Chapter 10 10.1
Chapter 8 8.1
Contents
Chapter 3 3.1
About the Authors I-5 A note to the students I-7 Simple Mathematics useful for students of Accounting I-9
Chapter 5 5.1 Chapter 6 6.1
Chapter 1 1.1
Chapter 7 7.1
Chapter 11 11.1 Chapter 12 12.1
Chapter 9 9.1
I-13
Chapter 4 4.1
Chapter 2 2.1
Chapter 16 16.1
Solved Paper: June 2022: Principles & Practice of Accounting P.16
Chapter 14 14.1
Chapter 20 20.1
Chapter 17 17.1
Chapter 19 19.1
I-14
Chapter 15 15.1
Chapter 18 18.1
Chapter 13 13.1
Chapter 21 21.1
Chapter 22 22.1 Chapter 23 23.1
Solved Paper: December 2021: Principles & Practice of Accounting P.1
For example, if goods are sold to Mr. A on credit, the same will affect goods/sales account and A’s account and entries will be made in opposite direction in these two accounts.
Before going to discuss the double entry principle it becomes necessary to explain certain terms which are frequently used in accounting. They are discussed in later questions.
In other words, the meaning of a transaction is to ‘receive’ and ‘give’, viz., one party receive and the other party gives, e.g. if X gives 400 to Y, Y is receiving 400 whereas X is giving the same and there is a monetary change between the parties.
According to this system, every transaction has got a two-fold aspect (dual aspect), i.e., one party giving the benefit and the other receiving the benefit and it has effect of opposite nature on two financial items. Information of one financial nature at one place is known as an account which is divided into two sides, debit and credit.
In short, one account is to be debited and another account is to be credited for every transaction in order to have a complete record of the same.
Accounting is record (written data).
In this section we will study meaning of various terms which will be useful while doing accounting. We willthedoubleunderstand:entrysystem,variouswaysofforming (making) a double entry, its recording in various books of entry & completion of accounting by posting into ledger accounts.
This system was invented by an Italian merchant named Fra Luco Pacioli in 1494 A.D.
Therefore, every transaction affects two accounts in opposite direction.
This system is called Double Entry System since it keeps records for every transaction in two accounts. Therefore, the basic principle, under this system, is that for every debit there must be a corresponding credit or vice versa.
A business dealing, which can be measured and expressed in terms of money and must be recorded in the books of account, is called a ‘transaction’.
In a transaction, there must be some monetary change between the parties.
This section covers in detail the procedure of book keeping & accounting. Accounting basically gets completed in two steps 1st an entry in book of entry (recording) & then its posting in Accounts in ledger (classifying).
8.1
Nominal Account Personal Account
Liabilities are like creditors, Loans taken, expense payable, advance received etc.
↓↓↓
Other person
(c)These both the arrows indicating give & take may take place at the same point of time (known as cash transaction) or at different point of time. (known as credit transactions).
2. In the above analysis you can observe:
Event is happening of something, which has financial effect on the entity.
Ex. A fire destroys furniture, Stock Balance at the end of the year etc.
(a)There are two persons of which one is the entity.
(b)Something (i.e. cash, property, goods, service or benefits) is given & in return something else is taken.
Ex. Table-chair for a furniture dealer is goods but for others it will be fixed Asset. Sales account & Purchase account are of goods only.
Assets is what belongs to entity, what it owns, and which is valuable. It may be in the nature of property like Land, Building, Goodwill etc. or In the nature of rights (right to receive money or money’s worth) like debtors, Bills receivable etc.
Capital & Reserves though appears on liability side of Balance Sheet but are part of owners equity & are commonly viewed distinctly from liability towards outsiders.
> > ACCOUNTING PROCESS 8.2
TRANSACTION
Entity
1. Goods a/c if prepared is treated as a real a/c but instead of preparing goods a/c, we prepare Purchase a/c, Sale a/c etc. to get full information, which are treated as nominal a/c.
This give and take can be of Cash, Property, Goods, Services and benefits etc. which has monetary value. So, a transaction also means a change in affairs that alters the financial state of parties in any way. There are always two parties in a transaction of which one must be the entity in whose books, accounting is being done.
(Transaction is a give & take which has some financial effect on entity) Cash/Property/Goods/Services/Benefits
Assets Expense or Income Asset or Liability
(d)Irrespective of whether both give & take is done at same time or at different point of time (i.e. indicating only one arrow at a time), there are always two accounts involved in a transaction (dual aspect concept).
↓↓
(e)These accounts can be classified according to function into Real, Nominal & Personal a/c or according to nature into Expense, Income, Asset or liability.
Whether it is goods or not should be viewed from entities view point.
Cash/PropertyGoods/Services/Benefits
Student should not be confused with the dictionary meaning of goods (i.e. any tangible item). Goods in accounting specifically includes only those items which are purchased for resale or consumption in the process of production.
Real Account
Liability is what the entity owes to others i.e. liable to give/pay something to others.
3.Representative Personal Account: e.g. Outstanding liabilities for Rent, Salary etc., i.e. Rent Payable a/c etc.
Capital a/c is also a personal a/c. It is the account of owner. Similarly Drawings a/c is also a personal a/c of owner.
It relates to items which exist in name only.
Therefore, it may be stated that account is the code or language of the accountant, and that is why it has been rightly said, an account is the code or language in which accountancy records and supplies information. An account has two sides, viz. debit — the left hand side and credit — the right hand side.
The value/price/charges of goods, services & other benefits received by an entity is an expense. These are the charges benefit of which is usually enjoyed or consumed within an accounting year. Ex.: Salary paid, Purchases, Discount allowed, Rent expense etc.
1.Natural Person: e.g. the name of an individual, the suppliers and buyers, say, Ram, Shyam etc.
This account incorporates items relating to ‘Expenses and Losses’, and ‘Income and Gains’. e.g. Rent, Salary, Dividend, Bad Debts etc. Thus it represents the accounts of Goods/Services/benefits consumed or rendered to others.
It has already been stated above that every transaction must be recorded in two accounts in the ledger which is done after proper classification of all transactions.
In simple words if we record one type/one nature of information at one place it is called an account. So an account gives information about one particular item of asset, liability, expense, loss, income etc.
It deals with the accounts relating to persons and takes the following forms-
The value/price of goods, services & others benefits which entity gives/provides to others is the income. Income is earned from the usual activity (ordinary activity) by the enterprise. Ex.: Fees received, Sales, Discount received, Interest income etc.
Complete records are also to be made by posting the transactions in different accounts which, in other words, supply all information to the management.
Traditionally all accounts are broadly classified into two heads : (a) Personal Account and (b) Impersonal TheAccount.Impersonal Account may further be sub-divided into (i) Real Account, and (ii) Nominal Account. So, accounts can be classified into Personal, Real and Nominal.
8.3 ACCOUNTING PROCESS
2.Artificial Person or legal or Notional Person: e.g. Bank, Firm, Association, Company etc.
It stands for properties and assets which are broadly classified as tangible and intangible e.g. Plant, Cash, Land, Building etc. are tangible real a/c whereas goodwill, patent, trade mark etc. are intangible assets.
Personal Account: ** Debit the receiver/the person who takes the benefit/the person from whom something is **receivable.Creditthe giver/the person who sacrifices the benefit/the person to whom we are liable to give/pay.
Real A/c. Nominal A/c. (expense) Personal A/c.
(i) Assets : These are resources controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise, namely cash, stock of goods, land, buildings, machinery etc.
iii) Capital : It generally refers to the amounts invested in an enterprise by its owner(s), the accretion to it or a reduction in it. Since capital is affected by expenses and incomes of revenue nature, there are two more categories of accounts, namely expenses and incomes. The difference between incomes and expenses known as profit or loss are taken into capital account.
It goes out It is given to others He is receiver
** Credit What goes out of the business.
a) Expenses : These represent those accounts which show the amount spent or even lost in carrying on operations.
⇑⇑⇑
> > ACCOUNTING PROCESS 8.4
The basic accounting equation specifies those broad categories, which are as follows:
(
Analysis of Transaction and Entry made from it Cr. Cr. Dr.
Real A/c. Nominal A/c. (income) Personal A/c.
(
⇑⇑⇑
ENTITY
⇓⇓⇓
It comes in It is received/enjoyed He is Giver Dr. Cr.
ii) Liabilities : These are financial obligations of an enterprise other than owners’ funds, namely long term loans, creditors, outstanding expenses etc.
Real Account : ** Debit What comes into the business.
b) Incomes : These represent those accounts which show the amounts earned by the enterprise.
Adjustment Accounts: Certain accounts do not have meaning on stand alone basis but they are adjustment to some other accounts like Provision for bad debt a/c, Depreciation provision a/c. etc.
Following are the four ways in which entry for a transaction or event can be made: Entry is simply “to decide which account is to be debited & which credited”.
(
(
Nominal Account: ** Debit All Expenses/losses ** Credit All Incomes/gains
PERSON Cash/PropertyGoods/Services/Benefits ⇓⇓⇓
Golden Rule (rules for Ascertaining ‘DEBIT’ & ‘CREDIT’)
⇑⇑⇑ Cash/PropertyGoods/Services/Benefits
⇓⇓⇓ Dr.
(
Personal a/cSBI is receiver of cash hence SBI a/c Dr. Cash a/c Real a/c Cash goes out hence cash a/c Cr.
(g) Paid for office stationery 50 Stationery a/c Nominal a/cStationery is an exp., hence stationery a/c Dr. Cash a/c Real a/c Cash goes out, hence cash a/c Cr.
(m) Received 100 as comm. Cash a/c Real a/c Cash comes in hence cash a/c Dr. from Anjali Comm. a/c Nominal a/cComm. received is income, hence commission a/c Cr.
(
(a)Commenced business with 10,000.
(h)Opened an account with State Bank of India 500
Transaction Account effected Classification Dr./Cr. With reason
c) Purchase machinery from Jay Machinery a/c Real a/c Machinery comes in hence machine a/c Dr. Engg. Works 3000 Jay Engg. Work a/cPersonal a/cJay Engg. Works is giver of machinery hence Jay Engg. Works a/c Cr.
EntrySolution:formed using classification of account
(d) Purchase 9% pref. shares in Shares a/c Real a/c Shares comes in hence shares a/c Dr. TISCO Ltd. 1000 (Investment a/c) Cash a/c Real a/c Cash is given, hence cash a/c Cr.
(g)Paid for office stationery 50
(a) Commenced business with Cash a/c Real a/c Cash comes in hence cash a/c Dr. 10,000 Owner/Capital a/cPersonal Owner is the giver of cash hence owners a/c i.e. Capital a/c Cr.
(
(l) Paid for life insurance premium Drawings a/c Personal a/cOwners insurance premium paid hence he is 200 Cash a/c Real a/c receiver, hence his a/c (drawing a/c) Dr. Cash goes out, hence cash a/c Cr.
(j) Sita paid on our behalf to Ram Ram a/c
(m)Received 100 from Anjali as commission
(c )Purchased machinery from Jay Engineering Works 3,000
(
(i )State Bank of India received dividend on our behalf 500
Illustration 8.1: State with the help of a table, which account will be debited & which account will be credited.
(b)Purchased goods worth 1,000
f) Paid rent to landlord 300 Rent a/c Nominal a/cRent paid is an expense hence rent a/c Dr. Cash a/c Real a/c Cash goes out, hence cash a/c Cr.
8.5
(i) SBI received dividend on our SBI a/c Personal a/cSBI is receiver of our money, hence behalf 500 Divided a/c Nominal a/cSBI a/c
(b) Purchased goods worth Purchase a/c Nominal a/cPurchase is an expense hence purchase a/c Dr. 1000 (assumed as cash purchase Cash a/c Real a/c Or Goods comes in hence purchase a/c Dr. because suppliers name not given) Cash goes out hence Cash a/c Cr.
e) Bought goods for cash 500 Purchase a/c Nominal a/cIt is an expense, hence purchase a/c Dr. Cash a/c Real a/c Cash goes out hence cash a/c Cr.
(f )Paid rent to landlord 300
(d)Purchased 9% preference share in TISCO Ltd. 1,000
(l )Paid for Life Insurance Premium 200
(n)Paid 400 to Anita on account
(k)Borrowed 1,000 from wife for doing business
(e )Bought goods for cash 500
DividendDr.received is an income, hence dividend a/c Cr.
(j )Sita paid 100 on our behalf to Ram
h) Opened an a/c with SBI 500 SBI a/c
Personal a/cRam is receiver of money hence Ram a/c Dr. 100 Sita a/c Personal a/cSita is giver of money, hence Sita a/c Cr.
(o)Cash sales 700
(k) Borrowed 1000 from wife Cash a/c Real a/c Cash comes in business, hence cash a/c Dr. for business Wife’s a/c Personal a/cWife is giver of cash, hence wife’s a/c (loan a/c) Cr.
ACCOUNTING PROCESS
Sold goods to Kanta for 3,000 on credit
20 Cash sales 5,000 22 Paid for travelling expenses 4,000 22
1.Increase in Asset - Dr. 4.Increase in Income or Profit - Cr. Decrease in Asset - Cr. Decrease in Income or Profit - Dr.
Paid allowances and commission to the travelling agent 1400
8.6
8
Assets Real or PersonalDr. Dr. Cr. Liability Personal Cr. Cr. Dr. Expense Nominal Dr. Dr. Cr. Income Nominal Cr. Cr. Dr.
ACCOUNTING
While making entries remember the following
The following Principles can also be applied for Ascertaining ‘DEBIT’ & ‘CREDIT’ Here one should keep in mind that Asset, Expenses and Stock/goods a/c. have debit balance and liability, income and capital account have credit balance. And further remember that Debit - Debit figures in same account will be added, Credit - Credit figures will be added but debit and credit figures will be subtracted from each other just like (+) & (-) in mathematics.
Personal a/cAnita is receiver, hence Anita a/c Dr. account Cash a/c Real a/c Cash goes out, hence cash a/c Cr.
(3) Dr. Dr. Cr. Cr. + + (-) (will get added) (will get added) (will get subtracted from each other)
Transaction Account effected Classification Dr./Cr. With reason PROCESS
Entries made on the basis of nature of Account
OR
29 Pawar Bros. returned defective goods of 500
Bought one table and one chair for 500, and paid for it cash
Received a cheque of 2,500 from Kanta
Nature of A/c.Type of A/c. Balance in the Effect of the transaction on it Account Increases itDecreases it
Illustration 8.2 : Journalise the following transactions-
6
28 Sold goods of 6,000 to Pawar Bros.
30 Paid staff salary for the month 500 and general expenses 1,000
(1) Dr. (2) Cr.
Bought goods from Ajay for 5,000 less trade discount 10%
When there is Effect to that a/cWhen there is Effect to that a/c
Bought one second hand typewriter for 500 and spent 200 for repairing it
1 April 20Mr. Rajendra started business with cash 2,000. Furniture 8,000. Stock of goods 5,000
15
Received house rent of 2,400 from Miss Lalita
4
(n) Paid 400 to Anita on
Received 4,000 as advance from Pawar Bros.
2.Increase in Stock/Goods - Dr. 5.Increase in Capital - Cr. Decrease in Stock/Goods - Cr. Decrease in Capital - Dr. 3.Increase in Expense or Loss - Dr. 6.Increase in Liability -Cr. Decrease in expense or Loss - Cr. Decrease in Liability - Dr.
(o) Cash sales 700 Cash a/c Real a/c Cash is received, hence cash a/c Dr. Sales a/c Nominal a/cSales is income hence sales a/c Cr. Or Goods goes out hence sales a/c Cr.
2
25
7
Anita a/c
15.4.20Old typewriter purchasedTypewriterAsset Dr.IncreasesTypewriter a/c Dr.700 and repaired and paid cashCash Asset Cr.DecreasesTo Cash a/c 700
EntrySolution:formed using nature of account
DateEffect of transaction Account NatureBala-EffectEntrynce
8.7
ACCOUNTING PROCESS
sold & cash Cash Asset Dr.IncreasesCash a/c Dr. 5000 received 5000 Sales IncomeCr.IncreasesTo Sales a/c 5000 22.4.20Travelling exp. paid inTravelling exp.ExpenseDr.IncreasesTravelling exp. a/c Dr.4000 cash 4000 Cash Asset Cr.DecreasesTo Cash a/c 4000 22.4.20Travelling exp. paid toTravelling exp.ExpenseDr.IncreasesTravelling exp. a/c Dr.1400 agent 1400 Cash Asset Cr.DecreasesTo Cash a/c 1400 25.4.20Cash 4000 receivedCash Asset Dr.IncreasesCash a/c. Dr. 4000 from Pawar BrothersPawar LiabilityCr. IncreasesTo Pawar Bros. a/c 4000 (advance - liability) Brothers 28.4.20Goods sold to PawarPawar Bros.Asset Dr.IncreasesPawar Bros. a/c Dr.6000 brothers (customer debtor)Sales IncomeCr.IncreasesTo Sales a/c 6000
8.4.20Received cash as rentCash Asset Dr.IncreasesCash a/c Dr. 2400 from Lalita 2400 Rent IncomeCr.IncreasesTo Rent 2400
When an account is to be transferred (i.e. it is being reduced/nullified) to some other a/c, the entry can be formed as follows:
Dr.IncreasesKanta a/c Dr. 3000 (debtor) on credit Sales IncomeCr.IncreasesTo Sales a/c 3000
6.4.20Goods500
bros, returns goodsSales return(-) IncomeDr.IncreaseSales return a/c Dr.500 (sales return) 500 Pawar bros.Asset Cr.DecreaseTo Pawar Bros. a/c 500 30.4.20Salary & general expensesSalary ExpenseDr.IncreaseSalary a/c Dr. 500 paid by cash Gen. exp.ExpenseDr.IncreaseGeneral exp. a/c1000 Cash Asset Cr.DecreaseTo Cash a/c 1500
4.4.20Furniture (table, chair)FurnitureAsset
7.4.20Received3000 cheque (& Bank Asset Dr.IncreasesBank a/c Dr. 2500 deposited in bank) fromKanta Asset Cr.DecreasesTo Kanta a/c 2500 Kanta (debtor) 2500
Dr.IncreasesFurniture a/c Dr.500 purchased & paid by cashCash Asset Cr.DecreasesTo Cash a/c 500
29.4.20Pawar6000
(1) In the two previous problems how entry is made is explained by analyzing transactions and using either classification of account or nature of account. Student can adopt either or both whichever is convenient. But there is no need to write those details in exam, there only entry need be written.
(2) There need not be two a/c for Pawar brothers. The same a/c. when shows credit balance represent advance received from customer hence liability and when goods is sold to him and debited to his a/c, then the debit balance (6000–4000 = 2000) is receivable hence an asset.
2.4.20Goods purchased fromPurchase a/cExpenseDr.IncreasesPurchase a/c Dr.4500 Ajay (creditor) 5000-10%Ajay a/c Liability Cr.IncreasesTo Ajay a/c 4500 i.e. 500= 4500
20.4.20Goods700
sold to Kanta Kanta Asset
1.4.20Rajendra (owner) bringCash a/cAsset a/c.Dr.IncreasesCash a/c Dr. 2000 cash, furniture and sockFurniture a/cAsset a/c.Dr.IncreasesFurniture a/c Dr.8000 (Capital a/c is the personalStock a/cAsset a/c.Dr.IncreasesStock a/c Dr. 5000 a/c of Rajendra) Rajendra a/cLiability a/c.Cr.IncreasesTo Capital a/c 15000
Posting Ledgers : Above entries are posted in the ledger books in respective accounts. Different accounts are prepared for each & every different nature of items. Each account will provide the complete details about the transaction of a particular nature for that accounting period. Accounts will have two sides known as Debit & Credit sides.
For example - Cheque received from Satish deposited in Bank 10,000 Bank A/c Dr. 10,000
Trial Balance : The accounts having balances are listed in a statement known as Trial Balance giving Debit & Credit balances separately.
P&L A/c Dr. 30,000
Entries for a transaction/event can be made by any one or more than one of the above listed 4 ways, but entry will be same.
Opening balance : Last years balances of assets (Dr. balance) & liabilities (Cr.balance) as shown in the balance sheet, will be recorded 1st in Journal and then posted to respective accounts in the ledger.
Transactions : Accounting starts with Transactions. Transaction means Receipts, Payments, Sale, Purchase etc. It is any give & take which has financial effects. Which affects the concern. (Business Entity concept)
If an account having debit balance is to be transferred. Then credit this account and debit the account where it is to be transferred. Ex. Salary Expense account 30,000 transferred to P&L account.
To Bank A/c 10,000
Total of debit & credit side must tally because accounting is done by double entry system. If it doesn’t tally that means there are errors which will have to be located & rectified.
Interest Income A/c Dr. 5,000
When an information is just a reversal/cancellation of an earlier transaction, then its entry can be formed as follows: Sometimes a transaction is not a new transaction rather it is the cancellation of some earlier transaction. In such cases simply reverse the original entry.
Closing entries : All the accounts (accounts of Income & Expenses) transferred to Trading profit & loss account gets closed & their net result i.e. the profit or loss is transferred to Capital Account. Whereas the accounts (accounts of Assets & Liabilities) shown in the Balance Sheet are carried forward to next year’s books of account as opening
balances.ACCOUNTING PROCESS 8.8
To Salary Expense A/c 30,000
Similarly if an account having credit balance is to be transferred. Then debit this account and credit the account where it is to be transferred. Ex. Interest Income account 5,000 transferred to P&L A/c.
Final a/c : With the help of this Trial Balance and other Adjustment/additional information the Final Statement of Accounts i.e. (a) Trading profit & loss Account and (b) Balance Sheet is prepared. This adjustment/additional information are the transactions which have not been recorded in the books of account so far, therefore double effect (i.e. debit & credit) has to be given for them.
Entry : Transaction is recorded by way of an entry in the Cash book/Journal/Purchase Register/Sale Register (books of entry) etc. as per Double Entry Principle i.e. Debiting some accounts & Crediting others with the equal amounts.
To P&L A/c 5,000
Later on we got the information that above cheque is dishonoured. Then simply reverse the above entry. Satish A/c Dr. 10,000
To Satish A/c 10,000
Balancing : At the end of accounting year all accounts are totalled & balanced, some accounts may have Nil balance, other may have Debit balance (i.e. Debit total is more) & some other may have credit balance (i.e. credit total is more.)
Whichever may be book of entry, double entry effect (i.e. debit & credit) will be always there, & it will be always same.
Solution:
1.Every transaction must be recorded.
2.It must be recorded in any one book of entry depending upon which books of entry are being maintained.
All cash transactions i.e. receipts & payments will be recorded in the cash book. Cash book will be prepared in the form of an account having debit and credit side. Receipt will be recorded on the debit side and payments on the credit side. The cash book itself serves the purpose of cash A/c & hence we don’t have to prepare separate cash A/c in Ledger.
4.Double entry for a transaction will be always same irrespective of the book of entry in which it is being 5.Concernrecorded.must maintain at least one book of entry but there is no maximum limit.
It is book of 1st entry in which transactions are recorded date wise, in the chronological order of their happening. Every transaction will be recorded in any one book of entry. There are many books of entry which can be prepared. Which books of entry are to be prepared depends upon the size of the business, nature of business and volume of transactions.
Posting:
Dr.DateParticulars/ReceiptLFAmountDateParticulars/PaymentLFAmountCr.
400 By
400 To
To Opening balance Purchase a/c Sales a/c a/c
Only one posting is made because cash book itself is also a cash account & hence when we write an entry on receipt side it means cash a/c is debited
1. CASH BOOK:
If the size grows we may prepare other books of entry also. e.g. Sales book, Purchase book, Return books, Bills Payable book, Bills Receivable book.
Illustration 8.3: Opening balance 400. Cash sales made 500. Interest received 300. Cash purchases made 400. Salary paid 200. Write cash book.
500 By Salary
Books of account can be classified into following two category: Books of entry : (also known as Subsidiary book, book of original entry or prime book of entry) Ledger : (also known as Principal book, book of 2nd entry)
The receipt side items will be posted on credit side in respective accounts in ledger. Payment side items will be posted on debit side in respective account in ledger.
200 8.9 ACCOUNTING PROCESS
When we write an entry on payment side it means cash a/c is credited & Balance of Cash a/c is cash balance & will be taken in Trial balance.
If it is very small business we may prepare only Journal or Cash book & Journal.
Cash Book (Single column)
Important Points:
3.It must be recorded by double entry principle.
Similarly a single column Bank book can also be prepared.
2. CASH-CUM-BANK BOOK:
Posting
To Rupesh a/c 10190 By Balance c/f 590 Total 301070 Total 201070
b. The discount columns are opened when the transactions involving discount allowed & discount received are frequent.
We can make cash book with two columns, one for cash transactions & other for Bank transactions. All deposits into & withdrawal from the bank will be recorded in bank column, & this itself is a bank a/c also. No need to prepare now Cash & Bank a/c in ledger.
a. Double column cash book can be of the following three types (i) Cash & Bank column (ii) Cash & discount column (iii) Bank & discount column.
Solution: Cash Book (Double column)
Illustration 8.4: Opening balance 400. Cash received from Anand 480 & Discount allowed 20. Rupesh settled his dues 200 @5% discount. We settled Truptis dues 300 at 5% discount. Paid to Rajani 195 & discount received 2.5%. Write cash book with discount column.
d. Unlike Cash & Bank column, discount column is not treated as an account & hence total of discount column is posted in Discount account in ledger.
By Cash a/c300To Cash a/c200
DateParticulars LFDis.CashDateParticulars LFDis.Cash
Trupti A/c By Sundry a/c500To Sundry a/c300
To Interest a/c 300
c. Discount allowed will be entered on debit side and discount received on credit side. Posting to other accounts will be the cash/bank amount plus discount.
Posting:
To Opening balance 400 By Trupti a/c 15285 To Anand a/c 20480 By Rajani a/c 5195
Posting
Rupesh A/c Rajani A/c By Cash a/c190To Cash a/c195 By Discount a/c10To Discount a/c5
Discount allowed A/c Discount received A/c
Dr.DateParticulars/ReceiptLFAmountDateParticulars/PaymentLFAmountCr.
ACCOUNTING PROCESS 8.10
To Sundry a/c 30 By Sundry a/c20
Posting from Bank column & cash column is made in the same way as explained in case of cash book. Balance of Cash and Bank columns will come in Trial balance as cash and bank balances.
By Balance c/f 600 Total 1200 Total 1200
Sales A/c Purchase A/c By Cash a/c500To Cash a/c400 Interest A/c Salary A/c
Dr. Cr.
Anand A/c
3. TRIPLE COLUMN CASH BOOK:
Anand A/c Trupti A/c
Solution: Petty Cash Book (Analytical cash book)
4. PETTY CASH BOOK:
8.11 ACCOUNTING
To Main Cash900
DateParticularsReceiptPayment Conve-StationeryPost-Re- Car-WagesTrave-Office yance agepairs tage llingexp. To Op. bal. 100
Illustration 8.6: Opening balance of petty Cash 100 Received from main Cashier 900. Petty cashier spent during the period: 50 for Conveyance, 80 for Stationery, 60 paid for postage stamps, 150 for repairs of furniture. 40 for carting. 200 paid to workers, 100 for office cleaning.
Discount allowed A/c Discount received A/c To Sundry a/c30 By Sundry a/c20
Illustration 8.5: Opening balance Cash 200 & Bank 400. Cheque received from Anand 480 & Discount allowed 20. Rupesh settled his dues 200 @5% discount by cash. We settled Truptis dues 300 at 5% discount by cheque. Paid cash to Rajani 195 & discount received 2.5%. Write Triple column cash book.
This is to be prepared to record the petty (small) expenses, which are incurred frequently.
It is also known as analytical cash book.
By Conveyance 5050
Solution: Cash Book (Triple column) Dr. Cr.
The columns can be for conveyance expenses, postage, repairs & maintenance, printing & stationery, salary, wages and so on.
By Bank a/c480To Bank a/c 285 By Discount a/c20To Discount a/c 15 Rupesh A/c Rajani A/c By Cash a/c190To Cash a/c 195 By Discount a/c10To Discount a/c 5
Posting
The: total of this column is debited to respective expense accounts in the ledger after a specific period may be monthly, weekly etc.
The Balance of petty cash book (i.e. receipts (-) payments) shows the balance of cash in hand which will be shown in Trial balance.
Cash column i.e. Cash account will always have debit balance but Bank column i.e. bank account can have either debit or credit balance.
By Stationery 80 80 PROCESS
On the payment side the amount is classified into various columns depending upon the account to which it has to be debited.
It will have three columns on both sides for cash, bank & discount. Entry in this book & posting to ledger accounts will be same as mentioned above.
DateParticulars LFDis.CashBankDateParticularsLFDis.CashBank To Opening bal. 200400 By Trupti a/c 15-285 To Anand a/c 20-480 By Rajani a/c 5195To Rupesh a/c 10190- By Balance c/f 195595 Total 30390880 Total 20390880
In petty cash book receipt will be from main cash book. Posting
Solution: Sales Book
ACCOUNTING PROCESS 8.12
By Cartage 40 40
It is a subsidiary book/subsidiary journal & posting is made from it to the sales account and accounts of the customers.
An amount is fixed which is given to petty cashier who meets expenses out of it & periodically or when the amount is spent, he takes reimbursement from main Cashier exactly equal to amount spent hence his cash balance again becomes equal to fixed imprest amount.
Illustration 8.7: Credit sales of goods made to Pravin 2,000, Pranay 1,500 & Prashant 1,000
To Sales a/c 2,000 To Sales a/c1,000
5. IMPREST SYSTEM:
Pravin 2,000 Pranay 1,500 Prashant 1,000 Total 4,500
By Repairs 150 150
Pranay A/c
Total 1,0001,00050 806015040200-100
6. SALES BOOK:
By Closing bal. 320
DateParticularsReceiptPayment Conve-StationeryPost-Re- Car-WagesTrave-Office yance agepairs tage llingexp.
By Postage 60 60
Ex. Imprest amount is fixed at 1000. Petty cashier has spent 785 in that period, thus he has balance of 215. Now he will get reimbursement from main cashier 785, thus his balance will again become 1000.
Sales Account is a final record and postings are made to it from Cash Book (Cash sales) and Sales Day Book (credit Salessales).Account is maintained in the ledger in the manner, the other accounts are maintained.
This is the upper limit of cash which petty cashier can have.
By Wages 200 200
The Sales Day-Book is a register specially kept to record credit sales of goods dealt in by the firm. Cash sales are entered in the Cash Book and not in the Sales Day Book. Credit sales of things other than the goods dealt in by the firm are not entered in the Sales day Book; they are Forjournalised.accounting, Goods means only those items in which the particulars concern is doing business i.e. purchasing & selling it.
Posting:
By Sundry a/c4,500To Sales a/c1,500 Pravin A/c
Sales Account is a nominal account and its balance is used for ascertaining gross profit or gross loss.
Posting
By Office exp. 100 100
Posting of total amount will be made to respective expense account in ledger.
The total of sales register is credited to sales a/c periodically say monthly. And individual amounts are debited to respective parties (debtors) a/c.
DateParticulars InvoiceL.F.Details Net Invoice No.
Prashant A/c
Sales A/c
It is a version of Petty cash book only.
7.PURCHASE BOOK:
Credit purchases of things other than the goods dealt in by the firm are not entered in the Purchases day Book; they are journalised.
All credit purchases of goods are recorded in purchase book. Cash purchases are entered in the Cash Book and not in the Purchases Day Book.
Prateek A/c
By Purchase a/c1,200To Sundry a/c4,000
The total of purchase register is debited to purchase a/c periodically say monthly & Individual amounts are credited to respective parties (suppliers) a/c.
Prateek 1,800 Puneet 1,200
Praneeta 1,000 Total 4,000
Posting
If there are regular/frequent cases of endorsing the Bills Receivable then instead of recording the same in Journal, we can prepare a Bills Receivable endorsed Book.
8. BILLS RECEIVABLE & BILLS PAYABLE BOOKS:
The total of Bills Receivable register is debited to Bills Receivable a/c. Individual amounts are Credited to respective parties a/c. Similarly the total of Bills Payable register is Credited to Bills Payable a/c. and Individual amounts are Debited to respective parties a/c.
Praneeta A/c
Cash sales & Cash Purchases will be recorded in Cash Book and credit sales & credit purchase of Assets will be recorded in Journal. Comments for sales account made above equally apply to purchase account.
Solution:
Posting:
Purchase Book
DateParticulars InvoiceL.F.Details Net Invoice No.
It is a subsidiary book/subsidiary journal & posting is made from it to the purchases account and accounts of the suppliers.
All Bills Receivables received are recorded in Bills Receivables book & Bills Payables issued will be recorded in Bills Payable book.
By Purchase a/c1,800 By Purchase a/c1,000 Puneet A/c Purchase A/c
Posting:
Entry for Discounting, Payment, Receipt, Dishonour etc. will not be recorded in this registers but will be recorded in Cash book/Journal etc.
Bills Receivable Endorsed book:
All Bills Receivable endorsed will be entered in it. The parties account to whom bill is endorsed will be debited from here and Total of this book will be monthly credited to Bills Receivable a/c.
Illustration 8.8: Credit purchase of goods made from Prateek 1,800, Puneet 1,200 & Praneeta 1,000.
Illustration 8.9: Refer Credit sales made in illustration 8.7 to Pravin 2,000, Pranay 1,500 & Prashant 1,000 and now bills are drawn on them. PROCESS
8.13 ACCOUNTING
DateParticulars
Sales Return Book
To Sundry a/c4,500
To Sales a/c 2,000By Bills receiv-2,000To Sales a/c1,000By Bills receivable able a/c a/c 1,000
Date ofDrawerPayeeDate of BillDue datePlace ofAmountL.F.Mode of Acceptance Payment Disposal
Posting
Illustration 8.10: Refer Credit purchase made as per Illustration 8.8 from Prateek 1,800, Puneet 1,200 & Praneeta 1,000 and bills drawn by them accepted.
Pravin 2000 Pranay 1500 Prashant 1000 Total 4500
Bills Payable Book
CreditL.F.Details Amount Note No.
To Bills Payable a/c1,200By Purchase a/c1,200 By Sundry a/c4,000
Prateek A/c Praneeta A/c
DateVoucherParty fromAcceptorDate DuePlace ofAmountL.F.Mode of ofNo.whom of BillDatePayment Disposal receipt Received
ACCOUNTING PROCESS 8.14
Bills Receivable Book
Prateek 1800 Puneet 1200 Praneeta 1000 Total 4000
Puneet A/c Bills Payable A/c
Posting
9. OTHERS:
Bills Receivable A/c Pranay A/c
Solution:
To Bills Payable a/c1,800By Purchase a/c1,800To Bills Pay-1,000By Purchase a/c1,000 able a/c
Solution:
To Sales a/c1,500By Bills receivable a/c 1,500 Pravin A/c Prashant A/c
Similarly Purchase Return Register, Sales Return Register, can be prepared if number of such transactions are Thelarge.procedure of preparing such books & posting from them is exactly similar to that seen for sales book & purchase book.
Journal
v)Adjusting entries: At the end of the year the amount of expenses or income may have to be adjusted for amounts received in advance or for amounts not yet settled in cash. Such an adjustment is also made through journal entries. Usually, the entries relating to Outstanding expenses, Prepaid expenses, Interest on capital and Depreciation are necessary.
Date Particulars LF Debit Credit
11. IF A CONCERN MAINTAINS ONLY JOURNAL AS BOOK OF ENTRY:
(c)Receipt of promissory notes or issue to them if separate bill books have not been maintained.
(e)Effects of accidents such as loss of property by fire etc.
(
i)Opening entries: When books are started for the new year, the opening balance of assets and liabilities are journalised.
DateParticulars
10. JOURNAL PROPER
(vii)Miscellaneous entries: The following entries will also be shown in Journal proper:
Transactions are first entered in a book called ‘Journal’ to show which account should be debited and which Journalcredited.creates preliminary records and is also called subsidiary book. All transactions are first recorded in the journal as and when they occur, the record is chronological, otherwise it would be difficult to maintain the records in an orderly manner.
(
If any of the above books mentioned in (1) to (9) are not maintained then the entries related to that book will also be recorded in Journal.
(vi)Entries on dishonour of Bills: If someone who accepted a promissory note (or bill) is not able to pay it on the due date, a journal entry will be necessary to record the non-payment or dishonour.
8.15 ACCOUNTING PROCESS
(
Total
(iii)Rectification entries: If an error has been committed, it is rectified through a journal entry.
(ii)Closing entries: At the end of the year nominal accounts are transferred to the profit and loss account. This is done through journal entries called closing entries.
DebitL.F. Details Amount
Note No.
(a)Credit purchase of things other than goods dealt in or materials required for production of goods e.g. credit purchase of asset will be journalised.
(b)An allowance to be given to the customers.
iv)Transfer entries: If some amount is to be transferred from one account to another, the transfer will be made through a journal entry.
From each entry debit and credit both will be posted into respective accounts in ledger.
(d)On an amount becoming irrecoverable, because of the customer becoming insolvent.
If there is no special book meant to record a transaction, it is recorded in the Journal (proper).
Journal gives details regarding any transaction. Thus Journal tells the accounts to be debited and credited and also the accounts involved.
Purchase Return Book
But actual debit & credit gets completed only when we write the amount from this book to respective accounts in ledger on debit or credit side as the case may be.
To By To By
(a)Profit & Loss Account: It shows result of the business (performance) for a particular period i.e. the profit earned or loss suffered by the concern.
All accounts are opened in a separate register known as a ledger
With&
FAmount
All other books are only books of entry they are not ledger accounts.
Whether payment is made or received is immaterial in accrual basis accounting.
If written on credit side means that account is credited.
Total Total
Accrual basis of accounting is also known as mercantile basis of accounting.
Only exception is cash & Bank a/c. which are not prepared in ledger because cash & Bank book itself is cash & Bank account also (when Cash cum Bank Book is prepared).
Instead of one ledger, concern can maintain multiple ledgers like Debtors ledger, Creditors ledger, General ledger etc.
Details about Final Account is covered in Chapter 13 in this Book.
ACCOUNTING PROCESS 8.16
Hence when we enter a transaction in a book of entry, we decide/write which account should be debited & which account should be credited.
Certain enterprises prepares Cash Flows statement also. It is covered in your Intermediate syllabus, hence not covered in this book.
If the amount is written on debit side that means that account is debited
Each account will have two sides, left hand side is known as debit side & right hand side as credit side.
The end results of book-keeping & accountancy, comes in the form of following two statements:
This process of writing the amount from books of entry to ledger account is known as ‘posting’.
All these accounts are then totalled & balanced.
All the accounts which are having balances either debit or credit are listed on a statement known as Trial Balance
Dr. Cr.
Ledger Account
DateParticularsFAmount
On the other hand, cash basis of accounting is system of accounting by which a transaction is recognized only if cash is received or paid, no entry is being made when a payment or receipt is merely due.
(b)Balance Sheet: It shows the financial position at the end of the year i.e. Assets and properties of the concern and the liabilities of the concern.
DateParticulars
the help of this Trial Balance, Final accounts namely Trading & P&L A/c and Balance sheet is prepared.
Posting:
A transaction is recognized when either a liability is created (i.e. when goods/services/benefits or properties are received) and/or an asset is created (i.e. when goods/services/benefits or properties are given).
A debit note is sent to the supplier when the goods purchased from him are returned (purchase return) or for discount to be received from him or for any expenses incurred for him.
Cash discount is usually given at the time of payment/receipt as against trade discount is given at the stage of
Cash discount is the discount offered by the supplier in consideration of early or timely payment. It may vary with the period of payment.
Asale/purchase.debitnoteis
To Party (who sent it) a/c PROCESS
Sales return/Discount allowed etc. a/c Dr. To Purchase return/Discount received etc.
(ii)Commission paid to brokers and bankers for services rendered.
iii)The excess of par or face value of shares or debentures over the amount paid by subscriber i.e. discount on issue of a security.
Entry:In the books of sender of Debit note
Accrual basis accounting is the only generally accepted accounting method for business entities which are supposed to operate for long period.
(iii)Commission paid to property dealers for assistance in renting out properties or for services in connection with purchases/sale of properties.
Commission earned is accounted for as an income, by the party rendering such facility/services and Commission allowed or paid is accounted for as an expense by the party availing such facility or service.
(iv)Commission to export import agent in foreign trade.
Cash basis accounting is suitable for short duration ventures.
All the chapters which you will study are on accrual basis only exception may be joint venture.
In the books of receiver of Debit note Party (to whom it is sent) a/c Dr.
(iv)The amount charged by a bank on discounting of a bill of exchange.
(i)Commission paid to selling or buying agents.
Trade discount is a discount on the selling price for bulk purchase or for purchasing above a minimum quantity or is offered generally to regular customers. It is also called quantity discount. This is a technique of sales promotion.
The term discount refers to any reduction or rebate allowed and is used to express one of the following situations:(
8.17 ACCOUNTING
(ii)An allowance given to the wholesalers or bulk buyers on the list price or retail price, known as trade discount. A trade discount is not shown in the books of account separately and it is shown by way of deduction from purchases/sales value.
For example:
Commission may be defined as remuneration of an employee or agent relating to services performed in connection with sales, purchases, collections or other types of business transactions and is usually based on a percentage of the amounts involved.
It is generally determined at the stage of sale itself & is deducted from the sale/purchase value & hence doesn’t appear separately in the Books of a/cs & Final a/cs.
It is accounted as a separate item & appears in the Profit & loss a/c.
(
a statement sent by one party to the other stating/informing him that his account has been debited with a specified amount and the reason for debit.
i)An allowance given for the settlement of a debt before it is due i.e., cash discount.
(c)He buys a showcase for 350.
(f)He buys a Cash Register Machine for 15,000.
(e)He purchases cloth 15,000.
Entity concepts: Business vs. Personal transactions
(d)He sells old domestic furniture for 300.
(c)Building Account
ACCOUNTING PROCESS 8.18
Illustration 8.12: Classify the following accounts into Personal, Real and Nominal.
(d)Calcutta Tramway Co. Account
In the books of receiver of Credit note Sales return/Discount allowed etc. a/c Dr. Party (who sent it) a/c Dr. To Party (to whom it is sent) a/c
(i)Personal exp., paid from personal sources No Yes
To Purchase return/Discount received etc.
(j)Personal liability, Money kept for personal use No Yes
(i)He pays salary to his domestic servant, 50 from private funds.
(b)Office exp. paid from office a/c Yes No
(b)He employs a typist for official correspondence and pays him 450 P.M.
Solution:
Transaction It is a transaction for & hence to be recorded in Analysis of the financial effect (both aspect)
Business (concern’s)Personal books, of Book Ramlal
Classification of Accounts
A credit note is sent to the customer when we receive good returned by them or for discount to be allowed to him or for any expenses incurred for us by him.
Illustration 8.11: Ramlal carries on business as a cloth dealer. State which of the following are transactions to be recorded in his business books.
(j)He takes a loan of 10,000 from a friend for the marriage of his daughter.
(a)Personal exp., paid from personal sources No Yes
(f)Office Assets, paid from office a/c Yes No
(a)He purchases a Mobile for his son.
(d)Personal income, Money received in personal a/c No Yes
(e)Office exp. paid from office a/c Yes No
(h)Personal exp., goods taken from shop Yes Yes
A Credit note is a statement/letter sent by one party to the other stating/informing him that his account has been credited with a specified amount and the reason for credit.
(h)He takes cloth 25 for use at home.
Entry:In the books of sender of Credit note
a. While deciding whether it is a transaction or not see both the aspects in it & if it creates any financial effect on entity like something is coming/received, something is going/paid, it is an expense or income, a change in an asset or a liability, then it is a transaction to be recorded in that entities books.
(g)He purchases domestic utensils for 200 for which he gives cloth from the shop.
b. The question is for the concern’s books only, but we have added personal books also. So as to give a comparative idea of whether it is a business transaction, personal transaction or both.
(a)Cash Account (b)Wages Account
(c)Office Asset, paid from office (assumed that show case is Yes No for shop)
(g)Personal exp. paid giving goods from shop Yes Yes
(a)Bought goods of Pran
(f)Salary a/c (N) & Cash a/c (R)
(m)Salary payable to ‘C’.
(f)Rent Account
(k)Cash sales to Mr. A.
(i )Interest Account
(k)Cash a/c (R) & Sales a/c (N)
(g)Capital Account
(q)Discount Allowed Account
Illustration 8.14: Which of the following payments are assets, which expenses and which are losses.
(l )Purchases from ‘B’ & paid cash.
(b)Acquiring trade marks.
Solution: Assets: a, b, f, j Expenses: c, e, g, h, i, l Losses: d, k
8.19
(i )Cash a/c (R) & Sharmas a/c (P)
(m)Salary a/c (N) & Salary payable a/c OR ‘C’ a/c (P)
(c)Rent a/c (N) & Cash a/c (R)
(d)Cash a/c (R) & Premnath a/c (P)
(f)Securing a lease of land for 20 years.
ACCOUNTING PROCESS
(c)Paid rent by cash
(o)Bad Debts Account
(c)Paying salaries.
Solution: Personal Accounts - d, e, g, h, p, t, u Real Accounts - a, c, j, l, m, n Nominal Accounts - b, f, i, k, o, q, r, s
(g)Paying Rent.
(l )Land Account
(j )Paid Cash to Rakesh.
(h)Drawings Account
Though not required by question, the classification of a/c has been marked. P=Personal a/c, R=Real a/c, N=Nominal a/c.
(h)Advertising.
(m)Goodwill Account
(p)Bank Account
Illustration 8.13: Mention the accounts affected in the following transaction:
(d)Received cash from Premnath
(a)Pran a/c (P) & Purchase a/c (N)
(g)Purchased furniture from Deodas
(g)Furniture a/c (R) & Deodas a/c (P)
(j )Patents.
(l )Purchases of goods
(i )Received cash from Sharmaji
(j )Trade Mark Account
Solution: Accounts affected
(u)Bills Receivable
(t)Salary Payable
(j )Cash a/c (R) & Rakesh a/c (P)
Classification of effect of Payment
(i )Stationery.
(b)Somnath a/c (P) & Sale a/c (N)
(e)East Bengal Club Account
Identification of Accounts in a transaction
(d)Compensation to injured workers.
(s)Discount Received Account
(a)Purchasing typewriters.
(e)Cash a/c (R) & Commission a/c (N)
(n)Patent Account
(h)Machinery a/c (R) & Devanand a/c (P)
(e)Paying Interest.
(e)Received commission in cash (f)Paid salaries in cash
(k)Dividend Account
(k)‘Theft of cash’
(l )Cash a/c (R) & Purchase a/c (N)
(r)Interest Received Account
(h)Sold Machinery to Devanand
(b)Sold goods to Somnath
This book is prepared exclusively for the Foundation Level of Chartered Accountancy Examination requirement. It covers the entire revised, new syllabus as per ICAI.
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DATE OF PUBLICATION : July 2022 : 3rd Edition NO : 9789356223172
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Principles &
AUTHOR : D.G. SHARMA , S.K. Agrawal
Lucid Discussions in a Simple Language] for theoretical concepts is provided for a comprehensive understanding [Numerous Illustrations] have been incorporated in the book [Detailed Working Notes & Practice Questions] along with Hints & Answers have provided in the book
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NO. OF PAGES : 608 TYPE : PAPERBACK
This book aims to build up the students' knowledge base & lay the foundation for their professional education. It endeavours to provide a good command of the basics such as Accounting Concepts & Conventions, Capital & Revenue Items, etc.
this
Solved 2021: Practice of
Paper: December
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Principles & Practice of Accounting (Accounts) |Study Material
The Present Publication is the 3rd Edition & updated till 30th April 2022 for CA-Foundation | New Syllabus | Dec. 2022/June 2023 exams. This book is authored by CA D.G. Sharma & Dr. S.K. Agrawal, with the following noteworthy features:As per the latest syllabus of the ICAI