assets: Cash `15,000; Bank `10,000; Sohan `8,000; Mohan `10,000; Stock `15,000 and
furniture `12,000.
Liabilities: Amar `8,000 and Gopi `5,000
May 3 Bought goods for `5,000.
May 5 Paid Salary `3,000.
May 7 Sold goods to Sohan for `10,000 less 10% trade discount.
May 9 Sohan returned goods of list price `2,000.
May 11 Received Cash `2,000 and a cheque of `6,000 from Sohan which was banked.
May 14 Bought furniture from Karan for `5,000.
May 15 Bought goods from Amar for `4,000 and Gopi for `5,000.
May 17 Paid cash to Amar `6,000.
May 19 Paid Gopi by cheque `4,900 and received discount `100.
May 22 Withdrew cash from bank `10,000.
May 25 Paid rent`4,000 in cash.
May 27 Bank charges `200.
May 29 Sold goods to Mohan `8,000.
May 30 Received cheque from Mohan for`7,000 and it was deposited in bank on May 31.
[Ans. Total of Trial Balance `90,100; Dr. Items: Cash `9,000, Bank `7,900;
Sohan `7,200; Mohan `11,000; Stock `15,000; Furniture `17,000,
Sales Return, `1,800, Purchases `14,000, Salary `3,000,
Rent `4,000, Bank charges `200, Cr. Items: Amar `6,000, Gopi `5,000,
Karan `5,000, Capital `57,000, Sales `17,000, Discount Recd. `100]
[Hint: May 30 Cheque received - Journal Proper]

16. Pass journal entries for the following transactions and post them into ledger:
(`)
(1) Bought goods for cash 5,000
(2) Sold goods for cash 9,000
(3) Bought furniture 3,000
(4) Bought goods from Ram 7,000
(5) Sold goods to Gokul of list price 10,000 less 10% trade discount.
(6) Gokul paid 8,800 in full settlement of his account.
(7) Paid cash to Ram 4,500
(8) Paid Salary 2,500
[Ans. Ledger Balances (Dr.): Purchases `12,000; Furniture `3,000; Salary `2,500;
Cash `2,800; Discount `200; Cr.: Sales `18,000; Ram `2,500]
17. Enter the following transactions in the cash book with cash and bank columns and post them into
ledger:
2022
May 1 Cash (Dr.) `8,000 and Bank (Cr.) `9,000.
May 3 A customer, Ram deposited cheque in our bank account `4,000.
May 5 Received two cheque for `5,000 from Akbar and 6,000 from Anil.
May 7 Paid Salary `3,000 and rent `2,000.
May 9 Cheque of Akbar banked and cheque of Anil endorsed to Rakesh.
May 11 Sold goods for cash `5,000.
May 15 Cash deposited into bank `3,000.
May 18 Bank charged interest `400.
May 20 Good sold for cash `7,000 of which cash deposited in bank `4,000.
[Ans. Cash `8,000; Bank `6,600]
[Hint: 1. May 5 - Cheques received - Journal Proper. 2. May 9 - Cheque endorsed Journal Proper]
18. Prepare Purchases Book and Sales Book of Ganga & Co. and post the transactions into ledger:
2022
May 3 Bought goods from Mohan Brothers 40 Ceiling fans @ `800 each less 10% trade discount
May 5 Sold goods to Kumar & Co. 10 Mixer grinders @ `600 each less 10% trade discount.
May 8 Mohan Lal & Sons bought goods from us-
4 T.V. Sets @ `5,000 each less 15% trade discount.
May 15 Gopal & Co. sold goods to us
100 tubelights @ `50 each
20 table fans @ `500 each
Less: 10% trade discount
May 20 Sold old furniture to Ram for `2,000.
[Ans. Total of Purchases Book `42,300 and Sales book `22,400]
Ledger 187
19. Prepare Purchases Book Return Book (Return Outward Book) and Sales Return Book (Return
Inward Book) of Sain Brothers and post these transactions into ledger:
2022
Jan. 3 Mohan returned goods of list price `2,000 less 10%.
Jan. 7 Returned goods to Sohan of list price `1,500 less 10% trade discount.
Jan. 10 Allowance claimed from Ram for mistake in totalling of invoice 100.
Jan. 15 Allowance claimed by Gopal for `1,000 due to mistake in totalling of invoice.
Jan. 22 Goods returned by Krishna for `2,000 being defective.
[Ans. Total Purchase Return Book 1,450 & Sales Return Book 4,800]
20. Prepare proper subsidiary books of Mehra & Co. from the transactions, post them into ledger and
prepare trial balance: 2022
Jan. 1 Assets: Cash `8,000; Ram `14,000; Mohan `8,000; Stock `31,000; Furniture `9,000.
Liabilities: Bank O/D `10,000, Gopal `8,000, Amar `4,000.
Jan. 3 Bought goods of list price 5,000 from Gopal less 10%.
Jan. 4 Sold goods to Ram for trade discount to both) 4,000 and Mohan 6,000 (less 10%
Jan. 8 Sold goods for cash `5,000.
Jan. 10 Goods returned to Gopal of list price `500.
Jan. 12 Ram returned goods for `1,000 less 10%.
Jan. 14 Bought furniture from Kamal `3,000.
Jan. 18 Paid salary `2,000 in cash and rent by cheque `1,000.
Jan. 22 Cash deposited into bank `3,000.
Jan. 24 Received two cheques from Ram for `5,000 and `7,000.
Jan. 28 Cheque received from Ram for `5,000 is endorsed to Gopal and cheque for `7,000 was
banked.
Jan. 30 Cheque of Ram for `7,000 returned dishonoured.
Jan. 31 Bank debited interest `300
[Ans. Total of Trial Balance 84,800; Dr. Items: Cash 8,000, Stock 31,000;
Furniture 12,000; Purchases 4,500; Sales Return A/c 900; Ram 11,700;
Mohan 13,400; Salary A/c 2,000; Rent A/c 1,000;
Interest A/c 300. Cr. Items: Bank 8,300; Capital 48,000; Sales 14,000;
Purchases Return 450; Gopal 7,050; Amar 4,000 & Kamal 3,000.]
[Hint: Jan. 24 - Cheques received - Journal Proper.
Jan. 28 - Cheques endorsed Journal Proper]

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(This book shall only be used for educational purposes.)

1. Introduction to Accounting ... 3-23

2. Theory Based Accounting ... 24-38

3. Accounting Equation ... 39-58

4. Recording of Business Transaction ... 59-71

5. Journal ... 72-110

6. Journal with GST ... 111-137

7. Subsidiary Books ... 138-172

8. Ledger ... 173-188

BASIC ACCOUNTING TERMS

PROFIT v/s GAIN

OTHER IMPORTANT TERMS

DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING

DIFFERENCE BETWEEN ACCOUNTING AND ACCOUNTANCY

Scope Accounting is Narrower in scope. Accountancy is Wider In scope

ACCOUNTING AS A SOURCE OF INFORMATION

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

THE SYSTEM OF ACCOUNTING

ADVANTAGES OF THE DOUBLE-ENTRY SYSTEM OF ACCOUNTING

2. Which of the following will not be recorded in books of accounts?

3. Which is the first step of the Accounting Process?

4. Qualitative characteristics of Accounting Information are:

5. Which of the following is not the branch of accounting?

7. Accounting is a broad term. It includes book-keeping and also includes:

8. Which of the following is not a business transaction?

10. Qualitative characteristics of accounting includes:

11. Which of the following is not a qualitative characteristic of accounting?

12. Which of the following is not an external user of Accounting Information?

13. Which of the following is not an advantage of Accounting?

14. Which is the last step of the Accounting process?

15. Which is the first step in the process of Accounting?

16. Which of the following is not a Current Liability?

17. Which of the following is not a Current Asset?

18. Purchases usually refers to:

19. Which one is not a tangible asset?

22. Drawing refers to withdrawal of cash by the business entity for:

23. Which of the following is not an intangible asset?

24. Which of the following is a capital expenditure?

25. Which of the following is not a current liability?

2. Name any two functions of accounting.

4. State any two advantages of accounting.

5. Name any two limitations of accounting.

6. Name any two types of accounting information.

7. Explain in brief about accounting (each part of 1 mark)

8. Who are internal users of the accounting service?

9. Name the external users of accounting information.

10. Who uses published and unpublished accounting information?

11. Who uses published accounting information?

12. Explain accounting as a language of business.

14. What is meant by capital?

15. What is meant by current liability?

16. What are non-current liabilities?

17. Give two examples of current liabilities.

18. Name two non-current liabilities.

19. What are Assets?

20. Give two examples each of tangible and intangible assets.

21. What are fixed assets?

23. What do you mean by capital receipt?

24. What is gain?